ITEM 1 - Condensed
Interim Financial Statements
Encision Inc.
Condensed Balance Sheets
(Unaudited)
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December 31, 2021
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March 31, 2021
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ASSETS
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Current assets:
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Cash
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$
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1,424,208
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$
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1,474,339
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Accounts receivable, net of allowance for doubtful accounts of
$0 at December 31, 2021 and $35,000 at March 31, 2021
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1,029,015
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1,024,370
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Inventories, net of reserve for obsolescence of $42,186 at December 31, 2021 and $70,000 at March 31, 2021
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1,405,789
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1,445,134
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Prepaid expenses and other assets
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149,434
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154,151
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Total current assets
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4,008,446
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4,097,994
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Equipment:
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Furniture, fixtures and equipment, at cost
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2,513,905
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2,695,297
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Accumulated depreciation
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(2,278,633
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)
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(2,429,580
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)
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Equipment, net
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235,272
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265,717
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Right of use asset
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856,481
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1,060,971
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Patents, net of accumulated amortization of $269,482 at December 31, 2021 and $317,821 at March 31, 2021
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188,722
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213,368
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Other assets
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30,574
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20,496
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TOTAL ASSETS
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$
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5,319,495
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$
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5,658,546
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LIABILITIES AND SHAREHOLDERS’ EQUITY
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Current liabilities:
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Accounts payable
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$
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531,021
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$
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389,088
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Secured notes
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18,400
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20,397
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Accrued compensation
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238,919
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181,686
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Other accrued liabilities
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136,974
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282,102
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Accrued lease liability
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357,083
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302,978
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Total current liabilities
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1,282,397
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1,176,251
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Long-term liability:
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Secured notes
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212,240
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220,263
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Accrued lease liability
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648,111
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926,808
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Unsecured promissory note
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—
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533,118
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Total liabilities
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2,142,748
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2,856,440
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Commitments and contingencies (Note 4)
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Shareholders’ equity:
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Preferred stock, no par value: 10,000,000 shares authorized; none issued and outstanding
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—
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—
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Common stock and additional paid-in capital, no par value: 100,000,000 shares
authorized; 11,679,034 issued and outstanding at December 31, 2021 and 11,582,641 issued and outstanding at March 31,
2021
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24,303,758
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24,265,831
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Accumulated (deficit)
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(21,127,011
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)
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(21,463,725
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)
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Total shareholders’ equity
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3,176,747
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2,802,106
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TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY
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$
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5,319,495
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$
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5,658,546
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The accompanying notes to financial statements are an integral part of
these condensed statements.
Encision Inc.
Condensed Statements of Operations
(Unaudited)
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Three Months Ended
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Nine Months Ended
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December 31, 2021
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December 31, 2020
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December 31, 2021
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December 31, 2020
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NET REVENUE:
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Product
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$
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1,733,658
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$
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1,998,979
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$
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5,347,259
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$
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5,093,118
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Service
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210,608
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163,621
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718,297
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297,457
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Total revenue
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1,944,266
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2,162,600
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6,065,556
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5,390,575
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COST OF REVENUE:
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Product
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828,153
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975,581
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2,728,464
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2,500,310
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Service
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106,792
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81,421
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356,228
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150,197
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Total cost of revenue
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934,945
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1,057,002
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3,084,692
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2,650,507
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GROSS PROFIT
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1,009,321
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1,105,598
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2,980,864
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2,740,068
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OPERATING EXPENSES:
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Sales and marketing
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504,709
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580,477
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1,594,728
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1,512,741
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General and administrative
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326,753
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372,994
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993,959
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998,620
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Research and development
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194,124
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139,390
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584,161
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443,452
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Total operating expenses
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1,025,586
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1,092,861
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3,172,848
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2,954,813
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OPERATING (LOSS) INCOME
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(16,265
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12,737
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(191,984
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(214,745
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Interest expense, net
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(1,806
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(16,380
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(3,359
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(51,021
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Extinguishment of debt income
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598,567
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533,118
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598,567
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Other income (expense), net
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2,060
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4,397
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(1,061
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)
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136,000
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Interest expense, extinguishment of debt income and other income (expense), net
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254
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586,584
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528,698
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683,546
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(LOSS) INCOME BEFORE PROVISION FOR INCOME TAXES
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(16,011
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599,321
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336,714
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468,801
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Provision for income taxes
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—
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—
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—
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—
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NET (LOSS) INCOME
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$
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(16,011
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)
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$
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599,321
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$
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336,714
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$
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468,801
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Net (loss) income per share—basic and diluted
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$
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0.00
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$
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0.05
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$
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0.03
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$
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0.04
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Weighted average shares—basic
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11,677,921
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11,582,641
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11,598,768
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11,582,641
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Weighted average shares—diluted
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11,677,921
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11,708,797
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12,045,389
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11,750,349
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The accompanying notes to financial statements are an integral part of
these condensed statements.
