ENCISION INC 10-K

Item 8. Financial Statements and Supplementary Data The following financial statements are included in this Report: Page Report of Independent Registered Public Accounting Firm for the fiscal year ended March 31, 2024 19 Balance Sheets as of March 31, 2024 and 2023 21 Statements of Operations for the fiscal years ended March 31, 2024 and 2023 22 Statements of Shareholders' Equity for the fiscal years ended March 31, 2024 and 2023 23 Statements of Cash Flows for the fiscal years ended March 31, 2024 and 2023 24 Notes to Financial Statements 25 18 Report of Independent Registered Public Accounting Firm To the Board of Directors and Shareholders of Encision, Inc. Opinion on the Financial Statements We have audited the accompanying balance sheet of Encision, Inc. (the Company) as of March 31, 2024, and the related statements of operations, shareholders’ equity, and cash flows for the year then ended and the related notes (collectively referred to as the financial statements). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of March 31, 2024, and the results of its operations and its cash flows for the year then ended, in conformity with accounting principles generally accepted in the United States of America. The financial statements of the Company as of March 31, 2023, were audited by other auditors whose report dated June 28, 2023, expressed an unqualified opinion on those statements. Basis for Opinion These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. 19 Critical Audit Matter The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates. Inventory Valuation - Finished Goods The Company’s inventories consist of finished goods and raw materials, which are manufactured or purchased for use in the Company’s finished goods. The Company offers several different products to its customers. The cost of the internally produced inventory is a combination of raw materials, labor to convert those materials to components of the inventory to finished goods, and an allocation of overhead and related costs. Significant judgment is exercised by the Company in determining the components of the costs of inventory and includes the determination of which costs to include at each manufacturing phase, including overhead allocation and materials used for production of finished goods, and monitoring the appropriate absorption of the overhead cost and correcting the hourly rate when necessary How the Critical Audit Matter Was Addressed in the Audit Our principal audit procedures related to the Company's inventory included the following: - We assessed the reasonableness of costs and the appropriate application of management’s significant accounting policies related to inventory, including determination of inventory obsolescence reserve. - We selected a sample of finished goods and raw materials and performed detailed testing over the items selected, including but not limited to the following: o Agreed the bill of materials source documents for each selection, including raw materials value, labor, and overhead allocations, and any other items relevant to price verification. o Agreed a selection of raw materials to the source documents, invoices, and any other items relevant to price verification o Tested managements identification and application of the overhead calculation and labor cost July 12, 2024 Green Growth CPAs We have served as the Company’s auditor since 2024. Los Angeles, California PCAOB ID Number 6580 20 Encision Inc. Balance Sheets March 31, 2024 March 31, 2023 ASSETS Current assets: Cash $ 42,509 $ 188,966 Accounts receivable 891,129 920,721 Inventories 1,402,338 1,899,202 Prepaid expenses and other assets 90,298 115,714 Total current assets 2,426,274 3,124,603 Equipment: Furniture, fixtures and equipment 2,627,726 2,615,676 Accumulated depreciation ( 2,373,722 ) ( 2,312,400 ) Equipment, net 254,004 303,276 Right of use asset, net 900,787 496,004 Patents, net 164,010 163,133 Other assets 65,641 46,953 TOTAL ASSETS $ 3,810,716 $ 4,133,969 LIABILITIES AND SHAREHOLDERS’ EQUITY Current liabilities: Accounts payable $ 346,049 $ 252,957 Line of credit 156,685 177,402 Secured notes 42,194 44,491 Accrued compensation 184,913 217,724 Other accrued liabilities 119,804 84,578 Accrued lease liability 370,377 353,674 Total current liabilities 1,220,022 1,130,826 Long-term liability: Secured notes 67,336 268,512 Accrued lease liability 696,610 239,820 Total liabilities 1,983,968 1,639,158 Commitments and contingencies (Note 4) Shareholders’ equity: Preferred stock, no par value: 10,000,000 shares authorized; none issued and outstanding — — Common stock and additional paid-in capital, no par value: 100,000,000 shares authorized; 11,858,627 issued and outstanding at March 31, 2024 and 11,769,543 at March 31, 2023 24,371,795 24,348,075 Accumulated (deficit) ( 22,545,047 ) ( 21,853,264 ) Total shareholders’ equity 1,826,748 2,494,811 TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY $ 3,810,716 $ 4,133,969 The accompanying notes to financial statements are an integral part of these statements. 21 Encision Inc. Statements of Operations Years Ended March 31, 2024 March 31, 202 3 NET REVENUE: Product $ 6,431,969 $ 6,885,158 Service 153,913 463,356 Total revenue 6,585,882 7,348,514 COST OF REVENUE: Product 3,370,855 3,313,620 Service 79,065 2,361 Total cost of revenue 3,449,920 3,315,981 GROSS PROFIT 3,135,962 4,032,533 OPERATING EXPENSES: Sales and marketing 1,634,124 2,032,415 General and administrative 1,520,727 1,486,796 Research and development 621,894 816,119 Total operating expenses 3,776,745 4,335,330 OPERATING (LOSS) ( 640,783 ) ( 302,797 ) OTHER (EXPENSE): Interest expense, net ( 62,373 ) ( 19,529 ) Other income, (expense) net 11,373 ( 1,619 ) Interest expense and other income, expense, net ( 51,000 ) ( 21,148 ) (LOSS) BEFORE PROVISION FOR INCOME TAXES ( 691,783 ) ( 323,945 ) Provision for income taxes — — NET (LOSS) $ ( 691,783 ) $ ( 323,945 ) Net (loss) per share—basic and diluted $ ( 0.06 ) $ ( 0.03 ) Weighted average shares—basic and diluted 11,770,391 11,762,995 The accompanying notes to financial statements are an integral part of these statements. 