e10vq
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
Mark One
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| þ |
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2009
or
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| o |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
FOR THE TRANSITION PERIOD FROM TO
Commission File Number: 0-20127
Escalon Medical Corp.
(Exact name of registrant as specified in its charter)
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| Pennsylvania
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33-0272839 |
| (State or other jurisdiction of
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(IRS Employer |
| incorporation or organization)
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Identification No.) |
| 435 Devon Park Drive, Building 100 |
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| Wayne, PA 19087
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19087 |
| (Address of principal executive offices)
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(Zip code) |
(610) 688-6830
(Registrant’s telephone number, including area code)
N/A
Former name, former address and former fiscal year, if changed since last report
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 þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its
website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule
405 of Regulation S-7 (section 232.405 of this chapter) during the preceding 12 months (or for such
shorter period that the registrant was required to submit and post such files). Yes o No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer,
a non-accelerated filer, or a smaller reporting company.
See the definitions of “large
accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
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| Large accelerated filer o |
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Accelerated filer o |
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Non-accelerated filer o
(Do not check if a smaller reporting company) |
|
Smaller reporting company þ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act). Yes o No þ
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as
of the latest practicable date: 7,413,930 shares of common stock, $0.001 par value, outstanding as
of May 15, 2009.
Escalon Medical Corp.
Form 10-Q Quarterly Report
Table of Contents
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31 |
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32 |
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33 |
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33 |
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2
Part I. Financial Statements
Item 1. Condensed Consolidated Financial Statements
3
ESCALON MEDICAL CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
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March 31, |
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June 30, |
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2009 |
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2008 |
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ASSETS |
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Current assets: |
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Cash and cash equivalents |
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$ |
1,222,647 |
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$ |
3,708,456 |
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Accounts receivable, net |
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6,351,066 |
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3,896,297 |
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Inventory, net |
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10,327,981 |
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8,670,160 |
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Note receivable |
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80,000 |
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— |
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Other current assets |
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404,863 |
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297,807 |
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Total current assets |
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18,386,557 |
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16,572,720 |
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Furniture and equipment, net |
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952,721 |
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1,078,839 |
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Goodwill |
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11,590,786 |
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11,590,786 |
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Trademarks and trade names |
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694,006 |
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694,006 |
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Patents, net |
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2,517,638 |
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157,883 |
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Covenant not to compete, customer list and other intangibles, net |
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1,546,055 |
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1,691,610 |
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Other assets |
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27,577 |
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110,176 |
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Total assets |
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$ |
35,715,340 |
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$ |
31,896,020 |
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LIABILITIES AND SHAREHOLDERS’ EQUITY |
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Current liabilities: |
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Current portion of long-term debt |
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$ |
376,314 |
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$ |
501,752 |
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Accounts payable |
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3,343,379 |
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2,628,004 |
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Accrued expenses |
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1,868,815 |
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2,895,920 |
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Deferred revenue |
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305,332 |
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— |
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Total current liabilities |
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5,893,840 |
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6,025,676 |
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Long-term debt, net of current portion |
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5,514,174 |
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250,871 |
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Accrued post-retirement benefits |
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1,087,000 |
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1,087,000 |
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Total long-term liabilities |
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6,601,174 |
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1,337,871 |
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Total liabilities |
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12,495,014 |
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7,363,547 |
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Shareholders equity: |
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Preferred stock, $0.001 par value; 2,000,000 shares
authorized; no shares issued and outstanding |
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— |
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— |
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Common stock, $0.001 par value; 35,000,000 shares authorized; 7,413,930 and
6,413,930 issued and outstanding at March 31, 2009 and |
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— |
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June 30, 2008, respectively |
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7,414 |
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6,414 |
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Common stock warrants |
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1,733,460 |
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1,601,346 |
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Additional paid-in capital |
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67,418,884 |
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66,299,242 |
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Accumulated deficit |
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(45,128,496 |
) |
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(43,267,466 |
) |
Accumulated other comprehensive (loss) income |
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(810,936 |
) |
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(107,063 |
) |
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Total shareholders’ equity |
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23,220,326 |
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24,532,473 |
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Total liabilities and shareholders’ equity |
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$ |
35,715,340 |
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$ |
31,896,020 |
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See notes to condensed consolidated financial statements
4
ESCALON MEDICAL CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
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Three Months Ended March 31, |
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Nine Months Ended March 31, |
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2009 |
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2008 |
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2009 |
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2008 |
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Net revenues: |
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Product revenue |
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$ |
9,173,876 |
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$ |
8,138,627 |
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$ |
25,903,900 |
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$ |
22,421,603 |
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Other revenue |
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31,122 |
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48,940 |
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97,123 |
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154,315 |
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Revenues, net |
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9,204,998 |
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8,187,567 |
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26,001,023 |
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22,575,918 |
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Costs and expenses: |
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Cost of goods sold |
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4,729,430 |
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4,912,381 |
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14,209,211 |
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12,786,574 |
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Marketing, general and administrative |
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4,212,994 |
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4,097,401 |
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10,859,315 |
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10,409,662 |
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Research and development |
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810,130 |
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1,040,116 |
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2,749,131 |
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2,840,227 |
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Total costs and expenses |
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9,752,554 |
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10,049,898 |
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27,817,657 |
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26,036,463 |
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(Loss) from operations |
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(547,556 |
) |
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(1,862,331 |
) |
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(1,816,635 |
) |
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(3,460,545 |
) |
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Other (expense) and income: |
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Equity in Ocular Telehealth Management, LLC |
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(31,336 |
) |
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(14,013 |
) |
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(65,387 |
) |
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(64,735 |
) |
Gain on sale of equipment |
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— |
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— |
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91,871 |
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— |
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Interest income |
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285 |
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78,189 |
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50,938 |
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265,277 |
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Interest expense |
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(104,566 |
) |
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(17,987 |
) |
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(121,817 |
) |
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(24,276 |
) |
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Total other income |
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(135,617 |
) |
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46,189 |
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(44,395 |
) |
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176,266 |
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Net (loss) before taxes |
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(683,173 |
) |
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(1,816,142 |
) |
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(1,861,030 |
) |
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(3,284,279 |
) |
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Provision for income taxes |
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0 |
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126,480 |
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0 |
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126,480 |
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Net (loss) |
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$ |
(683,173 |
) |
|
$ |
(1,942,622 |
) |
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$ |
(1,861,030 |
) |
|
$ |
(3,410,759 |
) |
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Basic net (loss) per share |
|
$ |
(0.09 |
) |
|
$ |
(0.30 |
) |
|
$ |
(0.27 |
) |
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$ |
(0.53 |
) |
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Diluted net (loss) per share |
|
$ |
(0.09 |
) |
|
$ |
(0.30 |
) |
|
$ |
(0.27 |
) |
|
$ |
(0.53 |
) |
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Weighted average shares — basic |
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|
7,413,930 |
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6,389,315 |
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6,895,411 |
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6,388,905 |
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Weighted average shares — diluted |
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|
7,413,930 |
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|
6,389,315 |
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6,895,411 |
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6,388,905 |
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See notes to condensed consolidated financial statements
5
ESCALON MEDICAL CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
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| For the Nine Months Ended March 31, |
|
2009 |
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2008 |
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(Unaudited) |
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(Unaudited) |
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Cash Flows from Operating Activities: |
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Net (loss) income |
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$ |
(1,861,030 |
) |
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$ |
(3,410,759 |
) |
Adjustments to reconcile net (loss) to net cash (used in)
operating activities: |
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Depreciation and amortization |
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525,652 |
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434,101 |
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Compensation expense related to stock options |
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223,756 |
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203,367 |
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Loss on Ocular Telehealth Management, LLC |
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65,387 |
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|
64,735 |
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(Gain)/loss on sale of assets |
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(91,871 |
) |
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— |
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Change in operating assets and liabilities: |
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Accounts receivable, net |
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(1,551,725 |
) |
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|
384,903 |
|
Inventory, net |
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|
157,258 |
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|
(547,742 |
) |
Other current and long-term assets |
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|
25,920 |
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|
136,120 |
|
Accounts payable, accrued expenses and other liabilities |
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|
294,643 |
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|
1,339,428 |
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Net cash (used in) operating activities |
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(2,212,010 |
) |
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(1,392,847 |
) |
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Cash Flows from Investing Activities: |
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Purchase of Biocode Hycel France, S.A. |
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(164,637 |
) |
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— |
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Investment in Ocular Telehealth Management, LLC |
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(36,000 |
) |
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(42,000 |
) |
Collection on note receivable |
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20,000 |
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— |
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Purchase of furniture and equipment |
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(151,126 |
) |
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(312,961 |
) |
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Net cash (used in) investing activities |
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(331,763 |
) |
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(354,961 |
) |
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Cash Flows from Financing Activities: |
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Principal payments on term loans |
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(376,309 |
) |
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|
(136,972 |
) |
Issuance of common stock — private placement |
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|
1,029,000 |
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|
— |
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Issuance of common stock — stock options |
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— |
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|
7,438 |
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Net cash provided by/(used in) financing activities |
|
|
652,691 |
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|
(129,534 |
) |
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Effect of exchange rate changes on cash and cash equivalents |
|
|
(594,727 |
) |
|
|
(98,093 |
) |
|
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Net (decrease) in cash and cash equivalents |
|
|
(2,485,809 |
) |
|
|
(1,975,435 |
) |
|
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Cash and cash equivalents, beginning of period |
|
|
3,708,456 |
|
|
|
8,879,462 |
|
|
|
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|
|
Cash and cash equivalents, end of period |
|
$ |
1,222,647 |
|
|
$ |
6,904,027 |
|
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Supplemental Schedule of Cash Flow Information: |
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Interest paid |
|
$ |
22,268 |
|
|
$ |
24,206 |
|
|
|
|
|
|
|
|
Income taxes paid |
|
$ |
0 |
|
|
$ |
114,714 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
Reclassification of other current assets to fixed assets |
|
$ |
0 |
|
|
$ |
145,561 |
|
|
|
|
|
|
|
|
| |
Sale of Equipment |
|
|
|
|
|
|
|
|
Note receivable for equipment |
|
$ |
100,000 |
|
|
|
— |
|
Net book value of equipment sold |
|
|
(8,129 |
) |
|
|
— |
|
Gain of sale of equipment |
|
|
(91,871 |
) |
|
|
— |
|
|
|
|
|
|
|
|
Cash received for equipment |
|
|
— |
|
|
|
— |
|
|
|
|
|
|
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|
|
|
|
|
|
|
|
Acquistion of Biocode Hycel France, S.A. |
|
|
|
|
|
|
|
|
Current assets |
|
|
3,487,769 |
|
|
|
— |
|
Furniture and equipment |
|
|
59,443 |
|
|
|
— |
|
Patents and other intangible assets |
|
|
2,503,090 |
|
|
|
— |
|
Long term debt |
|
|
(5,885,665 |
) |
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid to
acquire Biocode Hycel France, S.A |
|
$ |
164,637 |
|
|
|
— |
|
|
|
|
|
|
|
|
See notes to condensed consolidated financial statements
6
ESCALON MEDICAL CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
FOR THE NINE MONTHS ENDED MARCH 31, 2009
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
Common |
|
|
Additional |
|
|
|
|
|
|
Other |
|
|
Total |
|
| |
|
Common Stock |
|
|
Stock |
|
|
Paid-in |
|
|
Accumulated |
|
|
Comprehensive |
|
|
Shareholders’ |
|
| |
|
Shares |
|
|
Amount |
|
|
Warrants |
|
|
Capital |
|
|
Deficit |
|
|
(Loss) |
|
|
Equity |
|
BALANCE AT JUNE 30, 2008 |
|
|
6,413,930 |
|
|
$ |
6,414 |
|
|
$ |
1,601,346 |
|
|
$ |
66,299,242 |
|
|
$ |
(43,267,466 |
) |
|
$ |
(107,063 |
) |
|
$ |
24,532,473 |
|
Issuance of common stock |
|
|
1,000,000 |
|
|
|
1,000 |
|
|
|
— |
|
|
|
895,886 |
|
|
|
— |
|
|
|
— |
|
|
|
896,886 |
|
Issuance of warrants |
|
|
— |
|
|
|
— |
|
|
|
132,114 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
132,114 |
|
Comprehensive (Loss): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(1,861,030 |
) |
|
|
— |
|
|
|
(1,861,030 |
) |
Foreign currency translation |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(703,873 |
) |
|
|
(703,873 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive (loss) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,861,030 |
) |
|
|
(703,873 |
) |
|
|
(2,564,903 |
) |
Compensation expense |
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
223,756 |
|
|
|
0 |
|
|
|
0 |
|
|
|
223,756 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE AT MARCH 31, 2009 |
|
|
7,413,930 |
|
|
$ |
7,414 |
|
|
$ |
1,733,460 |
|
|
$ |
67,418,884 |
|
|
$ |
(45,128,496 |
) |
|
$ |
(810,936 |
) |
|
$ |
23,220,326 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to condensed consolidated financial statements
7
ESCALON MEDICAL CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OTHER COMPREHENSIVE (LOSS)
(Unaudited)
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three Months Ended March 31, |
|
Nine Months Ended March 31, |
| |
|
2009 |
|
2008 |
|
2009 |
|
2008 |
| |
|
|
|
|
Net (loss) |
|
$ |
(683,173 |
) |
|
$ |
(1,942,622 |
) |
|
$ |
(1,861,030 |
) |
|
$ |
(3,410,759 |
) |
Foreign currency translation |
|
|
(118,897 |
) |
|
|
(30,372 |
) |
|
|
(703,873 |
) |
|
|
(74,978 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
Comprehensive (loss) |
|
$ |
(802,070 |
) |
|
$ |
(1,972,994 |
) |
|
$ |
(2,564,903 |
) |
|
$ |
(3,485,737 |
) |
| |
|
|
|
|
See notes to condensed consolidated financial statements
8
Escalon Medical Corp. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
1. Basis of Presentation
Escalon Medical Corp. (“Escalon” or the “Company”) is a Pennsylvania corporation initially
incorporated in California in 1987, and reincorporated in Pennsylvania in November 2001. Within
this document, the “Company” collectively shall mean Escalon and its wholly owned subsidiaries:
Sonomed, Inc. (“Sonomed”), Escalon Vascular Access, Inc. (“Vascular”), Escalon Medical Europe GmbH
(“EME”), Escalon Digital Vision, Inc. (“EMI”), Escalon Pharmaceutical, Inc. (“Pharmaceutical”),
Escalon Holdings, Inc. (“EHI”), Escalon IP Holdings, Inc., Escalon Vascular IP Holdings, Inc.,
Sonomed IP Holdings, Inc., Drew Scientific Holdings, Inc., and Drew Scientific Group, Plc (“Drew”)
and its subsidiaries.. All inter-company accounts and transactions have been eliminated.
