The accompanying notes to financial statements are an integral part
of these statements.
The accompanying notes to financial statements are an integral part
of these statements.
The accompanying notes to financial statements are an integral part
of these statements.
The accompanying notes to financial statements are an integral part
of these statements.
NOTES TO FINANCIAL STATEMENTS
1. Description of Business
and Basis of Presentation
Encision Inc. is a medical device company that
designs, develops, manufactures and markets patented surgical instruments that provide greater safety to patients undergoing minimally-invasive
surgery. We believe that our patented AEM® surgical instrument technology is changing the marketplace for electrosurgical
devices and instruments by providing a solution to a well-documented risk in laparoscopic surgery. Our sales to date have been
made primarily in the United States.
We have an accumulated deficit of $22,048,459
at March 31, 2020. Operating funds have been provided primarily by issuances of our common stock and warrants, the exercise of
stock options to purchase our common stock, and by operating profits. Our liquidity has diminished because of prior years’
operating losses, and we may be required to seek additional capital in the future.
Our strategic marketing and sales plan is designed
to expand the use of our products in surgically active hospitals in the United States.
We had a net loss available to shareholders
of $198,312 and $236,096 for the fiscal years ended March 31, 2020 and 2019, respectively. At March 31, 2020, we had $385,132 in
cash available to fund future operations, borrowed $370,498 and had $233,103 available to borrow. On April 17, 2020, we entered
into an unsecured promissory note under the PPP for a principal amount of $598,567. The PPP was established under the recently
congressionally approved CARES Act. The term of the PPP loan is for two years with an interest rate of 1.0% per year, which will
be deferred for the first six months of the term of the loan. After the initial six-month deferral period, the loan requires monthly
payments of principal and interest until maturity with respect to any portion of the PPP loan which is not forgiven. Under
the terms of the CARES Act, a PPP loan recipient may apply for, and be granted, forgiveness for all or a portion of loans granted
under the PPP. Such forgiveness will be determined based upon the use of loan proceeds for payroll costs, rent and utility costs,
and the maintenance of employee and compensation levels.
During the fiscal year ended March 31, 2020,
the Company used cash in operations of $229,484. The principal reason for our loss for the fiscal year ended March 31, 2020 was
lower revenue and higher material costs as a result of the 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. Management concludes that it is probable that our
cash resources and our PPP proceeds 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 have ncreased our pricing on products to mitigate somewhat our higher
material costs. Therefore, the accompanying consolidated financial statements have been prepared assuming that we will continue
as a going concern.
2. Summary of Significant
Accounting Policies
Use of Estimates in the Preparation of Financial
Statements. The preparation of financial statements in conformity with accounting principles generally accepted in the United
States (“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, Cash Equivalents and Restricted Cash.
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 and restricted cash and short-term trade receivables, payables and
line of credit. The carrying values of cash, cash equivalents and restricted cash, short-term 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 accounts payable. The carrying value of all financial instruments approximates fair value. The amount of cash on deposit with
financial institutions occasionally exceeds the $250,000 federally insured limit at March 31, 2020. However, we believe that cash
on deposit that exceeds $250,000 in the 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.
We charge interest on past due accounts on a case-by-case basis.
A summary of the activity in our allowance for doubtful accounts
is as follows:
Years Ended
|
|
March 31, 2020
|
|
March 31, 2019
|
Balance, beginning of year
|
|
$
|
26,000
|
|
|
$
|
20,500
|
|
Provision for (recoveries of) estimated losses
|
|
|
32,168
|
|
|
|
(560
|
)
|
Write-off of uncollectible accounts
|
|
|
(168
|
)
|
|
|
6,060
|
|
Balance, end of year
|
|
$
|
58,000
|
|
|
$
|
26,000
|
|
The net accounts receivable balance at March
31, 2020 of $881,194 included no more than 8% from any one customer. The net accounts receivable balance at March 31, 2019 of $1,009,106
included no more than 8% from any one customer.
