ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion and analysis of our financial condition and results of operations together with the sections titled “Business” and “Risk Factors” and the consolidated financial statements and related notes included elsewhere in this Annual Report. This discussion contains forward-looking statements based upon current expectations that involve risks and uncertainties, as well as assumptions that may never materialize or that may be proven incorrect. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of various factors, including those discussed in the sections titled “Special Note Regarding Forward-Looking Statements” and “Risk Factors” and in other parts of this Annual Report.
The Company operates its business as one operating and reportable segment. For additional information, see “Note 14—Segment Information” in the notes to our consolidated financial statements included elsewhere in this Annual Report.
Financial Highlights
The following discussion and analysis should be read together with the consolidated financial statements and notes thereto and other financial information contained elsewhere in this Form 10-K and the discussion under “Risk Factors” included in Item 1A of this Form 10-K.
• Consolidated net revenue increased approximately $64,000 or 0.5%, to $12,046,000 during the year ended June 30, 2025 as compared to the prior fiscal year. The increase in net revenue is mainly attributed to an increase of approximately $114,000 in sales of Trek products, offset by a decrease of $33,000 in sales of Sonomed products and a decrease of $17,000 in AXIS revenue during the year ended June 30, 2025 .
• Consolidated cost of revenue totaled approximately $6,535,000, or 54.3%, of total revenue during the year ended June 30, 2025 , as compared to $6,835,000, or 57.0%, of total revenue of the prior fiscal year. The decrease of 2.7% in cost of revenue as a percentage of total revenue is mainly due to change in product mix.
• Consolidated marketing, general and administrative expenses increased $63,000, or 1.4%, to $4,625,000 during the year ended June 30, 2025 , as compared to the prior fiscal year. The increase in marketing, general and administrative expenses is mainly due to an increase in AXIS consulting expenses, Sonomed payroll and commission expenses offset by a decrease in network expenses and corporate payroll expenses during the year ended June 30, 2025.
• Consolidated research and development expenses increased $65,000 or 9.4%, to $753,000 during the year ended June 30, 2025 as compared to the same period of the prior fiscal year. Research and development expenses were
primarily expenses associated with the introduction of new or enhanced products. The increase in research and development expense is mainly due to increased AXIS consulting expenses during the year ended June 30, 2025 .
Results of Operations
Years Ended June 30, 2025 and 2024
The following table shows consolidated net revenue, as well as identifying trends in revenues for the years ended June 30, 2025 and 2024. Table amounts are in thousands:
For the Years Ended June 30,
% Change
Net Revenue:
Products
Service plans
Total
Consolidated net revenue increased approximately $64,000 or 0.5%, to $12,046,000 during the year ended June 30, 2025 as compared to the prior fiscal year. The increase in net revenue is mainly attributed to an increase of approximately $114,000 in sales of Trek products, offset by a decrease of $33,000 in sales of Sonomed products and a decrease of $17,000 in AXIS revenue during the year ended June 30, 2025 .
Foreign sales
The following table presents domestic and international sales from continuing operations. Table amounts are in thousands:
For the Years Ended June 30,
Domestic
Foreign
Total
The following table presents consolidated cost of revenue and as a percentage of revenues for the years ended June 30, 2025 and 2024. Table amounts are in thousands:
For the Years Ended June 30,
Cost of Revenue:
Total
Consolidated cost of revenue totaled approximately $6,535,000, or 54.3%, of total revenue during the year ended June 30, 2025 , as compared to $6,835,000, or 57.0%, of total revenue of the prior fiscal year. The decrease of 2.7% in cost of revenue as a percentage of total revenue is mainly due to change in product mix.
The following table presents consolidated marketing, general and administrative expenses for the years ended June 30, 2025 and 2024. Table amounts are in thousands:
For the Years Ended June 30,
% Change
Marketing, General and Administrative:
Total
Consolidated marketing, general and administrative expenses increased $63,000, or 1.4%, to $4,625,000 during the year ended June 30, 2025 as compared to the prior fiscal year. The increase in marketing, general and administrative expenses is mainly due to an increase in AXIS consulting expenses, Sonomed payroll and commission expenses offset by a decrease in network expenses and corporate payroll expenses during the year ended June 30, 2025.
The following table presents consolidated research and development expenses for the years ended June 30, 2025 and 2024.
Table amounts are in thousands:
For the Years Ended June 30,
% Change
Research and Development:
Total
Consolidated research and development expenses increased $65,000, or 9.4%, to $753,000 during the year ended June 30, 2025 as compared to the prior fiscal year. Research and development expenses were primarily expenses associated with the introduction of new or enhanced products. The increase in research and development expense is mainly due to increased AXIS consulting expense during the year ended June 30, 2025 .
Recently Announced Tariffs and Trade Measures
Beginning in the third quarter of fiscal year 2025, the U.S. government announced new tariffs on a broad range of imports, including a 10% tariff on most imports and additional individualized higher tariffs on certain specific goods and countries. In response, certain affected countries have imposed or may impose retaliatory tariffs on U.S. exports and may implement additional trade restrictions and/or other retaliatory measures in the future.
These recent and potential future tariffs and trade measures could adversely affect the Company’s business in several ways. Increased costs of imported raw materials, components, and finished goods may negatively impact profitability and gross margins. The Company may face challenges in passing these increased costs on to its customers due to competitive pressures or market conditions. Additionally, the uncertainty surrounding the duration and extent of these tariffs, as well as potential trade policy changes, could disrupt the Company’s supply chain, require alternative and potentially more expensive sourcing options, and impact long-term strategic planning and investment decisions. The imposition of retaliatory tariffs by other countries could also reduce the demand for the Company’s exported products, negatively impacting revenue and international sales.
Management is actively monitoring these developments, assessing the potential impacts on the Company’s business, and evaluating possible mitigation strategies, including exploring alternative sourcing, adjusting pricing strategies where feasible, and analyzing potential shifts in global supply chains. However, the ultimate financial impact of these tariffs and the associated uncertainty cannot be reasonably estimated at this time. This situation could have a material adverse effect on the Company’s future financial condition, results of operations, and cash flows. The Company will continue to evaluate these developments and provide updates in future filings as the situation evolves and more information becomes available.
Liquidity and Capital Resources
Our total cash as of June 30, 2025 consisted approximately $546,000 of cash on hand and restricted cash of approximately $256,000 compared to approximately $209,000 of cash on hand and restricted cash of $257,000 as of June 30, 2024. At June 30, 2025 and 2024, the Company’s balances exceeded federally insured limits by approximately $290,000 and $181,000, respectively.
Because our operations have not historically generated sufficient revenues to achieve profitability we will continue to closely monitor costs and expenses and may need to raise additional capital to fund operations.
We expect to continue to fund operations from cash on hand and through capital raising sources if possible and available, which may be dilutive to existing stockholders, through revenues from the licensing of our products, or through strategic alliances. Additionally, we may seek to sell additional equity or debt securities through one or more discrete transactions, or enter into a strategic alliance arrangement, but can provide no assurances that any such financing or strategic alliance arrangement will be available on acceptable terms, or at all. Moreover, the incurrence of indebtedness in connection with a debt financing would r esult in increased fixed obligations and could contain covenants that would restrict our operations.