The Company operates in the healthcare market specializing in the development, manufacture,
marketing and distribution of medical devices and pharmaceuticals in the areas of ophthalmology,
diabetes, hematology and vascular access. The Company and its products are subject to regulation
and inspection by the United States Food and Drug Administration (the “FDA”). The FDA requires
extensive testing of new products prior to sale and has jurisdiction over the safety, efficacy and
manufacture of products, as well as product labeling and marketing. The Company’s Internet address
is www.escalonmed.com.
In connection with the presentation of the current period condensed consolidated financial
statements, certain prior period balances have been reclassified to conform to current period
presentation.
The Drew business segment has experienced significant losses and negative cash flow from
operations in the last three years. On June 19, 2008 management implemented cost reductions at
Drew’s Dallas, TX location in order to bring Drew’s cost structure in line with anticipated
revenues. Management anticipates that these cuts combined with budgeted profits in the Company’s
other entities will provide sufficient liquidity in the coming fiscal year.
2. Stock-Based Compensation
As of March 31, 2009 and 2008 total unrecognized compensation cost related to non-vested
share-based compensation arrangements under the 2004 Equity Incentive Plan was $377,711 and
$226,715, respectively. The cost is expected to be recognized over a weighted average period of
four years. For the three-month periods ended March 31, 2009 and 2008, $37,444 and $142,454 was
recorded as compensation expense, respectively. For the nine-month periods ended March 31, 2009
and 2008, $223,756 and $203,367 was recorded as compensation expense, respectively.
Cash received from share option exercises under stock-based payment plans for the nine months
ended March 31, 2009 and 2008 was $0 and $7,438, respectively. No options were exercised during three months ended March 31, 2009 and 2008. The Company did not realize any tax
effect, which would be a reduction in its tax rate, on options due to the full valuation allowances
established on its deferred tax assets.
The Company measures compensation expense for its non-employee stock-based compensation under
the Financial Accounting Standards Board (FASB) Emerging Issues Task Force (EITF) Issue No. 96-18,
“Accounting for Equity Instruments that are Issued to Other Than Employees for Acquiring, or in
Conjunction with Selling, Goods or Service.” The fair value of the options issued is used to
measure the transaction, as this is more reliable than the fair value of the services received.
Fair value is measured as the value of the Company’s common stock on the date that the commitment
for performance by the counterparty has been reached or the counterparty’s performance is complete.
The fair value of the equity instrument is charged directly to compensation expense and additional
paid-in capital. For the three-month and nine-month periods ended March 31, 2009 and 2008, $0,
$103,688, $0 and $142,455, was recorded as compensation expense, respectively.
9
3. (Loss) Per Share
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 March 31, |
|
|
Nine Months Ended March 31, |
|
| |
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator for basic and diluted
earnings per share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) |
|
$ |
(683,173 |
) |
|
$ |
(1,942,622 |
) |
|
$ |
(1,861,030 |
) |
|
$ |
(3,410,759 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for basic earnings per
share — weighted average shares |
|
|
7,413,930 |
|
|
|
6,389,315 |
|
|
|
6,895,411 |
|
|
|
6,388,905 |
|
Effect of dilutive securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options and warrants |
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for diluted earnings
per
share — weighted average and
assumed conversion |
|
|
7,413,930 |
|
|
|
6,389,315 |
|
|
|
6,895,411 |
|
|
|
6,388,905 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic (loss) earnings per share |
|
$ |
(0.09 |
) |
|
$ |
(0.30 |
) |
|
$ |
(0.27 |
) |
|
$ |
(0.53 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted (loss) earnings per share |
|
$ |
(0.09 |
) |
|
$ |
(0.30 |
) |
|
$ |
(0.27 |
) |
|
$ |
(0.53 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Excluded from the calculation of diluted net loss per common share for the three months ended
March 31, 2009 and 2008 were 1,196,519 and 892,019 shares, respectively,
related to stock options and warrants
because their effect was anti-dilutive. For the nine months ended March 31, 2009 and 2008,
1,084,408 and 892,019 shares, respectively, were excluded from the calculation of diluted net loss
per common share related to stock options and warrants because their effect was anti-dilutive.
4. Legal Proceedings
The Company, from time to time is involved in various legal proceedings and disputes that
arise in the normal course of business. These matters have previously and could pertain to
intellectual property disputes, commercial contract disputes, employment disputes, and other
matters. The Company does not believe that the resolution of any of these matters has had or is
likely to have a material adverse impact on the Company’s business, financial condition or results
of operations.
5. Segment Information
During the three-month and nine-month periods ended March 31, 2009 and 2008, the Company’s
operations were classified into five principal reportable business segments that provide different
products or services.
Separate management of each segment is required because each business segment is subject to
different marketing, production and technology strategies.
10
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Segment Information (in thousands) - Three months ended March 31, |
| |
|
Drew |
|
Sonomed |
|
Vascular |
|
EMI |
|
Medical/Trek |
|
Total |
| |
|
2009 |
|
2008 |
|
2009 |
|
2008 |
|
2009 |
|
2008 |
|
2009 |
|
2008 |
|
2009 |
|
2008 |
|
2009 |
|
2008 |
| |
|
|
|
|
|
|
|
|
|
|
Revenues, net: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product revenue |
|
$ |
5,105 |
|
|
$ |
3,610 |
|
|
$ |
2,153 |
|
|
$ |
2,444 |
|
|
$ |
1,012 |
|
|
$ |
1,445 |
|
|
$ |
590 |
|
|
$ |
313 |
|
|
$ |
314 |
|
|
$ |
327 |
|
|
$ |
9,174 |
|
|
$ |
8,139 |
|
Other revenue |
|
|
31 |
|
|
|
49 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
31 |
|
|
|
49 |
|
| |
|
|
|
|
|
|
|
|
|
|
Total revenue, net |
|
|
5,136 |
|
|
|
3,659 |
|
|
|
2,153 |
|
|
|
2,444 |
|
|
|
1,012 |
|
|
|
1,445 |
|
|
|
590 |
|
|
|
313 |
|
|
|
314 |
|
|
|
327 |
|
|
|
9,205 |
|
|
|
8,188 |
|
| |
|
|
|
|
|
|
|
|
|
|
Costs and expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of goods sold |
|
|
2,599 |
|
|
|
2,509 |
|
|
|
1,189 |
|
|
|
1,312 |
|
|
|
408 |
|
|
|
660 |
|
|
|
311 |
|
|
|
176 |
|
|
|
221 |
|
|
|
256 |
|
|
|
4,728 |
|
|
|
4,913 |
|
Research & Development |
|
|
422 |
|
|
|
783 |
|
|
|
240 |
|
|
|
95 |
|
|
|
66 |
|
|
|
88 |
|
|
|
83 |
|
|
|
75 |
|
|
|
— |
|
|
|
— |
|
|
|
811 |
|
|
|
1,041 |
|
Marketing, General & Admin |
|
|
2,140 |
|
|
|
1,522 |
|
|
|
908 |
|
|
|
1,059 |
|
|
|
456 |
|
|
|
568 |
|
|
|
212 |
|
|
|
131 |
|
|
|
497 |
|
|
|
816 |
|
|
|
4,213 |
|
|
|
4,096 |
|
| |
|
|
|
|
|
|
|
|
|
|
Total costs and expenses |
|
|
5,161 |
|
|
|
4,814 |
|
|
|
2,337 |
|
|
|
2,466 |
|
|
|
930 |
|
|
|
1,316 |
|
|
|
606 |
|
|
|
382 |
|
|
|
718 |
|
|
|
1,072 |
|
|
|
9,752 |
|
|
|
10,050 |
|
| |
|
|
|
|
|
|
|
|
|
|
(Loss) income from
operations |
|
|
(25 |
) |
|
|
(1,155 |
) |
|
|
(184 |
) |
|
|
(22 |
) |
|
|
82 |
|
|
|
129 |
|
|
|
(16 |
) |
|
|
(69 |
) |
|
|
(404 |
) |
|
|
(745 |
) |
|
|
(547 |
) |
|
|
(1,862 |
) |
| |
|
|
|
|
|
|
|
|
|
|
Other (expense) and
income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity in OTM |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(31 |
) |
|
|
(15 |
) |
|
|
(31 |
) |
|
|
(15 |
) |
Gain on sale of equipment |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Interest income |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
1 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
77 |
|
|
|
— |
|
|
|
78 |
|
Interest expense |
|
|
(105 |
) |
|
|
(17 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(105 |
) |
|
|
(17 |
) |
| |
|
|
|
|
|
|
|
|
|
|
Total other (expense) and
income |
|
|
(105 |
) |
|
|
(17 |
) |
|
|
— |
|
|
|
1 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(31 |
) |
|
|
62 |
|
|
|
(136 |
) |
|
|
46 |
|
| |
|
|
|
|
|
|
|
|
|
|
(Loss) and income before taxes |
|
|
(130 |
) |
|
|
(1,172 |
) |
|
|
(184 |
) |
|
|
(21 |
) |
|
|
82 |
|
|
|
129 |
|
|
|
(16 |
) |
|
|
(69 |
) |
|
|
(435 |
) |
|
|
(683 |
) |
|
|
(683 |
) |
|
|
(1,816 |
) |
| |
|
|
|
|
|
|
|
|
|
|
Income taxes |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
17 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
110 |
|
|
|
— |
|
|
|
127 |
|
| |
|
|
|
|
|
|
|
|
|
|
Net (loss) income |
|
$ |
(130 |
) |
|
$ |
(1,172 |
) |
|
$ |
(184 |
) |
|
$ |
(38 |
) |
|
$ |
82 |
|
|
$ |
129 |
|
|
$ |
(16 |
) |
|
$ |
(69 |
) |
|
$ |
(435 |
) |
|
$ |
(793 |
) |
|
$ |
(683 |
) |
|
$ |
(1,943 |
) |
| |
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Segment Information (in thousands) - Nine months ended March 31, |
| |
|
Drew |
|
Sonomed |
|
Vascular |
|
EMI |
|
Medical/Trek/EHI |
|
Total |
| |
|
2009 |
|
2008 |
|
2009 |
|
2008 |
|
2009 |
|
2008 |
|
2009 |
|
2008 |
|
2009 |
|
2008 |
|
2009 |
|
2008 |
| |
|
|
|
|
|
|
|
|
|
|
Revenues, net: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product revenue |
|
$ |
13,108 |
|
|
$ |
9,799 |
|
|
$ |
7,285 |
|
|
$ |
7,206 |
|
|
$ |
2,908 |
|
|
$ |
3,125 |
|
|
$ |
1,656 |
|
|
$ |
1,250 |
|
|
$ |
947 |
|
|
$ |
1,043 |
|
|
$ |
25,904 |
|
|
$ |
22,423 |
|
Other revenue |
|
|
97 |
|
|
|
154 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
97 |
|
|
|
154 |
|
| |
|
|
|
|
|
|
|
|
|
|
Total revenue, net |
|
|
13,205 |
|
|
|
9,953 |
|
|
|
7,285 |
|
|
|
7,206 |
|
|
|
2,908 |
|
|
|
3,125 |
|
|
|
1,656 |
|
|
|
1,250 |
|
|
|
947 |
|
|
|
1,043 |
|
|
|
26,001 |
|
|
|
22,577 |
|
| |
|
|
|
|
|
|
|
|
|
|
Costs and expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of goods sold |
|
|
7,648 |
|
|
|
6,353 |
|
|
|
4,004 |
|
|
|
3,778 |
|
|
|
1,074 |
|
|
|
1,294 |
|
|
|
842 |
|
|
|
640 |
|
|
|
640 |
|
|
|
722 |
|
|
|
14,208 |
|
|
|
12,787 |
|
Research & Development |
|
|
1,377 |
|
|
|
1,975 |
|
|
|
928 |
|
|
|
435 |
|
|
|
175 |
|
|
|
217 |
|
|
|
270 |
|
|
|
214 |
|
|
|
— |
|
|
|
— |
|
|
|
2,750 |
|
|
|
2,841 |
|
Marketing, General & Admin |
|
|
4,719 |
|
|
|
3,809 |
|
|
|
2,527 |
|
|
|
2,765 |
|
|
|
1,354 |
|
|
|
1,401 |
|
|
|
599 |
|
|
|
428 |
|
|
|
1,661 |
|
|
|
2,005 |
|
|
|
10,860 |
|
|
|
10,408 |
|
| |
|
|
|
|
|
|
|
|
|
|
Total costs and expenses |
|
|
13,744 |
|
|
|
12,137 |
|
|
|
7,459 |
|
|
|
6,978 |
|
|
|
2,603 |
|
|
|
2,912 |
|
|
|
1,711 |
|
|
|
1,282 |
|
|
|
2,301 |
|
|
|
2,727 |
|
|
|
27,818 |
|
|
|
26,036 |
|
| |
|
|
|
|
|
|
|
|
|
|
(Loss) income from
operations |
|
|
(539 |
) |
|
|
(2,184 |
) |
|
|
(174 |
) |
|
|
228 |
|
|
|
305 |
|
|
|
213 |
|
|
|
(55 |
) |
|
|
(32 |
) |
|
|
(1,354 |
) |
|
|
(1,684 |
) |
|
|
(1,817 |
) |
|
|
(3,459 |
) |
| |
|
|
|
|
|
|
|
|
|
|
Other (expense) and
income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity in OTM |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(65 |
) |
|
|
(65 |
) |
|
|
(65 |
) |
|
|
(65 |
) |
Gain on sale of equipment |
|
|
92 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
92 |
|
|
|
— |
|
Interest income |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
