UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Form 10-Q
☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended December 31, 2017
OR
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from __________ to________
Commission file number: 001-11789
ENCISION INC.
(Exact name of registrant as specified in its charter)
Colorado | 84-1162056 | |
(State or other jurisdiction of incorporation or organization) |
6797 Winchester Circle
Boulder, Colorado80301
(Address of principal executive offices)
(303)444-2600
(Registrant'sRegistrant’s telephone number)
Securities registered pursuant to Section 12(b) of the Securities Exchange Act of 1934:
Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
Common Stock, no par value | ECIA | OTC Bulletin Board |
Securities registered under Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes [X]☒ No [_]
Indicate by check mark whether the registrant has submitted electronically, and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes [X]☒ No [_]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large“large accelerated filer," "accelerated filer"” “accelerated filer” , “smaller reporting company” and "smaller reporting company"“emerging growth” in Rule 12b-2 of the Exchange Act.
Large accelerated filer | Accelerated filer | |
Non-accelerated | Smaller reporting company | |
Emerging growth company |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [_]
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [_] ☐No [X]
Indicate the number of shares outstanding of each of the issuer'sissuer’s classes of common equity, as of the latest practicable date:
Common Stock no par value (Class) | Shares |
(outstanding at |
ENCISION INC.
FORM 10-Q
For the Three and NineSix Months Ended December 31, 2017September 30, 2023
INDEX
Page Number | ||
PART I. | FINANCIAL INFORMATION | |
ITEM 1 - | Condensed Interim Financial Statements: | |
- Condensed Balance Sheets as of September 30, 2023 and March 31, 2023 | 1 | |
- Condensed Statements of Three and Six Months Ended September 30, 2023 and 2022 | 2 | |
- Condensed Statements of Cash Flows for the Six Ended September 30, 2023 and 2022 | 3 | |
- Notes to Condensed Interim Financial Statements | 4 | |
ITEM 2 - | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 10 |
ITEM 4 - | Controls and Procedures | 17 |
PART II. | OTHER INFORMATION | |
ITEM 1 - | Legal Proceedings | 17 |
ITEM 1A - | Risk Factors | 17 |
ITEM 2 - | Unregistered Sales of Equity Securities | 17 |
ITEM 3 - | Defaults on Senior Securities | 17 |
ITEM 4 - | Mine Safety Disclosures | 17 |
ITEM 5 - | Other Information | 17 |
ITEM 6 - | Exhibits | 18 |
SIGNATURE | 19 |
i
Page Number | ||||||||
PART I. | FINANCIAL INFORMATION | |||||||
ITEM 1 | – | Condensed Interim Financial Statements: | ||||||
– | Condensed Balance Sheets as of December 31, 2017 and March 31, 2017 | 3 | ||||||
– | Condensed Statements of Operations for the Three and Nine Months Ended December 31, 2017 and 2016 | 4 | ||||||
– | Condensed Statements of Cash Flows for the Nine Months Ended December 31, 2017 and 2016 | 5 | ||||||
– | Notes to Condensed Interim Financial Statements | 6 | ||||||
ITEM 2 | – | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 11 | |||||
ITEM 4 | – | Controls and Procedures | 17 | |||||
PART II. | OTHER INFORMATION | |||||||
ITEM 6 | – | Exhibits | 18 | |||||
SIGNATURE | 19 |
PART I
FINANCIAL INFORMATIONITEM 1
-Encision Inc.
Condensed Balance Sheets
December 31, 2017 | March 31, 2017 | |||||||
ASSETS | ||||||||
Current assets: | ||||||||
Cash and cash equivalents | $ | 212,581 | $ | 45,117 | ||||
Restricted cash | 25,000 | 50,000 | ||||||
Accounts receivable, net of allowance for doubtful accounts of $14,500 at December 31, 2017 and $33,000 at March 31, 2017 | 937,419 | 1,042,281 | ||||||
Inventories, net of reserve for obsolescence of $30,000 at December 31, 2017 and $50,000 at March 31, 2017 | 1,246,835 | 1,128,412 | ||||||
Prepaid expenses | 143,278 | 62,290 | ||||||
Total current assets | 2,565,113 | 2,328,100 | ||||||
Equipment, at cost: | ||||||||
Furniture, fixtures and equipment | 3,007,053 | 3,161,687 | ||||||
Accumulated depreciation | (2,630,546 | ) | (2,693,302 | ) | ||||
Equipment, net | 376,507 | 468,385 | ||||||
Patents, net of accumulated amortization of $232,970 at December 31, 2017 and $212,345 at March 31, 2017 | 268,593 | 253,980 | ||||||
Other assets | 18,402 | 16,450 | ||||||
TOTAL ASSETS | $ | 3,228,615 | $ | 3,066,915 | ||||
LIABILITIES AND SHAREHOLDERS' EQUITY | ||||||||
Current liabilities: | ||||||||
Accounts payable | $ | 521,783 | $ | 402,914 | ||||
Accrued compensation | 182,443 | 267,399 | ||||||
Other accrued liabilities | 270,707 | 248,130 | ||||||
Line of credit | –– | 275,055 | ||||||
Deferred rent | 30,384 | 30,384 | ||||||
Total current liabilities | 1,005,317 | 1,223,882 | ||||||
Long-term liability: | ||||||||
Deferred rent | 17,724 | 40,512 | ||||||
Total liabilities | 1,023,041 | 1,264,394 | ||||||
Commitments and contingencies (Note 4) | ||||||||
Shareholders' equity: | ||||||||
Preferred stock, no par value: 10,000,000 shares authorized; none issued and outstanding | –– | –– | ||||||
Common stock and additional paid-in capital, no par value: 100,000,000 shares authorized; 10,683,355 shares issued and outstanding at December 31, 2017 and March 31, 2017 | 23,801,466 | 23,752,131 | ||||||
Accumulated (deficit) | (21,595,892 | ) | (21,949,610 | ) | ||||
Total shareholders' equity | 2,205,574 | 1,802,521 | ||||||
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY | $ | 3,228,615 | $ | 3,066,915 |
(Unaudited)
September 30, 2023 | March 31, 2023 | |||||||
ASSETS | ||||||||
Current assets: | ||||||||
Cash | $ | 306,001 | $ | 188,966 | ||||
Accounts receivable | 1,024,350 | 920,721 | ||||||
Inventories, net of reserve for obsolescence of $115,000 at September 30, 2023 and $51,000 at March 31, 2023 | 1,642,123 | 1,899,202 | ||||||
Prepaid expenses | 53,234 | 115,714 | ||||||
Total current assets | 3,025,708 | 3,124,603 | ||||||
Equipment: | ||||||||
Furniture, fixtures and equipment, at cost | 2,615,676 | 2,615,676 | ||||||
Accumulated depreciation | (2,343,640 | ) | (2,312,400 | ) | ||||
Equipment, net | 272,036 | 303,276 | ||||||
Right of use asset | 1,168,779 | 496,004 | ||||||
Patents, net of accumulated amortization of $313,419 at September 30, 2023 and $306,946 at March 31, 2023 | 167,448 | 163,133 | ||||||
Other assets | 54,803 | 46,953 | ||||||
TOTAL ASSETS | $ | 4,688,774 | $ | 4,133,969 | ||||
LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||||
Current liabilities: | ||||||||
Accounts payable | $ | 300,155 | $ | 252,957 | ||||
Line of credit | 338,414 | 177,402 | ||||||
Secured notes | 44,498 | 44,491 | ||||||
Accrued compensation | 167,060 | 217,724 | ||||||
Other accrued liabilities | 41,186 | 84,578 | ||||||
Accrued lease liability | 272,639 | 353,674 | ||||||
Total current liabilities | 1,163,952 | 1,130,826 | ||||||
Long-term liability: | ||||||||
Secured notes | 255,704 | 268,512 | ||||||
Accrued lease liability | 896,140 | 239,820 | ||||||
Total liabilities | 2,315,796 | 1,639,158 | ||||||
Commitments and contingencies (Note 4) | — | — | ||||||
Shareholders’ equity: | ||||||||
Preferred stock, | par value: shares authorized; issued and outstanding— | — | ||||||
Common stock and additional paid-in capital, no par value: shares authorized; issued and outstanding at September 30, 2023 and March 31, 2023 | 24,374,224 | 24,348,075 | ||||||
Accumulated (deficit) | (22,001,246 | ) | (21,853,264 | ) | ||||
Total shareholders’ equity | 2,372,978 | 2,494,811 | ||||||
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY | $ | 4,688,774 | $ | 4,133,969 |
The accompanying notes to financial statements are an integral part of these unaudited condensed financial statements.