As of June 30, 2025 we had an accumulated deficit of approximately $68.4 million, historically incurred recurring losses from operations and negative cash flows from operating activities. The Company generated net income from operations in the current year and fiscal 2023, and reported positive cash flows from operating activities in the current year as well as in fiscal 2021 and 2023. While the overall trend has been toward profitability, The Company had net profit for just two years of the last five years, and currently the Company has adverse ratios of cash to current liabilities and days payable outstanding. Additionally, there is uncertainty in the market related to the tariffs and the related impacts to the international business and supply chain cost impacts. The question remains whether the Company will keep the profitability trend and sales growth. These factors raise substantial doubt regarding our ability to continue as a going concern, and our ability to generate cash to meet our cash requirements for the following twelve months as of the filing date of this form 10-K.
The following table presents overall liquidity and capital resources as of June 30, 2025 and 2024. Table amounts are in thousands:
June 30,
June 30,
Current Ratio:
Current assets
Less: Current liabilities
Working capital
Current ratio
Debt to Total Capital Ratio:
Note payable, lease liabilities, and EIDL loan
Total equity
Total capital
Total debt to total capital
Working Capital Position
Working capital increased approximately $199,000 to $1,927,000 as of June 30, 2025, and the current ratio increas ed to 1.72 to 1 to from 1.65 to 1 when compared to June 30, 2024.
The increase in working capital is primarily attributed to a $215,000 increase in current assets as of June 30, 2025 mainly due to rise in current assets, driven by net operating income and higher inventory levels, as well as an increase in accrued expenses, partially offset by lease liability payments..
Debt to total capital ratio was 21.5% and 22.5% as of June 30, 2025 and June 30, 2024, respectively.
Cash Flow Provided By (Used In) Operating Activities
During year ended June 30, 2025 the Company provided approximately $381,000 of cash in operating activities as compared to approximately $603,000 of cash used in operating activities during the year ended June 30, 2024.
For the year ended June 30, 2025, its cash provided by operations is mainly due to a decrease in accounts receivable of $628,000, an increase in deferred revenue of $48,000, an increase in accrued expenses of $45,000 , an increase in lease liability of $227,000 , an increase in accounts payable of $30,000, and a decrease in other current assets of $30,000. The cash inflow is offset by an increase in inventories of 486,000. The remaining offsetting items for cash used in operations is comprised of less significant items.
For the year ended June 30, 2024, its cash used in operations is mainly due to an increase in accounts receivable of 454,000, a decrease in lease liability of 328,000, and a decrease in deferred revenue of $146,000. The cash outflow is offset by an increase in accounts payable of $152,000 and a decrease in other current assets of 56,000. The remaining offsetting items for cash used in operations is comprised of less significant items.
Cash Flows Used In Investing Activities
Cash flows used in investing activities for the year ended June 30, 2025 was due to purchase of the fixed assets of $4,000. Cash flows used in investing activities for the year ended June 30, 2024 was due to purchase of the fixed assets of $40,000.
Any necessary capital expenditures have generally been funded out of cash from operations, and the Company is not aware of any factors that would cause historical capital expenditure levels to not be indicative of capital expenditures in the future and, accordingly, does not believe that the Company will have to commit material resources to capital investment for the foreseeable future.
Cash Flows Used in Financing Activities
For the year ended June 30, 2025 the cash used in the financing activities of $40,000 was attributed to repayment of notes payable of $37,000, and repayment of EIDL loan of $3,000.
For the year ended June 30, 2024 the cash used in the financing activities of $37,000 was attributed to repayment of notes payable of $33,000, and repayment of EIDL loan of $4,000.
Off-balance Sheet Arrangements and Contractual Obligations
The Company was not a party to any off-balance sheet arrangements during the years ended June 30, 2025 and 2024.
Critical Accounting Estimates
The preparation of financial statements requires management to make estimates and assumptions that impact amounts reported therein. The consolidated 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. We consider an accounting estimate to be critical if: (i) the accounting estimate requires us to make assumptions about matters that were highly uncertain at the time the accounting estimate was made, and (ii) changes in the estimate that are reasonably likely to occur from period to period or use of different estimates that we reasonably could have used in the current period, would have a material impact on our financial condition or results of operations. There are items within our financial statements that require estimation but are not deemed critical, as defined above.
Recently Issued Accounting Standards
The Company considers the applicability and impact of all accounting standards updates ("ASUs"). Management periodically reviews new accounting standards that are issued.
In December 2023, the FASB issued ASU 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures, which requires disaggregated information about a reporting entity’s effective tax rate reconciliation, as well as information related to income taxes paid to enhance the transparency and decision usefulness of income tax disclosures. This ASU will be effective for the annual period ending June 30, 2026. The Company is currently evaluating the timing and impacts of adoption of this ASU.
In November 2024, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2024-03, Income Statement reporting Comprehensive Income - Expense Disaggregation Disclosure (Subtopic 220-40): Disaggregation of Income Statement Expense, which requires disclosure in the notes to the financial statements of specified information about certain costs and expenses. The amendments are effective for the fiscal years beginning after December 15, 2026, and for interim periods within the fiscal years beginning after December 15, 2027. Early adoption is permitted. The amendments should be applied either prospectively to financial statements issued for reporting periods after the effective date of this ASU or retrospectively to any or all prior periods presented in the financial statements. The Company is currently evaluating the new guidance to determine the impact it may have on its consolidated financial statements and related disclosure.
In January 2025, the FASB issued ASU 2025-01, Income Statement—Reporting Comprehensive Income—Expense Disaggregation Disclosures (Subtopic 220-40): Clarifying the Effective Date, which clarifies the effective date of ASU 2024-03. ASU 2024-03 expands disclosure requirements to require disaggregation of specified expense captions by natural expense categories. The amendments are effective for public business entities for annual reporting periods beginning after December 15, 2026, and for interim periods within those fiscal years beginning after December 15, 2027; early adoption is permitted. The Company is currently evaluating its impact on our footnote disclosures.
In July 2025, the FASB issued ASU 2025-5, “Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses for Accounts Receivable and Contract Assets” to simplify the estimation of expected credit losses for current accounts receivable and current contract assets arising from revenue-transactions under ASC 606. Key changes include a practical expedient, available to all entities, that allows assuming that conditions as of the balance sheet date will remain unchanged over the life of those assets, and for entities other than public business entities, an accounting policy election to consider subsequent cash collections after the balance sheet date in estimating those losses. The amendments are effective for annual periods beginning after December 15, 2025, including interim periods, with early adoption permitted; the guidance should be applied prospectively. The Company is currently evaluating the timing and impacts of adoption of this ASU.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Escalon Medical Corp.