Warranty Accrual. 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, our warranty obligation
is based upon historical experience and is also affected by product failure rates and material usage incurred in
correcting a product failure. Should actual product failure rates or material usage costs differ from our estimates, revisions
to the estimated warranty liability would be required. A summary of our warranty claims activity, included in other accrued liabilities,
is as follows:
Years Ended
|
|
March 31, 2020
|
|
March 31, 2019
|
Balance, beginning of year
|
|
$
|
10,000
|
|
|
$
|
10,000
|
|
Provision for estimated warranty claims
|
|
|
(10,129
|
)
|
|
|
4,592
|
|
Claims made
|
|
|
129
|
|
|
|
(4,592
|
)
|
Balance, end of year
|
|
$
|
—
|
|
|
$
|
10,000
|
|
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 March 31, 2020 and 2019, inventory consisted
of the following:
|
|
March 31, 2020
|
|
March 31, 2019
|
Raw materials
|
|
$
|
1,147,983
|
|
|
$
|
1,063,780
|
|
Finished goods
|
|
|
516,918
|
|
|
|
458,763
|
|
Total gross inventories
|
|
|
1,664,901
|
|
|
|
1,522,543
|
|
Less reserve for obsolescence
|
|
|
(39,000
|
)
|
|
|
(50,000
|
)
|
Total net inventories
|
|
$
|
1,625,901
|
|
|
$
|
1,472,543
|
|
A summary of the activity in our inventory
reserve for obsolescence is as follows:
Years Ended
|
|
March 31, 2020
|
|
March 31, 2019
|
Balance, beginning of year
|
|
$
|
50,000
|
|
|
$
|
21,000
|
|
Provision for estimated obsolescence
|
|
|
(11,000
|
)
|
|
|
29,000
|
|
Write-off of obsolete inventory
|
|
|
—
|
|
|
|
—
|
|
Balance, end of year
|
|
$
|
39,000
|
|
|
$
|
50,000
|
|
Property and Equipment. Property and
equipment are stated at cost, with depreciation computed over the estimated useful lives of the assets, generally three 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. Depreciation expense for the years ended March 31, 2020 and
2019 was $111,721 and $154,609, respectively.
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. A summary of our patents at March 31, 2020 and 2019 is as follows:
|
|
March 31, 2020
|
|
March 31, 2019
|
Patents issued
|
|
$
|
473,607
|
|
|
$
|
447,430
|
|
Accumulated amortization
|
|
|
(281,649
|
)
|
|
|
(254,992
|
)
|
Patents issued, net of accumulated amortization
|
|
|
191,958
|
|
|
|
192,438
|
|
Patent applications
|
|
|
46,026
|
|
|
|
67,176
|
|
Accumulated amortization
|
|
|
(9,688
|
)
|
|
|
(11,035
|
)
|
Patent applications, net of accumulated amortization
|
|
|
36,338
|
|
|
|
56,141
|
|
Total net patents and patent applications
|
|
$
|
228,296
|
|
|
$
|
248,579
|
|
The expected annual amortization expense related
to patents and patent applications as of March 31, 2020, for the next five fiscal years, is as follows:
Fiscal Year
|
|
Amount
|
|
2021
|
|
|
$
|
24,629
|
|
|
2022
|
|
|
|
21,712
|
|
|
2023
|
|
|
|
20,253
|
|
|
2024
|
|
|
|
18,440
|
|
|
2025 and following
|
|
|
|
143,262
|
|
|
Total
|
|
|
$
|
228,296
|
|
Other Accrued Liabilities. At March
31, 2020 and 2019, other accrued liabilities consisted of the following:
|
|
March 31, 2020
|
|
March 31, 2019
|
Bonus
|
|
$
|
10,000
|
|
|
$
|
—
|
|
Warranty
|
|
|
—
|
|
|
|
10,000
|
|
Sales commissions
|
|
|
29,994
|
|
|
|
50,129
|
|
Sales and use tax
|
|
|
12,037
|
|
|
|
22,494
|
|
Marketing fees
|
|
|
10,511
|
|
|
|
4,041
|
|
Payroll taxes
|
|
|
22,712
|
|
|
|
27,188
|
|
Miscellaneous
|
|
|
10,823
|
|
|
|
12,582
|
|
Total other accrued liabilities
|
|
$
|
96,077
|
|
|
$
|
126,434
|
|
Income Taxes. We account for income
taxes under the provisions of 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. Should we achieve sufficient,
sustained income in the future, we may conclude that some or all of the valuation allowance should be reversed (Note 5).