1 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
51 |
|
|
|
264 |
|
|
|
51 |
|
|
|
265 |
|
Interest expense |
|
|
(122 |
) |
|
|
(24 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(122 |
) |
|
|
(24 |
) |
| |
|
|
|
|
|
|
|
|
|
|
Total other (expense) and
income |
|
|
(30 |
) |
|
|
(24 |
) |
|
|
— |
|
|
|
1 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(14 |
) |
|
|
199 |
|
|
|
(44 |
) |
|
|
176 |
|
| |
|
|
|
|
|
|
|
|
|
|
(Loss) and income before taxes |
|
|
(569 |
) |
|
|
(2,208 |
) |
|
|
(174 |
) |
|
|
229 |
|
|
|
305 |
|
|
|
213 |
|
|
|
(55 |
) |
|
|
(32 |
) |
|
|
(1,368 |
) |
|
|
(1,485 |
) |
|
|
(1,861 |
) |
|
|
(3,283 |
) |
| |
|
|
|
|
|
|
|
|
|
|
Income taxes |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
17 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
110 |
|
|
|
— |
|
|
|
127 |
|
| |
|
|
|
|
|
|
|
|
|
|
Net (loss) income |
|
$ |
(569 |
) |
|
$ |
(2,208 |
) |
|
$ |
(174 |
) |
|
$ |
212 |
|
|
$ |
305 |
|
|
$ |
213 |
|
|
$ |
(55 |
) |
|
$ |
(32 |
) |
|
$ |
(1,368 |
) |
|
$ |
(1,595 |
) |
|
$ |
(1,861 |
) |
|
$ |
(3,410 |
) |
| |
|
|
|
|
|
|
|
|
|
|
11
6. Related-Party Transactions
The Company and a member of the Company’s Board of Directors are founding and equal members of
Ocular Telehealth Management, LLC (“OTM”). OTM is a diagnostic telemedicine company
providing remote examination, diagnosis and management of disorders affecting the human eye.
OTM’s initial focus is on the diagnosis of diabetic retinopathy by creating access and providing
annual dilated retinal examinations for the diabetic population. Through March 31, 2009 and 2008,
the Company has invested $393,000 and $335,000, respectively in OTM, including $36,000 and $42,000
invested during the nine-month period ended March 31, 2009 and 2008, respectively. As of March 31,
2009, the Company owned 45% of OTM. The Company provides administrative support functions to OTM.
From inception through March 31, 2009, OTM had revenue of approximately $40,714 and incurred
expenses of approximately $712,950.
7. Biocode Hycel Acquisition
On December 31, 2008 Drew acquired certain assets of Biocode Hycel (“Biocode”) for $5,922,000
(4,200,000 euros) plus acquisition costs of approximately $129,000. The sales price was payable in cash
of approximately $165,000 (approximately 116,000 euros) and $5,885,665 in debt from Drew. Biocode
is being vertically integrated into the Company’s clinical diagnostics business that includes Drew
Scientific and JAS Diagnostics. The seller-provided financing, which is guaranteed by the Company,
requires payment over four years as follows:
| |
• |
|
the first interest-only payment is due in December of 2009; |
| |
| |
• |
|
thereafter, every nine months, an interest payment is due at an annual interest rate of
7%; |
| |
| |
• |
|
18 months after the closing date a principal payment of Euro 800,000 is due; |
| |
| |
• |
|
30 months after the closing date a principal payment of Euro 1,000,000 is due; |
| |
| |
• |
|
36 months after the closing date a principal payment of Euro 1,000,000 is due; and |
| |
| |
• |
|
48 months after the closing date a principal payment of Euro 1,375,000 is due. |
The payment amount in United States Dollars will be determined on the payment due date, based
upon the then current exchange rate between the United States Dollar and the Euro.
After evaluating the Biocode transaction, the Company concluded that the assets purchased
lacked certain key components necessary to categorize the transaction as a purchase of a business
as defined by EITF 98-3 These key missing components included:
Employees essential to continue to conduct normal operations were not transferred to Biocode.
Key employees remained with the Transferor to continue to operate the remaining components of their
company. These key missing skills include chemists with hematology background, quality control
personnel, senior management and administrative personnel.
Access to customers that would buy the outputs of the transferred set is limited. Since the
Company only purchased certain assets of the Transferor, both we and the Transferor will attempt to
sell our outputs to the same customers. The customers of the Transferor bought both hematology
products (now the out put of Biocode) and biochemistry products still produced by the Transferor.
It will take time for the customers to adjust to this new arrangement..
Business processes essential to conducting normal operations were not fully transferred. The
manufacturing, accounting and administrative processes of the Transferor commingled all of the
various out puts that the transferor produced. Because of this limited transfer no discrete
processes were in place to manage and account for the activities of the transferred set. These
accounting and administrative functions need to be implemented from scratch. This process includes
the Transferor and Biocode working closely to bifurcate the transferred set from the elements
retained by the Transferor. Other critical senior management, accounting and administrative
functions not included in the transferred set are currently being performed outside of the
transferred set by employees of Biocode’s parent until these functions can be put in place.
12
The Company has concluded that the cost, time frame and level of effort required to implement
the missing elements taken as a whole are more than minor, therefore, the transaction constituted
the purchase of certain assets and not the purchase of a business.
The following table summarizes the purchase price allocation of estimated fair values of
assets acquired as of December 31, 2008, the date of acquisition.
| |
|
|
|
|
Current Assets |
|
$ |
3,487,769 |
|
Fixed Assets |
|
|
59,443 |
|
Patents and other intangible assets |
|
|
2,503,090 |
|
|
|
|
|
Total |
|
$ |
6,050,302 |
|
|
|
|
|
8. Private Equity Financing
On November 20, 2008, the Company completed a $1,100,000 private placement of common stock and
common stock purchase warrants to accredited investors. The Company sold 1,000,000 shares of common
stock at $1.10 per share. The investors also received warrants to purchase an additional 150,000
shares of common stock at an exercise price of $1.21 per share, which expire in 5 years. The
warrants cannot be exercised for 181 days and have a fair value of $132,114. The fair value of the
warrants was estimated at the date of agreement using the Black-Scholes pricing method. The net
proceeds to the Company from the offering, after fees and expenses, were $1,029,000. As the result
of the private placement, the Company had 7,413,930 shares of common stock outstanding, not
including the shares issuable upon the exercise of the warrants.
The shares were offered in reliance on an exemption from the registration requirements of the
Securities Act of 1933 (the “Securities Act”). The shares may not be offered or sold in the United
States absent an effective registration statement or an applicable exemption from the registration
requirements of the Securities Act and applicable state securities laws.
9. Selected Financial Data
The following selected financial data are derived from the consolidated financial statements
of the Company. The data should be read in conjunction with “Management’s Discussion and Analysis
of Financial Condition and Results of Operations” included in Item 7 in the financial statements
and related notes to consolidated financial statements thereto included in Item 8 of the Company’s
Form 10-K annual report for the fiscal year ended June 30, 2008.
13
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
For the Years Ended June 30, |
|
| |
|
2008 |
|
|
2007 |
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
| |
|
(Amounts in thousands, except per share amounts) |
|
Statement of Operations Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product revenue |
|
$ |
29,988 |
|
|
$ |
27,893 |
|
|
$ |
27,544 |
|
|
$ |
23,864 |
|
|
$ |
12,348 |
|
Other revenue |
|
|
222 |
|
|
|
10,945 |
|
|
|
2,247 |
|
|
|
3,060 |
|
|
|
2,373 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues, net |
|
|
30,210 |
|
|
|
38,838 |
|
|
|
29,791 |
|
|
|
26,924 |
|
|
|
14,721 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs and expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of goods sold |
|
|
17,310 |
|
|
|
15,771 |
|
|
|
16,004 |
|
|
|
13,158 |
|
|
|
5,476 |
|
Marketing, general and administrative |
|
|
14,392 |
|
|
|
13,806 |
|
|
|
13,995 |
|
|
|
12,556 |
|
|
|
5,206 |
|
Research and development |
|
|
4,058 |
|
|
|
3,461 |
|
|
|
2,828 |
|
|
|
1,893 |
|
|
|
776 |
|
Goodwill Impairment |
|
|
9,575 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total costs and expenses |
|
|
45,335 |
|
|
|
33,038 |
|
|
|
32,827 |
|
|
|
27,607 |
|
|
|
11,458 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income from operations |
|
|
(15,125 |
) |
|
|
5,800 |
|
|
|
(3,036 |
) |
|
|
(683 |
) |
|
|
3,263 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other (expense) and income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain on sale of available for sale
securities |
|
|
0 |
|
|
|
75 |
|
|
|
1,157 |
|
|
|
3,412 |
|
|
|
0 |
|
Equity in Ocular Telehealth
Management, LLC |
|
|
(88 |
) |
|
|
(88 |
) |
|
|
(174 |
) |
|
|
(64 |
) |
|
|
0 |
|
Interest income |
|
|
300 |
|
|
|
208 |
|
|
|
162 |
|
|
|
69 |
|
|
|
59 |
|
Interest expense |
|
|
(12 |
) |
|
|
(29 |
) |
|
|
(64 |
) |
|
|
(55 |
) |
|
|
(407 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other (expense) and income |
|
|
200 |
|
|
|
166 |
|
|
|
1,081 |
|
|
|
3,362 |
|
|
|
(348 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income before taxes |
|
|
(14,925 |
) |
|
|
5,966 |
|
|
|
(1,955 |
) |
|
|
2,679 |
|
|
|
2,915 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for income taxes |
|
|
135 |
|
|
|
51 |
|
|
|
31 |
|
|
|
232 |
|
|
|
173 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income |
|
$ |
(15,060 |
) |
|
$ |
5,915 |
|
|
$ |
(1,986 |
) |
|
$ |
2,447 |
|
|
$ |
2,742 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net (loss) income per share |
|
$ |
(2.36 |
) |
|
$ |
0.93 |
|
|
$ |
(0.32 |
) |
|
$ |
0.42 |
|
|
$ |
0.70 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net (loss) income per share |
|
$ |
(2.36 |
) |
|
$ |
0.92 |
|
|
$ |
(0.32 |
) |
|
$ |
0.39 |
|
|
$ |
0.64 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares — basic used
in per share calculation |
|
|
6,389 |
|
|
|
6,375 |
|
|
|
6,152 |
|
|
|
5,832 |
|
|
|
3,897 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares — diluted
used in per share calculation |
|
|
6,389 |
|
|
|
6,434 |
|
|
|
6,152 |
|
|
|
6,231 |
|
|
|
4,304 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
At June 30, |
| |
|
2008 |
|
2007 |
|
2006 |
|
2005 |
|
2004 |
| |
|
(Amounts in thousands) |
| Balance Sheet Data: |
|
|
Cash and cash equivalents |
|
$ |
3,708 |
|
|
$ |
8,879 |
|
|
$ |
3,380 |
|
|
$ |
5,116 |
|
|
$ |
12,602 |
|
Working capital |
|
|
10,547 |
|
|
|
17,238 |
|
|
|
10,616 |
|
|
|
13,613 |
|
|
|
13,966 |
|
Total assets |
|
|
31,896 |
|
|
|
45,017 |
|
|
|
38,645 |
|
|
|
40,049 |
|
|
|
29,457 |
|
Current portion of long term debt |
|
|
502 |
|
|
|
150 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt, net of current portion |
|
|
251 |
|
|
|
0 |
|
|
|
163 |
|
|
|
392 |
|
|
|
2,396 |
|
Total liabilities |
|
|
7,364 |
|
|
|
5,612 |
|
|
|
5,545 |
|
|
|
5,530 |
|
|
|
5,996 |
|
Accumulated deficit |
|
|
(43,267 |
) |
|
|
(28,208 |
) |
|
|
(34,122 |
) |
|
|
(32,136 |
) |
|
|
(34,585 |
) |
No cash dividends were paid in any of the periods presented.