Encision Inc.
Condensed Statements of Cash Flows
(Unaudited)
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Nine Months Ended
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December 31, 2021
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December 31, 2020
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Cash flows (used in) operating activities:
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Net income
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$
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336,714
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$
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468,801
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Adjustments to reconcile net income to net cash (used in) operating activities:
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Extinguishment of debt income
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(533,118
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)
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(598,567
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Depreciation and amortization
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85,896
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67,907
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Stock-based compensation expense related to stock options
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29,832
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25,014
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(Recovery from) doubtful accounts, net change
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(35,000
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)
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(31,500
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)
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(Recovery from) provision for inventory obsolescence, net change
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(27,814
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)
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24,000
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Other income from release of accounts payable
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—
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(56,435
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)
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Change in operating assets and liabilities:
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Right of use asset, net
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(20,102
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)
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67,856
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Accounts receivable
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30,355
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(130,049
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)
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Inventories
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67,159
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80,318
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Prepaid expenses and other assets
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(5,361
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)
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(107,510
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)
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Accounts payable
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141,933
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86,766
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Accrued compensation and other accrued liabilities
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(87,895
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)
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212,394
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Net cash (used in) generated by operating activities
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(17,401
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)
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108,995
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Cash flows (used in) investing activities:
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Acquisition of property and equipment
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(17,550
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)
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(4,144
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)
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Patent costs
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(13,255
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)
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(15,858
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)
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Net cash (used in) generated by investing activities
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(30,805
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)
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(20,002
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)
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Cash flows from financing activities:
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Net proceeds from options exercised
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8,095
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—
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Paydown of credit facility, net change
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—
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(370,498
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)
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(Paydown of) secured notes
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(10,020
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)
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—
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Unsecured promissory note
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—
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598,567
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EIDL loan
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—
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152,000
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Net cash (used in) generated by financing activities
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(1,925
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)
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380,069
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Net (decrease) increase in cash
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(50,131
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)
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469,062
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Cash, beginning of fiscal year
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1,474,339
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385,132
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Cash, end of fiscal quarter
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$
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1,424,208
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$
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854,194
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Supplemental disclosures of cash flow information:
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Cash paid during the year for interest
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$
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5,418
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$
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34,633
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The accompanying notes to financial statements are an integral part of
these condensed statements.
ENCISION INC.
NOTES TO CONDENSED INTERIM FINANCIAL STATEMENTS
DECEMBER 31, 2021
(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 $21,127,011 at December
31, 2021. A significant portion of our operating funds have been provided by issuances of our common stock and warrants, and the exercise
of stock options to purchase our common stock. Shareholders’ equity increased by $374,641 since March 31, 2021 as a result of our
net income of $336,714, share-based compensation of $29,832 and net proceeds from stock options exercised of $8,095. 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.
We have been actively monitoring the novel coronavirus
(“COVID”) situation and its impact globally. Our production facilities continued to operate during the year as they had prior
to the COVID pandemic with minimal change, other than for enhanced safety measures intended to prevent the spread of the virus. The remote
working arrangements and travel restrictions imposed by various governments had limited impact on our ability to maintain operations during
the year, as our manufacturing operations have generally been exempted from stay-at-home orders. However, we cannot predict the impact
of the progression of the COVID pandemic on future results due to a variety of factors, including the continued good health of our employees,
the ability of suppliers to continue to operate and deliver, our ability and our customers to maintain operations, continued access to
transportation resources, the changing needs and priorities of customers, any further government and/or public actions taken in response
to the pandemic and ultimately the length of the pandemic. We will continue to closely monitor the COVID pandemic in order to ensure the
safety of our people and our ability to serve our customers and patients worldwide.
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, 2021 filed on June 23, 2021.
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.
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.