ASC 740 prescribes a comprehensive model for
how companies should recognize, measure, present, and disclose in their financial statements uncertain tax positions taken or expected
to be taken on a tax return. Under ASC 740, tax positions must initially be recognized in the financial statements when it is more
likely than not the position will be sustained upon examination by the tax authorities. Such tax positions must initially and subsequently
be measured as the largest amount of tax benefit that has a greater than 50% likelihood of being realized upon ultimate settlement
with the tax authority assuming full knowledge of the position and relevant facts.
The cumulative effect of adopting ASC 740 on
April 1, 2007 has been recorded net in deferred tax assets, which resulted in no ASC 740 liability on the balance sheet. The total
amount of unrecognized tax benefits as of the date of adoption was zero. There are open statutes of limitations for taxing authorities
in federal and state jurisdictions to audit the Company’s tax returns from fiscal year ended March 31, 1999 through the current
period. Our policy is to account for income tax related interest and penalties in income tax expense in the statements of operations.
There have been no income tax related interest or penalties assessed or recorded. Because the Company has provided a full valuation
allowance on all of its deferred tax assets, the adoption of ASC 740 had no impact on our effective tax rate.
Revenue Recognition. Revenue from product sales, net of discounts,
are recorded when we ship the product and title has passed to the customer, provided that we have evidence of a customer arrangement
and can conclude that collection is probable. 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.
Sales Taxes. We collect sales tax from
customers and remit the entire amount to each respective state. We recognize revenue from product sales net of sale taxes.
Research and Development Expenses. We
expense research and development costs for products and processes as incurred.
Advertising Costs. We expense advertising
costs as incurred. Advertising expense for the years ended March 31, 2020 and 2019 was minimal.
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.
ASC 718 requires companies 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 the accompanying statements
of operations.
Stock-based compensation expense recognized
during the period is based on the value of the portion of share-based payment awards that is ultimately expected to vest during
the period. Stock-based compensation expense recognized in our statements of operations for fiscal years 2020 and 2019 included
compensation expense for share-based payment awards granted prior to, but not yet vested as of March 31, 2020, based on the grant
date fair value. Compensation expense for all share-based payment is recognized using the straight-line, single-option method.
As stock-based compensation expense recognized in the accompanying statements of operations for fiscal years 2020 and 2019 is based
on awards ultimately expected to vest, it has been reduced for estimated forfeitures. ASC 718 requires forfeitures to be estimated
at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates.
We used the Black-Scholes option-pricing model
(“Black-Scholes model”) to determine fair value. Our determination of fair value of share-based payment awards on the
date of grant using an option-pricing model is affected by our stock price as well as assumptions regarding a number of highly
complex and subjective variables. These variables include, but are not limited to our expected stock price volatility over the
term of the awards, and actual and projected employee stock option exercise behaviors. Although the fair value of employee stock
options is determined in accordance with ASC 718 using an option-pricing model, that value may not be indicative of the fair value
observed in a willing buyer/willing seller market transaction.
Stock-based compensation expense recognized
under ASC 718 for fiscal years 2020 and 2019 was $30,708 and $37,027, respectively, which consisted of stock-based compensation
expense related to director and employee stock options.
Stock-based compensation expense related to
director and employee stock options under ASC 718 for fiscal years 2020 and 2019 was allocated as follows:
Years Ended
|
|
March 31, 2020
|
|
March 31, 2019
|
Cost of sales
|
|
$
|
2,811
|
|
|
$
|
2,026
|
|
Sales and marketing
|
|
|
3,317
|
|
|
|
4,034
|
|
General and administrative
|
|
|
22,671
|
|
|
|
28,919
|
|
Research and development
|
|
|
1,909
|
|
|
|
2,048
|
|
Stock-based compensation expense
|
|
$
|
30,708
|
|
|
$
|
37,027
|
|
Segment Reporting. We have concluded
that we have one operating segment.