14
10. Goodwill Impairment
Drew encountered a series of events during the third and fourth quarters of the fiscal year
ended June 30, 2008 that had a material effect on the valuation of our goodwill related to the
purchase of Drew. These events include a development delay of Drew’s DS-360 instrument that Drew
had previously anticipated would be completed by the fourth quarter of the fiscal year ended June
30, 2008, and a contract dispute with Point Care Technologies (“PCT”) that has delayed the
development of Drew’s 2280 HT HIV instrument (see footnote 8 “Commitments and Contingencies” in the
notes to the financial statements in the Company’s Form 10-K annual report for the fiscal year
ended June 30, 2008).
The development of Drew’s proposed new diabetes instrument, the DS-360, is indefinitely
delayed because of difficulties related to the final phase of its development. The DS-360 is to be
Drew’s next generation diabetes instrument, which is a key line of business for Drew. The
uncertainty of the DS-360’s completion combined with the continued aging of Drew’s existing
diabetes instrument offerings has had a negative impact on Drew’s estimated future operating
results and cash flow. Drew, in consultation with independent consultants, continues to evaluate
the development status of the DS-360 project. Until the evaluation is completed, Drew cannot
estimate the timing of the 510(k) application submission for the instrument to the FDA or whether
the submission will be made.
Also, Drew had anticipated that the joint development project it had undertaken with PCT of
Drew’s 2280 HT HIV instrument would be completed during the fiscal year ended June 30, 2008. In
December 2008 Drew settled a contract dispute with PCT relating to this project (see footnote 8
“Commitments and Contingencies” in the Company’s Form 10-K annual report for the fiscal year ended
June 30, 2008 for details on the dispute). As part of the settlement, dated November 3, 2008 Drew
and PCT are no longer jointly developing the 2280 HT HIV instrument, and Drew is unable to estimate
when or if the 2280 HT HIV instrument will be completed. Drew undertook the development effort at
considerable cost because it believed that the 2280 HT HIV instrument had significant potential in
monitoring the status of HIV patients. The uncertainty whether the 2280 HT HIV will be completed
has had a negative impact on Drew’s estimated future operating results and cash flow.
Because of these developments and the continued diminished operating results of Drew’s aging
legacy projects, the Company reduced its work force during the fourth quarter of the year ended
June 30, 2008 by 23 positions and restructured certain management responsibilities. These events
negatively affected the evaluation by the Company of the future operating results and cash flows of
Drew.
The Company tests goodwill for possible impairment on an annual basis and at any other time
events occur or circumstances indicate that the carrying amount of goodwill may be impaired.
The first step of the SFAS No. 142 impairment analysis consists of a comparison of the fair
value of the reporting segment with its carrying amount, including the goodwill. The fair value was
determined based on the income approach, which estimates the fair value based on the future
discounted cash flows. Under the income approach, the Company assumed, with respect to Drew, a
forecasted cash flow period of five years, long-term annual growth rates of 5% and a discount rate
of 14%.
Based on the annual income approach analysis that was separately performed for each operating
segment, it was determined that in the Drew segment the carrying amount of the goodwill was in
excess of its respective fair value. As such, the Company was required to perform the second step
analysis for Drew in order to determine the amount of the goodwill impairment. The second step
analysis consisted of comparing the implied fair value of the goodwill with the carrying amount of
the goodwill, with an impairment charge resulting from any excess of the carrying value of the
goodwill over the implied fair value of the goodwill. Based on the second step analysis, the
Company concluded that all $9,574,655 of the goodwill recorded at Drew was impaired. As a result,
the Company recorded a non-cash goodwill impairment charge to operations totaling $9,574,655 during the quarter ended June 30, 2008.
The determination as to whether a write-down of goodwill is necessary involves significant
judgment based on short-term and long-term projections of the Company. The assumptions supporting
the
15
estimated future cash flows of the reporting segment, including profit margins, long-term
forecasts, discount rates and terminal growth rates, reflect the Company’s best estimates.
11. Recently Issued Accounting Standards
In December 2007, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 141(R),
Business Combinations (“SFAS 141(R)”). SFAS 141(R) will significantly change the accounting for
business combinations in a number of areas including the treatment of contingent consideration,
contingencies, acquisition costs, in-process research and development and restructuring costs. In
addition, under SFAS 141(R), changes in deferred tax asset valuation allowances and acquired income
tax uncertainties in a business combination after the measurement period will impact income tax
expense. SFAS 141(R) applies prospectively to business combinations for which the acquisition date
is on or after the beginning of the first annual reporting period beginning on or after December
15, 2008. Early application is not permitted. The effect of SFAS 141(R) on our consolidated
financial statements will be dependent on the nature and terms of any business combinations that we
consummate on or after July 1, 2009.
In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated
Financial Statements (“SFAS 160”). SFAS 160 amends Accounting Research Bulletin No. 51 to establish
accounting and reporting standards for the noncontrolling (minority) interest in a subsidiary and
for the deconsolidation of a subsidiary. It clarifies that a noncontrolling interest in a
subsidiary is an ownership interest in the consolidated entity that should be reported as equity in
the consolidated financial statements and establishes a single method of accounting for changes in
a parent’s ownership interest in a subsidiary that do not result in deconsolidation. SFAS 160 is
effective for fiscal years beginning on or after December 15, 2008. We do not expect the adoption
of SFAS 160 to have a significant impact on our consolidated financial statements unless a future
transaction results in a noncontrolling interest in a subsidiary.
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and
Financial Liabilities Including an Amendment of FASB Statement No. 115 (“SFAS No. 159”). SFAS No.
159 permits a company to choose to measure many financial instruments and other items at fair value
that are not currently required to be measured at fair value. The objective is to improve financial
reporting by providing a company with the opportunity to mitigate volatility in reported earnings
caused by measuring related assets and liabilities differently without having to apply complex
hedge accounting provisions. SFAS No. 159 is effective for fiscal years beginning after November
15, 2007 and, accordingly, we adopted the provisions of this Statement on July 1, 2008.
In June 2007, the FASB ratified Emerging Issues Task Force Issue 07-3, Accounting for Advance
Payments for Goods or Services to Be Used in Future Research and Development Activities (“EITF
07-3”). EITF 07-3 provides guidance on the capitalization of non-refundable advance payments for
goods and services to be used in future research and development activities until such goods have
been delivered or the related services have been performed. As applicable to us, this pronouncement
became effective for our fiscal year beginning on July 1, 2008.
In July 2006, the FASB issued FASB Interpretation No. 48, Accounting for Uncertainty in Income
Taxes—an interpretation of FASB Statement No. 109 (“FIN 48”). FIN 48 clarifies the accounting for
uncertainty in income taxes recognized in the enterprise’s financial statements. This
Interpretation prescribes a recognition threshold and measurement attribute for the financial
statement recognition and measurement of a tax position taken or expected to be taken in the tax
return. We adopted the provisions of FIN 48 on July 1, 2007. As of the date of adoption, the
2005-2007 tax years remain subject to examination by major tax jurisdictions. As of June 30, 2008,
the 2005-2008 tax years remain subject to examination by major tax jurisdictions.
As a result of the implementation of FIN 48, we recognized no material adjustments in the
liability for unrecognized income tax benefits and, at the adoption date of July 1, 2008, we had no
unrecognized tax benefits which would have affected our effective tax rate if recognized. At June
30, 2008, we also had no unrecognized tax benefits. If uncertain tax positions had been recorded,
then we would recognize interest
16
and penalties related to uncertain tax positions in income tax
expense. As of June 30, 2008, no accrued interest related to uncertain tax positions has been
recorded.
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements (“SFAS No. 157”).
SFAS No. 157 establishes a framework for measuring fair value and expands the disclosures on fair
value measurements. The FASB Agreed to defer the effective date of SFAS 157 for all nonfinancial
assets and liabilities, except those that are recognized or disclosed at fair value in the
financial statements on a recurring basis. The FASB again rejected the proposal of a full one year
deferral of the effective date of SFAS 157. SFAS 157 was issued in September 2006, and is
effective for financial statements issued for fiscal years beginning after November 15, 2007 and
interim periods within those fiscal years. The company adopted this statement on July 1, 2008 for
assets and liabilities not subject to the deferral and will adopt this statement on July 1, 2009
for all other assets and liabilities. SFAS 157 did not have and is not expected to have a material
effect on the condensed financial position, results of operations or cash flows of the Company.
12. Recent Developments
Sonomed encountered a series of events during the third quarter that may have a material
effect on the valuation of the Company’s goodwill. These events include a development delay of
Sonomed’s VuMax III that was previously anticipated would be completed by the fourth quarter of the
fiscal year ending June 30, 2009, and the overall deterioration of sales and continued margin
compression on Sonomed’s international sales.
The development of Sonomed’s VuMax III is significantly delayed due to difficulties related to
the final phase of the development of the instrument. Sonomed, in consultation with independent
consultants, is in the process of evaluating the development status of the VuMax III. Until the
evaluation is completed Sonomed will not be able to estimate the timing or likelihood of product
introduction.
Sonomed is also experiencing a decrease in sales, particularly in Europe, and continued margin
compression on its international business. Sonomed cannot determine when or if sales volumes will
rebound or if margins will materially improve.
At March 31, 2009, the Company had approximately $9.5 million of goodwill recorded on its
balance sheet as a result of its purchase of Sonomed. If Sonomed’s efforts to complete the VuMax
III are not successful or is significantly delayed, and the decrease in sales and compressed
margins on international sales continue, the Company could be required to record an impairment
charge with respect to all or a portion of the related recorded goodwill.
13. SFAS No. 157, “Fair Value Measurements”
On July 1, 2008, the Company adopted Financial Accounting Standards No. 157 Fair Value
Measurement (“SFAS 157”) for financial assets and liabilities. This standard defines fair value
and establishes a hierarchy for reporting the reliability of input measurements used to assess fair
value for all assets and liabilities. SFAS 157 defines fair value as the selling price that would
be received for an asset, or paid to transfer a liability, in the principal or most advantageous
market on the measurement date. The
17
hierarchy established prioritizes fair value measurements
based on the types of inputs used in the valuation technique. The inputs are categorized in the
following levels:
Level 1 — Observable inputs such as quoted prices in active markets for identical assets or
liabilities
Level 2 — Directly or indirectly observable inputs for quoted and other than quoted prices for
identical or similar assets and liabilities in active or non-active markets.