Fair Value of Financial Instruments. Our financial
instruments consist of cash, trade receivables, payables and Economic Injury Disaster Loan (“EIDL”) loan. The carrying values
of cash and trade receivables approximate their fair value due to their short maturities.The fair values of the EIDL Loan approximates
the carrying value based on estimated discounted future cash flows using the current rates at which similar loans would be made.
Concentration of Credit Risk. Financial instruments,
which potentially subject us to concentrations of credit risk, consist of cash and accounts receivable. From time to time, the amount
of cash on deposit with financial institutions may exceed the $250,000 federally insured limit at December 31, 2021. We believe that our
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, 2021
of $1,029,015 and at March 31, 2021 of $1,024,370 included no more than 17% 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, 2021 and March 31, 2021 inventory consisted of the following:
Schedule of inventory
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|
|
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|
|
|
|
December
31, 2021
|
|
|
March 31,
2021
|
|
Raw materials
|
|
$
|
1,086,031
|
|
|
$
|
1,038,094
|
|
Finished goods
|
|
|
361,944
|
|
|
|
477,040
|
|
Total gross inventories
|
|
|
1,447,975
|
|
|
|
1,515,134
|
|
Less reserve for obsolescence
|
|
|
(42,186
|
)
|
|
|
(70,000
|
)
|
Total net inventories
|
|
$
|
1,405,789
|
|
|
$
|
1,445,134
|
|
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 three and nine months ended December 31, 2021 was $18,079 and $47,995, respectively, and for the three and nine months
ended December 31, 2020 was $13,277 and $45,554, respectively. 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 expense 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, 2021, 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. 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. As presented on the Statement of Operations our revenue is disaggregated between
product revenue and service revenue. As it relates specifically to product revenue, we do not believe further disaggregation is necessary
as substantially all of our product revenue comes from multiple products within a line of medical devices. Our engineering service contracts
are billed on a time and materials basis and revenue is recognized over time as the services are performed.
Deferred Revenue. We record a contract liability to deferred revenue
when funds are received prior to the recognition of the associated revenue. Deferred revenue as of December 31, 2021 and March 31, 2021 includes
a contract liability for customer prepayments and is included in other accrued liabilities. Deferred revenue as of December 31, 2021 and
March 31, 2020 includes customer prepayments of $229,167 and $0, respectively and is included in other accrued liabilities.
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, we 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, 2021 was $14,104 and $29,832, respectively and for the three and nine months
ended December 31, 2020 was $8,483 and $25,014, respectively, which consisted of stock-based compensation expense related to grants of
employee stock options.
Segment Reporting. We have concluded that we
have two operating segments, product and service. Product designs, develops, manufactures and markets patented surgical instruments. Service
performs electrical engineering activities for external entities.
Schedule of service performs electrical engineering activities for external entities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
December 31, 2021
|
|
|
Nine Months Ended
December 31, 2021
|
|
|
|
Product
|
|
|
Service
|
|
|
Total
|
|
|
Product
|
|
|
Service
|
|
|
Total
|
|
Net revenue
|
|
$
|
1,733,658
|
|
|
$
|
210,608
|
|
|
$
|
1,944,266
|
|
|
$
|
5,347,259
|
|
|
$
|
718,297
|
|
|
$
|
6,065,556
|
|
Cost of revenue
|
|
|
828,153
|
|
|
|
106,792
|
|
|
|
934,945
|
|
|
|
2,728,464
|
|
|
|
356,228
|
|
|
|
3,084,692
|
|
Gross profit
|
|
|
