ITEM 1 - Condensed
Interim Financial Statements
Encision Inc.
Condensed Balance
Sheets
(Unaudited)
|
|
December 31,
2019
|
|
March 31,
2019
|
ASSETS
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
195,357
|
|
|
$
|
273,348
|
|
Restricted cash
|
|
|
—
|
|
|
|
25,000
|
|
Accounts receivable, net of allowance for doubtful accounts of $35,500 at December 31, 2019 and $26,000 at March 31, 2019
|
|
|
1,058,692
|
|
|
|
1,009,106
|
|
Inventories, net of reserve for obsolescence of $41,000 at December 31, 2019 and $50,000 at March 31, 2019
|
|
|
1,360,962
|
|
|
|
1,472,543
|
|
Prepaid expenses
|
|
|
118,531
|
|
|
|
130,016
|
|
Total current assets
|
|
|
2,733,542
|
|
|
|
2,910,013
|
|
Equipment, at cost:
|
|
|
|
|
|
|
|
|
Furniture, fixtures and equipment
|
|
|
3,114,125
|
|
|
|
3,061,329
|
|
Accumulated depreciation
|
|
|
(2,903,407
|
)
|
|
|
(2,811,761
|
)
|
Equipment, net
|
|
|
210,718
|
|
|
|
249,568
|
|
Right of use asset (Note 7)
|
|
|
1,382,760
|
|
|
|
—
|
|
Patents, net of accumulated amortization of $285,225 at December 31, 2019 and $266,028 at March 31, 2019
|
|
|
233,737
|
|
|
|
248,579
|
|
Other assets
|
|
|
19,548
|
|
|
|
19,548
|
|
TOTAL ASSETS
|
|
$
|
4,580,305
|
|
|
$
|
3,427,708
|
|
LIABILITIES AND SHAREHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
509,602
|
|
|
$
|
578,956
|
|
Accrued compensation
|
|
|
190,070
|
|
|
|
295,875
|
|
Other accrued liabilities
|
|
|
101,150
|
|
|
|
126,434
|
|
Accrued lease liability (Note 7)
|
|
|
271,226
|
|
|
|
—
|
|
Total current liabilities
|
|
|
1,072,048
|
|
|
|
1,001,265
|
|
Long-term liability:
|
|
|
|
|
|
|
|
|
Accrued lease liability (Note 7)
|
|
|
1,216,525
|
|
|
|
—
|
|
Deferred rent
|
|
|
—
|
|
|
|
74,821
|
|
Total liabilities
|
|
|
2,288,573
|
|
|
|
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; 11,582,641 shares issued and outstanding at December 31, 2019 and March 31, 2019
|
|
|
24,223,784
|
|
|
|
24,201,769
|
|
Accumulated (deficit)
|
|
|
(21,932,052
|
)
|
|
|
(21,850,147
|
)
|
Total shareholders’ equity
|
|
|
2,291,732
|
|
|
|
2,351,622
|
|
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY
|
|
$
|
4,580,305
|
|
|
$
|
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
|
|
Nine Months Ended
|
|
|
December 31, 2019
|
|
December 31, 2018
|
|
December 31, 2019
|
|
December 31, 2018
|
NET REVENUE
|
|
$
|
2,038,925
|
|
|
$
|
2,117,454
|
|
|
$
|
5,891,934
|
|
|
$
|
6,718,257
|
|
COST OF REVENUE
|
|
|
955,520
|
|
|
|
1,054,980
|
|
|
|
2,826,563
|
|
|
|
3,149,620
|
|
GROSS PROFIT
|
|
|
1,083,405
|
|
|
|
1,062,474
|
|
|
|
3,065,371
|
|
|
|
3,568,637
|
|
OPERATING EXPENSES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales and marketing
|
|
|
544,495
|
|
|
|
645,301
|
|
|
|
1,611,996
|
|
|
|
2,077,522
|
|
General and administrative
|
|
|
293,806
|
|
|
|
312,001
|
|
|
|
943,600
|
|
|
|
953,968
|
|
Research and development
|
|
|
158,942
|
|
|
|
189,353
|
|
|
|
567,754
|
|
|
|
542,602
|
|
Total operating expenses
|
|
|
997,243
|
|
|
|
1,146,655
|
|
|
|
3,123,350
|
|
|
|
3,574,092
|
|
OPERATING INCOME (LOSS)
|
|
|
86,162
|
|
|
|
(84,181
|
)
|
|
|
(57,979
|
)
|
|
|
(5,455
|
)
|
Interest expense, net
|
|
|