Encision Inc.
Condensed Statements of Operations
(Unaudited)
Three Months Ended | Nine Months Ended | |||||||||||||||
December 31, 2017 | December 31, 2016 | December 31, 2017 | December 31, 2016 | |||||||||||||
NET REVENUE | $ | 2,190,305 | $ | 2,229,870 | $ | 6,716,480 | $ | 6,657,875 | ||||||||
COST OF REVENUE | 956,687 | 1,165,414 | 2,880,101 | 3,394,204 | ||||||||||||
GROSS PROFIT | 1,233,618 | 1,064,456 | 3,836,379 | 3,263,671 | ||||||||||||
OPERATING EXPENSES: | ||||||||||||||||
Sales and marketing | 569,802 | 638,735 | 1,745,121 | 1,882,337 | ||||||||||||
General and administrative | 368,545 | 383,106 | 1,057,810 | 1,087,239 | ||||||||||||
Research and development | 223,977 | 300,392 | 635,165 | 880,760 | ||||||||||||
Total operating expenses | 1,162,324 | 1,322,233 | 3,438,096 | 3,850,336 | ||||||||||||
OPERATING INCOME (LOSS) | 71,294 | (257,777 | ) | 398,283 | (586,665 | ) | ||||||||||
Interest expense, net | (15,343 | ) | (15,093 | ) | (44,165 | ) | (44,681 | ) | ||||||||
Other income (expense), net | 118 | (1,295 | ) | (400 | ) | 18,931 | ||||||||||
Interest expense and other income (expense), net | (15,225 | ) | (16,388 | ) | (44,565 | ) | (25,750 | ) | ||||||||
INCOME (LOSS) BEFORE PROVISION FOR INCOME TAXES | 56,069 | (274,165 | ) | 353,718 | (612,415 | ) | ||||||||||
Provision for income taxes | –– | –– | –– | –– | ||||||||||||
NET INCOME (LOSS) | $ | 56,069 | $ | (274,165 | ) | $ | 353,718 | $ | (612,415 | ) | ||||||
Net income (loss) per share—basic | $ | 0.01 | $ | (0.03 | ) | $ | 0.03 | $ | (0.06 | ) | ||||||
Net income (loss) per share—diluted | $ | 0.01 | $ | (0.03 | ) | $ | 0.03 | $ | (0.06 | ) | ||||||
Weighted average shares—basic | 10,683,355 | 10,678,344 | 10,683,355 | 10,674,548 | ||||||||||||
Weighted average shares—diluted | 10,707,814 | 10,678,344 | 10,702,493 | 10,674,548 |
Three Months Ended | Six Months Ended | |||||||||||||||
September 30, 2023 | September 30, 2022 | September 30, 2023 | September 30, 2022 | |||||||||||||
NET REVENUE: | ||||||||||||||||
Product | $ | 1,752,413 | $ | 1,704,365 | $ | 3,365,965 | $ | 3,400,094 | ||||||||
Service | 73,978 | — | 113,809 | 458,633 | ||||||||||||
Total revenue | 1,826,391 | 1,704,365 | 3,479,774 | 3,858,727 | ||||||||||||
COST OF REVENUE: | ||||||||||||||||
Product | 926,455 | 872,352 | 1,696,493 | 1,742,257 | ||||||||||||
Service | 37,327 | — | 57,947 | — | ||||||||||||
Total cost of revenue | 963,782 | 872,352 | 1,754,440 | 1,742,257 | ||||||||||||
GROSS PROFIT | 862,609 | 832,013 | 1,725,334 | 2,116,470 | ||||||||||||
OPERATING EXPENSES: | ||||||||||||||||
Sales and marketing | 389,342 | 489,700 | 822,778 | 992,667 | ||||||||||||
General and administrative | 366,377 | 397,664 | 755,133 | 741,783 | ||||||||||||
Research and development | 100,854 | 223,053 | 269,274 | 393,521 | ||||||||||||
Total operating expenses | 856,573 | 1,110,417 | 1,847,185 | 2,127,971 | ||||||||||||
OPERATING INCOME (LOSS) | 6,036 | (278,404 | ) | (121,851 | ) | (11,501 | ) | |||||||||
Interest expense, net | (16,851 | ) | (4,250 | ) | (31,083 | ) | (6,613 | ) | ||||||||
Other income, net | 3,286 | 3,334 | 4,951 | 3,394 | ||||||||||||
Interest expense and other income, net | (13,565 | ) | (916 | ) | (26,132 | ) | (3,219 | ) | ||||||||
(LOSS) BEFORE PROVISION FOR INCOME TAXES | (7,529 | ) | (279,320 | ) | (147,983 | ) | (14,720 | ) | ||||||||
Provision for income taxes | — | — | — | — | ||||||||||||
NET (LOSS) | $ | (7,529 | ) | $ | (279,320 | ) | $ | (147,983 | ) | $ | (14,720 | ) | ||||
Net (loss) per share—basic and diluted | $ | $ | ) | $ | ) | $ | ||||||||||
Weighted average shares—basic and diluted |
The accompanying notes to financial statements are an integral part of these unaudited condensed financial statements.
Encision Inc.