Index to Consolidated Financial Statements
Page
Report of Independent Registered Public Accounting Firm (CBIZ CPAs P.C., Firm ID 199: Marcum LLP, Firm ID 688)
Consolidated Balance Sheets at June 30, 2025 and 2024
Consolidated Statements of Operations for the Years Ended June 30, 2025 and 2024
Consolidated Statements of Stockholders’ Equity for the Years Ended June 30, 2025 and 2024
Consolidated Statements of Cash Flows for the Years Ended June 30, 2025 and 2024
Notes to Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm
To the Stockholders and Board of Directors of Escalon Medical Corp.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheet of Escalon Medical Corp. and subsidiaries (the “Company”) as of June 30, 2025, the related consolidated statements of operations, stockholders’ equity and cash flows for the year ended June 30, 2025, and the related notes (collectively referred to as the “financial statements”). In our opinion, based on our audit, the financial statements present fairly, in all material respects, the financial position of the Company as of June 30, 2025, and the results of its operations and its cash flows for the year ended June 30, 2025, in conformity with accounting principles generally accepted in the United States of America.
Explanatory Paragraph – Going Concern
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As more fully described in Note 2, the Company has historically incurred recurring losses from operations and incurred negative cash flows from operating activities, and currently the Company has adverse ratios of cash to current liabilities and days payable outstanding. These conditions raise substantial doubt about the Company's ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 2. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audit we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion.
Our audit included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audit provides a reasonable basis for our opinion.
Retrospective Application of a Change in Accounting Principle
We also have audited the adjustments to the 2024 consolidated financial statements to retrospectively apply the change in accounting due to the adoption of Financial Accounting Standards Board Accounting Standards Update No. 2023-07, Segment Reporting (Topic 280), as described in Note 14. In our opinion, such adjustments are appropriate and have been properly applied. We were not engaged to audit, review, or apply any procedures to the 2024 consolidated financial statements of the Company other than with respect to the adjustments and, accordingly, we do not express an opinion or any other form of assurance on the 2024 consolidated financial statements taken as a whole.
Critical Audit Matters
Critical audit matters are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. We determined that there are no critical audit matters.
/s/ CBIZ, CPAs P.C.
CBIZ, CPAs P.C.
Marlton, New Jersey
September 29, 2025
Report of Independent Registered Public Accounting Firm
To the Stockholders and Board of Directors of Escalon Medical Corp.
Opinion on the Financial Statements
We have audited, before the adjustments to retrospectively apply the changes in the accounting described in Note 3, the accompanying consolidated balance sheet of Escalon Medical Corp. (the “Company”) as of June 30, 2024, the related consolidated statements of operations, stockholders’ equity and cash flows for the year ended June 30, 2024, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements, before the adjustments to retrospectively apply the change in accounting described in Note 3, present fairly, in all material respects, the financial position of the Company as of June 30, 2024, and the results of its operations and its cash flows for the year ended June 30, 2024, in conformity with accounting principles generally accepted in the United States of America .
We were not engaged to audit, review or apply any procedures to the adjustments to retrospectively apply the change in the accounting described in Note 3 and, accordingly, we do not express an opinion or any other form of assurance about whether such adjustments are appropriate and have been properly applied. Those adjustments were audited by other auditors.
Explanatory Paragraph – Going Concern The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As more fully described in Note 2, the Company has a significant working capital deficiency, has incurred significant losses and needs to raise additional funds to meet its obligations and sustain its operations. These conditions raise substantial doubt about the Company's ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 2. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Basis for Opinion These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audit we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. Our audit included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or , and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audit provide s a reasonable basis for our opinion.
/s/ Marcum LLP
Marcum LLP
We served as the Company’s auditors from 2010 to 2025.
Marlton, New Jersey
September 30, 2024
ESCALON MEDICAL CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
June 30,
June 30,
ASSETS
Current assets:
Cash
Restricted cash
Accounts receivable
Less: allowance for credit losses
Accounts receivable, net
Inventories
Other current assets
Total current assets
Property and equipment, net
Right-of-use assets
License and patent, net
Other long term assets
Total assets
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Current portion of note payable
Current portion of EIDL loan
Accounts payable
Accrued expenses
Related party accrued interest
Current portion of operating lease liabilities
Deferred revenue
Other short term liabilities
Total current liabilities
Note payable, net of current portion
Operating lease liabilities, net of current portion
EIDL loan, net of current portion
Total liabilities
Commitments and Contingencies (Note 10)
Stockholders' equity:
Series A convertible preferred stock, $0.001 par value; 2,000,000 shares authorized; 2,000,000 shares issued and outstanding (liquidation value of $1,025,531 and $974,003)
Common stock, $0.001 par value; 35,000,000 shares authorized; 7,415,329 shares issued and outstanding
Additional paid-in capital
Accumulated deficit
Total stockholders’ equity
Total liabilities and stockholders’ equity
See notes to consolidated financial statements
ESCALON MEDICAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended June 30,
Net revenues:
Products
Service plans
Revenues, net
Costs and expenses:
Cost of revenue
Marketing, general and administrative
Research and development
Total costs and expenses
Income (loss) from operations
Other expense
Other expense
Interest expense, net
Total other expenses, net
Income tax expense
Net income (loss)
Less undeclared dividends on preferred stocks
Less income allocated to convertible preferred stocks
Net income (loss) applicable to common stockholders
Net income (loss) per share
Basic income (loss) per share applicable to common stockholder
Diluted income (loss) per share
Weighted average shares—basic
Weighted average shares—diluted
See notes to consolidated financial statements
ESCALON MEDICAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
FOR THE YEARS ENDED JUNE 30, 2025 AND 2024
Series A Convertible Preferred Stock
Common Stock
Additional
Paid-in
Capital
Accumulated
Deficit
Total
Stockholders’
Equity
Shares
Amount
Shares
Amount
Balance at June 30, 2024
Net income
Balance at June 30, 2025
Series A Convertible Preferred Stock
Common Stock
Additional
Paid-in
Capital
Accumulated Deficit
Total
Stockholders’
Equity
Shares
Amount
Shares
Amount
Balance at June 30, 2023
Net loss
Balance at June 30, 2024
See notes to consolidated financial statements
ESCALON MEDICAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended June 30,
Cash Flows from Operating Activities:
Net income (loss)
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Change in allowance for credit loss
Decrease in inventory valuation
Depreciation and amortization
Non cash lease expense
Change in operating assets and liabilities:
Accounts receivable
Inventories
Other current assets
Accounts payable
Accrued expenses
Change in operating lease liability
Deferred revenue
Other short-term and long-term liabilities
Net cash provided by (used in) operating activities
Cash Flows from Investing Activities:
Purchase of equipment
Net cash used in investing activities
Cash Flows from Financing Activities:
Repayment of EIDL loan
Repayment of note payable
Net cash used in financing activities
Net increase (decrease) in cash, cash equivalents and restricted cash
Cash, and restricted cash, beginning of year
Cash, and restricted cash, end of year
Cash, and restricted cash consist of the following:
End of year
Cash
Restricted cash
Beginning of year
Cash
Restricted cash
Supplemental Schedule of Cash Flow Information:
Interest paid
Non Cash Investing Activities
Non Cash Finance Activities
Right-of-use assets obtained in exchange for lease obligations
See notes to consolidated financial statements
Escalon Medical Corp. and Subsidiaries
Notes to Consolidated Financial Statements
1. Organization and Description of Business
Escalon Medical Corp. ("Escalon" or "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, which includes its division called "Trek" and its wholly owned subsidiaries: Sonomed, Inc. (“Sonomed”), Escalon Digital Solutions, Inc. (“EMI”), and Sonomed IP Holdings, Inc.