(16,172
|
)
|
|
|
(1,837
|
)
|
|
|
(25,167
|
)
|
|
|
(48,476
|
)
|
Other income (expense), net
|
|
|
113
|
|
|
|
1,616
|
|
|
|
1,241
|
|
|
|
425
|
|
Interest expense and other income (expense), net
|
|
|
(16,059
|
)
|
|
|
(221
|
)
|
|
|
(23,926
|
)
|
|
|
(48,051
|
)
|
INCOME (LOSS) BEFORE PROVISION FOR INCOME TAXES
|
|
|
70,103
|
|
|
|
(84,402
|
)
|
|
|
(81,905
|
)
|
|
|
(53,506
|
)
|
Provision for income taxes
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
NET INCOME (LOSS)
|
|
$
|
70,103
|
|
|
$
|
(84,402
|
)
|
|
$
|
(81,905
|
)
|
|
$
|
(53,506
|
)
|
Net income (loss) per share—basic and diluted
|
|
$
|
0.01
|
|
|
$
|
(0.01
|
)
|
|
$
|
(0.01
|
)
|
|
$
|
0.00
|
|
Weighted average shares—basic
|
|
|
11,578,371
|
|
|
|
10,798,740
|
|
|
|
11,565,027
|
|
|
|
10,721,817
|
|
Weighted average shares—diluted
|
|
|
11,631,172
|
|
|
|
10,798,740
|
|
|
|
11,565,027
|
|
|
|
10,721,817
|
|
The accompanying notes to financial
statements are an integral part of these condensed statements.
Encision Inc.
Condensed Statements
of Cash Flows
(Unaudited)
|
|
Nine Months Ended
|
|
|
December 31, 2019
|
|
December 31, 2018
|
Operating activities:
|
|
|
|
|
|
|
|
|
Net (loss)
|
|
$
|
(81,905
|
)
|
|
$
|
(53,506
|
)
|
Adjustments to reconcile net income to net cash used in operating activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
111,623
|
|
|
|
140,843
|
|
Share-based compensation expense
|
|
|
22,015
|
|
|
|
36,634
|
|
Provision for (recovery from) doubtful accounts, net
|
|
|
9,500
|
|
|
|
(500
|
)
|
(Recovery from) provision for inventory obsolescence, net
|
|
|
(9,000
|
)
|
|
|
24,000
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Right of use asset, net
|
|
|
30,170
|
|
|
|
—
|
|
Accounts receivable
|
|
|
(59,086
|
)
|
|
|
(61,034
|
)
|
Inventories
|
|
|
120,581
|
|
|
|
22,052
|
|
Prepaid expenses and other assets
|
|
|
11,485
|
|
|
|
(54,879
|
)
|
Accounts payable
|
|
|
(69,354
|
)
|
|
|
224,039
|
|
Accrued compensation and other accrued liabilities
|
|
|
(131,089
|
)
|
|
|
(150,340
|
)
|
Net cash generated by (used in) operating activities
|
|
|
(45,060
|
)
|
|
|
127,309
|
|
Investing activities:
|
|
|
|
|
|
|
|
|
Acquisition of property and equipment
|
|
|
(52,796
|
)
|
|
|
(9,982
|
)
|
Patent costs
|
|
|
(5,135
|
)
|
|
|
(4,865
|
)
|
Net cash (used in) investing activities
|
|
|
(57,931
|
)
|
|
|
(14,847
|
)
|
Financing activities:
|
|
|
|
|
|
|
|
|
Proceeds from the issuance of common stock
|
|
|
—
|
|
|
|
350,000
|
|
Net cash generated by financing activities
|
|
|
—
|
|
|
|
350,000
|
|
Net increase (decrease) in cash, cash equivalents, and restricted cash
|
|
|
(102,991
|
)
|
|
|
462,462
|
|
Cash, cash equivalents, and restricted cash beginning of period
|
|
|
298,348
|
|
|
|
139,538
|
|
Cash, cash equivalents, and restricted cash end of period
|
|
$
|
195,357
|
|
|
$
|
602,000
|
|
Supplemental disclosure:
|
|
|
|
|
|
|
|
|
Right of use asset
|
|
$
|
1,555,150
|
|
|
|
—
|
|
Accrued lease liability
|
|
$
|
1,619,842
|
|
|
|
—
|
|
Interest paid:
|
|
$
|
18,502
|
|
|
|
—
|
|
The accompanying notes to financial
statements are an integral part of these condensed statements.
