ESMC 10-K & 10-Q changes, risk factors and insider trading

Due to the Company’s history of operating losses, we have compiled these financial statements based on the assumption thethere Companyis cannotsubstantial continuedoubt related to our ability to continued as a going concern.

As of June 30, 2024,2025, we had an accumulated deficit of $68.5$68.4 million, and had incurred historical recurring losses from operations and negative cash flows from operating activities in prior years except for the fiscal year ended June 30, 2023.2023 and 2025. While the overall trend has been toward profitability, havingthe Company had net profit for just onetwo year outyears of the last five years, and currently the Company has adverse ratios of income,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.

Our continued operations will ultimately depend on the ability to be profitable from our operations and the on-goingongoing support of our stockholders and creditors.

On an on-goingongoing basis, the Company evaluates its estimates, including, among others, those relating to:

The Company has received CE approvalMark on several of the Company’s products that allows the Company to sell the products in the countries comprising the European Community. In addition to the CE mark,Mark, however, some foreign countries may require separate individual foreign regulatory clearances. The Company may not be able to obtain regulatory clearances for other products in the United States or foreign markets.

Healthcare costs have risen significantly over the past decade. There have been and continue to be proposals by legislators, regulators and third-party payorspayers to keep these costs down. Certain proposals, if passed, would impose limitations on the prices the Company will be able to charge for the Company’s products, or the amounts of reimbursement available for its products from governmental agencies or third-party payers. These limitations could have a material adverse effect on the Company’s financial position and results of operations.

Executive Overview—six-monthnine-month periods ended DecemberMarch 31, 20252026 and 20242025

•Consolidated net revenue increaseddecreased approximately $265,000$601,000 or 4.4%,6.3%, to $6,267,000$8,875,000 during the sixnine months ended DecemberMarch 31, 20252026 as compared to the same period of last fiscal year. The increasedecrease in net revenue is mainly attributed to ana increasedecrease of $455,000$310,000 in sales of Sonomed products, offset by a decrease of $207,000$305,000 in sales of Trek products and a decrease of $51,000 of Digital service revenue, partially offset by an increase of $92,000 in ultrasound service revenue during the sixnine months ended DecemberMarch 31, 2025.2026. The decrease in Sonomed sales was mainly driven by backorders caused by a significant vendor’s fulfillment constraints related to shifting demand. Trek product sales declined compared to the prior year, which had higher-than-average order volume and fulfillment.

•Consolidated cost of revenue totaled approximately $3,590,000,$5,252,000, or 57.3%,59.2%, of total revenue during the sixnine months ended DecemberMarch 31, 2025,2026, as compared to $3,215,000,$5,089,000, or 53.6%,53.7%, of total revenue of the same period of last fiscal year. The increase of 3.7%5.5% in cost of revenue as a percentage of total revenue is mainly due to change in product mix.mix and a $98,000 retention and severance accrual associated with the sales of AXIS software, which significantly increased Digital cost of revenue.

•Consolidated marketing, general and administrative expenses increased $173,000,$349,000, or 7.7%,10.2%, to $2,434,000$3,770,000 during the sixnine months ended DecemberMarch 31, 2025,2026, as compared to the same period of last fiscal year. The increase is mainly due to a $91,000$223,000 increase in payroll,payroll $49,000and fringe benefits expenses, a $81,000 increase in bonus, a $41,000 increase in advertising expenses, and a $35,000 increase in legal expenses, a $27,000 increase in travel expenses, and $20,000 in benefits, partially offset by ana $60,000$61,000 accounts receivable credit loss adjustmentadjustment, a $41,000 decrease in commission expenses and a $27,000 decrease of $27,000 in network expenses during the sixnine months ended DecemberMarch 31, 2025.2026.

•Consolidated research and development expenses increaseddecreased $50,000$85,000 or 16.8%,18.4%, to $347,000$377,000 during the sixnine months ended 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 increasedecrease in research and development expense is mainly due to ana increase$144,000 decrease of $64,000 ultrasound consulting expenses offset by nonrecurring AXIS consulting expenses of $14,000 during the sixnine months ended DecemberMarch 31, 2025.2026, offset by an increase of $33,000 ultrasound consulting expenses and an increase of $28,000 outside services .

