ITEM 1
-
Condensed
Interim Financial Statements
Encision Inc.
Condensed Balance Sheets
(Unaudited)
|
|
June 30,
2019
|
|
March 31,
2019
|
ASSETS
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
135,569
|
|
|
$
|
273,348
|
|
Restricted cash
|
|
|
—
|
|
|
|
25,000
|
|
Accounts receivable, net of allowance for doubtful accounts of $20,000 at June 30, 2019 and $26,000 at March 31, 2019
|
|
|
1,021,341
|
|
|
|
1,009,106
|
|
Inventories, net of reserve for obsolescence of $40,000 at June 30, 2019 and $50,000 at March 31, 2019
|
|
|
1,377,719
|
|
|
|
1,472,543
|
|
Prepaid expenses
|
|
|
132,583
|
|
|
|
130,016
|
|
Total current assets
|
|
|
2,667,212
|
|
|
|
2,910,013
|
|
Equipment, at cost:
|
|
|
|
|
|
|
|
|
Furniture, fixtures and equipment
|
|
|
3,082,315
|
|
|
|
3,061,329
|
|
Accumulated depreciation
|
|
|
(2,848,095
|
)
|
|
|
(2,811,761
|
)
|
Equipment, net
|
|
|
234,220
|
|
|
|
249,568
|
|
Right of use asset
|
|
|
1,181,590
|
|
|
|
—
|
|
Patents, net of accumulated amortization of $272,526 at June 30, 2019 and $266,028 at March 31, 2019
|
|
|
242,886
|
|
|
|
248,579
|
|
Other assets
|
|
|
19,548
|
|
|
|
19,548
|
|
TOTAL ASSETS
|
|
$
|
4,345,456
|
|
|
$
|
3,427,708
|
|
LIABILITIES AND SHAREHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
437,918
|
|
|
$
|
578,956
|
|
Accrued compensation
|
|
|
208,946
|
|
|
|
295,875
|
|
Other accrued liabilities
|
|
|
138,007
|
|
|
|
126,434
|
|
Line of credit
|
|
|
150,000
|
|
|
|
—
|
|
Accrued lease liability
|
|
|
158,721
|
|
|
|
—
|
|
Total current liabilities
|
|
|
1,093,592
|
|
|
|
1,001,265
|
|
Long-term liability:
|
|
|
|
|
|
|
|
|
Accrued lease liability
|
|
|
1,074,434
|
|
|
|
—
|
|
Deferred rent
|
|
|
—
|
|
|
|
74,821
|
|
Total liabilities
|
|
|
2,168,026
|
|
|
|
1,076,086
|
|
Commitments and contingencies (Note 4)
|
|
|
|
|
|
|
|
|
Shareholders’ equity:
|
|
|
|
|
|
|
|
|
Preferred stock, no par value: 10,000,000 shares authorized; none issued and outstanding
|
|
|
—
|
|
|
|
—
|
|
Common stock and additional paid-in capital, no par value: 100,000,000 shares authorized; 11,558,355 shares issued and outstanding at June 30, 2019 and March 31, 2019
|
|
|
24,209,471
|
|
|
|
24,201,769
|
|
Accumulated (deficit)
|
|
|
(22,032,041
|
)
|
|
|
(21,850,147
|
)
|
Total shareholders’ equity
|
|
|
2,177,430
|
|
|
|
2,351,622
|
|
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY
|
|
$
|
4,345,456
|
|
|
$
|
3,427,708
|
|
The accompanying notes to financial statements are an integral part
of these condensed statements.
Encision Inc.
Condensed Statements of Operations
(Unaudited)
|
|
Three Months Ended
|
|
|
June 30, 2019
|
|
June 30, 2018
|
NET REVENUE
|
|
$
|
1,928,575
|
|
|
$
|
2,404,292
|
|
COST OF REVENUE
|
|
|
995,604
|
|
|
|
1,103,177
|
|
GROSS PROFIT
|
|
|
932,971
|
|
|
|
1,301,115
|
|
OPERATING EXPENSES:
|
|
|
|
|
|
|
|
|
Sales and marketing
|
|
|
530,505
|
|
|
|
775,785
|
|
General and administrative
|
|
|
345,600
|
|
|
|
320,260
|
|
Research and development
|
|
|
236,144
|
|
|
|
166,672
|
|
Total operating expenses
|
|
|
1,112,249
|
|
|
|
1,262,717
|
|
OPERATING INCOME (LOSS)
|
|
|
(179,278
|
)
|
|
|
38,398
|
|
Interest expense, net
|
|
|
(2,783
|
)
|
|
|
(18,450
|
)
|
Other income (expense), net
|
|
|
167
|
|
|
|
(1,365
|
)
|
Interest expense and other income (expense), net
|
|
|
(2,616
|
)
|
|
|
(19,815
|
)
|
INCOME (LOSS) BEFORE PROVISION FOR INCOME TAXES
|
|
|
(181,894
|
)
|
|
|
18,583
|
|
Provision for income taxes
|
|
|
—
|
|
|
|
—
|
|
NET INCOME (LOSS)
|
|
$
|
(181,894
|
)
|
|
$
|
18,583
|
|
Net income (loss) per share—basic and diluted
|
|
$
|
(0.02
|
)
|
|
$
|
0.00
|
|
Weighted average shares—basic
|
|
|
11,558,355
|
|
|
|
10,683,355
|
|
Weighted average shares—diluted
|
|
|
11,558,355
|
|
|
|
10,704,655
|
|
The accompanying notes to financial statements are an integral part
of these condensed statements.
Encision Inc.