The Company operates in the healthcare market, specializing in the development, manufacture, marketing and distribution of medical devices and pharmaceuticals in the area of ophthalmology. The Company and its products are subject to regulation and inspection by the United States Food and Drug Administration (the “FDA”). The FDA and other government authorities require extensive testing of new products prior to sale and have jurisdiction over the safety, efficacy and manufacture of products, as well as product labeling and marketing.
The Company’s common stock trades on the OTCQB Market under the symbol “ESMC.”
2 . Going Concern
The Company’s operations are subject to a number of factors that can affect its operating results and financial condition. Such factors include, but are not limited to: the continuous enhancement of the current products, development of new products; changes in domestic and foreign regulations; ability to manufacture successfully; competition from products manufactured and sold or being developed by other companies; the price of, and demand for, the Company’s products and its ability to raise capital to support its operations.
To date, the Company’s operations have not generated sufficient revenues to enable consistent profitability. Through June 30, 2025, while the Company had net income and positive cash flow from operations, however, it has historically incurred recurring losses from operations and incurred negative cash flows from operating activities, and currently the Company has adverse ratios of cash to current liabilities and days payable outstanding. Additionally, there is uncertainty in the market related to tariffs and the related impacts to the international business and supply chain cost impacts. These factors raise substantial doubt regarding the Company’s ability to continue as a going concern for the following twelve months as of the filing date of this form 10-K.
The accompanying consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. These consolidated financial statements do not include any adjustments relating to the realization of the carrying value of assets or the amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern.
The Company's continuance as a going concern is dependent on its future profitability and on the ongoing support of its shareholders, affiliates and creditors. In order to mitigate the going concern issues, the Company is actively pursuing business partnerships, managing its continuing operations, and implementing cost-cutting measures. The Company may not be successful in any of these efforts.
3. Basis of Presentation and Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All intercompany accounts and transactions have been eliminated.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America ("US GAAP") requires management to make estimates and assumptions that impact the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.
Segment Information
The Company has one operating and reportable segment. The Company’s CODM is its Chief Executive Officer and Chief Operating Officer, who reviews financial information presented on a consolidated basis for the purpose of allocating resources and evaluating financial performance.
Cash
For the purposes of reporting cash flows, the Company considers all cash accounts, which are not subject to withdrawal restrictions or penalties, and highly liquid investments with original maturities of 90 days or less to be cash and cash equivalent s. From time to time cash balances exceed federal insurance limits. At June 30, 2025 and 2024, the Organization’s balances exceeded federally insured limits by approximately $ 290,000 and $ 181,000 , respectively.
Restricted Cash
As of June 30, 2025 and 2024 restricted cash included approximately $ 257,000 and $ 256,000 , which was pursuant to the requirements in the TD Bank Loan entered into June 2018 (see Note 6).
Accounts Receivable
Accounts receivables are recorded at net realizable value. The Company performs ongoing credit evaluations of customers financial conditions and does not require collateral for accounts receivable arising in the normal course of business. The Company maintains allowances for potential credit losses based on the Company’s historical trends, specific customer issues and current economic trends. Accounts are written off against the allowance when they are determined to be uncollectible based on management’s assessment of individual accounts. While such credit losses have historically been within the Company’s expectation and the provision established, the Company cannot guarantee that this will continue. The Company recorded an allowance for credit losses of $ 164,499 and $ 171,104 as of June 30, 2025 and 2024, respectively . The opening balance of accounts receivable for the year ended June 30, 202 was $1,807,599. The movement within the accounts receivable balance was due to new orders and collections during the period.
The activity for the allowance for credit losses during years ended June 30, 2025 and 2024 , is as follows
For the Years ended June 30,
Balance, July 1
Provision
Recovery
Write-offs
Balance, June 30
Inventories
Inventories are stated at the lower of cost or net realizable value. Cost is determined on a first-in, first-out basis and include freight-in materials, labor and overhead costs. Inventories are written down if the estimated net realizable value is less than the recorded value. The Company reviews the carrying cost of inventories by product to determine the adequacy of reserves for obsolescence. In accounting for inventories, the Company must make estimates regarding the estimated realizable value of inventory. The estimate is based, in part, on age of inventory. If actual conditions are less favorable than those the Company has projected, the Company may need to increase its reserves for excess and obsolete inventories. Any increases in the reserves will adversely impact the Company’s results of operations. The establishment of a reserve for excess and obsolete inventory establishes a new cost basis in the inventory. Such reserves are not reduced until the product is sold. If the Company is able to sell such inventory any related reserves would be reversed in the period of sale. In accordance with industry practice, service parts inventory is included in current assets, although service parts are carried for established requirements during the serviceable lives of the products and, therefore, not all parts are expected to be sold within one year.
June 30,
Raw materials
Work in process
Finished goods
Total inventories
Property and Equipment
Property and equipment are recorded at cost. Leasehold improvements are amortized on a straight-line basis over the lesser of the estimated useful life of the asset or lease term. Depreciation on property and equipment is recorded using the straight-line method over the estimated economic useful life of the related assets. Estimated useful lives are generally three years to five years for computer equipment and software, five years to seven years for furniture and fixtures and five years to ten years for production and test equipment. Depreciation and amortization expense for the years ended June 30, 2025 and 2024 was approximately $35,000 and $25,000, respectively.
Property and equipment consist of the following:
June 30,
Equipment
Furniture and fixtures
Leasehold improvements
Less: Accumulated depreciation and amortization
Intangible Assets and Long-Lived Assets
Long-lived assets including intangible assets deemed to have finite lives, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Impairment indicators include, among other conditions, cash flow deficits, historic or anticipated declines in revenue or operating profit or material adverse changes in the business climate that indicate that the carrying amount of an asset may be impaired. When impairment indicators are present, the recoverability of the asset is measured by comparing the carrying value of the asset to the estimated undiscounted future cash flows expected to be generated by the asset. If the projected undiscounted cash flows from the asset are less than the carrying value of the asset the asset is considered to be impaired. The impairment to be recognized is measured by the amount by which the carrying amount of the asset exceeds the fair value of the asset. At June 30, 2025 and 2024 the Company performed a qualitative assessment and considered the totality of events and circumstances, including the existence of substantial to continue as a going , and concluded that it is not more likely than not that the fair value of the related assets are below their carrying amount. Based on this assessment, no charges were recorded for the periods presented.
Accrued Warranties
The Company provides a limited one-year warranty against manufacturer’s defects on its products sold to customers. The Company’s standard warranties require the Company to repair or replace, at the Company’s discretion, defective parts during such warranty period. The Company accrues for its product warranty liabilities based on estimates of costs to be incurred during the warranty period, based on historical repair information for warranty costs.
Fair Value of Financial Instruments
The carrying amounts for cash and cash equivalents, restricted cash, accounts receivable, and accounts payable approximate their fair value because of their short-term maturity. The Company determined that the carrying amount of the notes payable and lease liabilities approximates fair value since such debt borrowing bears interest at the approximate current market rate. While the Company believes the carrying value of the assets and liabilities are reasonable, considerable judgment is used to develop estimates of fair value; thus the estimates are not necessarily indicative of the amounts that could be realized in a
current market exchange. .Hierarchical levels, which are directly related to the amount of subjectivity associated with the inputs to the valuation of these assets or liabilities, are as follows:
Level 1: Inputs that are unadjusted, quoted prices in active markets for identical assets or liabilities at the measurement date.