Three and SixNine Months Ended DecemberMarch 31, 20252026 and 20242025

The following table shows consolidated net revenue, as well as identifying trends in revenues for the three and sixnine months ended DecemberMarch 31, 20252026 and 2024.2025. Table amounts are in thousands:

Consolidated net revenue increaseddecreased approximately $370,000$865,000 or 11.5%,24.9%, to $3,591,000$2,609,000 during the three months ended DecemberMarch 31, 20252026 as compared to the same period of last fiscal year. The increasedecrease in net revenue is mainly attributed to ana increasedecrease of $583,000$701,000 in sales of Sonomed products, offset by a decrease of $192,000$98,000 in sales of Trek products and a decrease of $52,000 of Digital revenue during the three months ended DecemberMarch 31, 2025.2026. The decrease in Sonomed sales was mainly driven by backorders caused by a significant vendor’s fulfillment constraints related to shifting demand. Trek product sales declined compared to the prior year, which had higher-than-average order volume and fulfillment.

Consolidated net revenue increaseddecreased approximately $265,000$601,000 or 4.4%,6.3%, to $6,267,000$8,875,000 during the sixnine months ended DecemberMarch 31, 20252026 as compared to the same period of last fiscal year. The increasedecrease in net revenue is mainly attributed to ana increasedecrease of $455,000$310,000 in sales of Sonomed products, offset by a decrease of $207,000$305,000 in sales of Trek products and a decrease of $51,000 of Digital service revenue offset by an increase of $92,000 in ultrasound service revenue during the sixnine months ended DecemberMarch 31, 2025.2026. The decrease in Sonomed sales was mainly driven by backorders caused by a significant vendor’s fulfillment constraints related to shifting demand. Trek product sales declined compared to the prior year, which had higher-than-average order volume and fulfillment.

The following table presents domestic and international sales from continuing operations for the three and sixnine months ended DecemberMarch 31, 20252026 and 2024.2025. Table amounts are in thousands:

The following table presents consolidated cost of revenue and as a percentage of revenues for the three and sixnine months ended DecemberMarch 31, 20252026 and 2024.2025. Table amounts are in thousands:

Consolidated cost of revenue totaled approximately $2,035,000,$1,662,000, or 56.7%,63.7%, of total revenue during the three months ended DecemberMarch 31, 2025,2026, as compared to $1,647,000,$1,874,000, or 51.1%,53.9%, of total revenue same period of last fiscal year. The increase of 5.6%9.8% in cost of revenue as a percentage of total revenue is mainly due to change in product mix.mix and a $98,000 retention and severance accrual associated with the sales of AXIS software.

Consolidated cost of revenue totaled approximately $3,590,000,$5,252,000, or 57.3%,59.2%, of total revenue during the sixnine months ended DecemberMarch 31, 2025,2026, as compared to $3,215,000,$5,089,000, or 53.6%,53.7%, of total revenue same period of last fiscal year. The increase of 3.7%5.5% in cost of revenue as a percentage of total revenue is mainly due to change in product mix.mix and a $98,000 retention and severance accrual associated with the sales of AXIS software.

The following table presents consolidated marketing, general and administrative expenses for the three and sixnine months ended DecemberMarch 31, 20252026 and 2024.2025. Table amounts are in thousands:

Consolidated marketing, general and administrative expenses increased $173,000,$177,000, or 7.7%,15.3%, to $2,434,000$1,336,000 during the sixthree months ended DecemberMarch 31, 20252026 as compared to the same period of last fiscal year. The increase is mainly due to a $91,000$80,000 increase in payroll,bonus, $49,000a $84,000 increase in advertisingpayroll and fringe benefits expenses, $35,000a $12,000 increase in legalconsulting and a $10,000 increase in exhibits expenses, $27,000 in travel expenses, and $20,000 in benefits, partiallyrespectively, offset by ana $60,000 accounts receivable credit loss adjustment and a$18,000 decrease of $27,000 in networkcommission expenses during the sixthree months ended DecemberMarch 31, 2025.2026.

The following table presents consolidated research and development expenses for the three and sixnine months ended DecemberMarch 31, 20252026 and 2024.2025.

Consolidated research and development expenses decreased 25,000,135,000, or 16.0%,81.8%, to $131,000$30,000 during the three months ended DecemberMarch 31, 20252026 as compared to same period of last fiscal year. Research and development expenses were primarily expenses associated with the introduction of new or enhanced products. The decrease in research and development expense is mainly due to the decreased nonrecurring AXIS consulting expenses of $50,000 offset by an increase of $25,000 in ultrasound consulting expenses$130,000 during the three months ended DecemberMarch 31, 2025.2026. The AXIS consulting expenses discontinued and $40,000 consulting expense accrual was reversed during the third quarter of this current fiscal year.