Condensed Statements of Cash Flows
(Unaudited)
|
|
Three Months Ended
|
|
|
June 30, 2019
|
|
June 30, 2018
|
Operating activities:
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(181,894
|
)
|
|
$
|
18,583
|
|
Adjustments to reconcile net income to net cash used in operating activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
42,832
|
|
|
|
47,587
|
|
Share-based compensation expense
|
|
|
7,702
|
|
|
|
12,093
|
|
(Recovery from) doubtful accounts, net
|
|
|
(6,000
|
)
|
|
|
(3,000
|
)
|
(Recovery from) inventory obsolescence, net
|
|
|
(10,000
|
)
|
|
|
—
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Right of use asset, net
|
|
|
(23,256
|
)
|
|
|
—
|
|
Accounts receivable
|
|
|
(6,235
|
)
|
|
|
(284,959
|
)
|
Inventories
|
|
|
104,824
|
|
|
|
201,506
|
|
Prepaid expenses and other assets
|
|
|
(2,567
|
)
|
|
|
(44,033
|
)
|
Accounts payable
|
|
|
(141,038
|
)
|
|
|
(16,870
|
)
|
Accrued compensation and other accrued liabilities
|
|
|
(75,356
|
)
|
|
|
(72,953
|
)
|
Net cash (used in) operating activities
|
|
|
(290,988
|
)
|
|
|
(142,046
|
)
|
Investing activities:
|
|
|
|
|
|
|
|
|
Acquisition of property and equipment
|
|
|
(20,986
|
)
|
|
|
(5,288
|
)
|
Patent costs
|
|
|
(805
|
)
|
|
|
(1,171
|
)
|
Net cash (used in) investing activities
|
|
|
(21,791
|
)
|
|
|
(6,459
|
)
|
Financing activities:
|
|
|
|
|
|
|
|
|
Borrowings from credit facility, net change
|
|
|
150,000
|
|
|
|
87,110
|
|
Net cash generated by financing activities
|
|
|
150,000
|
|
|
|
87,110
|
|
Net (decrease) in cash, cash equivalents, and restricted cash
|
|
|
(162,779
|
)
|
|
|
(61,395
|
)
|
Cash, cash equivalents, and restricted cash beginning of period
|
|
|
298,348
|
|
|
|
139,538
|
|
Cash, cash equivalents, and restricted cash end of period
|
|
$
|
135,569
|
|
|
$
|
78,143
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure:
|
|
|
|
|
|
|
|
|
Right of use asset
|
|
$
|
1,214,983
|
|
|
|
—
|
|
Accrued lease liability
|
|
$
|
1,279,675
|
|
|
|
—
|
|
The accompanying notes to financial statements are an integral part
of these condensed statements.
ENCISION INC.
NOTES TO CONDENSED INTERIM FINANCIAL STATEMENTS
JUNE 30, 2019
(Unaudited)
Note 1.
ORGANIZATION AND NATURE OF BUSINESS
Encision Inc. is a medical device company that
designs, develops, manufactures and markets patented surgical instruments that provide greater safety to, and saves lives of, patients
undergoing minimally-invasive surgery. We believe that our patented AEM
®
(Active Electrode Monitoring) surgical
instrument technology is changing the marketplace for electrosurgical devices and instruments by providing a solution to a patient
safety risk in laparoscopic surgery. Our sales to date have been made principally in the United States.
We have an accumulated deficit of $22,032,041
at June 30, 2019. A significant portion of our operating funds have been provided by issuances of our common stock and warrants,
a line of credit, and the exercise of stock options to purchase our common stock. Shareholders’ equity decreased by $174,192
as a result of our loss of $181,894, and increased as a result of share-based compensation of $7,702. Should our liquidity be diminished
in the future because of operating losses, we may be required to seek additional capital.
Our strategic marketing and sales plan is designed
to expand the use of our products in surgically active hospitals and surgery centers in the United States.
Note 2.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation.
The condensed
interim financial statements included herein have been prepared by us, without audit, pursuant to the rules and regulations of
the Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles accepted in the United States (“GAAP”)
have been condensed or omitted pursuant to such rules and regulations, although we believe that the disclosures made are adequate
to make the information presented not misleading. The condensed interim financial statements and notes thereto should be read in
conjunction with the financial statements and the notes thereto included in our Annual Report on Form 10-K for the fiscal year
ended March 31, 2019, filed on June 14, 2019.
The accompanying condensed interim financial
statements have been prepared, in all material respects, in conformity with the standards of accounting measurements and reflect,
in the opinion of management, all adjustments necessary to summarize fairly the financial position and results of operations for
such periods in accordance with GAAP. All adjustments are of a normal recurring nature. The results of operations for the most
recent interim period are not necessarily indicative of the results to be expected for the full year.
We had a net loss of $181,894 for the fiscal
quarter ended June 30, 2019. At June 30, 2019, we had cash of $135,569, borrowings of $150,000 and $850,000 available under our
line of credit. Working capital was $1,573,620, a decrease of $335,128 from March 31, 2019. We used $290,988 of cash in the fiscal
quarter ended June 30, 2019, primarily as a result of our loss and reduction of accounts payable. The principal reason for our
loss for the fiscal year ended March 31, 2019 was higher material costs as a result of the U.S. governmental tariffs. These facts
and circumstances were initial indicators that created uncertainty about our ability to continue as a going concern. To address
this uncertainty, management has developed plans to ensure that we have the working capital necessary to fund operations. In July
2019, we reduced personnel and departmental costs by more than $1 million annualized. We expect that the $1 million annualized
cost reductions will return us, starting in the near-term, to profitability. We have a new line of credit (see Note 7), for up
to $1 million, restricted by eligible receivables. Management concludes that it is probable that our cash resources and line of
credit will be sufficient to meet our cash requirements for twelve months from the issuance of the consolidated financial statements.
In the event that the governmental tariffs are reduced or eliminated then we expect that the higher material costs that we experienced
will be reduced. We are increasing our pricing on products to mitigate somewhat our higher material costs. Therefore, the accompanying
condensed financial statements have been prepared assuming that we will continue as a going concern.
Use of Estimates in the Preparation of Financial
Statements.
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions.
Such estimates and assumptions affect the reported amounts of assets and liabilities as well as disclosure of contingent assets
and liabilities at the date of the financial statements and the reported amounts of sales and expense during the reporting period.
Actual results could differ from those estimates.
Cash and Cash Equivalents.
For purposes
of reporting cash flows, we consider all cash and highly liquid investments with an original maturity of three months or less to
be cash equivalents. Restricted cash is cash that was deposited to obtain a letter of credit for our importing and exporting activities.
Fair Value of Financial Instruments.
Our financial instruments consist of cash, cash equivalents, restricted cash, short-term trade receivables, payables and a line
of credit. The carrying values of cash, cash equivalents, restricted cash short-term trade receivables, payables and line of credit
approximate their fair value due to their short maturities.