22 Encision Inc. Statements of Shareholders’ Equity Shares of Common Stock Common Stock and Additional Paid-in Capital Accumulated Deficit Total Shareholders’ Equity BALANCES AT MARCH 31, 2022 11,719,543 $ 24,275,183 $ ( 21,529,319 ) $ 2,745,864 Net loss — — ( 323,945 ) ( 323,945 ) Compensation expense related to stock based compensation — 51,892 — 51,892 Options exercised 50,000 21,000 — 21,000 BALANCES AT MARCH 31, 2023 11,769,543 $ 24,348,075 $ ( 21,853,264 ) $ 2,494,811 Net loss — — ( 691,783 ) ( 691,783 ) Compensation expense related to stock based compensation — 53,552 — 53,552 Options exercised 89,084 ( 29,832 ) — ( 29,832 ) BALANCES AT MARCH 31, 2024 11,858,627 $ 24,371,795 $ ( 22,545,047 ) $ 1,826,748 The accompanying notes to financial statements are an integral part of these statements. 23 Encision Inc. Statements of Cash Flows Years Ended March 31, 2024 March 31, 2023 Cash flows provided by (used in) operating activities: Net (loss) $ ( 691,783 ) $ ( 323,945 ) Adjustments to reconcile net (loss) income to net cash (used in) operating activities: Depreciation and amortization 85,218 86,906 Stock-based compensation expense related to stock options 53,552 51,892 Provision for inventory obsolescence 12,000 15,000 Change in operating assets and liabilities: Right of use asset, net 68,710 ( 42,912 ) Accounts receivable 29,592 26,902 Inventories 484,866 ( 329,881 ) Prepaid expenses and other assets 6,728 ( 8,294 ) Accounts payable 93,092 ( 323,423 ) Accrued compensation and other accrued liabilities 2,414 ( 13,730 ) Net cash provided by (used in) operating activities 144,389 ( 861,485 ) Cash flows (used in) investing activities: Acquisition of property and equipment ( 12,050 ) ( 173,269 ) Patent costs ( 24,773 ) ( 10,030 ) Net cash (used in) investing activities ( 36,823 ) ( 183,299 ) Cash flows provided by (used in) financing activities: Borrowings from (paydown of) credit facility, net change ( 20,717 ) 239,752 Borrowings from (paydown of) secured notes ( 203,473 ) 23,353 Net proceeds (payments) from exercise of stock options ( 29,833 ) 21,000 Net cash provided by (used in) financing activities ( 254,023 ) 284,105 Net (decrease) in cash ( 146,457 ) ( 760,679 ) Cash, beginning of fiscal year 188,966 949,645 Cash, end of fiscal year $ 42,509 $ 188,966 Supplemental disclosure of non-cash investing activity information: Supplemental disclosures of cash flow information: Cash paid during the year for interest $ 62,373 $ 19,529 The accompanying notes to financial statements are an integral part of these statements. 24 ENCISION INC. NOTES TO FINANCIAL STATEMENTS 1. Description of Business and Basis of Presentation Encision Inc. is a medical device company that designs, develops, manufactures and markets patented surgical instruments that provide greater safety to patients undergoing minimally-invasive surgery. We believe that our patented AEM ® surgical instrument technology is changing the marketplace for electrosurgical devices and instruments by providing a solution to a well-documented risk in laparoscopic surgery. Our sales to date have been made primarily in the United States. Sales included $ 311,104 from Australia and $ 48,861 from New Zealand. We have an accumulated deficit of $ 22,545,047 at March 31, 2024. 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 by operating profits. Our liquidity has diminished because of prior years’ operating losses, and we may be required to seek additional capital in the future. Our strategic marketing and sales plan is designed to expand the use of our products in surgically active hospitals in the United States. In February 2024, we signed a Proof-of-Concept Services Agreement with Vicarious Surgical Inc. (“Vicarious”). The Vicarious robot design intends to maximize visualization, precision, and control of instruments in robotic-assisted minimally invasive surgery. We had (net loss) available to shareholders of $( 691,783 ) and $( 323,945 ) for the fiscal years ended March 31, 2024 and 2023, respectively. At March 31, 2024, we had $ 42,509 in cash available to fund future operations. We increased our pricing on products to mitigate somewhat our higher material costs. We have a line of credit for up to $ 1 million, restricted by eligible receivables. Management concludes that it is probable that our cash resources and line of credit will be sufficient to meet our cash requirements for twelve months from the issuance of the financial statements The accompanying consolidated financial statements have been prepared assuming that we will continue as a going concern. 2. Summary of Significant Accounting Policies Use of Estimates in the Preparation of Financial Statements . The preparation of financial statements in conformity with accounting principles generally accepted in the United States (“GAAP”) requires management to make estimates and assumptions. Such estimates and assumptions affect the reported amounts of assets and liabilities as well as disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of sales and expense during the reporting period. Actual results could differ from those estimates. Cash and Cash Equivalents For purposes of reporting cash flows, we consider all cash and highly liquid investments with an original maturity of three months or less to be cash equivalents. Fair Value of Financial Instruments . Our financial instruments consist of cash, cash equivalents, short-term trade receivables, payables, line of credit, PPP loan, Economic Injury Disaster Loan (“EIDL”) loan and secured notes. The carrying values of cash, cash equivalents, trade receivables, payables, line of credit approximate their fair value due to their short maturities. The