905,505
|
|
|
|
103,816
|
|
|
|
1,009,321
|
|
|
|
2,618,795
|
|
|
|
362,069
|
|
|
|
2,980,864
|
|
Operating income (loss)
|
|
|
(120,081
|
)
|
|
|
103,816
|
|
|
|
(16,265
|
)
|
|
|
(554,053
|
)
|
|
|
362,069
|
|
|
|
(191,984
|
)
|
Depreciation and amortization
|
|
|
32,302
|
|
|
|
—
|
|
|
|
32,302
|
|
|
|
85,896
|
|
|
|
—
|
|
|
|
85,896
|
|
Patent and capital expenditures
|
|
|
11,382
|
|
|
|
—
|
|
|
|
11,382
|
|
|
|
30,805
|
|
|
|
—
|
|
|
|
30,805
|
|
Equipment and patents, net
|
|
$
|
423,994
|
|
|
$
|
—
|
|
|
$
|
423,994
|
|
|
$
|
423,994
|
|
|
$
|
—
|
|
|
$
|
423,994
|
|
|
|
Three Months Ended
December 31, 2020
|
|
|
Nine Months Ended
December 31, 2020
|
|
|
|
Product
|
|
|
Service
|
|
|
Total
|
|
|
Product
|
|
|
Service
|
|
|
Total
|
|
Net revenue
|
|
$
|
1,998,979
|
|
|
$
|
163,621
|
|
|
$
|
2,162,600
|
|
|
$
|
5,093,118
|
|
|
$
|
297,457
|
|
|
$
|
5,390,575
|
|
Cost of revenue
|
|
|
975,581
|
|
|
|
81,421
|
|
|
|
1,057,002
|
|
|
|
2,500,310
|
|
|
|
150,197
|
|
|
|
2,650,507
|
|
Gross profit
|
|
|
1,023,398
|
|
|
|
82,200
|
|
|
|
1,105,598
|
|
|
|
2,592,808
|
|
|
|
147,260
|
|
|
|
2,740,068
|
|
Operating income (loss)
|
|
|
(69,463
|
)
|
|
|
82,200
|
|
|
|
12,737
|
|
|
|
(362,005
|
)
|
|
|
147,260
|
|
|
|
(214,745
|
)
|
Depreciation and amortization
|
|
|
20,584
|
|
|
|
—
|
|
|
|
20,584
|
|
|
|
67,907
|
|
|
|
—
|
|
|
|
67,907
|
|
Patent and capital expenditures
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
4,144
|
|
|
|
—
|
|
|
|
4,144
|
|
Equipment and patents, net
|
|
$
|
387,549
|
|
|
$
|
—
|
|
|
$
|
387,549
|
|
|
$
|
387,549
|
|
|
$
|
—
|
|
|
$
|
387,549
|
|
Recently Issued Accounting Pronouncements.
In June 2016, the FASB issued ASU 2016-13, “Measurement of Credit Losses on Financial Instruments”. ASU 2016-13 adds a current
expected credit loss (“CECL”) impairment model to U.S. GAAP that is based on expected losses rather than incurred losses.
Modified retrospective adoption is required with any cumulative-effect adjustment recorded to retained earnings as of the beginning of
the period of adoption. ASU 2016-13 is effective for fiscal years beginning after December 15, 2019, excluding smaller reporting entities,
which will be effective for fiscal years beginning after December 15, 2022. We will adopt ASU 2016-13 beginning April 1, 2023 and do not
expect the application of the CECL impairment model to have a significant impact on our allowance for uncollectible amounts for accounts
receivable.
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 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 income (loss) per share:
Schedule of basic and diluted net loss per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
December 31, 2021
|
|
|
December 31, 2020
|
|
|
December 31, 2021
|
|
|
December 30, 2020
|
|
Net (loss) income
|
|
$
|
(16,011
|
)
|
|
$
|
599,321
|
|
|
$
|
336,714
|
|
|
$
|
468,801
|
|
Weighted-average basic shares outstanding
|
|
|
11,677,921
|
|
|
|
11,582,641
|
|
|
|
11,598,768
|
|
|
|
11,582,641
|
|
Effect of dilutive securities
|
|
|
—
|
|
|
|
126,156
|
|
|
|
366,355
|
|
|
|
167,708
|
|
Weighted-average diluted shares
|
|
|
11,819,567
|
|
|
|
11,745,161
|
|
|
|
12,045,389
|
|
|
|
11,750,349
|
|
Basic net income (loss) per share
|
|
$
|
0.00
|
|
|
$
|
0.05
|
|
|
$
|
0.03
|
|
|
$
|
0.04
|
|
Diluted net income (loss) per share
|
|
$
|
0.00
|
|
|
$
|
0.05
|
|
|
$
|
0.03
|
|
|
$
|
0.04
|
|
Antidilutive employee stock options
|
|
|
1,076,000
|
|
|
|
909,844
|
|
|
|
709,645
|
|
|
|
868,292
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 4. COMMITMENTS AND CONTINGENCIES
We have a noncancelable lease agreement for our facilities
at 6797 Winchester Circle, Boulder, Colorado. The lease expires October 31, 2024.
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, 2021 is as follows:
|
Schedule of Lease
payment
|
|
|
|
|
|
Fiscal Year
|
|
|
Amount
|
|
|
2022
|
|
|
$
|
90,625
|
|
|
2023
|
|
|
|
372,167
|
|
|
2024
|
|
|
|
386,667
|
|
|
2025
|
|
|
|
232,139
|
|
|
Total
|
|
|
$
|
1,081,598
|
|
During January 2021, we canceled our relationship with Crestmark Bank.