ENCISION INC.
NOTES TO CONDENSED
INTERIM FINANCIAL STATEMENTS
DECEMBER 31, 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 $21,932,052 at December 31, 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 $59,890 as a result of our loss of $81,905, and increased as a result of share-based compensation of $22,015.
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 net income
of $70,103 for the fiscal quarter, and net loss of $81,905 for the nine months ended December 31, 2019. At December 31, 2019,
we had cash of $195,357, no borrowings and $716,349 available under our line of credit. Working capital was $1,661,494, a decrease
of $247,254 from March 31, 2019. We used $102,991 of cash in the fiscal nine months ended December 31, 2019, primarily as a result
of our loss and reduction of accrued compensation and other accrued liabilities. The principal reason for our loss for the nine
months ended December 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 developed plans to ensure that we have the working capital necessary to fund operations. In July 2019, we reduced personnel
and departmental costs. We expect that the cost reductions will return us to profitability and is evidenced by our net income
of $70,103 for the quarter ended December 31, 2019. We have a new line of credit (see Note 4), 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 condensed financial statements. 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 December 31, 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 December 31, 2019 of $1,058,692 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 December 31, 2019 and March 31, 2019, inventory consisted of
the following:
|
|
December 31, 2019
|
|
March
31, 2019
|
Raw materials
|
|
$
|
1,108,386
|
|
|
$
|
1,063,780
|
|
Finished goods
|
|
|
293,576
|
|
|
|
458,763
|
|
Total gross inventories
|
|
|
1,401,962
|
|
|
|
1,522,543
|
|
Less reserve for obsolescence
|
|
|
(41,000
|
)
|
|
|
(50,000
|
)
|
Total net inventories
|
|
$
|
1,360,962
|
|
|
$
|
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. Depreciation expense for the nine months ended December 31, 2019 was $91,646. 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 December 31, 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 our 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 and nine months ended December 31, 2019 was $6,650 and $22,015, respectively, and
for the three and nine months ended December 31, 2018 was $10,890 and $36,634, 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 leased liabilities in
other long-term assets of $1,555,150 and long-term liabilities of $1,619,842 (see Notes 4 and 7).
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
|
|
Nine Months Ended
|
|
|
December 31, 2019
|
|
|
|
December 31, 2018
|
|
|
December 31, 2019
|
|
|
December 31, 2018
|
Net income (loss)
|
|
$
|
70,103
|
|
|
$
|
(84,402
|
)
|
|
$
|
(81,905
|
)
|
|
$
|
(53,506
|
)
|
Weighted-average shares — basic
|
|
|
11,578,371
|
|
|
|
10,798,740
|
|
|
|
11,565,027
|
|
|
|
10,721,817
|
|
Effect of dilutive potential common shares
|
|
|
52,801
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Weighted-average shares — diluted
|
|
|
11,631,172
|
|
|
|
10,798,740
|
|
|
|
11,565,027
|
|
|
|
10,721,817
|
|
Net income (loss) per share — basic
|
|
$
|
0.01
|
|
|
$
|
(0.01
|
)
|
|
$
|
(0.01
|
)
|
|
$
|
0.00
|
|
Net income (loss) per share — diluted
|
|
$
|
0.01
|
|
|
$
|
(0.01
|
)
|
|
$
|
(0.01
|
)
|
|
$
|
0.00
|
|
Antidilutive employee stock options and RSUs
|
|
|
910,199
|
|
|
|
900,286
|
|
|
|
963,000
|
|
|
|
900,286
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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. 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 December 31, 2019 is as follows:
Fiscal Year
|
|
Amount
|
|
2020 (3 months remaining)
|
|
|
$
|
66,638
|
|
|
2021
|
|
|
|
343,167
|
|
|
2022
|
|
|
|
357,667
|
|
|
2023
|
|
|
|
372,167
|
|
|
2024
|
|
|
|
386,667
|
|
|
2025
|
|
|
|
130,500
|
|
|
Total
|
|
|
$
|
1,656,806
|
|
On
August 9, 2019, we entered into a loan and security agreement with Crestmark Bank. The loan is due on demand, has no financial
covenants and is secured by all of our assets. 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 (4.75% at December 31, 2019)
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 December 31, 2019. FDA inspections are conducted
periodically at the discretion of the FDA. Our latest inspection by the FDA occurred in October 2019.