Level 2: Inputs (other than quoted prices included in Level 1) that are either directly or indirectly observable for the asset or liability through correlation with market data at the measurement date and for the duration of the instrument’s anticipated life.
Level 3: Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities and that reflect management’s best estimate of what market participants would use in pricing the asset or liability at the measurement date.
Revenue Recognition
The Company recognizes revenue when its performance obligations with its customers have been satisfied. At contract inception, the Company determines if the contract is within the scope of Accounting Standards Codification (“ASC”) Topic 606, Revenue from Contracts with Customers, and then evaluates the contract using the following five steps: (1) identify the contract with the customer; (2) identify the performance obligations; (3) determine the transaction price; (4) allocate the transaction price to the performance obligations; and (5) recognize revenue when (or as) the entity satisfies a performance obligation. The Company only recognizes revenue to the extent that it is probable that a significant revenue reversal will not occur in a future period.
The Company generates product revenue from the sale of medical device products and the sale and installation of the Company's AXIS image management system software. Revenue for service plans relate to the customer care plans for the Company’s equipment and AXIS image management system software.
Revenue is recognized upon transfer of control of the promised goods or services to the customer for an amount that reflects the consideration that the Company expects to be entitled in exchange for those goods or services. The Company’s performance obligations are for product sales, installation of AXIS image management system software and customer care plans. The performance obligations are determined at contract inception based upon promises within the contract that are distinct.
The product sales and installation of AXIS image management system software performance obligations are satisfied at a point in time, which is upon shipment for product sales and upon successful installation for the AXIS image management system. The performance obligation for customer care plans is satisfied over time as the customer receives and consumes the Company’s services.
The Company invoices its customers upon shipment for product sales. For the installation of AXIS image management system software and customer care plans, the Company invoices its customers upon successful installation. Invoice payments are generally due within 30 days of invoice date. The transaction price is determined based on fixed consideration in the Company’s customer contracts and is recorded net of variable consideration. In determining the transaction price, a significant financing component does not exist since the timing from when the Company invoices its customers to when payment is received as it is less than one year.
Revenue for product sales and installation of AXIS image management system software is recognized when delivered or installed. The customer care plan revenues are recognized proportionately over the service period, which is a 12-month period.
The Company has elected the following practical expedients in applying ASC 606:
• Unsatisfied Performance Obligations - all performance obligations relate to contracts with a duration of less than one year, the Company has elected to apply the optional exemption provided in ASC 606 and therefore, is not required to disclose the aggregate amount of the transaction price allocated to performance obligations that are unsatisfied or partially unsatisfied at the end of the reporting period.
• Contract Costs - all incremental customer contract acquisition costs are expensed as they are incurred as the amortization period of the asset that the Company otherwise would have recognized is one year or less in duration.
• Significant Financing Component - the Company does not adjust the promised amount of consideration for the effects of a significant financing component as the Company expects, at contract inception, that the period between when the entity transfers a promised good or service to a customer and when the customer pays for that good or service will be one year or less.
• Sales Tax Exclusion from the Transaction Price - the Company excludes from the measurement of the transaction
price all taxes assessed by a governmental authority that are both imposed on and concurrent with a specific revenue-producing transaction and collected by the Company from the customer.
• Shipping and Handling Activities - the Company elected to account for shipping and handling activities as a fulfillment cost rather than as a separate performance obligation.
• Portfolio Approach - the Company applied the Portfolio Approach to contract reviews within its identified revenue streams that have similar characteristics and the Company believes this approach would not differ materially than if applying Topic 606 to each individual contract.
Deferred Revenue
The Company records deferred revenues when cash payments are received or due in advance of its performance. The Company’s deferred revenues relate to payments received for the customer care plans for a 12-month period. The consideration received is recognized monthly over the service period.
Years ended June 30,
Beginning of Year
Additions
Revenue Recognized
End of Year
Revenue recorded that was included within prior period deferred revenue was $ 238,000 and $ 289,000 , respectively for the years ended June 30, 2025 and 2024, respectively. The movement within the deferred revenue balance was due to new orders and the subsequent revenue recognition.
Shipping and Handling Revenues and Costs
Shipping and handling revenues are included in product revenue and the related costs are included in cost of revenue.
Research and Development
All research and development costs are charged to operations as incurred.
(Earnings) Losses Per Share
The Company used the two-class method to compute net income per common share. These participating securities included the Company’s convertible preferred stock which accrues dividends payable. The two-class method requires earnings for the period to be allocated between common stock and participating securities based upon their respective rights to receive distributed and undistributed earnings.
Under the two-class method, for periods with net income, basic net income per common share is computed by dividing the net income attributable to common stockholders by the weighted average number of shares of common stock outstanding during the period. Net income attributable to common stockholders is computed by subtracting from net income the portion of current period earnings that the participating securities would have been entitled to receive pursuant to their dividend rights had all of the period’s earnings been distributed. No such adjustment to earnings is made during periods with a net loss, as the holders of the participating securities have no obligation to fund losses.
Diluted net income per common share is computed under the two-class method by using the weighted average number of shares of common stock outstanding, plus, for periods with net income attributable to common stockholders, the potential dilutive effects of stock options. The Company analyzed the potential dilutive effect of any outstanding dilutive securities under the “if-converted” method and treasury-stock method when calculating diluted earnings per share, in which it is assumed that the outstanding participating securities convert into common stock at the beginning of the period or date of issuance, if later. The Company reports the more dilutive of the approaches (two-class or “if-converted”) as its diluted net income per share during the period. Basic earning per share is computed by dividing net income by the weighted average number of shares of common stock outstanding during the year. As of June 30, 2025 and 2024 , the average market prices for the years then ended are less than the exercise price of all the outstanding stock options and, therefore, the inclusion of the stock options would be anti-dilutive.
For the Years Ended June 30,
Numerator:
Numerator for basic earnings (loss) per share:
Net income (loss)
Less undeclared dividends on convertible stocks
Less net income allocated to convertible preferred stocks
Net income (loss) applicable to common stockholders
Net income (loss)
Undeclared dividends on convertible stocks
Net income (loss) applicable to convertible common stockholders
Denominator:
Denominator for basic earnings per share - weighted average shares outstanding
Weighted average preferred stock converted to common stock
Denominator for diluted earnings per share - weighted average and assumed conversion
Net income (loss) per share:
Basic net income (loss) per share
Diluted net income (loss) per share
The following table summarizes convertible preferred stock and securities that, if exercised would have an anti-dilutive effect
on earnings per share.
For the Years Ended June 30,
Stock options
Convertible preferred stock
Total potential dilutive securities not included in income per share
Income Taxes
The Company accounts for income taxes under the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the consolidated financial statements. Under this method, the Company determines deferred tax assets and liabilities on the basis of the differences between the financial statement and tax bases of assets and liabilities by using enacted tax rates in effect for the year in which the differences are expected to reverse. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date. The estimated annual effective tax rate is updated quarterly based on changes in the forecast of full-year income and tax expense. For the years ended June 30, 2025 and 2024, the Company’s provision for income taxes and effective tax rate were zero.