Condensed Statements of Cash Flows
(Unaudited)
Nine Months Ended | ||||||||
December 31, 2017 | December 31, 2016 | |||||||
Operating activities: | ||||||||
Net income (loss) | $ | 353,718 | $ | (612,415 | ) | |||
Adjustments to reconcile net income (loss) to net cash used in operating activities: | ||||||||
Depreciation and amortization | 154,150 | 168,357 | ||||||
Share-based compensation expense | 49,335 | 52,411 | ||||||
(Recovery from) provision for doubtful accounts, net | (18,500 | ) | 11,000 | |||||
(Recovery from) provision for inventory obsolescence, net | (20,000 | ) | (240,000 | ) | ||||
Changes in operating assets and liabilities: | ||||||||
Accounts receivable | 123,362 | (249,823 | ) | |||||
Inventories | (98,423 | ) | 834,772 | |||||
Prepaid expenses and other assets | (82,940 | ) | (45,741 | ) | ||||
Accounts payable | 118,869 | 152,527 | ||||||
Accrued compensation and other accrued liabilities | (85,167 | ) | (71,081 | ) | ||||
Net cash generated by (used in) operating activities | 494,404 | 7 | ||||||
Investing activities: | ||||||||
Acquisition of property and equipment | (41,647 | ) | (104,057 | ) | ||||
Patent costs | (35,238 | ) | (21,102 | ) | ||||
Net cash (used in) investing activities | (76,885 | ) | (125,159 | ) | ||||
Financing activities: | ||||||||
Paydown of credit facility, net change | (275,055 | ) | (103,821 | ) | ||||
Change in restricted cash | 25,000 | –– | ||||||
Net cash (used in) financing activities | (250,055 | ) | (103,821 | ) | ||||
Net increase (decrease) in cash and cash equivalents | 167,464 | (228,973 | ) | |||||
Cash and cash equivalents, beginning of period | 45,117 | 292,840 | ||||||
Cash and cash equivalents, end of period | $ | 212,581 | $ | 63,867 |
Six Months Ended | September 30, 2023 | September 30, 2022 | ||||||
Cash flows (used in) operating activities: | ||||||||
Net (loss) | $ | (147,983 | ) | $ | (14,720 | ) | ||
Adjustments to reconcile net (loss) to net cash (used in) operating activities: | ||||||||
Depreciation and amortization | 43,775 | 41,329 | ||||||
Stock-based compensation expense related to stock options | 26,149 | 25,207 | ||||||
Provision for (recovery from) inventory obsolescence, net change | 64,000 | 29,000 | ||||||
Change in operating assets and liabilities: | ||||||||
Right of use asset, net | (97,490 | ) | (19,039 | ) | ||||
Accounts receivable | (103,629 | ) | 32,587 | |||||
Inventories | 193,079 | (303,138 | ) | |||||
Prepaid expenses and other assets | 54,630 | 50,740 | ||||||
Accounts payable | 47,198 | (143,470 | ) | |||||
Accrued compensation and other accrued liabilities | (82,732 | ) | (36,005 | ) | ||||
Net cash (used in) operating activities | (3,003 | ) | (337,509 | ) | ||||
Cash flows (used in) investing activities: | ||||||||
Acquisition of property and equipment | (122 | ) | (191,550 | ) | ||||
Patent costs | (16,727 | ) | (9,780 | ) | ||||
Net cash (used in) investing activities | (16,849 | ) | (201,330 | ) | ||||
Cash flows from financing activities: | ||||||||
Net proceeds from options exercised | — | 16,400 | ||||||
Borrowing from secured notes | 136,887 | 109,633 | ||||||
Net cash generated by financing activities | 136,887 | 126,033 | ||||||
Net increase (decrease) in cash | 117,035 | (412,806 | ) | |||||
Cash, beginning of fiscal year | 188,966 | 949,645 | ||||||
Cash, end of fiscal quarter | $ | 306,001 | $ | 536,839 | ||||
Supplemental disclosures of cash flow information: | ||||||||
Cash paid during the year for interest | $ | 31,083 | $ | 6,613 |
The accompanying notes to financial statements are an integral part of these unaudited condensed financial statements.
ENCISION INC.
NOTES TO UNAUDITED CONDENSED INTERIM FINANCIAL STATEMENTS
SEPTEMBER 30, 2023
(Unaudited)
Note 1.
ORGANIZATION AND NATURE OF BUSINESSEncision 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 $21,595,892$22,001,246 at December 31, 2017.September 30, 2023. A significant portion of our operating funds have been provided by issuances of our common stock and warrants, a line of credit, and the exercise of stock options to purchase our common stock.stock, loans, and (in some periods) by operating profits. Shareholders’ equity decreased by $121,813 since March 31, 2023 as a result of our net loss of $147,983 and share-based compensation of $ . Should our liquidity be diminished in the future because of operating losses, we may be required to seek additional capital.
Our strategic marketing and sales plan is designed to expand the use of our products in surgically active hospitals and surgery centers in the United States.
Note 2.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIESBasis of Presentation.
The accompanying unaudited condensed interim financial statements have been prepared, in all material respects, in conformity with the standards of accounting measurements and reflect, in the opinion of management, all adjustments necessary to summarize fairly the financial position and results of operations for such periods in accordance with GAAP. All adjustments are of a normal recurring nature. The results of operations for the most recent interim period are not necessarily indicative of the results to be expected for the full year.
We had a net loss of $147,983 for the six months ended September 30, 2023. At September 30, 2023, we had cash of $306,001, current borrowings of $338,414 and borrowing capacity up to $1,000,000, as restricted by our eligible accounts receivable, under our line of credit. Working capital was $1,861,756, a decrease of $132,021 from March 31, 2023. We increased $117,035 of cash in the fiscal six months ended September 30, 2023, primarily as a result of our inventory decrease. Management is developing plans to ensure that we have the working capital necessary to fund operations. We will increase our pricing on products to mitigate our higher material costs. Management concludes that it is probable that our cash resources and line of credit will be sufficient to meet our cash requirements for twelve months from the issuance of the unaudited condensed financial statements. Therefore, the accompanying unaudited condensed financial statements have been prepared assuming that we will continue as a going concern.
Use of Estimates in the Preparation of Financial Statements.
Cash and Cash Equivalents.
Fair Value of Financial Instruments.
Concentration of Credit Risk.
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, 2017September 30, 2023 of $937,419$1,024,350 and at March 31, 20172023 of $1,042,281$920,721 included no more than 6%8% from any one customer.
Inventories
. Inventories are stated at the lower of cost (first-in, first-out basis)December 31, 2017 | March 31, 2017 | |||||||
Raw materials | $ | 967,017 | $ | 857,345 | ||||
Finished goods | 309,818 | 321,067 | ||||||
Total gross inventories | 1,276,835 | 1,178,412 | ||||||
Less reserve for obsolescence | (30,000 | ) | (50,000 | ) | ||||
Total net inventories | $ | 1,246,835 | $ | 1,128,412 |
Schedule of inventory | ||||||||
September 30, 2023 | March 31, 2023 | |||||||
Raw materials | $ | 1,423,869 | $ | 1,456,473 | ||||
Finished goods | 333,254 | 493,729 | ||||||
Total gross inventories | 1,757,123 | 1,950,202 | ||||||
Less reserve for obsolescence | (115,000 | ) | (51,000 | ) | ||||
Total net inventories | $ | 1,642,123 | $ | 1,899,202 |
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 six months ended September 30, 2023 and 2022 was $15,464 and $14,615, and $31,240 and $26,706, 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 areLong-Lived Assets.