fair values of the EIDL Loan approximates the carrying value based on estimated discounted future cash flows using the current rates at which similar loans would be made. Concentration of Credit Risk . Financial instruments, which potentially subject us to concentrations of credit risk, consist of cash and cash equivalents, and accounts receivable. The carrying value of all financial instruments approximates fair value. The amount of cash on deposit with financial institutions occasionally exceeds the $ 250,000 federally insured limit at March 31, 2024. However, we believe that cash on deposit that exceeds $ 250,000 in the financial institutions is financially sound and the risk of loss is minimal. We have no significant off-balance sheet concentrations of credit risk such as foreign exchange contracts, options contracts or other foreign hedging arrangements. We maintain the majority of our cash balances with one financial institution in the form of demand deposits. Accounts receivable are typically unsecured and are derived from transactions with and from entities in the healthcare industry primarily located in the United States. Accordingly, we may be exposed to credit risk generally associated with the healthcare industry. We maintain allowances for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. We charge interest on past due accounts on a case-by-case basis. The accounts receivable balance at March 31, 2024 of $ 891,129 included no more than 11% from any one customer. The accounts receivable balance at March 31, 2023 of $ 920,721 included no more than 8% from any one customer. 25 Warranty Accrual . We provide for the estimated cost of product warranties at the time sales are recognized. While we engage in extensive product quality programs and processes, including actively monitoring and evaluating the quality of our component suppliers, our warranty obligation is based upon historical experience and is also affected by product failure rates and material usage incurred in correcting a product failure. Should actual product failure rates or material usage costs differ from our estimates, revisions to the estimated warranty liability would be required. There was no warranty accrual at March 31, 2024. Inventories . Inventories are stated at the lower of cost (first-in, first-out basis) or net realizable value. We reduce inventory for estimated obsolete or unmarketable inventory equal to the difference between the cost of inventory and the net realizable value based upon assumptions about future demand and market conditions. If actual market conditions are less favorable than those projected by management, additional inventory write-downs may be required. At March 31, 2024 and 2023, inventory consisted of the following: Schedule of inventory March 31, 2024 March 31, 2023 Raw materials $ 1,044,161 $ 1,424,366 Finished goods 358,177 474,836 Total net inventories $ 1,402,338 $ 1,899,202 For the fiscal year 2024, Encision added $ 153,511 in additional inventory reserve and wrote off $ 141,511 in inventory. In fiscal year 2023, Encision added $ 49,917 in inventory reserve and wrote off $ 34,917 in previously reserved inventory. No inventory reserve was reduced from the prior year. Total Raw Materials reserve for fiscal year 2024 is $ 53,948 and $ 32,107 for fiscal year 2023. Finished goods reserve for fiscal year 2024 is $ 9,052 and $ 18,893 in fiscal year 2023. Right of Use Assets and Lease Liabilities . We determine if an arrangement includes a lease at the inception of the agreement and the right-of-use asset and lease liability is determined at the lease commencement date and is based on the present value of estimated lease payments. Our lease agreements contain both fixed and variable lease payments, none of which are based on a rate or an index. Fixed lease payments are included in the determination of the right-of-use asset and lease liability. Variable lease payments that are not based on a rate or index are expensed when incurred. The present value of estimated lease payments is determined utilizing the rate implicit in the lease agreement if that rate can be determined. If the implicit rate cannot be determined, the present value of estimated lease payments is determined utilizing our incremental borrowing rate. The incremental borrowing rate is determined at the lease commencement date and is estimated utilizing similar or collateralized borrowing instruments adjusted for the terms of leasing arrangement as necessary. Our lease agreements do not contain any material residual value guarantees or material restrictive covenants. The lease agreement is for our building. The original lease is from June 3, 2004 and was amended in August 2023 to extend the term until October 31, 2026. The balances as of March 2024 and 2023, for the Right of Use Asset were $ 900,787 and $ 496,004 , respectively. The balances as of March 2024 and 2023 for Lease Liabilities were $ 1,066,987 and $ 593,494 , respectively. Property and Equipment . Property and equipment are stated at cost, with depreciation computed over the estimated useful lives of the assets, generally three to seven years. We use the straight-line method of depreciation for property and equipment. Leasehold improvements are depreciated over the shorter of the remaining lease term or the estimated useful life of the asset. Maintenance and repairs are expensed as incurred and major additions, replacements and improvements are capitalized. Depreciation expense for the years ended March 31, 2024 and 2023 was $ 61,322 and $ 59,290 , respectively. Property and equipment additions for the years ended March 31, 2024 and 2023 were $ 12,050 and $ 173,269 , respectively. Property and equipment is comprised principally of equipment and is depreciated over seven years. Long-Lived Assets . Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. A long-lived asset is considered impaired when estimated future cash flows related to the asset, undiscounted and without interest, are insufficient to recover the carrying amount of the asset. If deemed impaired, the long-lived asset is reduced to its estimated fair value. Long-lived assets to be disposed of are reported at the lower of their carrying amount or estimated fair value less cost to sell. Patents . The costs of applying for patents are capitalized and amortized on a straight-line basis over the lesser of the patent’s economic or legal life (20 years from the date of application in the United States). Capitalized costs are expensed if patents are not issued. We review the carrying value of our patents periodically to determine whether the patents have continuing value and such reviews could result in the conclusion that the recorded amounts have been impaired. A summary of our patents at March 31, 2024 and 2023 is as follows: Summary of patents March 31, 2024 March 31, 2023 Patents issued 436,831 $ 432,345 Write off of obsolete patents — ( 2,500 ) Accumulated amortization ( 315,530 ) ( 292,066 ) Patents issued, net of accumulated amortization 121,301 137,779 Patent applications 57,897 37,733 Accumulated amortization ( 15,188 ) ( 12,380 ) Patent applications, net of accumulated amortization 42,709 25,353 Total net patents and patent applications $ 164,010 $ 163,132 26 The expected annual amortization expense related to patents and patent applications as of March 31, 2024, for the next five fiscal years, is as follows: Schedule of expected annual amortization expense Fiscal Year Amount 2025 $ 20,104 2026 19,150 2027 18,332 2028 17,841 Thereafter 88,583 Total $ 164,010 Other Accrued Liabilities . At March 31, 2024 and 2023, other accrued liabilities consisted of the following: Schedule of other accrued liabilities March 31, 2024 March 31, 2023 Sales commissions $ 9,794 $ 34,668 Sales and use tax 13,006 12,769 Marketing fees 21,217 13,788 Payroll taxes, payroll 45,172 16,883 Miscellaneous 30,615 6,470 Total other accrued liabilities $ 119,804 $ 84,578 Income Taxes . We account for income taxes under the provisions of ASC Topic 740, “Accounting for Income Taxes” (“ASC 740”). ASC 740 requires recognition of deferred income tax assets and liabilities for the expected future income tax consequences, based on enacted tax laws, of temporary differences between the financial reporting and tax bases of assets and liabilities. ASC 740 also requires recognition of deferred tax assets for the expected future tax effects of all deductible temporary differences, loss carryforwards and tax credit carryforwards. Deferred tax assets are then reduced, if deemed necessary, by a valuation allowance for the amount of any tax benefits which, more likely than not based on current circumstances, are not expected to be realized. Should we achieve sufficient, sustained income in the future, we may conclude that some or all of the valuation allowance should be reversed (Note 5). ASC 740 prescribes a comprehensive model for how companies should recognize, measure, present, and disclose in their financial statements uncertain tax positions taken or expected to be taken on a tax return. Under ASC 740, tax positions must initially be recognized in the financial statements when it is more likely than not the position will be sustained upon examination by the tax authorities. Such tax positions must initially and subsequently be measured as the largest amount of tax benefit that has a greater than 50% likelihood of being realized upon ultimate settlement with the tax authority assuming full knowledge of the position and relevant facts. There are open statutes of limitations for taxing authorities in federal and state jurisdictions to audit the Company’s tax returns from fiscal year ended March 31, 2003 through the current period. Our policy is to account for income tax related interest and penalties in income tax expense in the statements of operations. There have been no income tax related interest or penalties assessed or recorded. The Company has provided a full valuation allowance on all of its deferred tax assets. Revenue Recognition . We record revenue at a single point in time, when control is transferred to the customer, which is consistent with past practice. We will continue to apply our current business processes, policies, systems and controls to support recognition and disclosure. Our shipping policy is FOB Shipping Point. We recognize revenue from sales to stocking distributors when there is no right of return, other than for normal warranty claims. We have no ongoing obligations related to product sales, except for normal warranty obligations. As presented on the Statement of Operations our revenue is disaggregated between product revenue and service revenue. As it relates specifically to product revenue, we do not believe further disaggregation is necessary as substantially all our product revenue comes from multiple products within a line of medical devices. Our engineering service contracts are billed on a time and materials basis and revenue is recognized over time as the services are performed. We determine revenue recognition through the following steps: (1) identification of the contract with a customer; (2) identification of the performance obligations in the contract; (3) determination of the transaction price; (4) allocation of the transaction price to the performance obligations in the contract (where revenue is allocated on a relative standalone selling price basis by maximizing the use of observable inputs to determine the standalone selling price for each performance obligation); and (5) recognition of revenue when, or as, we satisfy a performance obligation. 