Basic and Diluted Income per Common Share.
Net income per share is calculated in accordance with ASC Topic 260, "Earnings Per Share" ("ASC 260"). Under
the provisions of ASC 260, basic net income per common share is computed by dividing net income for the period by the weighted
average number of common shares outstanding for the period. Diluted net income per common share is computed by dividing the net
income 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. Because we had a loss in fiscal years 2020 and 2019, the shares used in the
calculation of dilutive potential common shares exclude options to purchase shares. Therefore, basic net loss per common share
equals dilutive net loss per common share:
The following table presents the calculation of basic and diluted
net income (loss) per share:
Years Ended
|
|
March 31, 2020
|
|
March 31, 2019
|
Net income (loss)
|
|
$
|
(198,312
|
)
|
|
$
|
(236,096
|
)
|
Weighted-average shares — basic
|
|
|
11,573,211
|
|
|
|
10,932,670
|
|
Effect of dilutive potential common shares
|
|
|
—
|
|
|
|
—
|
|
Weighted-average shares — basic and diluted
|
|
|
11,573,211
|
|
|
|
10,932,670
|
|
Net loss per share — basic and diluted
|
|
$
|
(0.02
|
)
|
|
$
|
(0.02
|
)
|
Antidilutive equity units
|
|
|
998,000
|
|
|
|
990,286
|
|
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, 2019, 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.
3. Shareholders’
Equity
Stock Option Plans. We have a stock
option plan, the 2007 Stock Option Plan, and we adopted our 2014 Equity Incentive Plan (the “Plan,” as summarized below)
to promote our and our shareholders’ interests by helping us to attract, retain and motivate our key employees and associates.
Under the terms of the Plan, the Board of Directors may grant incentive and non-qualified stock options, stock appreciation rights,
restricted stock, restricted stock units, performance units, and other stock-based awards. The purchase price of the shares subject
to a stock option will be the fair market value of our common stock on the date the stock option is granted. Generally, vesting
of stock options occurs such that 20% becomes exercisable on each anniversary of the date of grant for each of the five years following
the grant date of such option. Generally, all stock options must be exercised within five years from the date granted. The number
of common shares reserved for issuance under the Plan is 1,100,000 shares of common stock, subject to adjustment for dividend,
stock split or other relevant changes in our capitalization.
Under ASC 718, the value of each employee stock
option was estimated on the date of grant using the Black-Scholes model for the purpose of financial information in accordance
with ASC 718. The use of a Black-Scholes model requires the use of actual employee exercise behavior data and the use of a number
of assumptions including expected volatility, risk-free interest rate and expected dividends. Employee stock options for 185,000
and 437,000 shares of stock were granted during fiscal years 2020 and 2019, respectively.
As of March 31, 2020, $178,000 of total unrecognized
compensation costs related to nonvested stock is expected to be recognized over a period of five years. The assumptions for employee
stock options are summarized as follows:
Years Ended
|
|
March 31, 2020
|
|
March 31, 2019
|
Risk-free interest rate
|
|
|
1.2% to 2.4%
|
|
|
|
2.2% to 3.1%
|
|
Expected life (in years)
|
|
|
5.0
|
|
|
|
5.0
|
|
Expected volatility
|
|
|
87% to 89%
|
|
|
|
87% to 91%
|
|
Expected dividend
|
|
|
0%
|
|
|
|
0%
|
|
Cumulative compensation cost recognized in
net income or loss with respect to options that are forfeited prior to vesting is adjusted as a reduction of compensation expense
in the period of forfeiture. The volatility of the stock is based on the historical volatility for the period that approximates
the expected lives of the options being valued. Fair value computations are highly sensitive to the volatility factor; the greater
the volatility, the higher the computed fair value of options granted.