The Company recognizes deferred tax assets to the extent that it believes that these assets are more likely than not to be realized. In making such a determination, the Company considers all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax-planning strategies, and results of recent operations. If the Company determines that it would be able to realize its deferred tax assets in the future in excess of their net recorded amount, the Company would make an adjustment to the deferred tax asset valuation allowance, which would reduce the provision for income taxes. We will continue to maintain a full valuation allowance on our deferred tax assets until
there is sufficient positive evidence to support the reversal of all or some portion of these allowances. A release of the valuation allowance would result in the recognition of certain deferred tax assets and a corresponding income tax benefit in the period the release is recorded. The amount of the valuation allowance release will be determined based on the available sources of future taxable income as of the period in which the release is recorded. As of June 30, 2025 and June 30, 2024, the Company has recorded a full valuation allowance against its deferred tax assets.
The Company records uncertain tax positions in accordance with ASC 740 on the basis of a two-step process in which (1) the Company determines whether it is more likely than not that the tax positions will be sustained on the basis of the technical merits of the position and (2) for those tax positions that meet the more-likely-than-not recognition threshold, the Company recognizes the largest amount of tax benefit that is more than 50 percent likely to be realized upon ultimate settlement with the related tax authority.
The Company recognizes interest and penalties related to unrecognized tax benefits on the income tax expense line in the accompanying consolidated statements of operations. As of June 30, 2025 and June 30, 2024, no accrued interest or penalties were required to be included on the related tax liability line in the consolidated balance sheets.
Leases
The Company determines if an arrangement is a lease at the inception of a contract. Operating lease right-of-use ("ROU") assets are included in right-of-use assets on the consolidated balance sheets. The current and long-term components of operating lease liabilities are included in the current portion of operating lease liabilities and operating lease liabilities, net of current portion, respectively on the consolidated balance sheets.
Operating lease ROU assets and operating lease liabilities are recognized based on the present value of the future minimum lease payments over the lease term. As most of the Company's leases do not provide an implicit rate, the Company uses an incremental borrowing rate based on the information available at the commencement date in determining the present value of future payments. Certain leases may include options to extend or terminate the lease. Lease expense for minimum lease payments is recognized on a straight-line basis over the lease term.
New Accounting Pronouncements
Recently Adopted Accounting Standards
In November 2023, the FASB issued ASU 2023-07, Segment Reporting (Topic 280). The amendments in this update improve reportable segment disclosure requirements, primarily through enhanced disclosures about significant segment expenses. ASU 2023-07 became effective for the Company's annual period ending June 30, 2025 and interim periods beginning after July 1, 2025. The Company adopted this ASU for the annual report for the year ended June 30, 2025. As a result, the Company has updated its segment disclosures in “Note 14– Segment Information,” providing more detailed information on significant expenses and other relevant segment items in accordance with the new guidance.
The adoption of ASU 2023-07 did not result in any changes to the Company’s reportable segments but did enhance the disclosures within our financial statements, increasing transparency for annual and interim reporting periods.
Recent Accounting Pronouncements Not Yet Adopted
In December 2023, the FASB issued ASU 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures, which requires disaggregated information about a reporting entity’s effective tax rate reconciliation, as well as information related to income taxes paid to enhance the transparency and decision usefulness of income tax disclosures. This ASU will be effective for the annual period ending June 30, 2026. The Company is currently evaluating the timing and impacts of adoption of this ASU.
In November 2024, FASB issued ASU 2024-03, Income Statement reporting Comprehensive Income - Expense Disaggregation Disclosure (Subtopic 220-40): Disaggregation of Income Statement Expense, which requires disclosure in the notes to the financial statements of specified information about certain costs and expenses. The amendments are effective for the fiscal years beginning after December 15, 2026, and for interim periods within the fiscal years beginning after December 15, 2027. Early adoption is permitted. The amendments should be applied either prospectively to financial statements issued for reporting periods after the effective date of this ASU or retrospectively to any or all prior periods presented in the financial statements. The Company is currently evaluating the new guidance to determine the impact it may have on its consolidated financial statements and related disclosure.
In January 2025, the FASB issued ASU 2025-01, Income Statement—Reporting Comprehensive Income—Expense Disaggregation Disclosures (Subtopic 220-40): Clarifying the Effective Date, which clarifies the effective date of ASU 2024-03. ASU 2024-03 expands disclosure requirements to require disaggregation of specified expense captions by natural expense categories. The amendments are effective for public business entities for annual reporting periods beginning after December 15, 2026, and for interim periods within those fiscal years beginning after December 15, 2027; early adoption is permitted. The Company is currently evaluating its impact on our footnote disclosures.
In July 30, 2025, the FASB issued ASU 2025-5, “Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses for Accounts Receivable and Contract Assets” to simplify the estimation of expected credit losses for current accounts receivable and current contract assets arising from revenue-transactions under ASC 606. Key changes include a practical expedient, available to all entities, that allows assuming that conditions as of the balance sheet date will remain unchanged over the life of those assets, and for entities other than public business entities, an accounting policy election to consider subsequent cash collections after the balance sheet date in estimating those losses. The amendments are effective for annual periods beginning after December 15, 2025, including interim periods, with early adoption permitted; the guidance should be applied prospectively. The Company is currently evaluating the timing and impacts of adoption of this ASU.
4. Intangible Assets
The Company's intangible assets consist of the following:
Licenses and Patents
The Company capitalized and amortized its purchased licenses and patents over 10 years and 20 years, respectively. Amortization expense is approximately $ 20,000 for each of the years ended June 30, 2025 and 2024. Annual amortization related entirely to licenses and patents is estimated to be $ 20,000 for the years ending June 30, 2026 and $ 5,000 for the year ending June 30, 2027.
The following table presents amortized licenses and patents as of June 30, 2025:
Gross
Carrying
Amount
Impairment
Adjusted
Gross
Carrying
Amount
Accumulated
Amortization
Net
Carrying
Value
Amortized Intangible Assets
Total
The following table presents amortized licenses and patents as of June 30, 2024:
Gross
Carrying
Amount
Impairment
Adjusted
Gross
Carrying
Amount
Accumulated
Amortization
Net
Carrying
Value
Amortized Intangible Assets
Total
5. Accrued Expenses
The following table presents accrued expenses:
June 30,
Accrued compensation
Warranty reserve
Tax payable
Other accruals
Total accrued expenses
Accrued compensation as of June 30, 2025 and 2024 primarily relates to payroll and vacation accrual.
6. TD Note Payable
On June 29, 2018 the Company entered a business loan agreement with TD bank receiving a line of credit evidenced by a promissory note of $ 250,000 . The interest is subject to change based on changes in an independent index which the Wall Street Journal Prime. The index rate at the date of the agreement is 5.000 % per annum. Interest on the unpaid principal balance of the note is calculated using a rate of 0.740 percentage points over the index, adjusted if necessary for any minimum and maximum rate limitations, resulting in an initial rate of 5.740 % per annum based on a year of 360 days. The Company was required to put $ 250,000 in the TD bank savings account as collateral. Mr. Richard J. DePiano Sr. executed a guarantee of the loan in favor of TD Bank. Mr. DePiano Sr. passed away on October 3, 2019, therefore the guarantee is now assumed by his estate.