We had no borrowings and incurred a $20,000 exit fee.
On August 4, 2020, we received $150,000 in loan funding
from the U.S. Small Business Administration (“SBA”) under the Economic Injury Disaster Loan (“EIDL”) program administered
by the SBA, which program was expanded pursuant to the CARES Act. The EIDL is evidenced by a promissory note, dated August 1, 2020 in
the original principal amount of $150,000 with the SBA, the lender. Under the terms of the Note, interest accrues on the outstanding principal
at the rate of 3.75% per annum. The term of the Note is thirty years, though it may be payable sooner upon an event of default under the
Note. Under the Note, we will be obligated to make equal monthly payments of principal and interest of $774 beginning on August 1, 2022
through the maturity date of August 1, 2050. The Note may be prepaid in part or in full, at any time, without penalty.
During January 2021, we entered into a note agreement
with U.S. Bank for $92,000. The note is for five years at a 5% interest rate and the proceeds were used to purchase equipment. The note
is secured by the equipment.
On February 8, 2021, we entered into an unsecured
promissory note under the PPP for a principal amount of $533,118. The PPP was established under the Consolidated Appropriations Act of
2020, enacted December 27, 2020. 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. This was our second PPP loan. On April 17, 2020,
we entered into an unsecured promissory note under the PPP for a principal amount of $598,567. In the quarter that ended December 31,
2020, we achieved the requirements for forgiveness, and all of the $598,567 was forgiven. We recognized the forgiveness as extinguishment
of debt income of $598,567. During the quarter that ended December 31, 2021, we achieved the requirements for forgiveness of the second
note and recognized the forgiveness as extinguishment of debt income of $533,118.
The minimum future EIDL payment, by fiscal year, as
of December 31, 2021 is as follows:
|
Schedule of EIDL payment
|
|
|
|
|
|
Fiscal Year
|
|
|
Amount
|
|
|
2022
|
|
|
|
—
|
|
|
2023
|
|
|
|
3,091
|
|
|
2024
|
|
|
|
3,208
|
|
|
2025
|
|
|
|
3,331
|
|
|
2026
|
|
|
|
3,457
|
|
|
Thereafter
|
|
|
|
142,693
|
|
|
Total
|
|
|
$
|
155,780
|
|
During January 2021, we entered into a note agreement
with U.S. Bank for $92,000. The note is for five years at a 5% interest rate and the proceeds were used to purchase equipment. The note
is secured by the equipment.
The minimum future principal U.S. Bank payment, by
fiscal year, as of December 31, 2021 is as follows:
|
Schedule of principal U.S. Bank payment
|
|
|
|
|
|
Fiscal Year
|
|
|
Amount
|
|
|
2022
|
|
|
|
4,600
|
|
|
2023
|
|
|
|
18,400
|
|
|
2024
|
|
|
|
18,400
|
|
|
2025
|
|
|
|
18,400
|
|
|
2026
|
|
|
|
15,060
|
|
|
Total
|
|
|
$
|
74,860
|
|
Aside from the operating lease, EIDL loan and U.S.
Bank loan, 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, 2021. 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 for the three and nine months ended December 31, 2021 and 2020, which was allocated as follows:
Schedule of summarizes stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
December 31, 2021
|
|
|
December 31, 2020
|
|
|
December 31, 2021
|
|
|
December 31, 2020
|
|
Cost of sales
|
|
$
|
(67
|
)
|
|
$
|
917
|
|
|
$
|
464
|
|
|
$
|
2,751
|
|
Sales and marketing
|
|
|
1,816
|
|
|
|
1,218
|
|
|
|
4,550
|
|
|
|
3,653
|
|
General and administrative
|
|
|
10,953
|
|
|
|
5,803
|
|
|
|
22,408
|
|
|
|
16,974
|
|
Research and development
|
|
|
1,402
|
|
|
|
545
|
|
|
|
2,410
|
|
|
|
1,636
|
|
Stock-based compensation expense
|
|
$
|
14,104
|
|
|
$
|
8,483
|
|
|
$
|
29,832
|
|
|
$
|
25,014
|
|
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 190,000 stock options granted, 2,533 stock options
exercised and 17,467 stock options forfeited during the three months ended December 31, 2021. There were 200,000 stock options granted,
96,393 stock options exercised and 58,607 stock options forfeited during the nine months ended December 31, 2021. There were 20,000 stock
options granted and 60,000 stock options forfeited during the three months ended December 31, 2020, and 110,000 stock options granted
and 72,000 stock options forfeited during the nine months ended December 31, 2020.