Patents. The costs of applying for patents are capitalized and amortized on a straight-line basis over the lesser of the patent'spatent’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.
Revenue Recognition.
Research and Development Expenses
. We expense research and development costs for products and processes as incurred.Stock-based compensation expense recognized under ASC 718 for the three and ninesix months ended December 31, 2017September 30, 2023 and 2022 was $16,143$ and $49,335, respectively,$ , and for the three$ and nine months ended December 31, 2016 was $17,998 and $52,411,$ , respectively, which consisted of stock-based compensation expense related to grants of employee stock options and restricted stock units ("RSUs").
Segment Reporting.
Information, 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. ASU 2016-02 will be effectivesegment, for the Company beginning in its third quarter of 2020three and early adoption is permitted. The Company is currently evaluating the timing of its adoptionsix months ended September 30, 2023 and the impact of adopting the new lease standard on its consolidated financial statements. However, the ultimate impact of adopting ASU 2016-02 will depend on the Company's lease portfolio as of the adoption date.2022 follows:
Schedule of reporting segments | ||||||||||||||||||||||||
Three Months Ended September 30, 2023 | Six Months Ended September 30, 2023 | |||||||||||||||||||||||
Product |
Service |
Total |
Product |
Service |
Total | |||||||||||||||||||
Net revenue | $ | 1,752,413 | $ | 73,978 | $ | 1,826,391 | $ | 3,365,965 | $ | 113,809 | $ | 3,479,774 | ||||||||||||
Cost of revenue | 926,455 | 37,327 | 963,782 | 1,696,493 | 57,947 | 1,754,440 | ||||||||||||||||||
Gross profit | 825,958 | 36,651 | 862,609 | 1,669,472 | 55,862 | 1,725,334 | ||||||||||||||||||
Operating income (loss) | 6,036 | — | 6,036 | (177,713 | ) | 55,862 | (121,851 | ) | ||||||||||||||||
Depreciation and amortization | 21,525 | — | 21,525 | 43,775 | — | 43,775 | ||||||||||||||||||
Patent and capital expenditures | 16,350 | — | 16,350 | 16,849 | — | 16,849 | ||||||||||||||||||
Equipment and patents, net | $ | 439,484 | $ | — | $ | 439,484 | $ | 439,484 | $ | — | $ | 439,484 |
Three Months Ended September 30, 2022 | Six Months Ended September 30, 2022 | |||||||||||||||||||||||
Product |
Service |
Total |
Product |
Service |
Total | |||||||||||||||||||
Net revenue | $ | 1,704,365 | $ | — | $ | 1,704,365 | $ | 3,400,094 | $ | 458,633 | $ | 3,858,727 | ||||||||||||
Cost of revenue | 872,352 | — | 872,352 | 1,742,257 | — | 1,742,257 | ||||||||||||||||||
Gross profit | 832,013 | — | 832,013 | 1,657,837 | 458,633 | 2,116,470 | ||||||||||||||||||
Operating income (loss) | (278,404 | ) | — | (278,404 | ) | (470,134 | ) | 458,633 | (11,501 | ) | ||||||||||||||
Depreciation and amortization | 21,242 | — | 21,242 | 41,329 | — | 41,329 | ||||||||||||||||||
Patent and capital expenditures | 139,001 | — | 139,001 | 201,330 | — | 201,330 | ||||||||||||||||||
Equipment and patents, net | $ | 530,017 | $ | — | $ | 530,017 | $ | 530,017 | $ | — | $ | 530,017 |
6 |
We report both basic and diluted net income (loss) per share. Basic net income or loss per common share is computed by dividing net income or loss for the period by the weighted average number of common shares outstanding for the period. Diluted net income or loss per common share is computed by dividing the net income or loss for the period by the weighted average number of common and potential common shares outstanding during the period if the effect of the potential common shares is dilutive. The shares used in the calculation of dilutive potential common shares exclude options and RSUs to purchase shares where the exercise price was greater than the average market price of common shares for the period.
The following table presents the calculation of basic and diluted net lossincome (loss) per share:
Three Months Ended | Nine Months Ended | |||||||||||||||
December 31, 2017 | December 31, 2016 | December 31, 2017 | December 31, 2016 | |||||||||||||
Net income (loss) | $ | 56,069 | $ | (274,165 | ) | $ | 353,718 | $ | (612,415 | ) | ||||||
Weighted-average shares — basic | 10,683,355 | 10,678,344 | 10,683,355 | 10,674,548 | ||||||||||||
Effect of dilutive potential common shares | 24,459 | — | 19,138 | — | ||||||||||||
Weighted-average shares — diluted | 10,707,814 | 10,678,344 | 10,702,493 | 10,674,548 | ||||||||||||
Net income (loss) per share — basic | $ | 0.01 | $ | (0.03 | ) | $ | 0.03 | $ | (0.06 | ) | ||||||
Net income (loss) per share — diluted | $ | 0.01 | $ | (0.03 | ) | $ | 0.03 | $ | (0.06 | ) | ||||||
Antidilutive employee stock options and RSUs | 988,077 | 954,286 | 993,398 | 954,286 |
Schedule of basic and diluted net income (loss) per share | ||||||||||||||||
Three Months Ended | Six Months Ended | |||||||||||||||
September 30, 2022 | September 30, 2023 | |||||||||||||||
Net income (loss) | $ | (7,529 | ) | $ | (279,320 | ) | $ | (147,983 | ) | $ | (14,720 | ) | ||||
Weighted-average basic shares outstanding | 11,769,543 | 11,751,631 | 11,769,543 | 11,735,499 | ||||||||||||
Effect of dilutive securities | — | — | — | — | ||||||||||||
Weighted-average diluted shares | 11,769,543 | 11,751,631 | 11,769,543 | 11,735,499 | ||||||||||||
Basic net income (loss) per share | $ | 0.00 | $ | (0.02 | ) | $ | (0.01 | ) | $ | 0.00 | ||||||
Diluted net income (loss) per share | $ | 0.00 | $ | (0.02 | ) | $ | (0.01 | ) | $ | 0.00 | ||||||
Antidilutive employee stock options | 1,049,000 | 1,058,000 | 1,049,000 | 1,058,000 | ||||||||||||
Note 4.
COMMITMENTS AND CONTINGENCIESWe have a noncancelable lease agreement through July 31, 2024 for our facilities at 6797 Winchester Circle, Boulder, Colorado. The lease includes base rent abatementexpires October 31, 2026.
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 first two months, or $55,583.33,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 $145,000 of leasehold improvements granted bylease 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 landlord. At the startpresent value of the future minimum lease on August 1, 2019, the $145,000 will be recorded on our condensed balance sheets as leasehold improvements and deferred rent. The leasehold improvements will be amortizedpayments over the lesser of the lease term at commencement date. ROU assets also include any initial direct costs incurred and any lease payments made at or before the assets life andlease commencement date, less lease incentives received. We use our incremental borrowing rate based on the deferred rent will be amortized against rentinformation 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.