TD bank elected to exercise the term note conversion option to convert the loan balance of $201,575 to a five-year term note effective March 29, 2023 ("the Conversion Date"). The scheduled monthly principal and interest payments in the amount of $4,247 began on April 29, 2023. Commencing on the Conversion Date, the aggregate principal balance outstanding bears interest at a fixed per annum rate of 9.49% pursuant to the loan's terms and conditions.
The future annual principal amounts and accrued interest to be paid as of June 30, 2025 are as follows:
Year ending June 30,
TD Note Payment
Total
7. Long-term debt
Economic Injury Disaster ("EIDL") loan
EIDL is designed to provide economic relief to businesses that are currently experiencing a temporary loss of revenue due to the Coronavirus (COVID-19) pandemic. EIDL proceeds can be used to cover a wide array of working capital and normal operating expenses, such as continuation to health care benefits, rent, utilities, and fixed debt payments. The Company received $ 150,000 EIDL loan. The annual interest rate is 3.75 %. The payment term is 30 years and the monthly payment is $ 731 from July 1, 2021. The EIDL loan is secured by the tangible and intangible personal property of the Company. The EIDL loan is secured by the tangible and intangible personal property of the Company.
The future annual principal amounts and accrued interest to be paid as of June 30, 2025 are as follows:
Year ending June 30,
EIDL Loan Payment
Thereafter
Total
8. Capital Stock Transactions
Stock Option Plans
As of June 30, 2025, the Company had in effect one employee stock option plan that provide for incentive and non-qualified stock options. Under the terms of the plans, options may not be granted for less than the fair market value of the Common Stock at the date of grant. Vesting generally occurs ratably between one and five years and for non-employee directors, immediately, and the options are exercisable over a period no longer than 10 years after the grant date. As of June 30, 2025, options to purchase 21,000 shares of the Company’s common stock were outstanding and exercisable.
The following is a summary of Escalon’s stock option activity and related information for the fiscal years ended June 30, 2025 and 2024:
Common
Stock
Options
Weighted
Average
Exercise
Price
Common
Stock
Options
Weighted
Average
Exercise
Price
Outstanding at the beginning of the year
Granted
Exercised
Forfeited
Outstanding at the end of the year
Exercisable at the end of the year
The following table summarizes information about stock options outstanding as of June 30, 2025:
Number
Outstanding
at June 30,
Weighted
Average
Remaining
Contractual
Life (Years)
Weighted
Average
Exercise
Price
Number
Exercisable
at June 30,
Weighted
Average
Exercise
Price
Range of Exercise Prices
Total
There was no compensation expense related to stock options for the years ended June 30, 2025 and 2024.
9. Income Taxes
The provision for income taxes for the years ended June 30, 2025 and 2024 consists of the following:
Current income tax provision
Federal
State
Deferred income tax provision
Federal
State
Change in valuation allowance
Income tax expense (benefit)
Income tax expense (benefit) as a percentage of loss for the years ended June 30, 2025 and 2024 differ from statutory federal income tax rate due to the following:
Statutory federal income tax rate
State tax rate
Permanent differences
Return to provision
Expired net operating loss
State rate change
Other
Valuation allowance
Effective income tax rate
The components of the net deferred income tax assets and liabilities as of June 30, 2025 and 2024 are as follows:
Deferred income tax assets:
Net operating loss carryforward
Stock options
Operating lease liability
Allowance for doubtful accounts
Accrued vacation
Inventory reserve
Warranty reserve
Total deferred income tax assets
Valuation allowance
Deferred income tax liabilities:
Accelerated depreciation
Right of use asset
Total deferred income tax liabilities
As of June 30, 2025, the Company has a valuation allowance of $ 7,073,376 , which primarily relates to the federal net operating loss carryforwards. During the year ended June 30, 2025, the valuation allowance decreased by $ 534,387 and during the year
ended June 30, 2024 , the valuation increased by $ 53,359 . The valuation allowance is a result of management evaluating its estimates of the net operating losses available to the Company as they relate to the results of operations of acquired businesses subsequent to their being acquired by the Company. The Company evaluates a variety of factors in determining the amount of the valuation allowance, including the Company’s earnings history, the number of years the Company’s operating loss can be carried forward, the existence of taxable temporary differences, and near-term earnings expectations. Future reversal of the valuation allowance will be recognized either when the benefit is realized or when it has been determined that it is more likely than not that the benefit will be realized through future earnings. The Company has available federal and state net operating loss carry forwards of approximately $ 29,513,000 and $ 4,241,000 , respectively, of which $ 23,332,000 and $ 2,348,000 , respectively, will expire over the next ten years, $ 3,953,000 and $ 1,361,000 , respectively, will expire in years eleven through twenty , and $ 2,229,000 and $ 533,000 , respectively, which will not expire. The Company’s deferred tax assets consist primarily of net operating loss (“NOLs”) carryforwards which may be to be utilized taxable income. However, the extent of the ability to utilize the NOLs could be limited under Internal Revenue Code Section 382. The Company has not completed a 382 study to date.
The Company continues to monitor the realization of its deferred tax assets based on changes in circumstances, for example, recurring periods of income for tax purposes following historical periods of cumulative losses or changes in tax laws or regulations. The Company’s income tax provision and management’s assessment of the realizability of the Company’s deferred tax assets involve judgments and estimates. If taxable income expectations change, in the near term the Company may be required to reduce the valuation allowance which would result in a material benefit to the Company’s results of operations in the period in which the benefit is determined by the Company.
The Company files income tax returns in the U.S. and various state and local jurisdictions. The Company is currently open to audit under the statute of limitations by the Internal Revenue Service for the fiscal year ended June 30, 2020 and subsequent years remain open to tax examination. However, to the extent allowed by law, the tax authorities may have the right to examine prior periods where net operating losses were generated and carried forward, and make adjustments up to the amount of the net operating loss amount. At June 30, 2025, the Company did not have any unrecognized tax positions. The Company has provided what it believes to be an appropriate amount of tax for items that involve interpretation to the tax law. However, events may occur in the future that will cause the Company to reevaluate the current provision and may result in an adjustment to the liability for taxes. On July 4, 2025, President Trump signed into law the legislation commonly referred to as the One Big Beautiful Bill Act (“OBBBA”). The OBBBA includes various provisions, such as the permanent extension of certain expiring provisions of the Tax Cuts and Jobs Act, modifications to the international tax framework and the restoration of favorable tax treatment for certain business provisions. The OBBBA has multiple dates, with certain provisions in 2025 and others implemented through 2027. We are currently assessing its impact on our consolidated financial statements and will recognize the income tax effects in the consolidated financial statements beginning in the period in which the OBBBA was signed into law.
10. Commitments and Contingencies
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 included intellectual property disputes, 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.