27 Topic 606 requires the disaggregation of revenue into broad categories, which we have defined as shown below. Schedule of disaggregation revenue March 31, 2024 March 31, 2023 Product revenue $ 6,431,969 $ 6,885,158 Service revenue 153,913 463,356 Total revenues $ 6,585,882 $ 7,348,514 Sales Taxes . We collect sales tax from customers and remit the entire amount to each respective state. We recognize revenue from product sales net of sale taxes. Research and Development Expenses . We expense research and development costs for products and processes as incurred. Advertising Costs . We expense advertising costs as incurred. Advertising expense for the years ended March 31, 2024 and 2023 was minimal. Stock-Based Compensation . Stock-based compensation is presented in accordance with the guidance of ASC Topic 718, “Compensation – Stock Compensation” (“ASC 718”). Under the provisions of ASC 718, companies are required to estimate the fair value of share-based payment awards on the date of grant using an option-pricing model. The value of the portion of the award that is ultimately expected to vest is recognized as expense over the requisite service periods in our statements of operations. ASC 718 requires companies to estimate the fair value of share-based payment awards on the date of grant using an option-pricing model. The value of the portion of the award that is ultimately expected to vest is recognized as expense over the requisite service periods in the accompanying statements of operations. Stock-based compensation expense recognized during the period is based on the value of the portion of share-based payment awards that is ultimately expected to vest during the period. Stock-based compensation expense recognized in our statements of operations for fiscal years 2024 and 2023 included compensation expense for share-based payment awards granted prior to, but not yet vested as of March 31, 2024, based on the grant date fair value. Compensation expense for all share-based payment is recognized using the straight-line, single-option method. As stock-based compensation expense recognized in the accompanying statements of operations for fiscal years 2024 and 2023 is based on awards ultimately expected to vest, it has been reduced for estimated forfeitures. ASC 718 requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. We used the Black-Scholes option-pricing model (“Black-Scholes model”) to determine fair value. Our determination of fair value of share-based payment awards on the date of grant using an option-pricing model is affected by our stock price as well as assumptions regarding a number of highly complex and subjective variables. These variables include, but are not limited to our expected stock price volatility over the term of the awards, and actual and projected employee stock option exercise behaviors. Although the fair value of employee stock options is determined in accordance with ASC 718 using an option-pricing model, that value may not be indicative of the fair value observed in a willing buyer/willing seller market transaction. Stock-based compensation expense recognized under ASC 718 for fiscal years 2024 and 2023 was $ 53,552 and $ 51,892 , respectively, which consisted of stock-based compensation expense related to director and employee stock options. Stock-based compensation expense related to director and employee stock options under ASC 718 for fiscal years 2024 and 2023 was allocated as follows: Schedule of stock-based compensation expense Years Ended March 31, 2024 March 31, 2023 Cost of sales $ 134 $ 631 Sales and marketing 7,261 7,009 General and administrative 41,180 39,630 Research and development 4,977 4,622 Stock-based compensation expense $ 53,552 $ 51,892 Segment Reporting . We have concluded that we have two operating segments, product and service. Product designs, develops, manufactures and markets patented surgical instruments. Service performs electrical engineering activities for external entities. 28 Schedule of operating segments Year Ended March 31, 2024 Year Ended March 31, 2023 Product Service Total Product Service Total Net revenue $ 6,431,969 $ 153,913 $ 6,585,882 $ 6,885,158 $ 463,356 $ 7,348,514 Cost of revenue 3,370,855 79,065 3,449,920 3,313,620 2,361 3,315,981 Gross profit 3,061,114 74,848 3,135,962 3,571,538 460,995 4,032,533 Operating income (loss) ( 715,631 ) 74,848 ( 640,783 ) ( 763,792 ) 460,995 ( 302,797 ) Depreciation and amortization 85,218 — 85,218 86,906 — 86,906 Capital expenditures 12,050 — 12,050 173,269 — 173,269 Equipment and patents, net $ 418,014 $ — $ 418,014 $ 466,409 $ — $ 466,409 Basic and Diluted Income per Common Share . Net income per share is calculated in accordance with ASC Topic 260, "Earnings Per Share" ("ASC 260"). Under the provisions of ASC 260, basic net income per common share is computed by dividing net income for the period by the weighted average number of common shares outstanding for the period. Diluted net income per common share is computed by dividing the net income for the period by the weighted average number of common and potential common shares outstanding during the period if the effect of the potential common shares is dilutive. Because we had a loss in fiscal years 2024 and 2023, the shares used in the calculation of dilutive potential common shares exclude options to purchase shares. The following table presents the calculation of basic and diluted net income (loss) per share: Schedule of basic and diluted net income (loss) per share Years Ended March 31, 2024 March 31, 2023 Net income (loss) $ ( 691,783 ) $ ( 323,945 ) Weighted-average shares — basic 11,770,391 11,762,995 Effect of dilutive potential common shares — — Weighted-average shares — basic and diluted 11,770,391 11,762,995 Net loss per share — basic and diluted $ ( 0.06 ) $ ( 0.03 ) Antidilutive equity units 751,000 1,049,000 3. Shareholders’ Equity Stock Option Plans. We adopted our 2014 Equity Incentive Plan (the “Plan,” as summarized below) to promote our and our shareholders’ interests by helping us to attract, retain and motivate our key employees and associates. Under the terms of the Plan, the