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 and nine months
ended December 31, 2019 and 2018, which was allocated as follows:
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
December 31, 2019
|
|
December 31, 2018
|
|
December 31, 2019
|
|
December 31, 2018
|
Cost of sales
|
|
$
|
703
|
|
|
$
|
658
|
|
|
$
|
2,108
|
|
|
$
|
1,973
|
|
Sales and marketing
|
|
|
796
|
|
|
|
1,296
|
|
|
|
2,389
|
|
|
|
3,890
|
|
General and administrative
|
|
|
5,064
|
|
|
|
8,275
|
|
|
|
16,128
|
|
|
|
28,789
|
|
Research and development
|
|
|
87
|
|
|
|
661
|
|
|
|
1,390
|
|
|
|
1,982
|
|
Stock-based compensation expense
|
|
$
|
6,650
|
|
|
$
|
10,890
|
|
|
$
|
22,015
|
|
|
$
|
36,634
|
|
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 25,000 stock
options granted and 5,000 stock options and 24,286 RSUs were forfeited during the three months ended December 31, 2019, and 110,000
stock options granted and 88,000 stock options and 24,286 RSUs forfeited during the nine months ended December 31, 2019. Share-based
compensation cost for RSUs is measured based on the closing fair market value of our common stock on the date of grant.
As of December
31, 2019, approximately $133,000 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 $16,813 and $53,407 to an entity owned by one of our directors during the three and nine months ended December 31, 2019,
respectively, and $17,681 and $52,726 to an entity owned by one of our directors during the three and nine months ended December
31, 2018, respectively.
Note
7. IMMATERIAL ERROR CORRECTION
This
Quarterly Report on Form 10-Q for us for the nine months ended December 31, 2019, includes the restatement of our previously filed
condensed balance sheets for the three months ended June 30 and September 30, 2019.
We have concluded
that in the Assets section of the Balance Sheet, Right of use asset, and under Liabilities the Accrued lease liability, were misstated
and that for comparative purposes in filings these figures should be re-stated but that the adjustments are not material modifications.
The misstatement was a result of an incorrect entry to the model that we used. Accordingly, we have determined that prior financial
statements should be corrected, even though such revisions are immaterial with respect to the prior year financial statements.
Furthermore, we have determined that correcting prior period’s financial statements for immaterial changes would not require
previously filed reports to be amended. The effect of these restatements on our Balance Sheet as reported on the Form 10-Q reports,
are as follows:
|
|
|
|
Three Months Ended
|
|
|
April 1,
2019
|
|
June 30,
2019
|
|
September 30, 2019
|
Correct right of use asset
|
|
$
|
1,555,150
|
|
|
$
|
1,512,343
|
|
|
$
|
1,447,657
|
|
Right of use asset reported
|
|
|
1,234,620
|
|
|
|
1,181,590
|
|
|
|
1,131,125
|
|
Difference
|
|
$
|
320,530
|
|
|
$
|
330,753
|
|
|
$
|
316,532
|
|
|
|
|
|
Three Months Ended
|
|
|
April 1,
2019
|
|
June 30,
2019
|
|
September 30, 2019
|
Correct accrued lease liability
|
|
$
|
1,619,842
|
|
|
$
|
1,557,751
|
|
|
$
|
1,551,993
|
|
Accrued lease liability reported
|
|
|
1,234,620
|
|
|
|
1,230,623
|
|
|
|
1,226,074
|
|
Difference
|
|
$
|
385,222
|
|
|
$
|
327,128
|
|
|
$
|
325,919
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 8. SUBSEQUENT EVENTS
We
evaluated all of our activity as of the date the condensed interim financial statements were issued and concluded that no subsequent
events have occurred that would require recognition in our financial statements or disclosed in the notes to our condensed interim
financial statements.