Concentration of Credit Risk.
Financial
instruments, which potentially subject us to concentrations of credit risk, consist of cash and cash equivalents, accounts receivable
and a line of credit. From time to time, the amount of cash on deposit with financial institutions may exceed the $250,000 federally
insured limit at June 30, 2019. We believe that cash on deposit that exceeds $250,000 with financial institutions is financially
sound and the risk of loss is minimal.
We have no significant off-balance sheet concentrations
of credit risk such as foreign exchange contracts, options contracts or other foreign hedging arrangements. We maintain the majority
of our cash balances with one financial institution in the form of demand deposits.
Accounts receivable are typically unsecured
and are derived from transactions with and from entities in the healthcare industry primarily located in the United States. Accordingly,
we may be exposed to credit risk generally associated with the healthcare industry. We maintain allowances for doubtful accounts
for estimated losses resulting from the inability of our customers to make required payments. The net accounts receivable balance
at June 30, 2019 of $1,021,341 and at March 31, 2019 of $1,009,106 included no more than 8% from any one customer.
Inventories
. Inventories are stated
at the lower of cost (first-in, first-out basis) or net realizable value. We reduce inventory for estimated obsolete or unmarketable
inventory equal to the difference between the cost of inventory and the net realizable value based upon assumptions about future
demand and market conditions. If actual market conditions are less favorable than those projected by management, additional inventory
write-downs may be required. At June 30, 2019 and March 31, 2019, inventory consisted of the following:
|
|
June 30, 2019
|
|
March 31, 2019
|
Raw materials
|
|
$
|
1,148,006
|
|
|
$
|
1,063,780
|
|
Finished goods
|
|
|
269,713
|
|
|
|
458,763
|
|
Total gross inventories
|
|
|
1,417,719
|
|
|
|
1,522,543
|
|
Less reserve for obsolescence
|
|
|
(40,000
|
)
|
|
|
(50,000
|
)
|
Total net inventories
|
|
$
|
1,377,719
|
|
|
$
|
1,472,543
|
|
Property and Equipment
. Property and
equipment are stated at cost, with depreciation computed over the estimated useful lives of the assets, generally five to seven
years. We use the straight-line method of depreciation for property and equipment. Leasehold improvements are depreciated over
the shorter of the remaining lease term or the estimated useful life of the asset. Maintenance and repairs are expensed as incurred
and major additions, replacements and improvements are capitalized.
Long-Lived Assets.
Long-lived assets
are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be
recoverable. A long-lived asset is considered impaired when estimated future cash flows related to the asset, undiscounted and
without interest, are insufficient to recover the carrying amount of the asset. If deemed impaired, the long-lived asset is reduced
to its estimated fair value. Long-lived assets to be disposed of are reported at the lower of their carrying amount or estimated
fair value less cost to sell.
Patents.
The costs of applying for patents
are capitalized and amortized on a straight-line basis over the lesser of the patent’s economic or legal life (20 years from
the date of application in the United States). Capitalized costs are expensed if patents are not issued. We review the carrying
value of our patents periodically to determine whether the patents have continuing value and such reviews could result in the conclusion
that the recorded amounts have been impaired.
Income Taxes.
We account for income
taxes under the provisions of FASB Accounting Standards Codification (“ASC”) Topic 740, “Accounting for Income
Taxes” (“ASC 740”). ASC 740 requires recognition of deferred income tax assets and liabilities for the expected
future income tax consequences, based on enacted tax laws, of temporary differences between the financial reporting and tax bases
of assets and liabilities. ASC 740 also requires recognition of deferred tax assets for the expected future tax effects of all
deductible temporary differences, loss carryforwards and tax credit carryforwards. Deferred tax assets are then reduced, if deemed
necessary, by a valuation allowance for the amount of any tax benefits, which, more likely than not based on current circumstances,
are not expected to be realized. As a result, no provision for income tax is reflected in the accompanying statements of operations.
Should we achieve sufficient, sustained income in the future, we may conclude that some or all of the valuation allowance should
be reversed. We are required to make many subjective assumptions and judgments regarding our income tax exposures. At June 30,
2019, we had no unrecognized tax benefits, which would affect the effective tax rate if recognized and had no accrued interest,
or penalties related to uncertain tax positions.
Revenue Recognition.
We record revenue
at a single point in time, when control is transferred to the customer, which is consistent with past practice. We will continue
to apply our current business processes, policies, systems and controls to support recognition and disclosure. Our shipping policy
is FOB Shipping Point. We recognize revenue from sales to stocking distributors when there is no right of return, other than for
normal warranty claims. We have no ongoing obligations related to product sales, except for normal warranty obligations. We evaluated
the requirement to disaggregate revenue, and concluded that substantially all of its revenue comes from multiple products within
a line of medical devices.
Research and Development Expenses
. We
expense research and development costs for products and processes as incurred.
Stock-Based Compensation
. Stock-based
compensation is presented in accordance with the guidance of ASC Topic 718, “Compensation – Stock Compensation”
(“ASC 718”). Under the provisions of ASC 718, companies are required to estimate the fair value of share-based payment
awards on the date of grant using an option-pricing model. The value of the portion of the award that is ultimately expected to
vest is recognized as expense over the requisite service periods in our statements of operations.
Stock-based compensation expense recognized
under ASC 718 for the three months ended June 30, 2019 and 2018 was $7,702 and $12,093, respectively, which consisted of stock-based
compensation expense related to grants of employee stock options and restricted stock units (“RSUs”).
Segment Reporting.
We have concluded
that we have one operating segment.
Recent Accounting Pronouncements.
We
have reviewed all recently issued accounting pronouncements.
ASU No. 2014-09 (ASC
606), Revenue from Contracts with Customers became effective for us beginning April 1, 2018, and adopted the new accounting standard
using the modified retrospective transition approach. We record revenue under ASC 606 at a single point in time, when control is
transferred to the customer, which is consistent with past practice. We will continue to apply our current business processes,
policies, systems and controls to support recognition and disclosure under the new standard. Based on the results of the evaluation,
we have determined that the adoption of the new standard presents no material impact on our financial statements.
