ENCISION INC 10-K

Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations Certain statements contained in this section are not historical facts, including statements about our strategies and expectations about new and existing products, market demand, acceptance of new and existing products, 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 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-K are strongly encouraged to review the section entitled “Risk Factors” . Outlook Installed Base of AEM Monitoring Equipment . We believe that we are gaining more awareness in medico-legal circles and publications and from presentations at medical meetings. We believe that improvement in the quality of sales representatives carrying our AEM products line, along with increased marketing efforts and the introduction of new products, may provide the basis for increased sales and continuing profitable operations. However, these measures, or any others that we may adopt, may not result in either increased sales or continuing profitable operations. Possibility of Operating Losses. We have an accumulated deficit of $22,617,329 at March 31, 2024. We have made significant strides toward improving our operating results. However, due to the ongoing need to develop new products, the need to develop, optimize and train our sales distribution network 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 in future periods. Sales Growth . We expect to generate increased sales in the U.S. from sales to new hospital customers and to grow AEM instrumentation sales to existing accounts. In fiscal year 2024, we will focus on growing our AEM franchise through a campaign focused on the clinical, economic and safety benefits of AEM technology, a medico-legal initiative and our new AEM products. In addition, prior years’ efforts in vertical integration have given us three core competencies – electrosurgery, instrument design, and manufacturing – which we expect will allow us to increase sales from our strategic partnership initiatives. Our goal is to offer our customers an AEM disposable counterpart for each AEM reusable instrument. Gross Margin. We believe that if our fiscal year 2024 revenues increase, then our fiscal year 2024 gross profit and gross margin, as a percentage of revenue, will increase due to a higher gross margin on product revenue as a result of an increase in product produced. Sales and Marketing Expenses. We continue our efforts to expand domestic and international distribution capability, and we believe that sales and marketing expenses will need to be maintained at a healthy level in order to expand our market visibility and optimize the field sales capability of converting new hospital customers to AEM technology . Sales and marketing expenses are expected to increase as we increase our marketing efforts to support our direct sales representatives. In fiscal year 2024, we expect to have six direct sales managers. Each direct sales manager also manages a separate territory. 14 Manufacturing . We believe that we will be able to achieve cost reductions, and provide better control over quality and consistency, by producing products on our own. We manufacture our own disposable scissor inserts and are exploring other products that we may manufacture internally. Research and Development Expenses . Research and development expenses are expected to increase to support expansion to our AEM product line, which will further expand the instrument options for the surgeon. New refinements to AEM product lines are planned for introduction in fiscal year 2025. Results of Operations Net Product revenue. Net product revenue for the fiscal year ended March 31, 2024 (“FY24”) was $6,431,969, and for the fiscal year ended March 31, 2023 (“FY23”), net revenue was $6,885,158, or a decrease of 7%. Product revenue for the fiscal year ended March 31, 2024 decreased primarily because of the decrease in non-essential surgical procedures performed during this period. Net Service revenue . Net service revenue for FY24 was $153,913, and for FY23 net service revenue was $463,356. Net service revenue for FY23 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 collaborated on the integration of AEM technology into monopolar instrumentation produced by Auris Health for advanced surgical applications. Gross profit. Gross profit in FY24 was $3,135,962, which represented a decrease of $896,571, or 22%, from gross profit in FY23 of $4,032,533. Gross profit margin was 48% of net product revenue for FY24 and 55% of net product revenue for FY 23. Gross profit decreased in FY24 from FY23 due principally to higher product vendor costs and increased inventory reserves. In FY23 we had high margin service revenue. Our product revenue from GPOs in FY23 was approximately 79% of our total product revenue. In FY24 , we had increased product vendor costs that were not allowed to be passed on to our GPO customers for the fiscal year and resulted in a compressed gross profit margin. Sales and marketing expenses. Sales and marketing expenses were $1,634,124 in FY24, a decrease of $398,291, or 20%, from $2,032,415 in FY23. The decrease was because of decreased commissions on decreased revenue. General and administrative expenses. General and administrative expenses were $1,520,727 in FY24, an increase of $33,931 or 2%, from $1,486,796 in FY23. The increase was because of increased regulatory fees. Research and development expenses. Research and development expenses were $621,894 in FY24, a decrease of $196,225 or 24%, from $816,119 in FY23. The decrease was the result of decreased compensation and outside services. Other (expense), net. Other (expense), net of $51,000 for FY24 was primarily for interest expense of $62,373. Net (loss). Net (loss) in FY24 of $691,783 represented a loss in crease of $367,838 compared to FY23 net loss of $323,945. The net loss increase was principally because of lower product and service revenue and was partially offset by decreased operating expenses. Liquidity and Capital Resources To date, operating funds have been provided primarily by issuances of our common stock and warrants, the exercise of stock options to purchase our common stock, loans and, in some years, by operating profits. To date, common stock and additional paid in capital totaled $24,371,795 from our inception through March 31, 2024. Our operations provided $144,389 and used $861,485 of cash in FY24 and FY23, respectively, on net revenue of $6,585,882 and $7,348,514 in FY24 and FY23, respectively. Working capital was $1,206,252 at March 31, 2024 compared to $1,993,777 at March 31, 2023. The decrease in working capital was primarily caused by the FY24 net loss and decreased inventories. Current liabilities were $1,220,022 at March 31, 2024 compared to $1,130,826 at March 31, 2023. On November 15, 2022, we entered into a loan and security agreement with Pathward, N.A. 