11. Related Party Transactions and Preferred Stock
On February 14, 2018, the Company entered into a Debt Exchange Agreement (the “Exchange Agreement”) with Mr. DePiano Sr., the Company's former Chairman and DP Associates Inc. Profit-Sharing Plan of which Mr. DePiano Sr. is the sole owner and sole trustee (the “Holders”). Pursuant to the terms of the Exchange Agreement, effective February 15, 2018, the Holders exchanged a total of $ 645,000 principal amount of debt related to the accounts receivable factoring program for 2,000,000 shares of Series A Convertible Preferred Stock (the “Preferred Stock”). As of June 30, 2025 and 2024, the related party interest accrual of $ 112,389 related to the debt prior to the exchange, remained as an on demanded payable.
Each share of Preferred Stock entitles the Holder thereof to 13 votes per share and will vote together with all other classes and series of stock of the Company as a single class on all actions to be taken by the Company’s stockholders. As a result of this voting power, the Holders as of June 30, 2025 beneficially own approximately 77.81 % of the voting power on all actions to be taken by the Company’s stockholders.
Subject to the terms and conditions of Preferred Stock, the holder of any share or shares of the Preferred Stock has the right, at its option at any time, to convert each such share of Preferred Stock (except that, upon any liquidation of the Company, the right of conversion will terminate at the close of business on the business day fixed for payment of the amounts distributable on the Preferred Stock) into 2.15 shares of Common Stock (the “Conversion Ratio”). The Conversion Ratio is subject to standard provisions for adjustment in the event of a subdivision or combination of the Company’s Common Stock and upon any reorganization or reclassification of the capital stock of the Company. If the Holders were to convert their shares of Preferred Stock into Common Stock at the Conversion Ratio the Holders would receive a total of 4,300,000 shares of Common Stock, or approximately 36.70 % of the then outstanding shares of Common Stock assuming such conversion.
Each outstanding share of the Preferred Stock accrues dividends calculated cumulatively at the annual rate of $ .0258 per share (such amount subject to equitable adjustment in the event of any stock dividend, stock split, combination, reclassification other similar event), payable upon the earlier of (i) a liquidation, dissolution or winding up of the Company or (ii) conversion of the Preferred Stock into Common Stock. Upon either of such events, all such accrued and unpaid dividends, whether or not earned or declared, to and until the date of such event, will become immediately due and payable and will be paid in full. The dividends payable to the holders of the Preferred Stock is payable in cash or, at the election of any such holder, in a number of additional shares of Common Stock equal to the amount of the dividend expressed in dolla rs divided by the then applicable Conversion Ratio, described above. As of June 30, 2025 and 2024 the cumulative dividends payable is $ 380,531 ($ 0.1903 per share) and $ 329,003 ($ 0.1645 per share), respectively.
Mr. DePiano Sr. passed away on O ctober 3, 2019 and le ft a will by which he appointed Richard J. DePiano, Jr., the Chief Executive Officer of the Company, as executor. Richard DePiano Jr. was elected to serve as chairman of the Company's board. Mr. DePiano, Jr. qualified as executor and has control over the listed shares in his capacity as executor of Mr. DePiano Sr.'s estate.
12. Concentration of Credit Risk
Credit Risk
Financial Instruments, which potentially subject the Company to concentration of credit risk, consist principally of cash and cash equivalents, restricted cash and trade receivables. Concentration of credit risk with respect to trade receivables is generally diversified due to the large number of entities comprising the Company's customer base and their dispersion across geographic areas principally within the United States and international. The Company routinely address the financial strength of its customer and, as a consequence, believes that its receivable credit risk exposure is limited. The Company does not require customers to post collateral.
Major Customer
One customer accounted for approximately 17 % of net sales during the year ended June 30, 2025 . One customer accounted for approximately 16 % of net sales during the year ended June 30, 2024.
As of June 30, 2025 the Company had one customer that represents approximately 21 % of the total accounts receivable balance. As of June 30, 2024 the Company had two customer that represents approximately 37 % and 14 % of the total accounts receivable balance.
Major Supplier
The Company's one largest suppliers accounted for 43 % of the total purchases for the year ended June 30, 2025 . T he Company's two largest suppliers accounted for the total purchases for 39 % and 11 % of total purchases for the year ended June 30, 2024 .
As of June 30, 2025 the Company had two suppliers that represent approximately 30 % and 28 % of the total accounts payable balance. As of June 30, 2024 the Company had two supplier that represents 25 % and 21 % of the total accounts payable balance.
Foreign Sales
Domestic and international sales from continuing operations are as follows:
(in thousands)
For the Years Ended June 30,
Domestic
Foreign
Total
13. Leases
The Company leases certain facilities and equipment under operating leases. Total lease expense, under ASC 842, was included in cost of revenue and marketing, general and administrative costs in the Company's audited consolidated statement of operations for the years ended June 30, 2025 and 2024 as follows:
Year Ended June 30,
Operating lease costs:
Fixed
Total:
Supplemental cash flow information was as follows:
Year Ended June 30,
Cash paid for amounts included in the measurement of lease liabilities
Operating cash flows for operating leases
Total
Leases recorded on the balance sheet consist of the following:
June 30,
Leases (operating)
Classification on the Balance Sheet
Assets
Operating lease ROU assets
Right-of-use asset
Liabilities
Current
Current portion of operating lease liabilities
Non-current
Operating lease liabilities
The table below reconciles the undiscounted future minimum lease payments (displayed by year and in the aggregate)
under noncancelable operating leases with terms of more than one year to the total operating lease liabilities
recognized on the consolidated balance sheets as of June 30, 2025:
The aggregate future lease payments for operating leases as of June 30, 2025 were as follows:
Operating
Total lease payments
Less interest
Present value of lease liabilities
Average lease terms and discount rates were as follows:
June 30,
Weighted-average remaining lease terms (years)
Operating leases
Weighted-average discount rate
Operating leases
14. Segment Information
Operating segments are defined as components of an entity for which separate financial information is available and that is regularly provided to the Chief Operating Decision Maker ("CODM") in deciding how to allocate resources to an individual segment and in assessing performance.
The Company’s CODM is consisted of the Chief Executive Officer and Chief Operating Officer. The CODM reviews financial information presented on a consolidated basis for purposes of making operating decisions, allocating resources, and evaluating financial performance. The accounting policies of the Company’s reportable segment, as well as how the Company derives revenue, are consistent with those described in "Note 3-Basis of Presentation and Summary of Significant Accounting Policies” within these financial statements.
The CODM uses consolidated net income (loss), consistent with GAAP to assess performance, evaluate cost optimization, and allocate resources, including personnel-related and financial or capital resources, in the annual budget and forecasting process, as well as budget-to-actual variances on a monthly basis. As such, the Company has determined that it operates as one operating and reportable segment.
As the Company has only one reportable segment, all revenues, expenses, and operating results are attributable to that segment. Total assets attributable to the Company’s sole reportable segment were $ 4,993,059 and $ 4,757,925
The following tables set forth significant expense categories and other specified amounts included in consolidated net income that are otherwise regularly provided to the CODM for the years ended June 30, 2025 and 2024:
Years Ended June 30,
Revenue
Cost of Revenue (1)
Research and Development
Sales and Marketing
General and Administrative (1)(2)
Depreciation and Amortization
Credit loss Adjustment
Other expense
Interest expense, net
Segment net income (loss)
(1) 2025 and 2024 exclude depreciation and amortization expenses in cost of revenue, general and administrative expenses.
(2) 2025 and 2024 exclude the credit loss adjustment.