In February 2016,
the FASB issued ASU No. 2016-02, Leases (Topic 842) ("ASU 2016-02"), which modified lease accounting for both lessees
and lessors to increase transparency and comparability by recognizing lease assets and lease liabilities by lessees for those leases
classified as operating leases under previous accounting standards and disclosing key information about leasing arrangements. Within
the opening balances for the fiscal year beginning April 1, 2019, we recognized leased assets and corresponding liabilities in
other long-term assets of $1,214,983.
Note 3.
Basic
and Diluted Income and Loss per Common Share
We report both basic and diluted net income
(loss) per share. Basic net income or loss per common share is computed by dividing net income or loss for the period by the weighted
average number of common shares outstanding for the period. Diluted net income or loss per common share is computed by dividing
the net income or loss for the period by the weighted average number of common and potential common shares outstanding during the
period if the effect of the potential common shares is dilutive. The shares used in the calculation of dilutive potential common
shares exclude options and RSUs to purchase shares where the exercise price was greater than the average market price of common
shares for the period.
The following table presents the calculation
of basic and diluted net loss per share:
|
|
Three Months Ended
|
|
|
June 30, 2019
|
|
June 30, 2018
|
Net income (loss)
|
|
$
|
(181,894
|
)
|
|
$
|
18,583
|
|
Weighted-average shares — basic
|
|
|
11,558,355
|
|
|
|
10,683,355
|
|
Effect of dilutive potential common shares
|
|
|
—
|
|
|
|
21,300
|
|
Weighted-average shares — diluted
|
|
|
11,558,355
|
|
|
|
10,704,655
|
|
Net income (loss) per share — basic
|
|
$
|
(0.02
|
)
|
|
$
|
0.00
|
|
Net income (loss) per share — diluted
|
|
$
|
(0.02
|
)
|
|
$
|
0.00
|
|
Antidilutive employee stock options and RSUs
|
|
|
980,286
|
|
|
|
986,236
|
|
|
|
|
|
|
|
|
|
|
Note 4.
COMMITMENTS AND CONTINGENCIES
Effective November 9, 2018, we extended our
noncancelable lease agreement through July 31, 2024 for our facilities at 6797 Winchester Circle, Boulder, Colorado. The lease
includes base rent abatement for the first two months, or $55,583, and $145,000 of leasehold improvements granted by the landlord.
In February 2016, the FASB issued ASU No. 2016-02,
Leases (Topic 842) ("ASU 2016-02"), which modified lease accounting for both lessees and lessors to increase transparency
and comparability by recognizing lease assets and lease liabilities by lessees for those leases classified as either finance or
operating leases under previous accounting standards and disclosing key information about leasing arrangements. We adopted Topic
842 on April 1, 2019, using the alternative modified transition method, which requires a cumulative effect adjustment, if any,
to the opening balance of retained earnings to be recognized on the date of adoption with prior periods not restated. There was
no cumulative effect adjustment recorded on April 1, 2019. Within the opening balances for the fiscal year beginning April 1, 2019,
we will recognize leased assets and corresponding liabilities in other long-term assets of $1,214,983. This includes two months
of rent abatements. The primary impact for us was the balance sheet recognition of right-of-use (“ROU”) assets and
lease liabilities for operating leases as a lessee.
We determine if an arrangement contains a lease
at inception. We currently do not have any finance leases. 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 at commencement date. ROU assets also include
any initial direct costs incurred and any lease payments made at or before the lease commencement date, less lease incentives received.
We use our incremental borrowing rate based on the information available at the commencement date in determining the lease liabilities
as our leases do not provide an implicit rate. Lease expense is recognized on a straight-line basis over the lease term.
The minimum future lease payment, by fiscal
year, as of June 30, 2019 is as follows:
Fiscal Year
|
|
Amount
|
|
2020 (9 months remaining)
|
|
|
$
|
199,913
|
|
|
2021
|
|
|
|
343,167
|
|
|
2022
|
|
|
|
357,667
|
|
|
2023
|
|
|
|
372,167
|
|
|
2024
|
|
|
|
386,667
|
|
|
2025
|
|
|
|
130,500
|
|
|
Total
|
|
|
$
|
1,790,081
|
|
On July 31, 2018, we signed a new line of credit
agreement with Bank of America Merrill Lynch. The facility provides for up to $1 million revolving line of credit. The interest
rate is a rate per year equal to the LIBOR Daily Floating Rate plus 2.75 percentage points. There is a minimum quarterly EBITDA
covenant and a minimum Collateral Coverage ratio of 2. Minimum Collateral Coverage is the ratio of gross accounts receivable plus
inventory to the line of credit commitment. As of June 30, 2019, we had $150,000 of borrowings from the credit facility and had
an additional $850,000 available to borrow. For the quarter ended June 30, 2019, we were not in compliance with the minimum quarterly
EBITDA covenant. This line was extended to August 31, 2019 and was replaced by a loan and security agreement with Crestmark Bank,
see below.
On August 9, 2019, we
entered into a loan and security agreement with Crestmark Bank, which replaced the Bank of America Merrill Lynch credit agreement.
The loan is due on demand and has no financial covenants. Under the agreement, we were provided with a line of credit that is not
to exceed the lesser of $1,000,000 or 85% of eligible accounts receivable. The interest rate is prime rate plus 1.5%, with a floor
of 6.75%, plus a monthly maintenance fee of 0.4%, based on the average monthly loan balance. Interest is charged on a minimum loan
balance of $500,000, a loan fee of 1% annually, and an exit fee of 3%, 2% and 1% during years one, two and three, respectively.
Aside from the operating lease, we do not have
any material contractual commitments requiring settlement in the future.
We are subject to regulation by the United
States Food and Drug Administration (“FDA”). The FDA provides regulations governing the manufacture and sale of our
products and regularly inspects us and other manufacturers to determine compliance with these regulations. We believe that we were
in substantial compliance with all known regulations at June 30, 2019. FDA inspections are conducted periodically at the discretion
of the FDA. Our latest inspection by the FDA occurred in October 2016.
Note 5.