The total fair value of options granted was
computed to be approximately $62,000 and $107,000, for the fiscal years ended March 31, 2020 and 2019, respectively. For disclosure
purposes, these amounts are amortized ratably over the vesting periods of the options. Effects of stock-based compensation, net
of the effect of forfeitures, totaled $30,708 and $37,027 for fiscal years 2020 and 2019, respectively.
The Black-Scholes model was developed for use
in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. In addition, option
valuation models require the use of assumptions, including the expected stock price volatility. Because our employee stock options
have characteristics significantly different than those of traded options, and because changes in the subjective input assumptions
can materially affect the fair value estimate, in management’s opinion, the existing models do not necessarily provide a
reliable single measure of the fair value of our employee stock options. A summary of our stock option activity and related information
for equity compensation plans approved by security holders for each of the fiscal years ended March 31, 2020 and 2019 is as follows:
|
|
|
|
|
STOCK OPTIONS OUTSTANDING
|
|
|
|
|
|
|
Number
Outstanding
|
|
|
|
Weighted-Average Exercise Price per Share
|
|
|
BALANCE AT MARCH 31, 2018
|
|
|
|
758,250
|
|
|
$
|
0.56
|
|
|
Granted
|
|
|
|
152,000
|
|
|
|
0.36
|
|
|
Forfeited/expired
|
|
|
|
(238,250
|
)
|
|
|
0.79
|
|
|
BALANCE AT MARCH 31, 2019
|
|
|
|
672,000
|
|
|
$
|
0.43
|
|
|
Granted
|
|
|
|
185,000
|
|
|
|
0.42
|
|
|
Forfeited/expired
|
|
|
|
(103,000
|
)
|
|
|
0.71
|
|
|
BALANCE AT MARCH 31, 2020
|
|
|
|
754,000
|
|
|
$
|
0.39
|
|
A summary of our stock option activity and
related information for equity compensation plans not approved by security holders for the fiscal year ended March 31, 2020 is
as follows:
|
|
|
|
|
STOCK OPTIONS OUTSTANDING
|
|
|
|
|
|
|
Number
Outstanding
|
|
|
|
Weighted-Average Exercise Price per Share
|
|
|
BALANCE AT MARCH 31, 2018
|
|
|
|
225,000
|
|
|
|
1.00
|
|
|
Granted
|
|
|
|
285,000
|
|
|
|
0.35
|
|
|
Forfeited/expired
|
|
|
|
(216,000
|
)
|
|
|
0.83
|
|
|
BALANCE AT MARCH 31, 2019
|
|
|
|
294,000
|
|
|
$
|
0.49
|
|
|
Forfeited/expired
|
|
|
|
(50,000
|
)
|
|
|
0.36
|
|
|
BALANCE AT MARCH 31, 2020
|
|
|
|
244,000
|
|
|
$
|
0.52
|
|
The following table summarizes information about employee stock
options outstanding and exercisable at March 31, 2020:
|
|
|
|
|
STOCK OPTIONS OUTSTANDING
|
|
|
|
STOCK OPTIONS EXERCISABLE
|
|
|
Range
of Exercise Prices
|
|
|
|
Number
Outstanding
|
|
|
|
Weighted-Average
Remaining Contractual Life (in Years)
|
|
|
|
Weighted-Average
Exercise Price
per
Share
|
|
|
|
Number
Exercisable
|
|
|
|
Weighted-Average
Exercise Price
per
Share
|
|
|
$0.30
- $0.35
|
|
|
|
540,000
|
|
|
|
2.2
|
|
|
|
$ 0.33
|
|
|
|
224,638
|
|
|
|
$ 0.32
|
|
|
$0.38 - $0.50
|
|
|
|
411,000
|
|
|
|
2.4
|
|
|
|
$ 0.43
|
|
|
|
197,239
|
|
|
|
$ 0.45
|
|
|
$0.55
- $0.74
|
|
|
|
47,000
|
|
|
|
3.7
|
|
|
|
$ 0.60
|
|
|
|
11,767
|
|
|
|
$ 0.74
|
|
|
|
|
|
|
998,000
|
|
|
|
2.4
|
|
|
|
$ 0.38
|
|
|
|
433,644
|
|
|
|
$ 0.39
|
|
A summary of our RSU activity and related information
for equity compensation plans approved by security holders for the fiscal year ended March 31, 2020 is as follows:
|
|
|
|
|
RSUs OUTSTANDING
|
|
|
|
|
|
|
Number
Outstanding
|
|
|
|
Weighted-Average Exercise Price per Share
|
|
|
BALANCE AT MARCH 31, 2019
|
|
|
|
24,286
|
|
|
$
|
0.62
|
|
|
Exercised
|
|
|
|
(24,286
|
)
|
|
|
0.62
|
|
|
BALANCE AT MARCH 31, 2020
|
|
|
|
—
|
|
|
|
—
|
|
The 998,000 options outstanding as of March