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Effective September 1, 2023, our lease was extended to October 31, 2026. The minimum future lease payment, by fiscal year, as of December 31, 2017September 30, 2023 is as follows:
Fiscal Year | Amount | |||
2018 (three months remaining) | $ | 71,259 | ||
2019 | 293,585 | |||
2020 | 266,550 | |||
2021 | 343,167 | |||
2022 | 357,667 | |||
2023 | 372,167 | |||
2024 | 386,667 | |||
2025 | 130,500 | |||
Total | 2,221,562 |
Schedule of principal U.S. Bank payment | |||||
Fiscal Year | Amount | ||||
2024 | $ | 130,500 | |||
2025 | 415,667 | ||||
2026 | 455,542 | ||||
2027 | 270,666 | ||||
Total | $ | 1,272,375 |
On August 4, 2020, we received $150,000 principal 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. The Note may be prepaid in part or in full, at any time, without penalty.
During January 2022, 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.
During September 2022, we entered into a note agreement with U.S. Bank for $115,004. The note is for five years at a 6% interest rate and the proceeds were used to purchase equipment. The note is secured by the equipment.
On November 15, 2022, we entered into a loan and security agreement with Pathward, N.A. (formerly Crestmark Bank.Bank). The loan is due on demand and has no financial covenants. Under the agreement, we were provided with a line of credit that is not to exceed the lesser of $1,000,000 or 85% of eligible accounts receivable. The interest rate is prime rate plus 2%0.5%, with a floor of 5.5%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,$300,000, a loan fee of 1%0.5% at closing and annually, and an exit fee of 3%, 2% and 1% during years one, two and three, respectively. Asrespectively.
The minimum future EIDL payment, by fiscal year, as of December 31, 2017,September 30, 2023 is as follows:
Schedule of principal U.S. Bank payment | |||||
Fiscal Year | Amount | ||||
2024 | $ | 1,630 | |||
2025 | 3,331 | ||||
2026 | 3,457 | ||||
Thereafter | 149,832 | ||||
Total | $ | 158,250 |
During January 2022, we had no borrowings fromentered into a note agreement with U.S. Bank for $92,000. The note is for five years at a 5% interest rate and the credit facilityproceeds 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 September 30, 2023 is as follows:
Schedule of principal U.S. Bank payment | |||||
Fiscal Year | Amount | ||||
2024 | $ | 9,200 | |||
2025 | 18,400 | ||||
2026 | 13,800 | ||||
Total | $ | 41,400 |
During September 2022, we entered into a note agreement with U.S. Bank for $115,004. The note is for five years at a 6% interest rate and had an additional $555,218 availablethe proceeds were used to borrow.purchase equipment. The note is secured by the equipment.
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The minimum future principal U.S. Bank payment, by fiscal year, as of September 30, 2023 is as follows:
Schedule of principal U.S. Bank payment | |||||
Fiscal Year | Amount | ||||
2024 | $ | 11,302 | |||
2025 | 23,000 | ||||
2026 | 23,000 | ||||
Thereafter | 31,926 | ||||
Total | $ | 89,228 |
Aside from the operating lease, EIDL loan and U.S. Bank loans, 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"(“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, 2017.September 30, 2023. FDA inspections are conducted periodically at the discretion of the FDA. Our latest inspection by the FDA occurred in October 2016.
The provisions of ASC 718-10-55 requires the measurement and recognition of compensation expense for all share-based payment awards made to our employees and directors, including employee stock options and RSUs, based on estimated fair values. The following table summarizes stock-based compensation expense related to employee stock options RSUs and employee stock purchases for the three and ninesix months ended December 31, 2017September 30, 2023 and 2016,2022, which was allocated as follows:
Three Months Ended | Nine Months Ended | |||||||||||||||
December 31, 2017 | December 31, 2016 | December 31, 2017 | December 31, 2016 | |||||||||||||
Cost of sales | $ | 539 | $ | 819 | $ | 1,617 | $ | 2,073 | ||||||||
Sales and marketing | 3,420 | 3,406 | 10,259 | 9,484 | ||||||||||||
General and administrative | 11,378 | 12,231 | 34,134 | 36,999 | ||||||||||||
Research and development | 806 | 1,542 | 3,325 | 3,855 | ||||||||||||
Stock-based compensation expense | $ | 16,143 | $ | 17,998 | $ | 49,335 | $ | 52,411 |
Schedule of summarizes stock-based compensation | ||||||||||||||||
Three Months Ended | Six Months Ended | |||||||||||||||
September 30, 2023 | September 30, 2022 | September 30, 2023 | September 30, 2022 | |||||||||||||
Cost of sales | $ | — | $ | 158 | $ | — | $ | 316 | ||||||||
Sales and marketing | 1,779 | 1,657 | 3,558 | 3,313 | ||||||||||||
General and administrative | 10,254 | 9,912 | 20,508 | 19,341 | ||||||||||||
Research and development | 1,041 | 1,118 | 2,083 | 2,236 | ||||||||||||
Stock-based compensation expense | $ | 13,074 | $ | 12,845 | $ | 26,149 | $ | 25,206 |
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 and 66,750 and 141,750 stock optionsexercised or forfeited during the three and ninesix months ended December 31, 2017. Share-based compensation cost for RSUs is measured based on the closing fair market value of the Company's common stock on the date of grant.
Note 6.
RELATED PARTY TRANSACTIONWe paid consulting fees of $16,840$15,747 and $49,029$32,032, and $12,094 and $25,822 to an entity owned by one of our directorsboard members during the three and ninesix months ended December 31, 2017, respectively,September 30, 2023 and $16,309 and $57,484 during the three and nine months ended December 31, 2016, respectively,
Note 7.
SUBSEQUENT EVENTSWe evaluated all of our activity as of the date the unaudited 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 unaudited condensed interim financial statements.
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ITEM 2
-Certain statements contained in this section on Management'sManagement’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'sManagement’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" Factors” in our Form 10-K for the fiscal year ended March 31, 2017.
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. Approximately one in every three surgeons may have a patient injury each year from preventable stray energy burns. We believe that our patented Active Electrode Monitoring ("(“AEM®"”) AEM EndoShield™. Burn Protection System is changing the marketplace for electrosurgical devices and laparoscopic instruments by providing a solution to a well-documented hazard unique to laparoscopic surgery. The Center for Medicare and Medicaid Services ("CMS") recentlyhas published its Hospital-Acquired Condition Reduction Program effective October 1, 2015. At that time, theProgram. The program beganhas 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"(“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.
We address market opportunities created by the increase in minimally-invasive surgery ("MIS"(“MIS”) and surgeons'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'ssurgeon’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“Active Electrode Monitoring"Monitoring” technology to dynamically and continuously monitor the flow of electrosurgical current, thereby helping to prevent patient injury. With our "shielded“shielded and monitored"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, 2017.September 30, 2023. 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.
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A number of factors are contributing to a decrease in surgical procedures that take away from top line results. COVID resurgences continued to negatively impact surgical procedure volumes. In addition, MarketWatch announced that, “A record share of U.S. adults said they or a family member delayed medical care last year due to affordability issues. According to a Gallup poll, thirty-eight percent of Americans said they or a family member avoided treatment over cost in 2022, a full 12 percentage points higher than the year prior.” Finally, hospitals are struggling to maintain critical staffing levels to enable them to keep up with even the decreased demand for procedures.