Board of Directors may grant incentive and non-qualified stock options, stock appreciation rights, restricted stock, restricted stock units, performance units, and other stock-based awards. The purchase price of the shares subject to a stock option will be the fair market value of our common stock on the date the stock option is granted. Generally, vesting of stock options occurs such that 20% becomes exercisable on each anniversary of the date of grant for each of the five years following the grant date of such option. Generally, all stock options must be exercised within five years from the date granted. The number of common shares reserved for issuance under the Plan is 1,100,000 shares of common stock, subject to adjustment for dividend, stock split or other relevant changes in our capitalization. Under ASC 718, the value of each employee stock option was estimated on the date of grant using the Black-Scholes model for the purpose of financial information in accordance with ASC 718. The use of a Black-Scholes model requires the use of actual employee exercise behavior data and the use of a number of assumptions including expected volatility, risk-free interest rate and expected dividends. Employee stock options for 120,000 and 155,000 shares of stock were granted during fiscal years 2024 and 2023, respectively. As of March 31, 2024, $ 145,000 of total unrecognized compensation costs related to nonvested stock is expected to be recognized over a period of five years. During the year ended March 31, 2024, various fully vested five-year stock options to purchase 328,916 shares of common stock of us previously granted to board members and employees expired unexercised. 29 The assumptions for employee stock options are summarized as follows: Summary of assumptions for employee stock options Year Ended March 31, 2024 Dividend yield 0 % Expected volatility 87 % to 93 % Risk-free interest rate 4.05 % to 4.64 % Expected life (in years) 5.0 Stock price $ 0.39 to $ 0.75 Exercise price $ 0.33 to $ 0.38 Cumulative compensation cost recognized in net income or loss with respect to options that are forfeited prior to vesting is adjusted as a reduction of compensation expense in the period of forfeiture. The volatility of the stock is based on the historical volatility for the period that approximates the expected lives of the options being valued. Fair value computations are highly sensitive to the volatility factor; the greater the volatility, the higher the computed fair value of options granted. Stock-based compensation expense related to director and employee stock options under ASC 718 for fiscal years 2024 and 2023 was allocated as follows: Schedule of stock-based compensation Years Ended March 31, 2024 March 31, 2023 Cost of sales $ 134 $ 631 Sales and marketing 7,261 7,009 General and administrative 41,180 39,630 Research and development 4,977 4,622 Stock-based compensation expense $ 53,552 $ 51,892 The total fair value of options granted was computed to be approximately $ 40,025 and $ 56,600 for the fiscal years ended March 31, 2024 and 2023, respectively. For disclosure purposes, these amounts are amortized ratably over the vesting periods of the options. Effects of stock-based compensation, net of the effect of forfeitures, totaled $ 53,552 and $ 51,892 for fiscal years 2024 and 2023, respectively. The Black-Scholes model was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. In addition, option valuation models require the use of assumptions, including the expected stock price volatility. Because our employee stock options have characteristics significantly different than those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management’s opinion, the existing models do not necessarily provide a reliable single measure of the fair value of our employee stock options. A summary of our stock option activity and related information for equity compensation plans approved by security holders for each of the fiscal years ended March 31, 2024 and 2023 is as follows: Summary of stock option activity STOCK OPTIONS OUTSTANDING Number Outstanding Weighted-Average Exercise Price per Share BALANCE AT MARCH 31, 2022 1,061,000 $ 0.65 Granted 155,000 0.51 Exercised ( 50,000 ) 0.42 Forfeited/expired ( 117,000 ) 0.47 BALANCE AT MARCH 31, 2023 1,049,000 0.66 Granted 120,000 0.44 Exercised ( 89,084 ) 0.34 Forfeited/expired ( 328,916 ) 0.44 BALANCE AT MARCH 31, 2024 751,000 $ 0.75 The following table summarizes information about employee stock options outstanding and exercisable at March 31, 2024: Schedule of employee stock options outstanding and exercisable STOCK OPTIONS OUTSTANDING STOCK OPTIONS EXERCISABLE Range of Exercise Prices Number Outstanding Weighted-Average Remaining Contractual Life (in Years) Weighted-Average Exercise Price per Share Number Exercisable Weighted-Average Exercise Price per Share $0.34 - $0.35 80,000 1.5 $ 0.35 77,072 $ 0.35 $0.39 - $0.50 260,000 1.3 $ 0.45 118,366 $ 0.46 $0.51 - $1.40 411,000 3.4 $ 1.02 196,026 $ 1.07 751,000 2.5 $ 0.75 391,464 $ 0.74 30 The 751,000 options outstanding as of March 31, 2024 are nonqualified stock options. The exercise price of all options granted through March 31, 2024 has been equal to or greater than the fair market value, as determined by our Board of Directors or based upon publicly quoted market values of our common stock on the date of the grant. The following table sets forth options to acquire shares of our common stock granted to Executive Officers during the fiscal year ended March 31, 2024. Schedule of options to acquire shares Name Grant Date Number of securities underlying options (#) Exercise price of option awards ($/Sh) Grant date fair value of option awards ($) (1) Gregory J. Trudel 10/19/23 10,000 .46 3,371 Brian Jackman ― — — — Mala Ray 10/19/23 10,000 .46 3,371 Name Number of Securities underlying unexercised options (#)exercisable Number of Securities underlying