31, 2020 are nonqualified stock options. The exercise price of all options granted through March 31, 2020 has been equal to or
greater than the fair market value, as determined by our Board of Directors or based upon publicly quoted market values of our
common stock on the date of the grant.
4. Commitments
and Contingencies
Effective November 9, 2017, 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.
On April 1, 2019, we adopted Accounting Standards
Codification (“ASC”) ASC 842 “Leases” using the initial date of adoption method, whereby the adoption does
not impact any periods prior to April 1, 2019. ASC Topic 842 retains a distinction between finance leases and operating leases.
The classification criteria for distinguishing between finance leases and operating leases are substantially similar to the classification
criteria for distinguishing between capital leases and operating leases in the previous leases’ guidance. We recorded an
operating Right of Use (“ROU”) asset of $1,555,150, and an operating lease liability of $1,619,842 as of April 1, 2019.
The difference between the initial operating ROU asset and operating lease liability of $64,692 is accrued rent previously recorded
under ASC 840. We elected to adopt the package of practical expedients and, accordingly, did not reassess any previously expired
or existing arrangements and related classifications under ASC 840.
If the rate implicit in the lease is not readily
determinable, we use our incremental borrowing rate as the discount rate. We use our best judgement when determining the incremental
borrowing rate, which is the rate of interest that we would have to pay to borrow on a collateralized basis over a similar term
to the lease payments.
Our operating lease includes the use of real
property. We have not identified any material finance leases as of March 31, 2020.
For the year ended March 31, 2020, we had $297,648
in lease expense.
The following is a maturity analysis of the
annual undiscounted cash flows reconciled to the carrying value of the operating lease liabilities as of March 31, 2020:
Fiscal Year
|
|
Amount
|
2021
|
|
$
|
343,167
|
|
2022
|
|
|
357,667
|
|
2023
|
|
|
372,167
|
|
2024
|
|
|
386,667
|
|
2025
|
|
|
130,500
|
|
Total operating lease payments
|
|
|
1,590,168
|
|
Less imputed interest
|
|
|
(167,465
|
)
|
Total operating lease liabilities
|
|
$
|
1,422,703
|
|
Weighted-average remaining lease term
|
|
|
4.3 years
|
|
Weighted-average discount rate
|
|
|
5.0
|
%
|
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 (3.25% at March 31, 2020) 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 March 31, 2020, we had $385,132
in cash available to fund future operations, borrowed $370,498 and had $233,103 available to borrow. On April 17, 2020, we entered
into an unsecured promissory note under the PPP for a principal amount of $598,567. The PPP was established under the recently
congressionally approved CARES Act. The term of the PPP loan is for two years with an interest rate of 1.0% per year, which will
be deferred for the first six months of the term of the loan. After the initial six-month deferral period, the loan requires monthly
payments of principal and interest until maturity with respect to any portion of the PPP loan which is not forgiven. Under
the terms of the CARES Act, a PPP loan recipient may apply for, and be granted, forgiveness for all or a portion of loans granted
under the PPP. Such forgiveness will be determined based upon the use of loan proceeds for payroll costs, rent and utility costs,
and the maintenance of employee and compensation levels.