SHARE-BASED COMPENSATION
The provisions of ASC 718-10-55 requires the
measurement and recognition of compensation expense for all share-based payment awards made to our employees and directors, including
employee stock options and RSUs, based on estimated fair values. The following table summarizes stock-based compensation expense
related to employee stock options, RSUs and employee stock purchases for the three months ended June 30, 2019 and 2018, which was
allocated as follows:
|
|
Three Months Ended
|
|
|
June 30, 2019
|
|
June 30, 2018
|
Cost of sales
|
|
$
|
681
|
|
|
$
|
601
|
|
Sales and marketing
|
|
|
790
|
|
|
|
1,296
|
|
General and administrative
|
|
|
5,622
|
|
|
|
9,592
|
|
Research and development
|
|
|
609
|
|
|
|
604
|
|
Stock-based compensation expense
|
|
$
|
7,702
|
|
|
$
|
12,093
|
|
Share-based compensation cost for stock options
is measured at the grant date, based on the fair value as calculated by the Black-Scholes-Merton ("BSM") option-pricing
model. The BSM option-pricing model requires the use of actual employee exercise behavior data and the application of a number
of assumptions, including expected volatility, risk-free interest rate and expected dividends. There were 40,000 stock options
granted and 50,000 stock options forfeited during the three months ended June 30, 2019. Share-based compensation cost for RSUs
is measured based on the closing fair market value of the Company's common stock on the date of grant.
As of June 30, 2019, $131,000 of total unrecognized
compensation costs related to nonvested stock options is expected to be recognized over a period of five years.
Note 6.
RELATED PARTY TRANSACTION
We paid consulting fees of $20,094 and $20,069
to an entity owned by one of our directors during the three months ended June 30, 2019 and 2018, respectively.
Note 7.
SUBSEQUENT EVENTS
We evaluated all of our
activity as of the date the condensed interim financial statements were issued and concluded that, except for the item that follows,
no subsequent events have occurred that would require recognition in our financial statements or disclosed in the notes to our
condensed interim financial statements. On August 9, 2019, we entered into a loan and security agreement with Crestmark Bank, which
replaced the Bank of America Merrill Lynch credit agreement. The loan is due on demand and has no financial covenants. Under the
agreement, we were provided with a line of credit that is not to exceed the lesser of $1,000,000 or 85% of eligible accounts receivable.
The interest rate is prime rate plus 1.5%, with a floor of 6.75%, plus a monthly maintenance fee of 0.4%, based on the average
monthly loan balance. Interest is charged on a minimum loan balance of $500,000, a loan fee of 1% annually, and an exit fee of
3%, 2% and 1% during years one, two and three, respectively.
ITEM 2
-
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Certain statements contained in this section
on Management’s Discussion and Analysis are not historical facts, including statements about our strategies and expectations
with respect to new and existing products, market demand, acceptance of new and existing products, marketing efforts, technologies
and opportunities, market and industry segment growth, and return on investments in products and markets. These statements are
forward looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and involve substantial risks
and uncertainties that may cause actual results to differ materially from those indicated by the forward looking statements. All
forward looking statements in this section on Management’s Discussion and Analysis are based on information available to
us on the date of this document, and we assume no obligation to update such forward looking statements. Readers of this Form 10-Q
are strongly encouraged to review the section entitled
“Risk Factors”
in our Form 10-K for the fiscal year ended
March 31, 2019.
General
Encision Inc., a medical device company based
in Boulder, Colorado, has developed and markets innovative technology that provides unprecedented outcomes and patient safety in
minimally-invasive surgery. We believe that our patented Active Electrode Monitoring (“AEM®”) AEM EndoShield™
Burn Protection System is changing the marketplace for electrosurgical devices and laparoscopic instruments by providing a solution
to a well-documented hazard unique to laparoscopic surgery. The Center for Medicare and Medicaid Services (“CMS”) recently
published its Hospital-Acquired Condition Reduction Program effective October 1, 2015. At that time, the program began to levy
as much as a 1% penalty on Medicare reimbursements to hospitals in the lower quadrant of performance for selected quality indicators,
including accidental puncture and laceration (“APL”). Examples of APL include the use of a cautery device (electrosurgery)
or scissors to dissect a tissue plane that errantly causes an injury to underlying bowels. During the quarter, a Safety Communication
was released by the FDA on May 29, 2018. It is on the FDA's website at: https://www.fda.gov/MedicalDevices/Safety/AlertsandNotices/ucm608637.htm.
The Safety Communication states that, "In addition to serving as an ignition source, monopolar energy use can directly result
in unintended patient burns from capacitive coupling and intra-operative insulation failure. If a monopolar electrosurgical units
(ESU) is used: Do not activate when near or in contact with other instruments.”
We address market opportunities created by
the increase in minimally-invasive surgery (“MIS”) and surgeons’ use of electrosurgery devices in these procedures.
The product opportunity exists in that monopolar electrosurgery instruments used in laparoscopic procedures provide excellent clinical
results, but are also susceptible to causing inadvertent collateral tissue damage outside the surgeon’s field of view due
to insulation failure and capacitive coupling. The risk of unintended electrosurgical burn injury to the patient in laparoscopic
surgery has been well documented. This risk poses a threat to patient safety, including the risk of death, and creates liability
exposure for surgeons and hospitals, as well as increased and preventable readmissions.
Our patented AEM technology provides surgeons
with the desired tissue effects, while capturing stray electrosurgical energy that can cause unintended and unseen tissue injury
that may result in death. AEM Surgical Instruments are equivalent to conventional instruments in size, shape, ergonomics, functionality
and competitive pricing, but they incorporate “Active Electrode Monitoring” technology to dynamically and continuously
monitor the flow of electrosurgical current, thereby helping to prevent patient injury. With our “shielded and monitored”
instruments, surgeons are able to perform electrosurgical procedures more safely, effectively and economically than is possible
using conventional instruments or alternative energy sources.
AEM technology has been recommended and endorsed
by many groups involved in MIS. Surgeons, nurses, biomedical engineers, the medicolegal community, malpractice insurance carriers
and electrosurgical device manufacturers advocate the use of AEM technology. We have focused our marketing strategies to date on
expanding the market awareness of the AEM technology and our broad independent endorsements and have continued efforts to improve
and expand the AEM technology penetration.
When a hospital or surgery center changes to
AEM technology, we receive recurring revenue from sales of replacement instruments. We believe that there is no directly competing
technology to supplant AEM products. The replacement market of reusable and disposable AEM products in hospitals and surgery centers
that use our AEM technology represented over 90% of our product revenue during the three months ended June 30, 2019. This revenue
stream is expected to grow as the base of accounts using AEM technology expands. In addition, we intend to further develop disposable
versions of more of our AEM products in order to meet market demands and expand our sales opportunities.