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
has published its Hospital-Acquired Condition Reduction Program. The program has begun 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. 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 unit (“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 and
nine months ended December 31, 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 $21,932,052 at December 31, 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 nine
months ended December 31, 2019, we used $45,060 of cash in our operating activities and used $52,796 for investments in property
and equipment. As of December 31, 2019, we had $195,357 in cash, cash equivalents and restricted cash available to fund future
operations, a decrease of $102,991 from March 31, 2019. Our working capital was $1,661,494 at December 31, 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 $21,932,052 at December 31, 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. Service 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 December 31, 2019 compared to the quarter ended December 31, 2018.
Net
revenue. Net revenue for the quarter ended December 31, 2019 was $2,038,925 compared to $2,117,454 for the quarter ended December
31, 2018, a decrease of 4%. The decrease of AEM product net revenue is attributable to business lost from hospitals that used
AEM technology during the quarter.
Gross
profit. Gross profit for the quarter ended December 31, 2019 of $1,083,405 represented an increase of 2% from gross profit
of $1,062,474 for the quarter ended December 31, 2018. Gross profit as a percentage of sales (gross margins) was 53% for the quarter
ended December 31, 2019 and 50% for the quarter ended December 31, 2018. Gross margin on net revenue was higher in this year’s
third quarter than last year’s third quarter principally as a result of lower labor costs, per unit of inventory.
Sales and
marketing expenses. Sales and marketing expenses of $544,495 for the quarter ended December 31, 2019 represented a decrease
of 16% from sales and marketing expenses of $645,301 for the quarter ended December 31, 2018. The
decrease was the result of lower compensation on a decrease to the direct salesforce, reduced sales samples, reduced advertising
and outside services, reduced trade show costs and reduced travel. The reduction was partially offset by higher commissions to
general purchasing organizations.
General and
administrative expenses. General and administrative expenses of $293,806 for the quarter ended December 31, 2019 represented
a decrease of 6% from general and administrative expenses of $312,001 for the quarter ended
December 31, 2018. The decrease was the result of a decrease to compensation and bank service charges. The reduction was
partially offset by higher bad debt accrual cost.
Research and
development expenses. Research and development expenses of $158,942 for the quarter ended December
31, 2019 represented a decrease of 16% compared to $189,353 for the quarter ended December 31, 2018. The decrease was the
result of decreased compensation.
Net income.
Net income was $70,103 for the quarter ended December 31, 2019 compared to net loss of $84,402 for the quarter ended December
31, 2018. The net income increase was principally a result of higher gross profit and lower total operating expenses, as explained
above.
For the nine
months ended December 31, 2019 compared to the nine months ended December 31, 2018.
Net
revenue. Net revenue for the nine months ended December 31, 2019 was $5,891,934 compared to $6,718,257 for the nine months
ended December 31, 2018, a decrease of 12%. The decrease of AEM product net revenue is attributable to business lost from hospitals
that used AEM technology during the nine months.
Gross
profit. Gross profit for the nine months ended December 31, 2019 of $3,065,371 represented a decrease of 14% from gross profit
of $3,568,637 for the nine months ended December 31, 2018. Gross profit as a percentage of sales (gross margins) decreased from
53% for the nine months ended December 31, 2018 to 52% for the nine months ended December 31, 2019. Gross margins were lower in
the nine months ended December 31, 2019 compared to last year’s nine months 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 $1,611,996 for the nine months ended December 31, 2019 represented a decrease
of 22% from sales and marketing expenses of $2,077,522 for the nine months ended December 31, 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, reduced advertising and outside services and reduced travel. The reduction was partially offset by
higher commissions to general purchasing organizations.