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 our and their compliance with these regulations. As of
March 31, 2020, we believe we were in substantial compliance with all known regulations. FDA inspections are conducted periodically
at the discretion of the FDA. We were last inspected in December 2012 and were notified of five observations from that inspection,
none of which we believe to be material.
Our obligation with respect to employee severance
benefits is minimized by the “at will” nature of the employee relationships. Our total obligation with respect to contingent
severance benefit obligations was none as of March 31, 2020 and 2019.
5. Income
Taxes
We account for income taxes under ASC 740,
which requires the use of the liability method. ASC 740 provides that deferred income tax assets and liabilities are recorded based
on the differences between the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes,
referred to as temporary differences. Deferred income tax assets and liabilities at the end of each period are determined using
the currently enacted tax rates applied to taxable income in the periods in which the deferred income tax assets and liabilities
are expected to be settled or realized.
Income tax provision (benefit) for income taxes
is summarized below:
Years Ended
|
|
March 31, 2020
|
|
March 31, 2019
|
Current:
|
|
|
|
|
Federal
|
|
$
|
––
|
|
|
$
|
––
|
|
State
|
|
|
––
|
|
|
|
––
|
|
Total current
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Deferred:
|
|
|
|
|
|
|
|
|
Federal
|
|
|
442,000
|
|
|
|
207,000
|
|
State
|
|
|
71,000
|
|
|
|
35,000
|
|
Total deferred
|
|
|
513,000
|
|
|
|
242,000
|
|
Valuation allowance
|
|
|
(513,000
|
)
|
|
|
(242,000
|
)
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
—
|
|
|
$
|
—
|
|
The following is a reconciliation
between the effective rate and the federal statutory rate:
Years Ended
|
|
March 31, 2020
|
|
March 31, 2019
|
Expected income tax rate
|
|
$
|
(42,000
|
)
|
|
$
|
(50,000
|
)
|
State income taxes, net of federal tax benefit
|
|
|
(9,000
|
)
|
|
|
(8,000
|
)
|
Other permanent differences
|
|
|
10,000
|
|
|
|
20,000
|
|
Research credits
|
|
|
(35,000
|
)
|
|
|
(54,000
|
)
|
Change in valuation allowance
|
|
|
76,000
|
|
|
|
92,000
|
|
Income tax expense
|
|
$
|
—
|
|
|
$
|
—
|
|
The components of the net accumulated deferred income tax asset
(liability) are as follows:
Years Ended
|
|
March 31, 2020
|
|
March 31, 2019
|
Other deferred assets
|
|
$
|
71,000
|
|
|
$
|
64,000
|
|
Valuation allowance
|
|
|
(71,000
|
)
|
|
|
(64,000
|
)
|
Current deferred tax assets
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Credits and net operating loss carryforwards
|
|
|
2,222,000
|
|
|
|
2,742,000
|
|
Valuation allowance
|
|
|
(2,222,000
|
)
|
|
|
(2,742,000
|
)
|
Long-term deferred tax assets
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax assets
|
|
|
—
|
|
|
|
—
|
|
Valuation allowance
|
|
|
—
|
|
|
|
—
|
|
Long-term deferred tax liabilities
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax liabilities
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets (liabilities)
|
|
$
|
—
|
|
|
$
|
—
|
|
The primary components of our deferred tax
assets are described below:
Years Ended
|
|
March 31, 2020
|
|
March 31, 2019
|
Differences in reporting long-term assets
|
|
$
|
71,000
|
|
|
$
|
64,000
|
|
Credits and net operating loss carryforwards
|
|
|
2,222,000
|
|
|
|
2,742,000
|
|
Less valuation allowance
|
|
|
(2,293,000
|
)
|
|
|
(2,806,000
|
)
|
Total deferred tax assets
|
|
$
|
—
|
|
|
$
|
—
|
|
In assessing the realizability of deferred
tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not
be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the
periods in which net operating losses and reversal of timing differences may offset taxable income. Management considers the scheduled
reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. A
valuation allowance is provided when it is more likely than not that some portion or all of a deferred tax asset will not be realized.