As of December 31, 2021, approximately $135,000 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 $15,348 and $57,764 to
an entity owned by one of our directors during the three and nine months ended December 31, 2021, respectively, and $16,000 and $45,103
during the three and nine months ended December 31, 2020, respectively.
Note 7. SUBSEQUENT EVENTS
We evaluated all of our activity
as of the date the condensed interim financial statements were issued and concluded that 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, 2021.
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, 2021. 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 $21,127,011 at December
31, 2021. A significant portion of our operating funds have been provided by issuances of our common stock and warrants 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, 2021, we
used $17,401 of cash in our operating activities and used $17,550 for investments in property and equipment. As of December 31, 2021,
we had $1,424,208 and at March 31, 2021 we had $1,474,339 in cash available to fund future operations, a decrease of $50,131 from March
31, 2021. Our working capital was $2,726,049 at December 31, 2021 compared to $2,921,743 at March 31, 2021.
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 eEdge™ scissors, our EM3 AEM Monitor, our AEM EndoShield Burn Protection
System and the recent introduction of our AEM 2X enTouch® Scissors. 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 2022. Our objectives for the remainder of fiscal year 2022
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.
We have been actively monitoring the COVID situation
and its impact. Our primary objectives have remained the same throughout the pandemic: to support the safety of our team members and their
families and continue to support patients. Our production facility continued to operate during the year as it had prior to the COVID pandemic
with very little change, other than for enhanced safety measures intended to prevent the spread of the virus. Our capital and financial
resources, including overall liquidity, remain strong. The remote working arrangements and travel restrictions imposed by various governments
had limited impact on our ability to maintain operations during the year, as our manufacturing operation has generally been exempted from
stay-at-home orders. However, we cannot predict the impact of the progression of the COVID pandemic on future results due to a variety
of factors, including the continued good health of our employees, the ability of suppliers to continue to operate and deliver, our ability
and our customers to maintain operations, continued access to transportation resources, the changing needs and priorities of customers,
any further government and/or public actions taken in response to the pandemic and ultimately the length of the pandemic. We will continue
to closely monitor the COVID pandemic in order to ensure the safety of our people and our ability to serve our customers and patients
worldwide.
We have entered into a Master Services Agreement with
Auris Health, Inc. (“Auris Health”). Auris Health is a part of the Johnson & Johnson family of companies. Under the agreement,
we will collaborate on the integration of AEM technology into monopolar instrumentation produced by Auris Health for advanced surgical
applications. This work is ongoing. In August 2021, we signed a Supply Agreement with Auris Health. The agreement has an initial term
of three years. During the term, Auris has agreed to buy certain AEM® Technology enabled products exclusively from us.
Possibility of Operating Losses: We have an
accumulated deficit of $21,127,011 at December 31, 2021. A significant portion of our operating funds have been provided by issuances
of our common stock and warrants, 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
2022. 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. The omission
or delay of elective surgeries would negatively impact the extent and timing of revenue growth. 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, 2021 compared
to the quarter ended December 31, 2020.
Net Product
revenue. Net product revenue for the quarter ended December 31, 2021 was $1,733,658 compared to $1,998,979 for the quarter ended December
31, 2020, a decrease of 13%. The decrease of AEM product net revenue is attributable to an increase of COVID rates at hospitals that used
AEM technology during the quarter.
Net Service
revenue. Net service revenue for the quarter ended December 31, 2021 was $210,608 compared to $163,621 for the quarter ended December
31, 2020, an increase of 28%. Net service revenue was for engineering services performed under a Master Services Agreement with Auris
Health, Inc. (“Auris Health”). Auris Health is a part of the Johnson & Johnson family of companies. Under the agreement,
we will collaborate on the integration of AEM technology into monopolar instrumentation produced by Auris Health for advanced surgical
applications. The engineering services are ongoing.