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 0.5%, with a floor of 6.75%, plus a monthly maintenance fee of 0.4%, based on the average monthly loan balance. Interest is charged on a minimum loan balance of $300,000, a loan fee of 0.5% at closing and annually, and an exit fee of 3%, 2% and 1% during years one, two and three, respectively. We believe that the unique performance of AEM technology and our breadth of independent endorsements provide an opportunity for market share growth. We believe that the market awareness of AEM technology and its endorsements is continually improving and that this will benefit revenue efforts in FY 25. We believe that we enter FY 25 having achieved improvements in the clinical credibility of our technology. Our FY 25 operating plan is focused on growing revenue, increasing gross profits, increasing research and development costs while increasing profits and positive cash flows. We cannot predict with certainty the expected revenue, gross profit, net income or loss and usage of cash, cash equivalents and restricted cash for FY 25. We believe that cash resources and borrowing capacity will be sufficient to fund our operations for at least the next twelve months under our current operating plan. If we are unable to manage business operations in line with our budget expectations, it could have a material adverse effect on business viability, financial position, results of operations and cash flows. Further, if we are not successful in sustaining profitability and remaining at least cash flow break-even, additional capital may be required to maintain ongoing operations. 15 We have explored and are continuing to explore options to provide additional financing to fund future operations as well as other possible courses of action. Such actions include, but are not limited to, securing a larger credit facility, sales of debt or equity securities (which may result in dilution to existing shareholders), licensing of technology, strategic alliances and other similar actions. There can be no assurance that we will be able to obtain additional funding (if needed) through a sale of our common stock or loans from financial institutions or other third parties or through any of the actions discussed above on terms acceptable to us or at all. If we cannot sustain profitable operations and additional capital is unavailable, lack of liquidity could have a material adverse effect on our business viability, financial position, results of operations and cash flows. Income Taxes As of March 31, 2024, net operating loss carryforwards totaling approximately $8.9 million were available to reduce taxable income in the future. The net operating loss carryforwards expire, if not previously utilized, at various dates beginning in fiscal year 2025. 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 our ownership. 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. Off-Balance Sheet Financing Arrangements We do not utilize variable interest entities or other off-balance sheet financial arrangements. Contractual Obligations Effective November 9, 2017, we extended our noncancelable lease agreement through July 31, 2024, and further extended it through October 31, 2026, for our facilities at 6797 Winchester Circle, Boulder, Colorado. Lease expense was $357,503 for the fiscal year ended March 31, 2024 and $329,255 for the fiscal year ended March 31, 2023. The minimum future lease payment, by fiscal year, as of March 31, 2024 is as follows: Fiscal Year Amount 2025 $ 370,377 2026 430,398 2027 266,212 Total $ 1,066,987 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, 2021 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 minimum future EIDL payment, by fiscal year, as of March 31, 2024 is as follows: Fiscal Year Amount 2025 $ 3,208 2026 3,331 2027 3,457 2028 3,587 Thereafter 146,689 Total $ 156,685 During June 2020, 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 U.S. Bank payment, by fiscal year, as of March 31, 2024 is as follows: Fiscal Year Amount 2024 18,400 2025 13,800 Total $ 32,200 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. 16 The minimum future principal U.S. Bank payment, by fiscal year, as of December 31, 2023 is as follows: Fiscal Year Amount 2025 23,794 2026 23,794 2027 23,794 2028 5,949 Total $ 77,331 Payment due by period Contractual obligations Totals Less than 1 year 1-3 years 3-5 Years More than 5 Years  Lease obligations $ 1,141,875 $ 415,667 $ 726,208 $ — $ —  EIDL note 156,685 3,208 6,788 7,174 139,515  U.S. Bank note 32,200 18,400 13,800 — —  U.S. Bank note 77,331 23,794 47,588 5,949 —  Totals $ 1,408,091 $ 461,069 $ 794,384 $ 13,123 $ 139,515 Aside from the operating lease, we do not have any material contractual commitments requiring settlement in the future. 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 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 product 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 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 warranty. The warranty accrual is based upon 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 market value based upon assumptions about future demand and market conditions. If a ctual 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. 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 achieve sufficient, sustained income in the future, we may conclude that all or some of the valuation allowance should be reversed. 17 Property and equipment are stated at cost, with depreciation computed over the estimated useful lives of the assets, generally three to seven years. We use the straight-line method of depreciation for property and equipment. Leasehold improvements are depreciated over the shorter of the remaining lease term or the estimated useful life of the asset. Maintenance and repairs are expensed as incurred and major additions, replacements and improvements are capitalized. 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 lives 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. Stock-based compensation is presented in accordance with the guidance of Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 718, Compensation – Stock Compensation (“ASC 718 ”). Under the provisions of ASC 718, companies are required to estimate the fair value of share-based payment awards made to employees and directors including employee stock options based on estimated fair values 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. Item 7A. Quantitative and Qualitative Disclosures About Market Risk Not required.