Due to our lack of earnings history, the net deferred tax assets have been fully offset by a valuation allowance.
As of March 31, 2020, we had approximately
$8.2 million of net operating loss carryovers for tax purposes. Additionally, we have approximately $327,000 of research and development
tax credits available to offset future federal income taxes. The net operating loss and credit carryovers begin to expire in the
fiscal year ended March 31, 2021. In the fiscal year ended March 31, 2021, net operating loss of approximately $1.1 million will
expire if sufficient taxable income is not available to use it. In fiscal years ended after March 31, 2020, net operating losses
expire at various dates through March 31, 2040. Our net operating loss carryovers at March 31, 2020 include $455,000 in income
tax deductions related to stock options which will be tax effected and the benefit will be reflected as a credit to additional
paid-in capital when realized. As such, these deductions are not reflected in our deferred tax assets. The Internal Revenue Code
contains provisions, which may limit the net operating loss carryforwards available to be used in any given year if certain events
occur, including significant changes in ownership interests.
6. Major
Customers/Suppliers
We depend on sales that are generated from
hospitals’ ongoing usage of AEM surgical instruments. In fiscal year 2020, we generated sales from over 300 hospitals that
have changed to AEM products, but no hospital customer contributed more than 6% to the total sales. Three vendors accounted for
approximately 64% of our inventory purchases.
7. Defined
Contribution Employee Benefit Plan
We have adopted a 401(k) Profit Sharing Plan
which covers all full-time employees who have completed at least three months of full-time continuous service and are age eighteen
or older. Participants may defer up to 20% of their gross pay up to a maximum limit determined by law. Participants are immediately
vested in their contributions. We may make discretionary contributions based on corporate financial results for the fiscal year.
To date, we have not made contributions to the 401(k) Profit Sharing Plan. Vesting in a contribution account (our contribution)
is based on years of service, with a participant fully vested after five years of credited service.
8. Related Party Transaction
We paid consulting fees of $69,189 and $67,102
to an entity owned by one of our directors in fiscal years 2020 and 2019, respectively.
9. Subsequent Events
Except for the two events that follow, management
evaluated all of our activity and concluded that, as of the date the financial statements were issued, no subsequent events have
occurred that would require recognition in the financial statements or disclosure in the notes to the financial statements.
On April 17, 2020, we entered into an unsecured
promissory note under the PPP for a principal amount of $598,567. The PPP was established under the recently congressionally approved
CARES Act. The term of the PPP loan is for two years with an interest rate of 1.0% per year, which will be deferred for the first
six months of the term of the loan. After the initial six-month deferral period, the loan requires monthly payments of principal
and interest until maturity with respect to any portion of the PPP loan which is not forgiven. Under the terms of the CARES
Act, a PPP loan recipient may apply for, and be granted, forgiveness for all or a portion of loans granted under the PPP. Such
forgiveness will be determined based upon the use of loan proceeds for payroll costs, rent and utility costs, and the maintenance
of employee and compensation levels.
On April 20, 2020, we entered into a Master
Services Agreement (“MSA”) with Auris Health, Inc. (“Auris Health”), which is based in Redwood City, CA
and a part of Johnson & Johnson Medical Devices Companies. The MSA (and the initial related Statement of Work thereunder) are
effective as of March 3, 2020. Under the MSA, we and Auris Health will collaborate on the development of equipment designed to
enable the compatibility of our AEM technology with monopolar instruments produced by Auris Health. The MSA has a term of up to
three years, but either party can terminate the MSA sooner upon 10 business days’ prior written notice. The initial phase
under the MSA is expected to last six months. We expect to receive up to approximately $320,000 in service fees for work during
the initial phase. After completion of the initial phase, the parties will mutually agree on the timing, parameters and compensation
for additional phases under the MSA (if any).