Gross
profit. Gross profit for the quarter ended December 31, 2021 of $1,009,321 represented a decrease of 9% from gross profit of $1,105,598
for the quarter ended December 31, 2020. Gross profit decreased as a result of lower total revenue and higher material costs. Gross profit
as a percentage of sales (gross margins) was 52% for the quarter ended December 31, 2021 and 51% for the quarter ended December 31, 2020.
Sales and marketing expenses. Sales and marketing
expenses of $504,709 for the quarter ended December 31, 2021 represented a decrease of 13% from sales and marketing expenses of $580,477
for the quarter ended December 31, 2020. The decrease was the result of lower commissions on lower
product revenue and lower trade samples.
General and administrative expenses. General
and administrative expenses of $326,753 for the quarter ended December 31, 2021 represented a decrease of 12% from general and administrative
expenses of $372,994 for the quarter ended December 31, 2020. The decrease was the result
of a decrease of compensation.
Research and development expenses. Research
and development expenses of $194,124 for the quarter ended December 31, 2021 represented an
increase of 39% compared to $139,390 for the quarter ended December 31, 2020. The increase was the result of an increase of compensation.
Net loss. Net loss was $16,011 for the quarter
ended December 31, 2021 compared to net income of $599,321 for the quarter ended December 31, 2020. The net loss increase was principally
a result of extinguishment of debt income in the December 31, 2020 quarter.
For the nine months ended December 31, 2021 compared
to the nine months ended December 31, 2020.
Net Product
revenue. Net product revenue for the nine months ended December 31, 2021 was $5,347,259 compared to $5,093,118 for the nine months
ended December 31, 2020, an increase of 5%. The increase of AEM product net revenue is attributable to normalization of hospitals that
used AEM technology during the nine months.
Net Service
revenue. Net service revenue for the nine months ended December 31, 2021 was $718,297 compared to $297,457 for the nine months ended
December 31, 2020, an increase of 42%. Net service revenue was for engineering services performed under a Master Services Agreement with
Auris Health, Inc. (“Auris Health”). Auris Health is a part of the Johnson & Johnson family of companies. Under the agreement,
we will collaborate on the integration of AEM technology into monopolar instrumentation produced by Auris Health for advanced surgical
applications. The engineering services are ongoing.
Gross
profit. Gross profit for the nine months ended December 31, 2021 of $2,980,864 represented an increase of 9% from gross profit of
$2,740,068 for the nine months ended December 31, 2020. Gross profit increased in line with increased revenue. Gross profit as a percentage
of sales (gross margins) was 49% for the nine months ended December 31, 2021 and 51% for the nine months ended December 31, 2020.
Sales and marketing expenses. Sales and marketing
expenses of $1,594,728 for the nine months ended December 31, 2021 represented an increase of 5% from sales and marketing expenses of
$1,512,741 for the nine months ended December 31, 2020. The increase was the result of higher commissions
on higher product revenue, advertising costs and travel. The increase was partially reduced by reduced sales samples.
General and administrative expenses. General
and administrative expenses of $993,959 for the nine months ended December 31, 2021 represented a decrease of 0% from general and administrative
expenses of $998,620 for the nine months ended December 31, 2020.
Research and development expenses. Research
and development expenses of $584,161 for the nine months ended December 31, 2021 represented
an increase of 32% compared to $443,452 for the nine months ended December 31, 2020. The increase was the result of an increase of compensation,
outside services and test materials.
Net income. Net income was $336,714 for the
nine months ended December 31, 2021 compared to net income of $468,801 for the nine months ended December 31, 2020. The net income decrease
was principally a result of higher other net income and extinguishment of debt income for the nine months December 31, 2020.
The results of operations for the three and nine months
ended December 31, 2021 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, and the exercise of stock options to purchase our common stock. Common
stock and additional paid in capital totaled $24,303,758 from inception through December 31, 2021.
During January 2021, we canceled our relationship with Crestmark Bank.
We had no borrowings and incurred a $20,000 exit fee.
On August 4, 2020, we received $150,000 in loan funding
from the U.S. Small Business Administration (“SBA”) under the Economic Injury Disaster Loan (“EIDL”) program administered
by the SBA, which program was expanded pursuant to the CARES Act. The EIDL is evidenced by a promissory note, dated August 1, 2020 in
the original principal amount of $150,000 with the SBA, the lender. Under the terms of the Note, interest accrues on the outstanding principal
at the rate of 3.75% per annum. The term of the Note is thirty years, though it may be payable sooner upon an event of default under the
Note. Under the Note, we will be obligated to make equal monthly payments of principal and interest of $774 beginning on August 1, 2022
through the maturity date of August 1, 2050. The Note may be prepaid in part or in full, at any time, without penalty.