General and
administrative expenses. General and administrative expenses of $943,600 for the nine months ended December 31, 2019 represented
a decrease of 1% from general and administrative expenses of $953,968 for the nine months ended
December 31, 2018. The decrease was the result of lower compensation and bank service charges. The reduction was partially
offset by an increase to outside accountants’ fee accrual, higher bad debt accrual cost, outside services and regulatory
fees.
Research and
development expenses. Research and development expenses of $567,754 for the nine months ended December
31, 2019 represented an increase of 5% compared to $542,602 for the nine months ended December 31, 2018. The increase was
the result of increased compensation. The increase was partially offset by lower outside services.
Net loss.
Net loss was $81,905 for the nine months ended December 31, 2019 compared to net loss of $53,506 for the nine months ended
December 31, 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 and nine months ended December 31, 2019 are not necessarily 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 $24,223,784 from inception
through December 31, 2019.
On
August 9, 2019, we entered into a loan and security agreement with Crestmark Bank. The loan is due on demand, has no financial
covenants and is secured by all of our assets. 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. At December
31, 2019, we had cash of $195,357, no borrowings and $716,349 available under our line of credit.
Our
operations used $45,060 of cash during the nine months ended December 31, 2019 on
net revenue of $5,891,934. 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 nine months ended December 31, 2019 are
not necessarily indicative of the expected amounts of cash to be generated from or used in operations in fiscal year 2020. To
reduce our costs and cash usage, we have implemented a reduction of personnel and departmental spending. At December 31, 2019,
we had $195,357 in cash, cash equivalents and restricted cash available to fund future operations. Our working capital was $1,661,494
at December 31, 2019 compared to $1,908,748 at March 31, 2019. The decrease of working capital at December 31, 2019 was the result
of our loss and a decrease to inventories. The decrease was partially offset by a decrease to accounts payable. Current liabilities
were $1,072,048 at December 31, 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.
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 December 31, 2019 is as follows:
Fiscal Year
|
|
Amount
|
|
2020 (3 months remaining)
|
|
|
$
|
66,638
|
|
|
2021
|
|
|
|
343,167
|
|
|
2022
|
|
|
|
357,667
|
|
|
2023
|
|
|
|
372,167
|
|
|
2024
|
|
|
|
386,667
|
|
|
2025
|
|
|
|
130,500
|
|
|
Total
|
|
|
$
|
1,656,806
|
|
Aside from the
operating lease, we do not have any material contractual commitments requiring settlement in the future.
As of December
31, 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
|
|
$
|
1,656,806
|
|
|
$
|
324,013
|
|
|
$
|
722,584
|
|
|
$
|
577,584
|
|
|
$
|
32,625
|
|
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.
ITEM
4 -
CONTROLS AND PROCEDURES
Management’s
Evaluation of Disclosures Controls and Procedures
Our management,
comprised of our Chief Executive Officer (CEO) and Principal Financial and Accounting Officer (PFAO) evaluated the effectiveness
of our disclosure controls and procedures as of December 31, 2019. The term “disclosure controls and procedures,”
as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, means controls and other procedures of a company that are
designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange
Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Based
on that evaluation, and taking the matters described below into account, our CEO and PFAO have concluded that our disclosure controls
and procedures over financial reporting were not effective during reporting period ended December 31, 2019.
Management’s
Report on Internal Control Over Financial Reporting
Our management
is responsible for establishing and maintaining adequate internal control over our financial reporting. “Internal control
over financial reporting” is defined in Rule 13a-15(f) or 15d-15(f) under the Exchange Act as a process designed by, or
under the supervision of, a company’s principal executive and principal financial officers and effected by a company’s
board of directors, management and other personnel to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements in accordance with U.S. generally accepted accounting principles and includes those
policies and procedures that:
● pertain
to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the
assets of a company;
● provide
reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with
U.S. generally accepted accounting principles and that receipts and expenditures of a company are being made only in accordance
with authorizations of management and directors of a company; and
● provide
reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of a company’s
assets that could have a material effect on the financial statements.