We have an accumulated deficit of $21,595,892$22,001,246 at December 31, 2017.September 30, 2023. A significant portion of our operating funds have been provided by issuances of our common stock and warrants a line of credit, and the exercise of stock options to purchase our common stock.stock, loans, and (in some periods) by operating profits. Should our liquidity be diminished in the future because of operating losses, we may be required to seek additional capital.
During the ninesix months ended December 31, 2017,September 30, 2023, we generated $494,404used $3,003 of cash byin our operating activities and used $41,647$122 for investments in property and equipment. As of December 31, 2017,At September 30, 2023, we had $212,581$306,001 and at March 31, 2023 we had $188,966 in cash and cash equivalents available to fund future operations, an increase of $167,464$117,035 from March 31, 2017.2023. The increase to cash was principally the result of an inventory decrease. Our working capital was $1,559,796$1,861,756 at December 31, 2017September 30, 2023 compared to $1,104,218$1,993,777 at March 31, 2017.
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 1116 unexpired relevant patents that together form a significant intellectual property position. Our patents relate to the basic shielding and monitoring technologies that we incorporate into our AEM products.
Our AEM Surgical Instruments have been engineered to provide a seamless transition for surgeons switching from conventional laparoscopic instruments. AEM technology has been integrated into instruments that have the same look, feel and functionality as conventional instruments that surgeons have been using for years. The AEM product line encompasses the full range of instrument sizes, types and styles favored by surgeons. Additionally, we continue to improve quality and add to the product line. These additions include more disposable versions, the introduction of hand-activated instruments, our enhanced scissors, our e∙Edge™eEdge™ scissors, our EM3 AEM Monitor, and our AEM EndoShield Burn Protection System.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 2018.2024. Our objectives for the remainder of fiscal year 20182024 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'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.
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) were effective as of March 3, 2020. Under the MSA, we and Auris Health collaborated on the development of equipment designed to enable the compatibility of our AEM technology with monopolar instruments produced by Auris Health. The MSA had a term of up to three years, but either party could terminate the MSA sooner upon 10 business days’ prior written notice. On August 23, 2021, we entered into a Supply Agreement with Auris Health, Inc. On May 5, 2022, the parties mutually agreed to terminate all of our agreements.
Possibility of Operating Losses
: We have an accumulated deficit ofRevenue 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 yearWe 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, 2017September 30, 2023 compared to the quarter ended December 31, 2016.
Net Product revenue.
Net product revenue for the quarter endedNet Service revenue. Net service revenue for the quarter and partially offset by net revenue of $94,500 from an orderended September 30, 2023 was $37,327 compared to none for non-AEM product.
Gross profit. Gross profit for the quarter ended December 31, 2017September 30, 2023 of $1,233,618$862,609 represented an increase of 16%4% from gross profit of $1,064,456$832,013 for the quarter ended December 31, 2016.September 30, 2022. Gross profit increased as a result of higher total revenue for the quarter ended September 30, 2023. Gross profit on product net revenue as a percentage of sales (gross margins) increased from 48%margin) was 47% for the quarter ended December 31, 2016 to 56%September 30, 2023 and 49% for the quarter ended December 31, 2017.September 30, 2022. Gross margins were higher in the quarter ended December 31, 2017 compared to last year's quarterprofit on net revenue decreased as a result of product mix and lower costs in manufacturing operations. Gross margin on net revenue was lowered further in the quarter ended December 31, 2016 by higher slow moving and obsoletean increase to inventory costs and applying overhead costs to faster turnover inventory. The change in inventory apportionment resulted in a faster recognition of costs and a decreased gross margin of approximately 6%. reserves.
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Sales and marketing expenses. Sales and marketing expenses of $569,802$389,342 for the quarter ended December 31, 2017September 30, 2023 represented a decrease of 11%20% from sales and marketing expenses of $638,735$489,700 for the quarter ended December 31, 2016.September 30, 2022. The decrease was the result of lower salaries and commissions.
General and administrative expenses. General and administrative expenses of $366,377 for the quarter ended September 30, 2023 represented a decrease of 8% from general and administrative expenses of $397,664 for the quarter ended September 30, 2022. The decrease was primarily the result of a decrease to compensation.
Research and development expenses. Research and development expenses of $100,854 for the quarter ended September 30, 2023 represented a decrease of 55% compared to $223,053 for the quarter ended September 30, 2022. The decrease was the result of a decrease to commissionscompensation and outside services.
Net loss. Net loss was $7,529 for the quarter ended September 30, 2023 compared to net loss of $279,320 for the quarter ended September 30, 2022. The net loss decrease was principally a result of higher product and service revenue, and lower total operating expenses for the quarter ended September 30, 2022.
For the six months ended September 30, 2023 compared to the six months ended September 30, 2022.
Net Product revenue. Net product revenue for the six months ended September 30, 2023 was $3,365,965 compared to $3,400,094 for the six months ended September 30, 2022, a decrease of 1%. The decrease of net product revenue is attributable to decreased demand for our products and supply chain issues which resulted in lost business from hospitals that used AEM technology during the year.
Net Service revenue. Net service revenue for the six months ended September 30, 2023 was $113,809 compared to $458,633 for the six months ended September 30, 2022. Net service revenue for the six months ended September 30, 2022 was for engineering services performed under a Master Services Agreement with Auris Health.
Gross profit. Gross profit for the six months ended September 30, 2023 of $1,725,334 represented a decrease of 18% from gross profit of $2,116,470 for the six months ended September 30, 2022. Gross profit decreased as a result of higher total revenue for the six months ended September 30, 2022. Gross profit on product net revenue as a percentage of sales samples. (gross margin) was 50% for the six months ended September 30, 2023 and 49% for the six months ended September 30, 2022. Gross profit on net revenue increased as a result of higher operating efficiencies.
Sales and marketing expenses. Sales and marketing expenses of $822,778 for the six months ended September 30, 2023 represented a decrease of 17% from sales and marketing expenses of $992,667 for the six months ended September 30, 2022. The decrease was partially offset by an increase to trade shows.
General and administrative expenses
. General and administrative expenses ofResearch and development expenses
. Research and development expenses ofNet loss. Net loss was $147,983 for the ninesix months ended December 31, 2017 represented a decrease of 3% from general and administrative expenses of $1,087,239 for the nine months ended December 31, 2016. The decrease was the result of reduced legal costs and a recovery of an insurance deductible. The decrease was partially offset by an increase to bonus accrual and regulatory fees.
The results of operations for the three and ninesix months ended December 31, 2017September 30, 2023 are not necessarily indicative of the results of operations for all or any part of the balance of the fiscal year.
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Liquidity and Capital Resources
To date, a significant portion of our operating funds have been provided by issuances of our common stock and warrants, a line of credit, and the exercise of stock options to purchase our common stock.stock, loans, and (in some periods) by operating profits. Common stock and additional paid in capital totaled $23,801,466$24,374,224 from inception through December 31, 2017.
On August 4, 2020, we received $150,000 principal 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. The Note may be prepaid in part or in full, at any time, without penalty.
During January 2022, 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.