We have an accumulated deficit of $22,032,041
at June 30, 2019. A significant portion of our operating funds have been provided by issuances of our common stock and warrants,
a line of credit, and the exercise of stock options to purchase our common stock. Should our liquidity be diminished in the future
because of operating losses, we may be required to seek additional capital.
During the three months ended June 30, 2019,
we used $290,988 of cash in our operating activities and used $20,986 for investments in property and equipment. As of June 30,
2019, we had $135,569 in cash, cash equivalents and restricted cash available to fund future operations, a decrease of $162,779
from March 31, 2019. Our working capital was $1,573,620 at June 30, 2019 compared to $1,908,748 at March 31, 2019.
Historical Perspective
We were
organized in 1991 and spent several years developing the AEM monitoring system and protective sheaths to adapt to conventional
electrosurgical instruments. We have invested heavily in an effort to protect our valuable technology, and, as a result of this
effort, we have been issued 16 unexpired relevant patents that together form a significant intellectual property position. Our
patents relate to the basic shielding and monitoring technologies that we incorporate into our AEM products.
Our AEM
Surgical Instruments have been engineered to provide a seamless transition for surgeons switching from conventional laparoscopic
instruments. AEM technology has been integrated into instruments that have the same look, feel and functionality as conventional
instruments that surgeons have been using for years. The AEM product line encompasses the full range of instrument sizes, types
and styles favored by surgeons. Additionally, we continue to improve quality and add to the product line. These additions include
more disposable versions, the introduction of hand-activated instruments, our enhanced scissors, our e∙Edge™ scissors,
our EM3 AEM Monitor and our AEM EndoShield Burn Protection System. Hospitals can make a complete and smooth conversion to our product
line, thereby advancing patient safety in MIS with optimal convenience.
Outlook
Installed Base of AEM Monitoring Equipment
:
We believe that sales of our installed base of AEM products will increase as the inherent risks associated with monopolar laparoscopic
electrosurgery become more widely acknowledged and as we focus on increasing our sales efficiency and continue to enhance our product
line. We expect that the replacement sales of electrosurgical instruments and accessories will also increase as additional facilities
adopt AEM technology. We anticipate that the efforts to improve the productivity of sales representatives carrying the AEM product
line, along with the introduction of next generation products, may provide the basis for increased sales and profitable operations.
However, these measures, or any others that we may adopt, may not result in either increased sales or profitable operations.
We believe that the unique performance of the
AEM technology and our breadth of independent endorsements provide an opportunity for continued market share growth. In our view,
market awareness and awareness of the clinical credibility of the AEM technology, as well as awareness of our endorsements, are
improving, and we expect this awareness to benefit our sales efforts for the remainder of fiscal year 2020. Our objectives for
the remainder of fiscal year 2020 are to optimize sales execution, to expand market awareness of the AEM technology and to maximize
the number of additional hospital and surgery center accounts switching to AEM instruments while retaining existing customers.
In addition, acceptance of AEM products depends on surgeons’ preference for our instruments, which depends on factors such
as ergonomics, quality and ease of use in addition to the technological and safety advantages of AEM products. If surgeons prefer
other instruments to our instruments, our business results will suffer.
Possibility of Operating Losses
: We
have an accumulated deficit of $22,032,041 at June 30, 2019. A significant portion of our operating funds have been provided by
issuances of our common stock and warrants, a line of credit, and the exercise of stock options to purchase our common stock. Should
our liquidity be diminished in the future because of operating losses, we may be required to seek additional capital. We have made
strides toward improving our operating results but due to the ongoing need to develop, optimize and train our direct sales managers
and the independent sales representative network, the need to support the development of refinements to our product line, and the
need to increase sustained sales to a level adequate to cover fixed and variable operating costs, we may operate at a net loss.
Sustained losses, or our inability to generate sufficient cash flow from operations to fund our obligations, may result in a need
to raise additional capital.
Revenue Growth
: We expect to generate
increased product revenue in the U.S. from sales to new customers and from expanded sales to existing customers as the medical
device industry stabilizes and our network of direct and independent sales representatives becomes more efficient. We believe that
the visibility and credibility of the independent clinical endorsements for AEM technology will contribute to new accounts and
increased product revenue in fiscal year 2020
.
We also expect to increase market share
through promotional programs of placing our AEM monitors at no charge into hospitals that commit to standardize with AEM instruments.
However, all of these efforts to increase market share and grow product revenue will depend in part on our ability to expand the
efficiency and effective coverage range of our direct and independent sales representatives, as well as maintain and in some cases,
improve the quality of our product offerings. S
ervice revenue represents design, development
and product supply revenue from our agreements with strategic partners.
We also have longer-term initiatives in place
to improve our prospects. We expect that development of next generation versions of our AEM products will better position our products
in the marketplace and improve our retention rate at hospitals and surgery centers that have changed to AEM technology, enabling
us to grow our sales.
We are exploring overseas markets to assess opportunities for sales
growth internationally.
Finally, we intend to explore opportunities to capitalize on our proven AEM technology via licensing
arrangements and strategic alliances. These efforts to generate additional sales and further the market penetration of our products
are longer term in nature and may not materialize. Even if we are able to successfully develop next generation products or identify
potential international markets or strategic partners, we may not be able to capitalize on these opportunities.
Gross Profit and Gross Margins
: Gross
profit and gross margins can be expected to fluctuate from quarter to quarter as a result of product sales mix, sales volume and
service revenue. Gross margins on products manufactured or assembled by us are expected to improve at higher levels of production
and sales.
Sales and Marketing Expenses
: We continue
to refine our domestic and international distribution capability, and
we believe that sales
and marketing expenses will decrease as a percentage of net sales with increasing sales volume.
Research and Development Expenses
:
Research
and development expenses are expected to increase to support quality improvement efforts and development of refinements to our
AEM product line and new products, which will further expand options for surgeons and hospitals.
Results of Operations
For the quarter ended June 30, 2019 compared
to the quarter ended June 30, 2018.
Net
revenue.