A material weakness
is a control deficiency, or combination of control deficiencies, such that there is a reasonable possibility that a material misstatement
of the annual or interim financial statements will not be prevented or detected on a timely basis.
Our internal
control system was designed to provide reasonable assurance to our management and board of directors regarding the preparation
and fair presentation of published financial statements. All internal control systems, no matter how well designed, have inherent
limitations, which may not prevent or detect misstatements. Therefore, even those systems determined to be effective can provide
only reasonable assurance with respect to financial statement preparation and presentation. Projections of any evaluation of effectiveness
to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
Material Weakness
Based upon our
evaluation of internal controls, our management determined that our controls over financial reporting were not adequate to ensure
certain complex accounting calculations were performed correctly. As such, our CEO and PFAO have concluded that our internal control
over financial reporting as of December 31, 2019 was not effective due to the material weaknesses described below:
|
·
|
Accounting
for our asset and liability related to our lease obligations for the June 30 and September
30, 2019 quarters. Miscalculations in these areas could impact our current assets, revenues,
operating results, and cash flow, although our has concluded that the impact of this
issue was not material to the financial statements for those periods.
|
Because of the
material weakness identified, a reasonable possibility exists that a material misstatement in our consolidated financial statements
will not be prevented or detected on a timely basis. While our internal controls are established and followed, it is clear by
the identified weaknesses that they were not operating as they should be. Management believes that this was the case due to our
limited staff along with time constraints. However, our Chief Executive Officer and our Principal Financial and Accounting Officer,
believe that the financial statements included in this quarterly report on Form 10-Q present, in all material respects, our financial
position, results of operations and cash flows for the periods presented, in conformity with U.S. GAAP.
Plan for Remediation
of Material Weaknesses
The remediation
effort outlined below is intended to address the identified material weaknesses in internal control over financial reporting.
We will continue
to monitor the effectiveness of our internal control over financial reporting in the areas affected by the facts described above
and employ any additional tools and resources deemed necessary to ensure that our financial statements are fairly stated in all
material respects.
This Quarterly
Report on Form 10-Q does not include an attestation report of our independent registered public accounting firm regarding internal
control over financial reporting due to an exemption provided by the Dodd-Frank Wall Street Reform and Consumer Protection Act,
or the Dodd-Frank Act, enacted into law in July 2010. The Dodd-Frank Act provides smaller public companies and debt-only issuers
with a permanent exemption from the requirement to obtain an external audit on the effectiveness of internal financial reporting
controls provided in Section 404(b) of the Sarbanes- Oxley Act. We are a smaller reporting company and are eligible for this exemption
under the Dodd-Frank Act.
Changes
in Internal Control Over Financial Reporting
Except for the
identification and mitigation of the material weakness noted above, there were no other changes in internal control over financial
reporting during the quarter ended December 31, 2019 that have materially affected, or are reasonably likely to materially affect,
our internal control over financial reporting.
Plan for Remediation
of Material Weaknesses
The remediation
effort outlined below is intended to address the identified material weaknesses in internal control over financial reporting.
This Quarterly
Report on Form 10-Q does not include an attestation report of our independent registered public accounting firm regarding internal
control over financial reporting due to an exemption provided by the Dodd-Frank Wall Street Reform and Consumer Protection Act,
or the Dodd-Frank Act, enacted into law in July 2010. The Dodd-Frank Act provides smaller public companies and debt-only issuers
with a permanent exemption from the requirement to obtain an external audit on the effectiveness of internal financial reporting
controls provided in Section 404(b) of the Sarbanes- Oxley Act. We are a smaller reporting company and are eligible for this exemption
under the Dodd-Frank Act. We will continue to monitor the effectiveness of our internal control over financial reporting in the
areas affected by the facts described above and employ any additional tools and resources deemed necessary to ensure that our
financial statements are fairly stated in all material respects.