Level 3 — Unobservable inputs not corroborated by market data, therefore requiring the entity to
use the best available information available in the circumstances, including the entity’s own data
Certain financial instruments are carried at cost on the condensed consolidated balance sheets,
which approximates fair value due to their short-term, highly liquid nature. These instruments
include cash and cash equivalents, accounts receivable, accounts payable and accrued expenses and
other liabilities.
The Company determined that the fair value of the outstanding long term debt approximates their
outstanding balances based on the remaining maturity of these instruments and other Level 3
measurements. The Company determined the estimated fair value amounts by using available market
information and commonly accepted valuation methodologies. However, considerable judgment is
required in interpreting market data as well as the risk of nonperformance related to the long term
debt. The use of different assumptions and/or estimation methodologies may have a material effect
on the estimate fair values.
14. Continuing Operations
As shown in the accompanying financial statements, the Company incurred a net loss and had
negative cash flows from operations during the nine-month period ended March 31, 2009. Management
of the Company has implemented a series of cost cutting measures to address these continuing losses
and negative cash flows from operations. Management projects that these measures will be
sufficient to allow all cash needs for the next 12 months to be provided by the Company’s
operations. The ability of the Company to continue as a going concern is dependent on the success
of these measures. The financial statements do not include any adjustments that might be necessary
if the Company is unable to continue as a going concern.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
This Management’s Discussion and Analysis of Financial Condition and Results of Operations should
be read in conjunction with our Financial Statements and related notes thereto and other financial
information elsewhere in this Form 10-Q and our Annual Report on Form 10-K for the year ended June
30, 2008.
Forward Looking Statements
Certain statements contained in, or incorporated by reference in, this report are
forward-looking statements made pursuant to the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995, which provide current expectations or forecasts of future events.
Such statements can be identified by the use of terminology such as “anticipate,” “believe,”
“could,” “estimate,” “expect,” “forecast,” “intend,” “may,” “plan,” “possible,” “project,”
“should,” “will,” and similar words or expressions. The Company’s forward-looking statements
include certain information relating to general business strategy, growth strategies, financial
results, liquidity, product development, the introduction of new products, the potential markets
and uses for the Company’s products, the Company’s regulatory filings with the FDA, acquisitions,
the development of joint venture opportunities, intellectual property and patent protection and
infringement, the loss of revenue due to the expiration or termination of certain agreements, the
effect of competition on the structure of the markets in which the Company competes and defending
the Company in litigation matters. The reader must carefully consider forward-looking statements
and understand that such statements involve a variety of risks and uncertainties, known and
unknown, and may be affected by assumptions that fail to materialize as anticipated. Consequently,
no forward-looking statement can be guaranteed, and actual results may vary materially. It is not
possible to foresee or identify all factors affecting the Company’s forward-looking statements, and
the reader therefore should not consider the list
18
of such factors contained in its periodic report
on Form 10-K for the year ended June 30, 2008 to be an exhaustive statement of all risks,
uncertainties or potentially inaccurate assumptions.
Executive Overview — Nine-Month Period Ended March 31, 2009
The following highlights are discussed in further detail within this report. The reader is
encouraged to read this report in its entirety to gain a more complete understanding of factors
impacting Company performance and financial condition.
| |
• |
|
Product revenue increased approximately 15.5% during the nine-month period ended March
31, 2009 as compared to the same period last fiscal year. The increase was primarily
related to increases in the Drew, Sonomed and EMI business segments. Product revenue at
Drew, Sonomed and EMI increased 33.8%, 1.1% and 32.5%, respectively, during the nine-month
period ended March 31, 2009 when compared to the same period last fiscal year. These
increases were offset by weakened sales in the Company’s Vascular and Medical/Trek
business segments. Sales at Vascular and Medical/Trek decreased approximately 6.9%, and
9.2%, respectively, during the nine-month period ended March 31, 2009 compared to the same
period last fiscal year. |
| |
| |
• |
|
Other revenue decreased approximately $57,000 or 37.0% during the nine-month period
ended March 31, 2009 as compared to the same period last fiscal year. This was
attributable to decreased Bio-Rad royalties received in the Drew business segment. |
| |
| |
• |
|
Cost of goods sold as a percentage of product revenue decreased to approximately 54.9%
during the nine-month period ended March 31, 2009, as compared to approximately 57.0% for
the same period last fiscal year. Gross margins in the Drew business segment, which have
historically been lower than those in the Company’s other business segments, improved to
41.7% due to the addition of higher margin JAS and Biocode reagent sales. The aggregate
cost of goods sold as a percentage of product revenue of the Sonomed, Vascular, EMI and
Medical/Trek business segments during the nine-month period ended March 31, 2009 was
approximately 51.3% in the current period as compared to 51.0% in the same period last
fiscal year. |
| |
| |
• |
|
Marketing, general and administrative expenses increased approximately 4.3% during the
nine-month period ended March 31, 2009 as compared to the same period in the prior fiscal
year. The increase was due to the addition of JAS and Biocode in the current period. |
| |
| |
• |
|
On November 20, 2009 the Company completed a $1,100,000 private placement of common
stock and common stock purchase warrants to accredited investors. The Company sold
1,000,000 shares of common stock at $1.10 per share. The investors also received warrants
to purchase an additional 150,000 shares of common stock at an exercise price of $1.21 per
share. |
Company Overview
The following discussion should be read in conjunction with interim condensed consolidated
financial statements and the notes thereto, which are set forth in Item 1 this report.
The Company operates in the healthcare market specializing in the development, manufacture,
marketing and distribution of medical devices and pharmaceuticals in the areas of ophthalmology,
diabetes, hematology and vascular access. The Company and its products are subject to regulation
and inspection by the FDA. The FDA requires extensive testing of new products prior to sale and
has jurisdiction over the safety, efficacy and manufacture of products, as well as product labeling
and marketing. The Company’s internet address is www.escalonmed.com.
19
Critical Accounting Policies
The preparation of financial statements requires management to make estimates and assumptions
that impact amounts reported therein. The most significant of those involve the application for
SFAS 142,
discussed further in Note 10 of the notes to the condensed consolidated financial statements
included in this report. The financial statements are prepared in conformity with accounting
principles generally accepted in the United States of America, and, as such, include amounts based
on informed estimates and judgments of management. For example, estimates are used in determining
valuation allowances for deferred income taxes, uncollectible receivables, obsolete inventory,
sales returns and rebates and purchased intangible assets. Actual results achieved in the future
could differ from current estimates. The Company used what it believes are reasonable assumptions
and, where applicable, established valuation techniques in making its estimates.
Revenue Recognition
The Company recognizes revenue from the sale of its products at the time of shipment, when
title and risk of loss transfer. The Company provides products to its distributors at agreed
wholesale prices and to the balance of its customers at set retail prices. Distributors can
receive discounts for accepting high volume shipments. The discounts are reflected immediately in
the net invoice price, which is the basis for revenue recognition. No further material discounts
are given.
The Company’s considerations for recognizing revenue upon shipment of product to a distributor
are based on the following:
| |
• |
|
Persuasive evidence that an arrangement (purchase order and sales invoice) exists
between a willing buyer (distributor) and the Company that outlines the terms of the sale
(company information, quantity of goods, purchase price and payment terms). The buyer
(distributor) does not have an immediate right of return. |
| |
| |
• |
|
Shipping terms are ex-factory shipping point. At this point the buyer (distributor)
takes title to the goods and is responsible for all risks and rewards of ownership,
including insuring the goods as necessary. |
| |
| |
• |
|
The Company’s price to the buyer (distributor) is fixed and determinable as
specifically outlined on the sales invoice. The sales arrangement does not have customer
cancellation or termination clauses. |
| |
| |
• |
|
The buyer (distributor) places a purchase order with the Company; the terms of the sale
are cash, COD or credit. Customer credit is determined based on the Company’s policies
and procedures related to the buyer’s (distributor’s) creditworthiness. Based on this
determination, the Company believes that collectibility is reasonably assured. |
The Company assesses collectibility based on creditworthiness of the customer and past
transaction history. The Company performs ongoing credit evaluations of its customers and does not
require collateral from its customers. For many of the Company’s international customers, the
Company requires an irrevocable letter of credit to be issued by the customer before the purchase
order is accepted.
Valuation of Intangible Assets
The Company annually evaluates for impairment its intangible assets and goodwill in accordance
with SFAS 142, “Goodwill and Other Intangible Assets,” or whenever events or changes in
circumstances indicate that the carrying value may not be recoverable. These intangible assets
include goodwill, trademarks and trade names. Factors the Company considers important that could
trigger an impairment review include significant under-performance relative to historical or
projected future operating results or significant negative industry or economic trends. If these
criteria indicate that the value of the intangible asset may be impaired, an evaluation of the
recoverability of the net carrying value of the asset is made. If this evaluation indicates that
the intangible asset is not recoverable, the net carrying value of the related intangible asset
will be reduced to fair value. Any such impairment charge could be significant and could have a
material adverse impact on the Company’s financial statements if and when an impairment charge is
20
recorded. No impairment losses were recorded for goodwill, trademarks and trade names during any
of the periods presented based on these evaluations.
At March 31, 2009, The Company had approximately $11.6 million of goodwill recorded on its
balance sheet.
(Loss) Per Share
The Company computes net (loss) per share under the provisions of SFAS No. 128, Earnings per
Share (SFAS 128), and Staff Accounting Bulletin, No. 98 (SAB 98).
Under the provisions of SFAS 128 and SAB 98, basic and diluted net (loss) per share is
computed by dividing the net (loss) for the period by the weighted average number of shares of
common stock outstanding during the period. The calculation of diluted net (loss) per share
excludes potential common shares if the effect is anti-dilutive. Basic earnings per share are
computed by dividing net (loss)/income by the weighted average number of shares of common stock
outstanding during the period. Diluted earnings per share are determined in the same manner as
basic earnings per share, except that the number of shares is increased by assuming exercise of
dilutive stock options and warrants using the treasury stock method.
Taxes
Estimates of taxable income of the various legal entities and jurisdictions are used in the
tax rate calculation. Management uses judgment in estimating what the Company’s income will be for
the year. Since judgment is involved, there is a risk that the tax rate may significantly increase
or decrease in any period.
In determining (loss)/income for financial statement purposes, management must make certain
estimates and judgments. These estimates and judgments occur in the calculation of certain tax
liabilities and in the determination of the recoverability of certain of the deferred tax assets,
which arise from temporary differences between the tax and financial statement recognition of
revenue and expense. SFAS 109 also requires that the deferred tax assets be reduced by a valuation
allowance, if based on the available evidence, it is more likely than not that all or some portion
of the recorded deferred tax assets will not be realized in future periods.
In evaluating the Company’s ability to recover the Company’s deferred tax assets, management
considers all available positive and negative evidence including the Company’s past operating
results, the existence of cumulative losses and near-term forecasts of future taxable income that
is consistent with the plans and estimates management is using to manage the underlying businesses.
Through March 31, 2009, the Company has recorded a full valuation allowance against the
Company’s net operating losses due to the uncertainty of their realization as a result of the
Company’s earnings history, the number of years the Company’s net operating losses and tax credits
can be carried forward, the existence of taxable temporary differences and near-term earnings
expectations. The amount of the valuation allowance could decrease if facts and circumstances
change that materially increase taxable income prior to the expiration of the loss carry forwards.
Any reduction would reduce (increase) the income tax expense (benefit) in the period such
determination is made by the Company.
Three- and Nine-Month Periods Ended March 31, 2009 and 2008
The following table shows consolidated product revenue by business segment as well as
identifying trends in business segment product revenues for the three- and nine-month periods ended
March 31, 2009 and 2008. Table amounts are in thousands:
21
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
For the Three Months Ended March 31, |
|
|
For the Nine Months Ended March 31, |
|
| |
|
2009 |
|
|
2008 |
|
|
% Change |
|
|
2009 |
|
|
2008 |
|
|
% Change |
|
Product Revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Drew |
|
$ |
5,105 |
|
|
$ |
3,610 |
|
|
|
41.4 |
% |
|
$ |
13,108 |
|
|
$ |
9,798 |
|
|
|
33.8 |
% |
Sonomed |
|
|
2,153 |
|
|
|
2,444 |
|
|
|
-11.9 |
% |
|
|
7,285 |
|
|
|
7,206 |
|
|
|
1.1 |
% |
Vascular |
|
|
1,012 |
|
|
|
1,445 |
|
|
|
-30.0 |
% |
|
|
2,908 |
|
|
|
3,125 |
|
|
|
-6.9 |
% |
EMI |
|
|
590 |
|
|
|
313 |
|
|
|
88.5 |
% |
|
|
1,656 |
|
|
|
1,250 |
|
|
|
32.5 |
% |
Medical/Trek |
|
|
314 |
|
|
|
327 |
|
|
|
-4.0 |
% |
|
|
947 |
|
|
|
1,043 |
|
|
|
-9.2 |
% |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
9,174 |
|
|
$ |
8,139 |
|
|
|
12.7 |
% |
|
$ |
25,904 |
|
|
$ |
22,422 |
|
|
|
15.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product revenue increased approximately $1,035,000, or 12.7%, to $9,174,000 for the
three-month period ended March 31, 2009 as compared to the same period last fiscal year.