Net revenue for the quarter ended June 30, 2019 was $1,928,575 compared to $2,404,292 for the quarter ended June 30,
2018, a decrease of 20%. The decrease of AEM product net revenue is attributable to business lost from hospitals that used AEM
technology during the quarter.
In addition, fewer capital monitor units were sold in the current quarter than were sold
in the quarter a year ago.
G
ross
profit
. Gross profit for the quarter ended June 30, 2019 of $932,971 represented a decrease of 28% from gross profit of $1,301,115
for the quarter ended June 30, 2018. Gross profit as a percentage of sales (gross margins) decreased from 54% for the quarter ended
June 30, 2018 to 48% for the quarter ended June 30, 2019. Gross margins were lower in the quarter ended June 30, 2019 compared
to last year’s quarter primarily as a result of higher material costs as a result of the U.S. tariffs and higher labor and
overhead costs, per unit of inventory, as a result of lower revenue.
Sales and marketing expenses
. Sales
and marketing expenses of $530,505 for the quarter ended June 30, 2019 represented a decrease of 32% from sales and marketing expenses
of $775,785 for the quarter ended June 30, 2018.
The decrease was the result of lower compensation
on a decrease to the direct salesforce, lower commissions on reduced revenue, reduced sales samples’ cost and reduced travel.
The reduction was partially offset by higher commissions to general purchasing organizations.
General and administrative expenses
.
General and administrative expenses of $345,600 for the quarter ended June 30, 2019 represented an increase of 8% from general
and administrative expenses of $320,260 for the quarter
ended
June 30, 2018. The increase
was the result of an increase to outside accountants’ fee accrual, outside services and regulatory fees.
Research and development expenses
. Research
and development expenses of $236,144 for the quarter ended
June 30, 2019
represented
an increase of 42% compared to $166,672 for the quarter ended June 30, 2018. The increase was the result of increased compensation.
Net loss.
Net loss was $181,894 for
the quarter ended June 30, 2019 compared to net income of $18,583 for the quarter ended June 30, 2018. The net loss increase was
principally a result of lower net revenue and lower gross profit that was partially offset by lower total operating expenses, as
explained above.
The results of operations for the three months
ended June 30, 2019 are not indicative of the results of operations for all or any part of the balance of the fiscal year.
Liquidity and Capital Resources
To date, a significant portion of our operating
funds have been provided by issuances of our common stock and warrants, a line of credit, and the exercise of stock options to
purchase our common stock. Common stock and additional paid in capital totaled $24,209,471 from inception through June 30, 2019.
On July 31, 2018, we signed a new line of credit
agreement with Bank of America Merrill Lynch. The facility provides for up to $1 million revolving line of credit. The interest
rate is a rate per year equal to the LIBOR Daily Floating Rate plus 2.75 percentage points. There is a minimum quarterly EBITDA
covenant and a minimum Collateral Coverage ratio of 2. Minimum Collateral Coverage is the ratio of gross accounts receivable plus
inventory to the line of credit commitment. As of June 30, 2019, we had no borrowings from the credit facility and had an additional
$1 million available to borrow. For the quarter ended June 30, 2019, we were not in compliance with the minimum quarterly EBITDA
covenant. This line was extended to August 31, 2019 and was replaced by a loan and security agreement with Crestmark Bank, see
below.
On August 9, 2019, we
entered into a loan and security agreement with Crestmark Bank, which replaced the Bank of America Merrill Lynch credit agreement.
The loan is due on demand and has no financial covenants. Under the agreement, we were provided with a line of credit that is not
to exceed the lesser of $1,000,000 or 85% of eligible accounts receivable. The interest rate is prime rate plus 1.5%, with a floor
of 6.75%, plus a monthly maintenance fee of 0.4%, based on the average monthly loan balance. Interest is charged on a minimum loan
balance of $500,000, a loan fee of 1% annually, and an exit fee of 3%, 2% and 1% during years one, two and three, respectively.
Our operations used $290,988
of cash during the
three months
ended June 30, 2019 on net revenue of $1,928,575. Cash
was principally used by the net loss, accounts payable, accrued compensation and other accrued liabilities and increased by inventories.
The amounts of cash used by operations for the three months ended June 30, 2019 are not indicative of the expected amounts of cash
to be generated from or used in operations in fiscal year 2019. To reduce our costs and cash usage, w we have implemented a reduction
of personnel and departmental spending in excess of $1 million annualized. e have implemented a reduction of personnel and departmental
spending in excess of $1 million annualized. At June 30, 2019, we had $135,569 in cash, cash equivalents and restricted cash available
to fund future operations. Our working capital was $1,573,620 at June 30, 2019 compared to $1,908,748 at March 31, 2019. The decrease
of working capital at June 30, 2019 was the result of our loss and a decrease to inventories. Current liabilities were $1,093,592
at June 30, 2019 compared to $1,001,265 at March 31, 2019.
Effective November 9, 2018, we extended our
noncancelable lease agreement through July 31, 2024 for our facilities at 6797 Winchester Circle, Boulder, Colorado. The lease
includes base rent abatement for the first two months, or $55,583, and $145,000 of leasehold improvements granted by the landlord.
In February 2016, the FASB issued ASU No. 2016-02,
Leases (Topic 842) (“ASU 2016-02”), which modified lease accounting for both lessees and lessors to increase transparency
and comparability by recognizing lease assets and lease liabilities by lessees for those leases classified as operating leases
under previous accounting standards and disclosing key information about leasing arrangements. Within the opening balances for
the fiscal year beginning April 1, 2019, we will recognize leased assets and corresponding liabilities in other long-term assets
of $1,214,983. The primary impact for us was the balance sheet recognition of right-of-use (“ROU”) assets and lease
liabilities for operating leases as a lessee.
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 at commencement
date. ROU assets also include any initial direct costs incurred and any lease payments made at or before the lease commencement
date, less lease incentives received. We use our incremental borrowing rate based on the information available at the commencement
date in determining the lease liabilities as our leases do not provide an implicit rate. Lease expense is recognized on a straight-line
basis over the lease term.