During January 2021, we entered into a note agreement with U.S. Bank for
$92,000. The note is for five years at a 5% interest rate and the proceeds were used to purchase equipment. The note is secured by the
equipment.
On February 8, 2021, we entered into an unsecured
promissory note under the PPP for a principal amount of $533,118. The PPP was established under the Consolidated Appropriations Act of
2020, enacted December 27, 2020. 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. This was our second PPP loan. On April 17, 2020,
we entered into an unsecured promissory note under the PPP for a principal amount of $598,567. In the quarter that ended December 31,
2020, we achieved the requirements for forgiveness, and all of the $598,567 was forgiven. We recognized the forgiveness as extinguishment
of debt income of $598,567. During the quarter that ended December 31, 2021, we achieved the requirements for forgiveness of the second
note and recognized the forgiveness as extinguishment of debt income of $533,118.
Our operations used $17,401 of cash during the nine
months ended December 31, 2021 on net revenue of $6,065,556. The amounts of cash provided by operations for the nine months ended
December 31, 2021 are not necessarily indicative of the expected amounts of cash to be generated from or used in operations in fiscal
year 2022. At December 31, 2021, we had $1,424,208 in cash available to fund future operations. Our working capital was $2,726,049 at
December 31, 2021 compared to $2,921,743 at March 31, 2020. Current liabilities were $1,282,397 at December 31, 2021 compared to $1,176,251
at March 31, 2020. We have a noncancelable lease agreement for our facilities at 6797 Winchester Circle, Boulder, Colorado. The lease
expires October 31, 2024.
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, 2021 is as follows:
Fiscal Year
|
|
|
Amount
|
|
|
2022
|
|
|
$
|
90,625
|
|
|
2023
|
|
|
|
372,167
|
|
|
2024
|
|
|
|
386,667
|
|
|
2025
|
|
|
|
232,139
|
|
|
Total
|
|
|
$
|
1,081,598
|
|
The minimum future EIDL payment, by fiscal year, as
of December 31, 2021 is as follows:
Fiscal Year
|
|
|
Amount
|
|
|
2022
|
|
|
|
—
|
|
|
2023
|
|
|
|
3,091
|
|
|
2024
|
|
|
|
3,208
|
|
|
2025
|
|
|
|
3,331
|
|
|
2026
|
|
|
|
3,457
|
|
|
Thereafter
|
|
|
|
142,693
|
|
|
Total
|
|
|
$
|
155,780
|
|
The minimum future principal U.S. Bank payment, by
fiscal year, as of December 31, 2021 is as follows:
Fiscal Year
|
|
|
Amount
|
|
|
2022
|
|
|
|
4,600
|
|
|
2023
|
|
|
|
18,400
|
|
|
2024
|
|
|
|
18,400
|
|
|
2025
|
|
|
|
18,400
|
|
|
2026
|
|
|
|
15,060
|
|
|
Total
|
|
|
$
|
74,860
|
|
Aside from the operating lease, EIDL loan and U.S.
Bank loan, we do not have any material contractual commitments requiring settlement in the future.
As of December 31, 2021, 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
|
|
$
|
1,081,598
|
|
|
$
|
369,750
|
|
|
$
|
653,813
|
|
|
$
|
58,035
|
|
|
$
|
—
|
|
EIDL loan
|
|
|
154,520
|
|
|
|
—
|
|
|
|
6,299
|
|
|
|
6,788
|
|
|
|
141,433
|
|
U.S. Bank loan
|
|
|
74,860
|
|
|
|
18,400
|
|
|
|
36,800
|
|
|
|
19,660
|
|
|
|
—
|
|
Total
|
|
$
|
1,310,978
|
|
|
$
|
388,150
|
|
|
$
|
696,912
|
|
|
$
|
84,483
|
|
|
$
|
141,433
|
|
Our fiscal year 2022 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 for fiscal year 2022. 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, 2021, net operating
loss carryforwards totaling approximately $7.1 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, 2022. 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. Our engineering service contracts
are billed on a time and materials basis and revenue is recognized over time as the services are performed. We record deferred revenue
when funds are received prior to the recognition of the associated revenue. We record a contract liability to deferred revenue which
includes customer prepayments and is included in other accrued liabilities.
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 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.