In the Drew business segment, product revenue increased $1,495,000, or 41.4%, as compared to
the same period last fiscal year. The increase in product revenue is related to the acquisition of
JAS Diagnostics in May 2008 and Biocode in December 2008. JAS and Biocode generated $325,000 and
$1,262,000 in revenue, respectively, for the three-month period ended March 31, 2009.
Product revenue decreased $291,000 or 11.9%, at the Sonomed business segment as compared to
the same period last fiscal year. The decrease in product revenue is due to a material drop in
sales to Sonomed’s European distributors related to the current difficult economic climate in
Europe. Sonomed cannot determine when or if sales volumes will rebound or if margins will
materially improve.
Product revenue decreased $433,000, or 30.0%, to $1,012,000 in the Vascular business segment
during the three-month period ended March 31, 2009, as compared to the same period last fiscal
year. The decrease in product revenue in the Vascular business segment was primarily related to an
increase in sales of Vascular’s new VascuView system in the prior year. The VascuView was approved
and ready for sale during the third quarter of fiscal 2008 and generated $525,000 in sales during
that period.
Product revenue increased $277,000, or 88.5%, in the EMI business segment when compared to the
same period last year. EMI continues to modify and improve its product offering and is gaining
market share in the digital imaging space.
In the Medical/Trek business segment, product revenue decreased $13,000, or 4.0%, to $314,000
during the three-month period ended March 31, 2009 as compared to the same period last fiscal year.
The decrease in Medical/Trek product revenue is attributed to Medical/Trek’s aging product line of
Ispan Intraocular gases and fiber optic light sources.
Product revenue increased approximately $3,482,000, or 15.5%, to $25,904,000 during the
nine-month period ended March 31, 2009 as compared to the same period last fiscal year.
In the Drew business segment, product revenue increased $3,310,000, or 33.8%, as compared to
the same period last fiscal year. The increase in product revenue is related to the acquisition of
JAS Diagnostics in May 2009 and Biocode in December 2008. JAS and Biocode generated $1,305,000 and
$1,262,000, respectively, in revenue for the nine month period ended March 31, 2009.
In the Sonomed business segment, product revenue increased $79,000, or 1.1%, as compared to
the same period last fiscal year. The increase in product revenue was primarily caused by an
increase in international sales related to the efforts of a new sales manager covering Southeast
Asia, India and the Pacific Rim, offset by a decrease in product revenue at Sonomed’s European
distributors related to the
current difficult economic climate in Europe. Sonomed cannot determine when or if European
sales volumes will rebound or if margins will materially improve.
22
In the Vascular business segment, product revenue decreased $217,000, or 6.9%, to $2,908,000
during the nine-month period ended March 31, 2009 as compared to the same period last fiscal year.
The decrease in product revenue in the Vascular business segment was primarily related to an
increase in sales of Vascular’s new VascuView system in the prior year. The VascuView was approved
and ready for sale during the third quarter of fiscal 2008 and generated $525,000 in sales during
that period.
Product revenue increased $406,000, or 32.5%, during the nine-month period ended March 31,
2009 in the EMI business segment when compared to the same period last year. The increase in sales
is related to the continued expansion of EMI’s product offerings and by the increased effectiveness
of two new salespeople brought on during the last year.
In the Medical/Trek business segment, product revenue decreased $96,000, or 9.2%, to $947,000
during the nine-month period ended March 31, 2009 as compared to the same period last fiscal year.
The decrease in Medical/Trek product revenue is attributed to Medical/Trek’s aging product line of
Ispan Intraocular gases and fiber optic light sources.
The following table shows consolidated other revenue by business segment as well as
identifying trends in business segment other revenues for the three- and nine-month periods ended
March 31, 2009 and 2008. Table amounts are in thousands:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
For the Three Months Ended March 31, |
|
|
For the Nine Months Ended March 31, |
|
| |
|
2009 |
|
|
2008 |
|
|
% Change |
|
|
2009 |
|
|
2008 |
|
|
% Change |
|
Other Revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Drew |
|
$ |
31 |
|
|
$ |
49 |
|
|
|
-36.7 |
% |
|
$ |
97 |
|
|
$ |
154 |
|
|
|
-37.0 |
% |
Sonomed |
|
|
0 |
|
|
|
0 |
|
|
|
0.0 |
% |
|
|
0 |
|
|
|
0 |
|
|
|
0.0 |
% |
Vascular |
|
|
0 |
|
|
|
0 |
|
|
|
0.0 |
% |
|
|
0 |
|
|
|
0 |
|
|
|
0.0 |
% |
EMI |
|
|
0 |
|
|
|
0 |
|
|
|
0.0 |
% |
|
|
0 |
|
|
|
0 |
|
|
|
0.0 |
% |
Medical/Trek |
|
|
0 |
|
|
|
0 |
|
|
|
0.0 |
% |
|
|
0 |
|
|
|
0 |
|
|
|
0.0 |
% |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
31 |
|
|
$ |
49 |
|
|
|
-36.7 |
% |
|
$ |
97 |
|
|
$ |
154 |
|
|
|
-37.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other revenue decreased by approximately $18,000, or 36.7%, to $31,000 during the three-month
period ended March 31, 2009 as compared to the same period last fiscal year. Other revenue
decreased by approximately $57,000, or 37.0%, to $97,000 during the nine-month period ended March
31, 2009 as compared to the same period last fiscal year. These decreases were attributable to
decreased royalties from Bio-Rad related to an OEM agreement between Bio-Rad and Drew as a result
of lower sales of Drew’s products in covered areas. While this agreement terminated as of May 15,
2006, the parties have continued to operate under the terms of the expired agreement pending
negotiation of a potential extension and/or revision.
The following table presents consolidated cost of goods sold by reportable business segment
and as a percentage of related segment product revenues for the three- and nine-month periods ended
March 31, 2009 and 2008. Table amounts are in thousands:
23
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
For the Three Months Ended March 31, |
|
|
For the Nine Months Ended March 31, |
|
| |
|
2009 |
|
|
% |
|
|
2008 |
|
|
% |
|
|
2009 |
|
|
% |
|
|
2008 |
|
|
% |
|
Cost of Goods Sold: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Drew |
|
$ |
2,599 |
|
|
|
50.9 |
% |
|
$ |
2,509 |
|
|
|
69.5 |
% |
|
$ |
7,648 |
|
|
|
58.3 |
% |
|
$ |
6,353 |
|
|
|
64.8 |
% |
Sonomed |
|
|
1,189 |
|
|
|
55.2 |
% |
|
|
1,312 |
|
|
|
53.7 |
% |
|
|
4,004 |
|
|
|
55.0 |
% |
|
|
3,778 |
|
|
|
52.4 |
% |
Vascular |
|
|
408 |
|
|
|
40.3 |
% |
|
|
660 |
|
|
|
45.7 |
% |
|
|
1,074 |
|
|
|
36.9 |
% |
|
|
1,294 |
|
|
|
41.4 |
% |
EMI |
|
|
311 |
|
|
|
52.7 |
% |
|
|
176 |
|
|
|
56.2 |
% |
|
|
842 |
|
|
|
50.9 |
% |
|
|
640 |
|
|
|
51.2 |
% |
Medical/Trek |
|
|
221 |
|
|
|
70.1 |
% |
|
|
256 |
|
|
|
78.3 |
% |
|
|
640 |
|
|
|
67.6 |
% |
|
|
722 |
|
|
|
69.2 |
% |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
4,728 |
|
|
|
51.5 |
% |
|
$ |
4,913 |
|
|
|
60.4 |
% |
|
$ |
14,208 |
|
|
|
54.9 |
% |
|
$ |
12,787 |
|
|
|
57.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of goods sold totaled approximately $4,728,000, or 51.5% of product revenue, for the
three-month period ended March 31, 2009, as compared to $4,913,000 or 60.4%, of product revenue for
the same period last fiscal year.
Cost of goods sold in the Drew business segment totaled $2,599,000, or 50.9% of product
revenue, for the three-month period ended March 31, 2009 as compared to $2,509,000, or 69.5% of
product revenue, for the same period last fiscal year. Gross margins in the Drew business segment
which have historically been lower than those in the Company’s other business segments improved to
49.1% due to the addition of higher margin JAS and Biocode reagent sales.
Cost of goods sold in the Sonomed business segment totaled $1,189,000, or 55.2% of product
revenue, for the three-month period ended March 31, 2009 as compared to $1,312,000, or 53.7% of
product revenue, for the same period last fiscal year. The increase in Sonomed’s cost of goods
sold as a percentage of revenue was primarily caused by an increase in sales discounts during the
period as a result of a large increase in sales to the more price sensitive international market
combined with a decrease in overall domestic sales.
Cost of goods sold in the Vascular business segment totaled $408,000, or 40.3% of product
revenue, for the three-month period ended March 31, 2009 as compared to $660,000, or 45.7% of
product revenue, for the same period last fiscal year. The decrease in Vascular’s cost of goods
sold as a percentage of revenue was primarily caused by the first sale of Vascular’s new VascuView
system during the third quarter of fiscal 2008. Vascular sold 50 units that yielded approximately
a 50% margin. Vascular’s margins on its traditional needle business remain unchanged at
approximately 60%.
Cost of goods sold in the EMI business segment totaled $311,000, or 52.7% of product revenue,
for the three-month period ended March 31, 2009 as compared to $176,000, or 56.2% of product
revenue, during the same period last fiscal year. The decrease in cost of goods sold as a
percentage of revenue is due to the product mix sold during the quarter.
Cost of goods sold in the Medical/Trek business segment totaled $221,000, or 70.1% of product
revenue, for the three-month period ended March 31, 2009 as compared to $256,000, or 78.3% of
product revenue, for the same period last fiscal year. The reason for the decrease in cost of
goods sold as a percentage of revenue is an increase in the cost of raw materials experienced
during the same period last year and an increase in Trek sales prices effective April 1, 2008.
Cost of goods sold totaled approximately $14,208,000, or 54.9% of product revenue, for the
nine-month period ended March 31, 2009, as compared to $12,787,000, or 57.0% of product revenue,
for the same period last fiscal year.
Cost of goods sold in the Drew business segment totaled $7,648,000, or 58.3% of product
revenue, for the nine-month period ended March 31, 2009 as compared to $6,353,000, or 64.8% of
product revenue, for the same period last fiscal year. Gross margins in the Drew business segment
which have
24
historically been lower than those in the Company’s other business segments improved to
41.7% due to the addition of higher margin JAS and Biocode reagent sales.
Cost of goods sold in the Sonomed business segment totaled $4,004,000, or 55.0% of product
revenue, for the nine-month period ended March 31, 2009 as compared to $3,778,000 or 52.4% of
product revenue, for the same period last fiscal year. The increase in Sonomed’s cost of goods
sold as a percentage of revenue was primarily caused by an increase in sales discounts during the
period as a result of a large increase in sales to the more price sensitive international market
combined with a decrease in overall domestic sales of the Company’s new Vumax II ultrasound
systems. Sonomed anticipates that this trend will continue until products currently under
development come online during the fourth quarter of the current fiscal year.
Cost of goods sold in the Vascular business segment totaled $1,074,000, or 36.9% of product
revenue, for the nine-month period ended March 31, 2009 as compared to $1,294,000, or 41.4% of
product revenue, for the same period last fiscal year. The decrease in Vascular’s cost of goods
sold as a percentage of revenue was primarily caused by the first sale of Vascular’s new VascuView
system during the third quarter of fiscal 2008. Vascular sold 50 units that yielded approximately
a 50% margin. Vascular’s margins on its traditional needle business remain unchanged at
approximately 60%.
Cost of goods sold in the EMI business segment totaled $842,000, or 50.9%, of product revenue
for the nine-month period ended March 31, 2009 as compared to $640,000, or 51.2%, of product
revenue, during the same period last fiscal year.
Cost of goods sold in the Medical/Trek business segment totaled $640,000, or 67.6% of product
revenue, for the nine-month period ended March 31, 2009 as compared to $722,000 or 69.2% of product
revenue, during the same period last fiscal year. The reason for the decrease in cost of goods sold
as a percentage of revenue is an increase in the cost of raw materials experienced during the same
period last year and an increase in Trek sales prices effective April 1, 2008.