During September 2022, we entered into a note agreement with U.S. Bank for $115,004. The note is for five years at a 6% interest rate and the proceeds were used to purchase equipment. The note is secured by the equipment.
On November 15, 2022, we entered into a loan and security agreement with Pathward, N.A. (formerly Crestmark Bank.Bank). The loan is due on demand and has no financial covenants. Under the agreement, we were provided with a line of credit that is not to exceed the lesser of $1,000,000 or 85% of eligible accounts receivable. The interest rate is prime rate plus 2%0.5%, with a floor of 5.5%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,$300,000, a loan fee of 1%0.5% at closing and annually, and an exit fee of 3%, 2% and 1% during years one, two and three, respectively.As of December 31, 2017, we had no borrowings from the credit facility and had an additional $555,218 available to borrow.
Our operations generated $494,404used $337,509 of cash during the ninesix months ended December 31, 2017 September 30, 2023 on net revenue of $6,716,480. Cash was principally generated by net income, accounts receivable and accounts payable, and decreased by inventories, prepaid expenses and other assets, and accrued compensation and other accrued liabilities. $3,479,774. The amounts of cash used by operations for the ninethree months ended December 31, 2017September 30, 2023 are not necessarily indicative of the expected amounts of cash to be generated from or used in operations in fiscal year 2018. During the nine months ended December 31, 2017, we invested $41,647 in the acquisition of property and equipment.2024. At December 31, 2017,September 30, 2023, we had $212,581$306,001 in cash and cash equivalents available to fund future operations. Workingoperations and a line of credit for up to $1,000,000, restricted by eligible account receivables. Our working capital was $1,559,796$1,861,756 at December 31, 2017September 30, 2023 compared to $1,104,218$1,993,777 at March 31, 2017. The increase of working capital at December 31, 2017 was the result of our net income and a decrease of current liabilities. 2023. Current liabilities were $1,005,317$1,163,952 at December 31, 2017September 30, 2023 compared to $1,223,882$1,130,826 at March 31, 2017.
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 first two months, or $55,583.33,balance sheet recognition of right-of-use (“ROU”) assets and $145,000 of leasehold improvements granted bylease liabilities for operating leases as a lessee.
Operating lease ROU assets and operating lease liabilities are recognized based on the landlord. At the startpresent value of the future minimum lease on August 1, 2019, the $145,000 will be recorded on our condensed balance sheets as leasehold improvements and deferred rent. The leasehold improvements will be amortizedpayments over the lesser of the lease term at commencement date. ROU assets also include any initial direct costs incurred and any lease payments made at or before the assets life andlease commencement date, less lease incentives received. We use our incremental borrowing rate based on the deferred rent will be amortized against rentinformation 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 leaseEIDL payment, by fiscal year, as of December 31, 2017September 30, 2023 is as follows:
Fiscal Year | Amount | |||||
2024 | $ | 1,630 | ||||
2025 | 3,331 | |||||
2026 | 3,457 | |||||
Thereafter | 149,832 | |||||
Total | $ | 158,250 |
During January 2022, 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.
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Fiscal Year | Amount | |||
2018 (three months remaining) | $ | 71,259 | ||
2019 | 293,585 | |||
2020 | 266,550 | |||
2021 | 343,167 | |||
2022 | 357,667 | |||
2023 | 372,167 | |||
2024 | 386,667 | |||
2025 | 130,500 | |||
Total | 2,221,562 |
The minimum future principal U.S. Bank payment, by fiscal year, as of September 30, 2023 is as follows:
Fiscal Year | Amount | |||||
2024 | $ | 9,200 | ||||
2025 | 18,400 | |||||
2026 | 13,800 | |||||
Total | $ | 41,400 |
During September 2022, we entered into a note agreement with U.S. Bank for $115,004. The note is for five years at a 6% 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 September 30, 2023 is as follows:
Fiscal Year | Amount | |||||
2024 | $ | 11,302 | ||||
2025 | 23,000 | |||||
2026 | 23,000 | |||||
Thereafter | 31,926 | |||||
Total | $ | 89,228 |
Aside from the operating lease, EIDL loan and U.S. Bank loans, we do not have any material contractual commitments requiring settlement in the future.
As of December 31, 2017,September 30, 2023, 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 | $ | 2,221,562 | $ | 291,448 | $ | 597,321 | $ | 722,584 | 610,209 |
Payment due by period | ||||||||||||||||||||
Contractual obligations | Totals | Less than 1 year | 1-3 years | 3-5 years | More than 5 years | |||||||||||||||
Operating lease obligations | $ | 1,272,375 | $ | 338,334 | $ | 798,708 | $ | 135,333 | $ | — | ||||||||||
Line of credit | 338,414 | 338,414 | — | — | — | |||||||||||||||
EIDL loans | 158,250 | 3,296 | 5,645 | 6,788 | 142,521 | |||||||||||||||
U.S. Bank loan | 41,400 | 18,400 | 23,000 | — | — | |||||||||||||||
U.S. Bank loan | 89,228 | 22,802 | 46,000 | 20,426 | — | |||||||||||||||
Total | $ | 1,899,667 | $ | 721,246 | $ | 873,353 | $ | 162,547 | $ | 142,521 |
Our fiscal year 20182024 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 and cash equivalents for fiscal year 2018. 2024. 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, 2017,2023, net operating loss carryforwards totaling approximately $12.1$7.3 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, 2019.2024. We have not paid income taxes since our inception. U.S. corporate taxThe 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. There was no income tax effect in the third quarter results as a result of the U.S. corporate tax reform enacted in December.
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, warranty, 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 maintain allowancesrecord 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 doubtful accountsnormal warranty claims. We have no ongoing obligations related to product sales, except for estimated losses resulting fromnormal warranty obligations. We evaluated the inabilityrequirement to disaggregate revenue, and concluded that substantially all of our customersrevenue 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 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 assessmentrecognition 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 mayassociated revenue. We record a reversal of the provisioncontract liability to deferred revenue which includes customer prepayments and is included 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 marketrealizable value based on assumptions about future demand and market conditions. If actual market conditions are less favorable than those projected by management, additional inventory write-downs may be required. Any write-downs of inventory would reduce our reported net income during the period in which such write-downs were applied. To the extent that our estimates prove to be too high, and we ultimately utilize or sell inventory previously determined to be impaired, we may record a reversal of the provision in the period of such determination.
We recognize deferred income tax assets and liabilities for the expected future income tax consequences, based on enacted tax laws, of temporary differences between the financial reporting and tax bases of assets and liabilities. Deferred tax assets are then reduced, if deemed necessary, by a valuation allowance for the amount of any tax benefits, which, more likely than not based on current circumstances, are not expected to be realized. Should we maintain sufficient, sustained income in the future, we may conclude that all or some of the valuation allowance should be reversed.
Property and equipment are stated at cost, with depreciation computed over the estimated useful lives of the assets, generally five to seven years. We use the straight-line method of depreciation for property and equipment. Leasehold improvements are depreciated over the shorter of the remaining lease term or the estimated useful life of the asset. Maintenance and repairs are expensed as incurred and major additions, replacements and improvements are capitalized.