The minimum future lease payment, by fiscal
year, as of June 30, 2019 is as follows:
Fiscal Year
|
|
Amount
|
|
2020 (9 months remaining)
|
|
|
$
|
199,913
|
|
|
2021
|
|
|
|
343,167
|
|
|
2022
|
|
|
|
357,667
|
|
|
2023
|
|
|
|
372,167
|
|
|
2024
|
|
|
|
386,667
|
|
|
2025
|
|
|
|
130,500
|
|
|
Total
|
|
|
$
|
1,790,081
|
|
Aside from the operating lease, we do not have
any material contractual commitments requiring settlement in the future.
As of June 30, 2019, the following table shows
our contractual obligations for the periods presented:
|
|
Payment due by period
|
Contractual obligations
|
|
Totals
|
|
Less than
1 year
|
|
1-3 years
|
|
3-5 years
|
|
More than
5 years
|
Operating lease obligations
|
|
$
|
1,790,081
|
|
|
$
|
285,705
|
|
|
$
|
708,084
|
|
|
$
|
698,417
|
|
|
$
|
97,875
|
|
Line of credit
|
|
|
150,000
|
|
|
|
150,000
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Totals
|
|
$
|
1,940,081
|
|
|
$
|
435,705
|
|
|
$
|
708,084
|
|
|
$
|
698,417
|
|
|
$
|
97,875
|
|
Our fiscal year 2020 operating plan is focused
on increasing new accounts, retaining existing customers, growing revenue, increasing gross profits and conserving cash. We are
investing in research and development efforts to develop next generation versions of the AEM product line. We have invested in
manufacturing property and equipment to manufacture disposable scissors inserts internally and to reduce our cost of product revenue.
We cannot predict with certainty the expected revenue, gross profit, net income or loss and usage of cash, cash equivalents or
restricted cash for fiscal year 2020. If we are unable to manage our business operations in line with budget expectations, it could
have a material adverse effect on our business viability, financial position, results of operations and cash flows.
Income
Taxes
As of March 31, 2019,
net operating loss carryforwards totaling approximately $10 million are available to reduce taxable income in the future. The net
operating loss carryforwards expire, if not previously utilized, at various dates beginning in the fiscal year ending March 31,
2020. We have not paid income taxes since our inception. The Tax Reform Act of 1986 and other income tax regulations contain provisions
which may limit the net operating loss carryforwards available to be used in any given year if certain events occur, including
changes in ownership interests. We have established a valuation allowance for the entire amount of our deferred tax asset since
inception due to our history of losses. Should we achieve sufficient, sustained income in the future, we may conclude that some
or all of the valuation allowance should be reversed. If some or all of the valuation allowance were reversed, then, to the extent
of the reversal, a tax benefit would be recognized which would result in an increase to net income.
Critical Accounting Policies and Estimates
Our discussion
and analysis of our financial condition and results of operations are based upon our financial statements, which have been prepared
in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements
requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, sales and expenses, and related
disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our estimates, including those related to bad
debts, inventories, sales returns, contingencies and litigation. We base our estimates on historical experience and on various
other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments
about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ
from these estimates under different assumptions or conditions. We believe the following critical accounting policies affect the
more significant judgments and estimates used in the preparation of our financial statements.
We record revenue at a single point in time,
when control is transferred to the customer, which is consistent with past practice. We will continue to apply our current business
processes, policies, systems and controls to support recognition and disclosure. Our shipping policy is FOB Shipping Point. We
recognize revenue from sales to stocking distributors when there is no right of return, other than for normal warranty claims.
We have no ongoing obligations related to product sales, except for normal warranty obligations. We evaluated the requirement to
disaggregate revenue, and concluded that substantially all of its revenue comes from multiple products within a line of medical
devices.
We maintain
allowances for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments.
If the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments,
additional allowances would be required, which would increase our expenses during the periods in which any such allowances were
made. The amount recorded as a provision for bad debts in each period is based upon our assessment of the likelihood that we will
be paid on our outstanding receivables, based on customer-specific as well as general considerations. To the extent that our estimates
prove to be too high, and we ultimately collect a receivable previously determined to be impaired, we may record a reversal of
the provision in the period of such determination.
We provide
for the estimated cost of product warranties at the time sales are recognized. While we engage in extensive product quality programs
and processes, including actively monitoring and evaluating the quality of our component suppliers, we have experienced some costs
related to warranties. The warranty accrual is based on historical experience and is adjusted based on current experience. Should
actual warranty experience differ from our estimates, revisions to the estimated warranty liability would be required.
We reduce
inventory for estimated obsolete or unmarketable inventory equal to the difference between the cost of inventory and the estimated
realizable value based on assumptions about future demand and market conditions. If actual market conditions are less favorable
than those projected by management, additional inventory write-downs may be required. Any write-downs of inventory would reduce
our reported net income during the period in which such write-downs were applied. To the extent that our estimates prove to be
too high, and we ultimately utilize or sell inventory previously determined to be impaired, we may record a reversal of the provision
in the period of such determination.
We recognize deferred income tax assets and
liabilities for the expected future income tax consequences, based on enacted tax laws, of temporary differences between the financial
reporting and tax bases of assets and liabilities. Deferred tax assets are then reduced, if deemed necessary, by a valuation allowance
for the amount of any tax benefits, which, more likely than not based on current circumstances, are not expected to be realized.
Should we maintain sufficient, sustained income in the future, we may conclude that all or some of the valuation allowance should
be reversed.
Property
and equipment are stated at cost, with depreciation computed over the estimated useful lives of the assets, generally five to seven
years. We use the straight-line method of depreciation for property and equipment.
Leasehold improvements are depreciated
over the shorter of the remaining lease term or the estimated useful life of the asset. Maintenance and repairs are expensed as
incurred and major additions, replacements and improvements are capitalized.
We amortize
our patent costs over their estimated useful lives, which is typically the remaining statutory life. From time to time, we may
be required to adjust these useful lives of our patents based on advances in technology, competitor actions, and the like. We review
the recorded amounts of patents at each period end to determine if their carrying amount is still recoverable based on our expectations
regarding sales of related products. Such an assessment, in the future, may result in a conclusion that the assets are impaired,
with a corresponding charge against earnings.
We currently
estimate forfeitures for stock-based compensation expense related to employee stock options and RSUs at 40% and evaluate the forfeiture
rate quarterly. Other assumptions that are used in calculating stock-based compensation expense include risk-free interest rate,
expected life, expected volatility and expected dividend.