The following table presents consolidated marketing, general and administrative expenses as
well as identifying trends in business segment marketing, general and administrative expenses for
the three- and nine-month periods ended March 31, 2009 and 2008. Table amounts are in thousands:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
For the Three Months Ended March 31, |
|
|
For the Nine Months Ended March 31, |
|
| |
|
2009 |
|
|
2008 |
|
|
% Change |
|
|
2009 |
|
|
2008 |
|
|
% Change |
|
| Marketing, General and Administrative: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Drew |
|
$ |
2,140 |
|
|
$ |
1,522 |
|
|
|
40.6 |
% |
|
$ |
4,719 |
|
|
$ |
3,809 |
|
|
|
23.9 |
% |
Sonomed |
|
|
908 |
|
|
|
1,059 |
|
|
|
-14.2 |
% |
|
|
2,527 |
|
|
|
2,765 |
|
|
|
-8.6 |
% |
Vascular |
|
|
456 |
|
|
|
568 |
|
|
|
-19.7 |
% |
|
|
1,354 |
|
|
|
1,401 |
|
|
|
-3.4 |
% |
EMI |
|
|
212 |
|
|
|
131 |
|
|
|
61.8 |
% |
|
|
599 |
|
|
|
428 |
|
|
|
40.0 |
% |
Medical/Trek |
|
|
497 |
|
|
|
816 |
|
|
|
-39.1 |
% |
|
|
1,661 |
|
|
|
2,005 |
|
|
|
-17.2 |
% |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
4,213 |
|
|
$ |
4,096 |
|
|
|
2.9 |
% |
|
$ |
10,860 |
|
|
$ |
10,408 |
|
|
|
4.3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketing, general and administrative expenses decreased $117,000, or 2.9%, to $4,213,000
during the three-month period ended March 31, 2009 as compared to the same period last fiscal year.
Marketing, general and administrative expenses in the Drew business segment increased
$618,000, or 40.6%, to $2,140,000 for the three-month period ended March 31, 2009 as compared to
the same period last fiscal year. This increase is due to the acquisitions of JAS and Biocode in
May and December 2008, respectively.
Marketing, general and administrative expenses in the Sonomed business segment decreased
$151,000, or 14.2%, to $908,000 for the three-month period ended March 31, 2009 as compared to the
25
same period last fiscal year. The decrease was due to decreased salaries and bonuses,
insurance, consulting, legal and travel expenses related to marketing and trade shows.
Marketing, general and administrative expenses in the Vascular business segment decreased
$112,000, or 19.7%, to $456,000 for the three-month period ended March 31, 2009 as compared to the
same period last fiscal year. The decrease was due to decreased salaries and bonuses, insurance,
consulting and legal expenses.
Marketing, general and administrative expenses in the EMI business segment increased $81,000,
or 61.8%, to $212,000 for the three-month period ended March 31, 2009 as compared to the same
period last fiscal year. The increase was primarily related to increased headcount and marketing
efforts which contributed to increasing the sales of digital imaging systems by 88.5% over the
prior period.
Marketing, general and administrative expenses in the Medical/Trek business segment decreased
$319,000, or 39.1%, to $497,000 for the three-month period ended March 31, 2009 as compared to the
same period last fiscal year. The decrease was related to decreased personnel costs attributed to
headcount, legal fees and consulting fees.
Marketing, general and administrative expenses increased $452,000, or 4.3%, to $10,860,000 for
the nine-month period ended March 31, 2009 as compared to the same period last fiscal year.
Marketing, general and administrative expenses in the Drew business segment increased
$910,000, or 23.9%, to $4,719,000 for the nine-month period ended March 31, 2009 as compared to the
same period last fiscal year. This increase is due to the acquisitions of JAS and Biocode in May
and December 2008, respectively.
Marketing, general and administrative expenses in the Sonomed business segment decreased
$238,000, or 8.6%, to $2,527,000 for the nine-month period ended March 31, 2009 as compared to the
same period last fiscal year. The decrease was due to decreased salaries and bonuses, insurance,
consulting, legal and travel expenses.
Marketing, general and administrative expenses in the Vascular business segment decreased
$47,000, or 3.4%, to $1,354,000 for the nine-month period ended March 31, 2009 as compared to the
same period last fiscal year. The decrease was due to decreased salaries and bonuses, insurance,
consulting and legal expenses.
Marketing, general and administrative expenses in the EMI business segment increased $171,000,
or 40.0%, to $599,000 for the nine-month period ended March 31, 2009 as compared to the same period
last fiscal year. The increase was primarily related to increased headcount and marketing efforts
which contributed to increasing the sales of digital imaging systems by 32.5% over the prior
period.
Marketing, general and administrative expenses in the Medical/Trek business segment decreased
$344,000, or 17.2%, to $1,661,000 for the nine-month period ended March 31, 2009 as compared to the
same period last fiscal year. The decrease was related to decreased personnel costs attributed to
headcount, legal fees and consulting fees.
The following table presents consolidated research and development expenses as well as
identifying trends in business segment research and development expenses for the three- and
nine-month periods ended March 31, 2009 and 2008. Table amounts are in thousands:
26
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
For the Three Months Ended March 31, |
|
|
For the Nine Months Ended March 31, |
|
| |
|
2009 |
|
|
2008 |
|
|
% Change |
|
|
2009 |
|
|
2008 |
|
|
% Change |
|
| Research and Development: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Drew |
|
$ |
422 |
|
|
$ |
783 |
|
|
|
-46.1 |
% |
|
$ |
1,377 |
|
|
$ |
1,975 |
|
|
|
-30.3 |
% |
Sonomed |
|
|
240 |
|
|
|
95 |
|
|
|
152.6 |
% |
|
|
928 |
|
|
|
435 |
|
|
|
113.3 |
% |
Vascular |
|
|
66 |
|
|
|
88 |
|
|
|
-25.0 |
% |
|
|
175 |
|
|
|
217 |
|
|
|
-19.4 |
% |
EMI |
|
|
83 |
|
|
|
75 |
|
|
|
10.7 |
% |
|
|
270 |
|
|
|
214 |
|
|
|
26.2 |
% |
Medical/Trek |
|
|
0 |
|
|
|
0 |
|
|
|
0.0 |
% |
|
|
0 |
|
|
|
0 |
|
|
|
0.0 |
% |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
811 |
|
|
$ |
1,041 |
|
|
|
-22.1 |
% |
|
$ |
2,750 |
|
|
$ |
2,841 |
|
|
|
-3.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development expenses decreased $230,000, or 22.1%, to $811,000 during the
three-month period ended March 31, 2009 as compared to the same period last fiscal year.
Research and development expenses in the Drew business segment decreased $361,000, or 46.1%,
to $422,000 during the three-month period ended March 31, 2009 as compared to the same period last
fiscal year. The decrease is related to the June 2008 decision to disband the research and
development department and rely on outsourced consultants under the direction of Drew to conduct
future research and development projects.
Research and development expenses in the Sonomed business segment increased $145,000, or
152.6%, to $240,000 during the three-month period ended March 31, 2009 as compared to the same
period last fiscal year. The increase is related to the development of three new products, the
PacScan Plus, MasterVu A, and the VuMax III. The PacScan Plus and MasterVu A will become available
for sale during the fourth quarter of fiscal 2009. The development of Sonomed’s Vumax III is
significantly delayed due to difficulties related to the final phase of the development of the
instrument. Sonomed, in consultation with independent consultants, is in the process of evaluating
the development status of the VuMax III. Until the evaluation is completed Sonomed will not be able
to estimate the timing of a 510(k) application submission for the instrument to the FDA or whether
a submission will be made.
Research and development expenses in the Vascular business segment decreased $22,000, or
25.0%, to $66,000 during the three-month period ended March 31, 2009 as compared to the same period
last fiscal year. The decrease was primarily due to a reduction in prototype expenses associated
with the VascuViewTM, a new visual ultrasound device, which Vascular introduced in the third
quarter of fiscal 2008.
Research and development expenses in the EMI business segment increased $8,000, or 10.7%, to
$83,000 during the three-month period ended March 31, 2009 as compared to the same period last
fiscal year. The increase was related to the continued upgrading of our digital imaging product
offering.
Research and development expenses decreased $91,000, or 3.2%, to $2,750,000 during the
nine-month period ended March 31, 2009 as compared to the same period last fiscal year.
Research and development expenses in the Drew business segment decreased $598,000, or 30.3%,
to $1,377,000 during the nine-month period ended March 31, 2009 as compared to the same period last
fiscal year. The decrease is related to the June 2008 decision to disband the research and
development department and rely on outsourced consultants under the direction of Drew to conduct
future research and development projects.
Research and development expenses in the Sonomed business segment increased $493,000, or
113.3%, to $928,000 during the nine-month period ended March 31, 2009 as compared to the same
period last fiscal year. The increase is related to the development of three new products, the
PacScan Plus,
MasterVu A, and the VuMax III. The PacScan Plus and MasterVu A will become available for sale
during the fourth quarter of fiscal 2009. The development of Sonomed’s Vumax III is significantly
delayed due to
27
difficulties related to the final phase of the development of the instrument.
Sonomed, in consultation with independent consultants, is in the process of evaluating the
development status of the VuMax III. Until the evaluation is completed Sonomed will not be able to
estimate the timing of a 510(k) application submission for the instrument to the FDA or whether a
submission will be made.
Research and development expenses in the Vascular business segment decreased $42,000, or
19.4%, to $175,000 during the nine-month period ended March 31, 2009 as compared to the same period
last fiscal year. The decrease was primarily due to a reduction in prototype expenses associated
with the VascuViewTM, a new visual ultrasound device, which Vascular introduced in the third
quarter of fiscal 2008.
Research and development expenses in the EMI business segment increased $56,000, or 26.2%, to
$270,000 during the nine-month period ended March 31, 2009 as compared to the same period last
fiscal year. The increase was related to the continued upgrading of our digital imaging product
offering.
The Company recognized a loss of $31,000 and $14,000 related to its investment in OTM during
the three-month periods ended March 31, 2009 and 2008, respectively, and $65,000 and $65,000 for
the nine-month periods ended March 31, 2009 and 2008, respectively. Commencing July 1, 2005, the
Company began recognizing all of the losses of OTM in its consolidated financial statements. OTM
is an early stage privately held company. Prior to July 1, 2005, the share of OTM’s loss
recognized by the Company was in direct proportion to the Company’s ownership equity in OTM. OTM
began operations during the three-month period ended September 30, 2004.
Interest income was $0 and $78,000 for the three-month periods ended March 31, 2009 and 2008,
respectively. The decrease was due to significantly smaller average cash balances and lower
interest rates during the current fiscal period.
Interest income was $51,000 and $265,000 for the nine-month periods ended March 31, 2009 and
2008, respectively. The decrease was due to significantly smaller average cash balances and lower
interest rates during the current fiscal period.
Interest expense was $105,000 and $18,000 for the three-month periods ended March 31, 2009 and
2008, respectively, and $122,000 and $24,000 for the nine-month periods ended March 31, 2009 and
2008, respectively. The increase for the three-month and nine-month periods is due to the debt related to the
acquisition of Biocode Hycel.
Liquidity and Capital Resources
Changes in overall liquidity and capital resources from continuing operations during the
nine-month period ended March 31, 2009 are reflected in the following table (in thousands):
28
| |
|
|
|
|
|
|
|
|
| |
|
March 31, |
|
|
June 30, |
|
| |
|
2009 |
|
|
2008 |
|
Current Ratio: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets |
|
$ |
18,386 |
|
|
$ |
16,573 |
|
Less: Current liabilities |
|
|
5,894 |
|
|
|
6,026 |
|
|
|
|
|
|
|
|
Working capital |
|
$ |
12,492 |
|
|
$ |
10,547 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current ratio |
|
3.1 to 1 |
|
|
2.8 to 1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt to Total Capital Ratio: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes payable and current maturities |
|
$ |
376 |
|
|
$ |
502 |
|
Long-term debt |
|
|
5,514 |
|
|
|
251 |
|
|
|
|
|
|
|
|
Total debt |
|
|
5,890 |
|
|
|
753 |
|
|
|
|
|
|
|
|
Total equity |
|
|
23,220 |
|
|
|
24,532 |
|
|
|
|
|
|
|
|
Total capital |
|
$ |
29,110 |
|
|
$ |
25,285 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total debt to total capital |
|
|
20.2 |
% |
|
|
3.0 |
% |
|
|
|
|
|
|
|
Working Capital Position
Working capital increased approximately $2,042,000 as of March 31, 2009, and the current ratio
increased to 3.1 to 1 when compared to June 30, 2008. The increase in working capital was caused
primarily by the acquisition of Biocode in December 2008.