unexercised options (#) unexercisable Option exercise price ($/Sh) Option expiration Date Gregory J. Trudel 4,631 369 0.35 11/12/24 8,422 1,578 0.41 03/12/25 7,272 2,728 0.50 11/12/25 37,000 38,000 1.40 01/13/27 30,800 39,200 1.35 04/19/27 4,684 5,352 0.51 02/09/28 — 10,000 0.46 01/19/29 Brian Jackman 4,631 369 0.35 11/12/24 4,100 900 0.55 05/25/25 7,272 2,728 0.50 11/12/25 4,933 5,067 1.40 01/13/27 4,183 10,817 0.51 02/09/28 Mala Ray 19,767 233 0.44 07/22/24 4,631 369 0.35 11/14/24 7,272 2,728 0.50 11/12/25 7,400 7,600 1.40 01/13/27 6,972 18,028 0.51 02/09/28 — 10,000 0.46 01/19/29 4. Commitments and Contingencies We have a noncancelable lease agreement for our facilities at 6797 Winchester Circle, Boulder, Colorado. The lease expires October 31, 2026. On April 1, 2021, we adopted Accounting Standards Codification (“ASC”) ASC 842 “Leases” using the initial date of adoption method, whereby the adoption does not impact any periods prior to April 1, 2019. ASC Topic 842 retains a distinction between finance leases and operating leases. The classification criteria for distinguishing between finance leases and operating leases are substantially similar to the classification criteria for distinguishing between capital leases and operating leases in the previous leases’ guidance. We recorded an operating Right of Use (“ROU”) asset of $ 1,555,150 , and an operating lease liability of $ 1,619,842 as of April 1, 2019. The difference between the initial operating ROU asset and operating lease liability of $ 64,692 is accrued rent previously recorded under ASC 840. We elected to adopt the package of practical expedients and, accordingly, did not reassess any previously expired or existing arrangements and related classifications under ASC 840. 31 If the rate implicit in the lease is not readily determinable, we use our incremental borrowing rate as the discount rate. We use our best judgement when determining the incremental borrowing rate, which is the rate of interest that we would have to pay to borrow on a collateralized basis over a similar term to the lease payments. Our operating lease includes the use of real property. We have not identified any material finance leases as of March 31, 2024. For the years ended March 31, 2024 and 2023, we had $ 329,255 and $ 357,644 , respectively, for lease expense. The following is a maturity analysis of the annual undiscounted cash flows reconciled to the carrying value of the operating lease liabilities as of March 31, 2024: Schedule of principal U.S. Bank payment Fiscal Year Amount 2025 $ 415,667 2026 455,542 2027 270,666 Total operating lease payments $ 1,141,875 Less imputed interest ( 74,888 ) Total operating lease liabilities $ 1,066,987 Weighted-average remaining lease term 2.6 years Weighted-average discount rate 5.0 % On November 15, 2023, 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. 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: Schedule of principal U.S. Bank payment Fiscal Year Amount 2024 3,091 2025 3,208 2026 3,331 2027 3,457 Thereafter 148,744 Total $ 161,831 During September 2020, we entered into a note agreement with U.S. Bank for $ 92,000 . The note is for five 5 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: Schedule of principal U.S. Bank payment Fiscal Year Amount 2024 18,400 2025 13,800 Total $ 32,200 During June 2022, we entered into a note agreement with U.S. Bank for $ 118,970 . 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 March 31, 2024 is as follows: Schedule of principal U.S. Bank payment Fiscal Year Amount 2025 23,794 2026 23,794 2027 23,794 2028 5,949 Total $ 77,331 32 We are subject to regulation by the United States Food and Drug Administration (“FDA”). The FDA provides regulations governing the manufacture and sale of our products and regularly inspects us and other manufacturers to determine our and their compliance with these regulations. As of March 31, 2024, we believe we were in substantial compliance with all known regulations. FDA inspections are conducted periodically at the discretion of the FDA. We were last inspected in October 2019. Our obligation with respect to employee severance benefits is minimized by the “at will” nature of the employee relationships. Our total obligation with respect to contingent severance benefit obligations was none as of March 31, 2024 and 2023. 5. Income Taxes We account for income taxes under ASC 740, which requires the use of the liability method. ASC 740 provides that deferred income tax assets and liabilities are recorded based on the differences between the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes, referred to as temporary differences. Deferred income tax assets and liabilities at the end of each period are determined using the currently enacted tax rates applied to taxable income in the periods in which the deferred income tax assets and liabilities are expected to be settled or realized. Income tax provision (benefit) for income taxes is summarized below: Schedule of income tax expense (benefit) Years Ended March 31, 2024 March 31, 2023 Current: Federal $ — $ — State — — Total current — — Deferred: Federal 22,000 ( 12,000 ) State 4,000 ( 1,000 ) Total deferred 26,000 ( 13,000 ) Valuation allowance ( 26,000 ) 13,000 Total $ — $ — The following is a reconciliation between the effective rate and the federal statutory rate: Schedule of effective income tax rate reconciliation Years Ended March 31, 2024 March 31, 2023 Expected income tax rate $ ( 145,000 ) $ ( 68,000 ) State income taxes, net of federal tax benefit ( 28,000 ) ( 13,000 ) Other permanent differences ( 10,000 ) 12,000 Research credits ( 8,000 ) — Change in valuation allowance 191,000 69,000 Income tax expense $ — $ — The components of the net accumulated deferred income tax asset (liability) are as follows: Schedule of deferred income tax asset liability Years Ended March 31, 2024 March 31, 2023 Other deferred assets $ 16,000 $ 42,000 Valuation allowance ( 16,000 ) ( 42,000 ) Current deferred tax assets — — Credits and net operating loss carryforwards 2,616,000 1,829,000 Valuation allowance ( 2,616,000 ) ( 1,829,000 ) Long-term deferred tax assets — — Total deferred tax assets — — Valuation allowance — — Long-term deferred tax liabilities — — Total deferred tax liabilities — — Net deferred tax assets (liabilities) $ — $ — 33 The primary components of our deferred tax assets are described below: Years Ended March 31, 2024 March 31, 2023 Differences in reporting long-term assets $ 16,000 $ 42,000 Credits and net operating loss carryforwards 2,616,000 1,829,000 Less valuation allowance ( 2,600,000 ) ( 1,871,000 ) Total deferred tax assets $ — $ — In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which net operating losses and reversal of timing differences may offset taxable income. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. A valuation allowance is provided when it is more likely than not that some portion or all of a deferred tax asset will not be realized. Due to our lack of earnings history, the net deferred tax assets have been fully offset by a valuation allowance. As of March 31, 2024, we had approximately $ 8.9 million of net operating loss carryovers for tax purposes. Additionally, we have approximately $ 384,000 of research and development tax credits available to offset future federal income taxes. The net operating loss and credit carryovers begin to expire in the fiscal year ended March 31, 2025. In fiscal years ended after March 31, 2024, net operating losses expire at various dates through March 31, 2045 . The Internal Revenue Code contains provisions, which may limit the net operating loss carryforwards available to be used in any given year if certain events occur, including significant changes in ownership interests. 6. Major Customers/Suppliers We depend on sales that are generated from hospitals’ ongoing usage of AEM surgical instruments. In fiscal year 2024, we generated sales from over 300 hospitals that have changed to AEM products. Three vendors accounted for approximately 47 % of our inventory purchases. 7. Defined Contribution Employee Benefit Plan We have adopted a 401(k) Profit Sharing Plan which covers all full-time employees who have completed at least three months of full-time continuous service and are age eighteen or older. Participants may defer up to 20% of their gross pay up to a maximum limit determined by law. Participants are immediately vested in their contributions. We may make discretionary contributions based on corporate financial results for the fiscal year. To date, we have not made contributions to the 401(k) Profit Sharing Plan. Vesting in a contribution account (our contribution) is based on years of service, with a participant fully vested after five years of credited service. 8. Related Party Transaction We paid consulting fees of $ 32,032 and $ 55,715 to an entity owned by one of our directors in fiscal years 2024 and 2023, respectively. 9. Subsequent Events Management evaluated all of our activity and concluded that, as of the date the financial statements were issued, no subsequent events have occurred that would require recognition in the financial statements or disclosure in the notes to the financial statements. 34 Item 9. Changes In and Disagreements with Accountants on Accounting and Financial Disclosure. On October 17, 2023, we were notified that Gries & Associates, LLC (“Gries”), our independent registered public accounting firm, had completed a sale of its customers to GreenGrowth CPAs Inc. (“GreenGrowth”). As a result of this transaction, Gries resigned its engagement with us immediately. On October 18, 2023, upon the approval of our Audit Committee, we engaged GreenGrowth as our new independent registered public accounting firm for our fiscal year ending March 31, 2023 and interim periods. Gries’ reports on our financial statements for the past two years did not contain an adverse opinion or a disclaimer of opinion, and were not qualified or modified as to uncertainty, audit scope, or accounting principles. The report had been prepared assuming that we would continue as a going concern and included an explanatory paragraph regarding our ability to continue as a going concern as result of recurring losses and a deficiency in shareholders’ equity. During the years ended March 31, 2023 and 2022, and the subsequent period through October 17, 2023, there were (i) no disagreements (as described in Item 304(a)(1)(iv) of Regulation S-K and the related instructions) between us and Gries on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which, if not resolved to Gries’ satisfaction, would have caused Gries to make reference thereto in its reports on the financial statements for such years; and (ii) no “reportable events” within the meaning of Item 304(a)(1)(v) of Regulation S-K, except that Gries advised us of material weaknesses in its internal control over financial reporting as of March 31, 2023 and 2022. During our two most recent fiscal years ended March 31, 2023 and 2022, and the subsequent interim period through the date of its engagement, we did not consult with GreenGrowth regarding either of the following: (i) the application of accounting principles to a specified transaction, either completed or proposed, or the type of audit opinion that might be rendered on our financial statements, and GreenGrowth did not provide a written report or oral advice on any accounting, auditing or financial reporting issue that GreenGrowth concluded was an important factor considered by us in reaching a decision as to the accounting, auditing or financial reporting issue, or (ii) any matter that was either the subject of a disagreement, as defined in Item 304(a)(1)(iv) of Regulation S-K and the related instructions, or a “reportable event,” as described in Item 304(a)(1)(v) of Regulation S-K.