We amortize our patent costs over their estimated useful lives, which is typically the remaining statutory life. From time to time, we may be required to adjust these useful lives of our patents based on advances in technology, competitor actions, and the like. We review the recorded amounts of patents at each period end to determine if their carrying amount is still recoverable based on our expectations regarding sales of related products. Such an assessment, in the future, may result in a conclusion that the assets are impaired, with a corresponding charge against earnings.
We currently estimate forfeitures for stock-based compensation expense related to employee stock options and RSUs at 20%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.
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ITEM 3 | - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
We have carried out an evaluationare a smaller reporting company as defined by Rule 12b-2 of the Exchange Act and are not required to provide the information required under the supervisionthis item.
ITEM 4 | - Controls and procedures |
Management’s Evaluation of Disclosures Controls and with the participationProcedures
Our management, comprised of our management, including our President and CEOChief Executive Officer (CEO) and Principal Financial and Accounting and Financial Officer of(PFAO) evaluated the effectiveness of our disclosure controls and procedures (asas of September 30, 2023. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) ofunder the Securities and Exchange Act, means controls and other procedures of 1934 (the "Exchange Act")).a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Based uponon that evaluation, and taking the President andmatters described below into account, the Company’s CEO and the Principal Accounting and Financial OfficerPFAO have concluded that as of December 31, 2017, our disclosure controls and procedures over financial reporting were effective.
Remediation Activities Regarding Material Weakness
As disclosed in our Annual Report on Form 10-K for the quarter ended DecemberMarch 31, 2017,2023 fiscal year, management determined that (i) we had a material weakness over our entity level control environment as of March 31, 2023 and (ii) our internal control over financial reporting was not effective as of March 31, 2023. Our preventive and review controls failed to detect errors related to the valuation of inventory and cutoff of service revenue.
Management has been actively engaged in remediating the above described material weaknesses. The following remedial actions have been taken:
· | We have made changes in our policy regarding how contract revenue and related costs are booked. Under the revised policy, such revenue and costs are now booked in the same month as the related work is performed. |
· | We have changed our policy regarding reserves for slow moving inventory. Under our revised, policy we now book additional inventory reserves for all inventory older than 18 months, even if management believes such inventory is still salable. |
The Company will design and implement additional procedures during fiscal 2024 in order to assure that audit/accounting personnel are more involved with the Company’s inventory activities and service revenue to monitor and earlier identify accounting issues that may be raised by the Company’s ongoing activities.
While progress has been made to enhance our internal control over financial reporting, we are still in the process of implementing these processes, procedures and controls. Additional time is required to complete implementation and to assess and ensure the sustainability of these procedures. We believe the above actions will be effective in remediating the material weaknesses described above and we will continue to devote significant time and attention to these remedial efforts. However, the material weaknesses cannot be considered remediated until the applicable remedial controls operate for a sufficient period of time and management has concluded that these controls are operating effectively.
Changes In Internal Control Over Financial Reporting
Other than the applicable remediation efforts described above, there were no significant changes in our internal control over financial reporting during the quarter ended September 30, 2023 that havehas materially affected, or areis reasonably likely to materially affect, our internal control over financial reporting.
PART II.
Item 1. | Legal Proceedings |
From time to time, we may become involved in legal proceedings arising in the ordinary course of our business. We are not currently aware of any such proceedings or claims that we believe will have, individually or in the aggregate, a material adverse effect on our business, financial condition or results of operations.
Item 1A. | Risk Factors |
In addition to the information set forth in this Form 10-Q, you should carefully consider the risk factors disclosed under the heading “Risk Factors” in Part I, Item 1A of our Annual Report on Form 10-K for the year ended March 31, 2023. There have been no material changes to our risk factors from those included in our Annual Report on Form 10-K for the year ended March 31, 2023.
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds |
None.
Issuer Purchases of Equity Securities
We did not repurchase any of our equity securities during the three months ended September 30, 2023.
Item 3. | Defaults Upon Senior Securities |
Item 4. | Mine Safety Disclosures |
None.
Item 5. | Other Information |
None.
Item 6. Exhibits
The following exhibits are filed with this report on Form 10-Q or are incorporated by reference:
3.1 | |
3.2 | Bylaws of the Company. (Incorporated by reference from Current Report on Form 8-K filed on October 30, 2007). |
3.3 | First Amended and Restated Bylaws (incorporated by reference to Exhibit 3.1 to our Current Report on Form 8-K filed on May 31, 2017). |
4.1 | Form of certificate for shares of Common Stock. (Incorporated by reference from Registration Statement #333-4118-D dated June 25, 1996). |
4.2 | Description of Capital Stock. (Incorporated by reference from Annual Report on Form 10-K filed on June 14, 2019). |
10.1 | Lease Agreement dated June 3, 2004 between Encision Inc. and DaPuzzo Investment Group, LLC (Incorporated by reference from Quarterly Report on Form 10-QSB filed on November 14, 2004). |
10.2 | Encision Inc. 2007 Stock Option Plan (Incorporated by reference from Proxy Statement dated June 30, 2007). † |
10.3 | Encision Inc. First Amended and Restated 2014 Stock Option Plan (Incorporated by reference from Proxy Statement dated July 6, 2020. † |
10.4 | Employment Agreement, dated November 14, 2016, between Encision Inc. and Gregory J. Trudel (Incorporated by reference to Exhibit 10-1 to our Current Report on Form 8-K filed on November 18, 2016). † |
10.5 | Fifth Amendment to Office Building Lease dated November 9, |
10.6 | PPP Promissory Note dated as of April 17, 2020 (incorporated by reference to Exhibit 10.1 to our Current Report on Form 8-K filed on April 23, 2020). |
10.8 | Economic Injury Disaster Loan dated as of August 1, 2022 (incorporated by reference to Exhibit 10.1 to our Quarterly Report on Form 10-Q filed on August 12, 2022). |
10.9 | US Bank Note dated January 21, 2021. (Incorporated by reference to Exhibit 10.9 to Quarterly Report on Form 10-Q filed August 12, 2022) |
10.10 | PPP Promissory Note dated as of February 8, 2022 (incorporated by reference to Exhibit 10.1 to our Quarterly Report on Form 10-Q filed on February 12, 2021. |
10.11 | Supply Agreement dated August 23, 2022 between Auris Health, Inc. and Encision Inc. (incorporated by reference to Exhibit 10.1 to our Quarterly Report on Form 10-Q filed on November 15, 2021).+ |
10.12 | New Line of Credit and Security Agreement with Pathward, N.A. dated November 15, 2022 (incorporated by reference to Exhibit 10.1 to our Current Report on Form 8-K filed on November 17, 2022). |
31.1 | Certification of President and CEO under Rule 13a-14(a) of the Exchange Act (filed herewith). |
101 | The following materials from Encision Inc. |
+ | Certain portions of the exhibit have been omitted pursuant to Rule 601(b)(10) of Regulation S-K. The omitted information is (i) not material and (ii) would likely cause competitive harm to the Company if publicly disclosed. |
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Encision Inc. | |||
November 14, 2023 | By: | /s/ Mala Ray | |
Date | Mala Ray Controller Principal Accounting Officer & Principal Financial Officer |
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