Cash Used in Operating Activities
During the nine-month periods ended March 31, 2009 and 2008, the Company used approximately
$2,212,000 and $1,393,000 of cash for operating activities. The net increase in cash used in
operating activities of approximately $1,186,000 for the nine-month period ended March 31, 2009 as
compared to the same period in the prior fiscal year is due primarily to the following factors:
The Company had a net loss of $1,861,000 and experienced net cash out flows from an increase
in accounts receivable approximately $1,552,000. These cash out flows were partially offset by an
increase in accounts payable of $295,000 and non-cash expenditures of depreciation and amortization
and compensation expense related to stock options of $526,000 and $224,000, respectively. In the
prior fiscal period the cash used in operating activities of $1,393,000 was related to net loss in
the prior year of $3,411,000 and an increase in inventory of approximately $548,000. These cash
out flows were partially offset by an increase in accounts payable and accrued expenses of
$1,339,000 and non-cash expenditures on depreciation and amortization and compensation expense
related to stock options of $434,000 and $203,367, respectively.
Our principal source of short-term liquidity is existing cash and cash equivalents, which we
believe will be sufficient to meet our operating needs and anticipated capital expenditures over at
least the next twelve months. For the long term, we intend to utilize principally existing cash and
cash equivalents as well as internally generated funds, which are anticipated to be derived
primarily from the sale of existing products and reagents and instrumentation products and reagents
currently under development. To the extent that these sources of liquidity are insufficient, we may
consider issuing debt or equity securities or curtailing or reducing our operations.
Management of the Company has implemented a series of cost cutting measures to address the
continuing losses and negative cash flows from operations. The ability of the Company to continue
as a
29
going concern is dependent on the success of these measures. The financial statements do not
include any adjustments that might be necessary if the Company is unable to continue as a going
concern.
Cash Flows (Used in) / Provided by Investing and Financing Activities
Cash
flows used in investing activities of $332,000 during the nine month period ended March
31, 2009 is related to fixed asset purchases of $151,000 and the acquisition of Biocode for
$165,000 in December 31, 2008. The net increase in cash flows used in investing activities from
the prior fiscal period was $355,000. The change relates primarily to the purchase of furniture
and equipment.
Cash flows provided by financing activities were approximately $653,000 during the nine-month
period ended March 31, 2009. During the period, the Company made scheduled long-term debt
repayments of approximately $376,000 and received $1,029,000 from the issuance of common stock
during the period. Cash flows used in financing activities for the same period last year were
approximately $130,000. During the prior fiscal period, the Company made scheduled long-term debt
repayments of approximately $136,972, which was offset by cash received from the exercise of stock
options in the amount of $7,000.
On November 20, 2008, the Company completed a $1,100,000 private placement of common stock and
common stock purchase warrants to accredited investors. The Company sold 1,000,000 shares of common
stock at $1.10 per share. The investors also received warrants to purchase an additional 150,000
shares of common stock at an exercise price of $1.21 per share which expire in five years. The net
proceeds to the Company from the offering, after fees and expenses were $1,029,000.
Debt History
On May 29, 2008 Drew issued a note payable in the amount of $752,623 related to the purchase
of JAS Diagnostics, Inc. The note is collateralized by JAS’ common stock. Principal is payable in
six quarterly installments of $125,437 plus interest at the prime rate (4% on March 31, 2009) as
published by the Bank of America. The balance on this debt at March 31, 2009 was $376,314.
On December 31, 2008 Drew issued a note payable in the amount of 4,175,000 Euros related to
the purchase of certain assets of Biocode. Biocode is being be vertically integrated into the
CVompany’s clinical diagnostics business that also includes Drew Scientific and JAS Diagnostics.
The purchase price for the acquisition was Euro 4,200,000 plus acquisition costs, of which Euro 25,000 was paid
upfront. The seller-provided financing, which is guaranteed by the Company, requires payment over
four years as follows:
| |
• |
|
the first interest-only payment is due in December of 2009 at the annual rate of 7%; |
| |
| |
• |
|
thereafter, every nine months, an interest payment is due at an annual interest rate of
7%; |
| |
| |
• |
|
after 18 months a principal payment of Euro 800,000 is due; |
| |
| |
• |
|
after 30 months a principal payment of Euro 1,000,000 is due; |
| |
| |
• |
|
after 36 months a principal payment of Euro 1,000,000 is due; and |
| |
| |
• |
|
after 48 months a principal payment of Euro 1,375,000 is due. |
The payment amount in United States Dollars will be determined on the payment due date, based
upon the then current exchange rate between the United States Dollar and the Euro.
30
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Interest |
|
|
|
|
|
|
|
|
|
|
| |
|
Rate |
|
2009 |
|
2010 |
|
2011 |
|
2012 |
|
Total |
Notes Payable -
Former JAS
Shareholders |
|
Prime |
|
$ |
376,314 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
376,314 |
|
| |
Notes Payable -
Biocode |
|
|
7 |
% |
|
|
|
|
|
|
1,056,608 |
|
|
|
2,641,520 |
|
|
|
1,816,046 |
|
|
|
5,514,174 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
$ |
376,314 |
|
|
$ |
1,056,608 |
|
|
$ |
2,641,520 |
|
|
$ |
1,816,046 |
|
|
$ |
5,890,488 |
|
| |
|
|
|
|
|
|
Off-Balance Sheet Arrangements and Contractual Obligations
The Company was not a party to any off-balance sheet arrangements during the three and
nine-month periods ended March 31, 2009 and 2008.
The following table presents the Company’s contractual obligations as of March 31, 2009
(interest is not included in the table as it is immaterial):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
Less than |
|
|
|
|
|
|
3-5 |
|
|
More than |
|
| |
|
Total |
|
|
1 Year |
|
|
1-3 Years |
|
|
Years |
|
|
5 Years |
|
Long-term debt |
|
$ |
5,890,488 |
|
|
$ |
376,314 |
|
|
$ |
3,698,128 |
|
|
$ |
1,816,046 |
|
|
$ |
0 |
|
| |
Operating lease agreements |
|
|
2,613,094 |
|
|
|
599,746 |
|
|
|
1,250,679 |
|
|
|
623,447 |
|
|
|
139,222 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
8,503,582 |
|
|
$ |
976,060 |
|
|
$ |
4,948,807 |
|
|
$ |
2,439,493 |
|
|
$ |
139,222 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Significant Items Likely To Impact Liquidity
On July 23, 2004, the Company acquired approximately 67% of the outstanding ordinary shares of
Drew, pursuant to the Company’s exchange offer for all of the outstanding ordinary shares of Drew,
and acquired all of the Drew shares during fiscal 2005. Drew does not have a history of producing
positive operating cash flows and, as a result, at the time of acquisition, was operating under
financial constraints and was under-capitalized. As Drew is integrated into the Company,
management will be working to reverse the situation, while at the same time seeking to strengthen
Drew’s market position. As of March 31, 2009, the Company has loaned approximately $19,000,000 to
Drew. The funds have been primarily used to procure components to build up inventory to support
the manufacturing process, to pay off accounts payable and debt of Drew, to fund new product
development and underwrite operating losses incurred since acquisition. The Company anticipates
that further working capital will likely be required by Drew.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Interest Rate Risk
The table below provides information about the Company’s financial instruments consisting of
both variable and fixed interest rate debt obligations. For debt obligations, the table represents
interest rates. Interest rates as of March 31, 2009 were variable at prime on the notes payable.
| |
|
|
|
|
| |
|
Interest |
| |
|
Rate |
Notes Payable — Former JAS Shareholders |
|
Prime |
| |
Notes Payable — Biocode Hycell |
|
|
7 |
% |
31
Exchange Rate Risk
Prior to the acquisition of Drew, the price of all product sold overseas was denominated in
United States Dollars and consequently the Company incurred no exchange rate risk on revenue.
However, a portion of Drew’s product revenue is denominated in United Kingdom Pounds and Euros.
During the three-month periods ended March 31, 2009 and 2008, Drew recorded approximately $2,575,000
and $1,137,000 respectively, of revenue denominated in United Kingdom Pounds and Euros,
respectively. During the nine-month periods ended March 31, 2009 and 2008, Drew recorded
approximately $4,811,000 and $3,114,000, respectively, of revenue denominated in United Kingdom
Pounds and Euros.
Drew incurs a portion of its expenses denominated in United Kingdom Pounds and Euros. During
the three-month periods ended March 31, 2009 and 2008, Drew incurred approximately $2,158,000 and
$1,255,000, respectively, of expense denominated in United Kingdom Pounds and Euros. During the nine-month
periods ended March 31, 2009 and 2008, Drew recorded approximately $4,300,000 and $3,206,000
respectively, of expense denominated in United Kingdom Pounds and Euros. The Company’s Sonomed and
Vascular business segments incur an immaterial portion of their marketing expenses in the European
market, the majority of which are transacted in Euros.
The Company experiences fluctuations, beneficial or adverse, in the valuation of currencies in
which the Company transacts its business, namely the United States Dollar, the United Kingdom Pound
and the Euro. The table below details total sales and expenses transacted in United Kingdom Pounds
and Euros.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three months ended |
|
|
Nine months ended |
|
| Total Foreign Sales |
|
March 31, 2009 |
|
|
March 31, 2008 |
|
|
March 31, 2009 |
|
|
March 31, 2008 |
|
Drew UK and Biocode |
|
$ |
2,575,362 |
|
|
$ |
1,137,481 |
|
|
$ |
4,810,698 |
|
|
$ |
3,113,719 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three months ended |
|
|
Nine months ended |
|
| Total Foreign Expenses |
|
March 31, 2009 |
|
|
March 31, 2008 |
|
|
March 31, 2009 |
|
|
March 31, 2008 |
|
Drew UK and Biocode |
|
$ |
2,157,519 |
|
|
$ |
1,254,951 |
|
|
$ |
4,300,104 |
|
|
$ |
3,206,145 |
|
Item 4T. Controls and Procedures
(A) Evaluation of Disclosure Controls and Procedures
The Company’s management, with the participation of the Company’s Chief Executive Officer and
Principal Financial and Accounting Officer, have established disclosure controls and procedures to
ensure that material information relating to the Company, including its consolidated subsidiaries,
is made known to the officers who certify the Company’s financial reports and to other members of
senior management and the Board of Directors.
Based on their evaluation of the effectiveness of the Company’s disclosure controls and
procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of March 31,
2009, the Chief Executive Officer and Principal Financial and Accounting Officer of the Company
have
concluded that such disclosure controls and procedures are effective to ensure that the
information required to be disclosed by the Company in reports that it files or submits under the
Exchange Act is recorded, processed, summarized and reported within the time periods specified in
SEC rules and forms, and that information required to be disclosed in the reports that the Company
files or submits under the Exchange Act is accumulated and communicated to the Company’s
management, including its Chief Executive Officer and Principal Financial and Accounting Officer,
to allow timely decisions regarding required disclosure.
32
(B) Internal Control over Financial Reporting
There have not been any changes in the Company’s internal control over financial reporting (as
such term is defined in Rule 13a-15(f) under the Exchange Act), during the third fiscal quarter
ended March 31, 2009 that have materially affected, or are reasonably likely to materially affect,
the Company’s internal control over financial reporting.
Part II. Other Information
Item 1. Legal Proceedings
See note 4 of the notes to the condensed consolidated financial statements for further
information regarding the Company’s legal proceedings.
Item 1A. Risk Factors
Reference is made to Item 1A “Risk Factors” of the Company’s Form 10-K annual report for the
year ended June 30, 2008.
The Company may be required to record an impairment charge with to goodwill recorded on its
balance sheet resulting from its purchase of Sonomed.
The development of Sonomed’s Vumax III is significantly delayed due to difficulties related to
the final phase of the development of the instrument. Sonomed, in consultation with independent
consultants, is in the process of evaluating the development status of the VuMax III. Until the
evaluation is completed Sonomed will not be able to estimate the timing of a 510(k) application
submission for the instrument to the FDA or whether a submission will be made.
Item 6. Exhibits
| |
31.1 |
|
Certificate of Chief Executive Officer under Rule 13a-14(a).
|
| |
| |
31.2 |
|
Certificate of Principal Financial and Accounting Officer under Rule 13a-14(a). |
| |
| |
32.1 |
|
Certificate of Chief Executive Officer under Section 1350 of Title 18 of the
United States Code. |
| |
| |
32.2 |
|
Certificate of Principal Financial and Accounting Officer under Section 1350
of Title 18 of the United States Code. |
33
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 15, 2009 |
By: |
/s/ Richard J. DePiano
|
|
| |
|
Richard J. DePiano |
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Chairman and Chief
Executive Officer |
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| Date: May 15, 2009 |
By: |
/s/ Robert O’Connor
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Robert O’Connor |
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Chief Financial Officer |
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