Consolidated research and development expenses increaseddecreased $50,000,$85,000, or 16.8%,18.4%, to $347,000$377,000 during the sixnine months ended DecemberMarch 31, 20252026 as compared to same period of last fiscal year. Research and development expenses were primarily expenses associated with the introduction of new or enhanced products. The increasedecrease in research and development expense is mainly due to ana increase$144,000 decrease of $64,000 ultrasound consulting expenses offset by nonrecurring AXIS consulting expenses of $14,000 during the sixnine months ended DecemberMarch 31, 2025.2026, offset by an increase of $33,000 ultrasound consulting expenses and an increase of $28,000 outside services.

Our total cash as of DecemberMarch 31, 20252026 was approximately $337,000$3,343,000 of cash on hand compared to approximately $546,000 of cash on hand and restricted cash of $257,000 as of June 30, 2025.

As of DecemberMarch 31, 20252026 the Company had an accumulated deficit of approximately $68.6$66.2 million. It had net loss from operations for the sixnine months ended DecemberMarch 31, 20252026 and has historically incurred recurring losses from operations and negative cash flows from operating activities. The Company generated net income from operations in fiscal year 2025 and fiscal 2023, and reported positive cash flows from operating activities in fiscal years 2025, 20212023 and 2023.2021. 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.years. Additionally, there is uncertainty in the market related to the tariffs and the related impacts to the international business and supply chain cost impacts. It remains uncertain 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 the Company's ability to generate cash to meet our cash requirements for the following twelve months as of the filing date of this form 10-Q.

The following table presents overall liquidity and capital resources as of DecemberMarch 31, 20252026 and June 30, 2025. Table amounts are in thousands:

Working capital decreasedincreased approximately $242,000$2,107,000 to $1,685,000$4,034,000 as of DecemberMarch 31, 2025,2026, and the current ratio decreasedincreased to 1.652.59 to 1 from 1.72 to 1 when compared to June 30, 2025.

Debt to total capital ratio was 31.6%19.6% and 21.5% as of DecemberMarch 31 20252026 and June 30, 2025, respectively.

During the sixnine months ended DecemberMarch 31, 20252026 the Company used approximately $432,000$151,000 of cash in operating activities as compared to approximately $334,000$365,000 of cash provided by operating activities during the sixnine months ended DecemberMarch 31, 2024.2025.

For the sixnine months ended DecemberMarch 31, 2025,2026, its cash used in operations is mainly due to annet increaseoperating in accounts receivableloss of $673,000,$523,000, a decrease in accounts payable of $394,000,$490,000, offset by a decrease in inventories of 618,000485,000, a decrease in accounts receivable of $223,000, an increase in deferred revenue of $162,000, and an increase in accrued expenses of $115,000, and deferred revenue of $112,000,$150,000. The remaining offsetting items for cash used in operations is comprised of less significant items.

For the sixnine months ended DecemberMarch 31, 2024,2025, its cash provided by operations is due to a net income of $214,000, a decrease in accounts receivable of $513,000, and$485,000, an increase in accrued liabilityexpenses of 116,000,175,000, and an increase in deferred revenue of $62,000,$96,000, offset by a decrease in accounts payable of $465,000,$294,000, and an increase in inventory of $106,000.131,000. The remaining offsetting items for cash provided by operations is comprised of less significant items.

Cash Flows UsedProvided inby Investing Activities

Cash flows usedprovided inby investing activities for the sixnine months ended DecemberMarch 31, 20252026 was due to net proceeds from sales of AXIS software of $2,825,000, offset by purchase of the fixed assets of $4,000. There were no cash flows used in investing activities for the quarter ended DecemberMarch 31, 2024.2025.

Cash Flows Used in (Provided by) Financing Activities

For the sixnine months ended DecemberMarch 31, 20242026 the cash used in financing activities was due to loan paymentsrepayment of $21,000TD bank loan balance of $126,000, and repayment of EIDL loan of $2,000.$3,000.

The Company was not a party to any off-balance sheet arrangements duringas theof six months ended DecemberMarch 31, 20252026 and June 30, 2025.