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 23 Balance Sheets as of March 31, 2023 and 2022 25 Statements of Operations for the fiscal years ended March 31, 2023 and 2022 26 Statements of Shareholders' Equity for the fiscal years ended March 31, 2023 and 2022 27 Statements of Cash Flows for the fiscal years ended March 31, 2023 and 2022 28 Notes to Financial Statements 29 22 Report of Independent Registered Public Accounting Firm Board of Directors and Shareholders Encision Inc. Opinion on the Financial Statements We have audited the accompanying consolidated balance sheet of Encision Inc. (the “Company”) as of March 31, 2023, and the related consolidated statement of operations, statements of stockholders’ deficit, and cash flows for each of the year then ended, and the related notes and schedules (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, 2023, and the results of its operations and its cash flows for each of the year then ended, in conformity with accounting principles generally accepted in the United States of America. Basis for Opinion These financial statements are the responsibility of the entity’s management. Our responsibility is to express an opinion on these financial statements based on our audit. 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 audit 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 audit, 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 entity’s internal control over financial reporting. Accordingly, we express no such opinion. Our audit 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 audit 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 audit provides a reasonable basis for our opinion. Inventories Critical Audit Matter Description 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 inventory is a combination of raw materials, labor to convert those materials to components of the inventory and finished goods, and an allocation of overhead and related costs. The Company also prepares an obsolescence valuation at year end to properly record inventory at lower of cost or net realizable value. Significant judgment is exercised by the Company in determining the costs of inventory and includes the following: · Determination of which costs to include at each manufacturing phase, including overhead allocation and materials used for production and finished goods. · Identification of Inventory on hand and any obsolescence reserve or write-offs determined based on usability of inventory on hand. Given the inherent uncertainty in forecasting product demand, including the impact of product releases, auditing the reasonableness of management’s estimated and assumptions related to inventory reserve required a high degree of auditor judgement and an increased extent of effort. 23 How the Critical Audit Matter Was Addressed in the Audit Our principal audit procedures related to the Company's inventory included the following: · We evaluated management’s significant accounting policies related to inventory for reasonableness. · 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 invoice, labor and overhead allocations, and any other items relevant to price verification o Tested managements identification and application of inventory costs for components and finished goods o Performed a physical inventory count as of year-end and tested the reconciliation of quantities on hand to the inventory listing, performing both existence and completeness testing. o Assessed the reasonableness of costs and the appropriate application of managements significant accounting policies related to Inventory, including determination of inventory obsolescence reserve. Emphasis of Matters-Risks and Uncertainties The Company is not able to predict the ultimate impact that COVID -19 will have on its business. However, if the current economic conditions continue, the pandemic could have an adverse impact on the economies and financial markets of many countries, including the geographical area in which the Company plans to operate. /s/ Gries & Associates, LLC We have served as the Company’s auditor since 2021. PCAOB ID: 6778 Denver, CO June 28, 2023 24 Encision Inc. Balance Sheets March 31, 2023 March 31, 2022 ASSETS Current assets: Cash $ 188,966 $ 949,645 Accounts receivable 920,721 947,623 Inventories, net of reserve for obsolescence of $ 51,000 at March 31, 2023 and $ 36,000 at March 31, 2022 1,899,202 1,584,321 Prepaid expenses and other assets 115,714 120,133 Total current assets 3,124,603 3,601,722 Equipment: Furniture, fixtures and equipment, at cost 2,615,676 2,468,949 Accumulated depreciation ( 2,312,400 ) ( 2,279,652 ) Equipment, net 303,276 189,297 Right of use asset 496,004 786,407 Patents, net of accumulated amortization of $ 306,946 at March 31, 2023 and $ 282,081 at March 31, 2022 163,133 180,719 Other assets 46,953 34,240 TOTAL ASSETS $ 4,133,969 $ 4,792,385 LIABILITIES AND SHAREHOLDERS’ EQUITY Current liabilities: Accounts payable $ 252,957 $ 576,381 Line of credit 177,402 — Secured notes 44,491 21,491 Accrued compensation 217,724 190,853 Other accrued liabilities 84,578 125,179 Accrued lease liability 353,674 362,487 Total current liabilities 1,130,826 1,276,391 Long-term liability: Secured notes 268,512 205,809 Accrued lease liability 239,820 564,321 Total liabilities 1,639,158 2,046,521 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; 11,769,543 issued and outstanding at March 31, 2023 and 11,719,543 at March 31, 2022 24,348,075 24,275,183 Accumulated (deficit) ( 21,853,264 ) ( 21,529,319 ) Total shareholders’ equity 2,494,811 2,745,864 TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY $ 4,133,969 $ 4,792,385 The accompanying notes to financial statements are an integral part of these statements. 25 Encision Inc. Statements of Operations Years Ended March 31, 2023 March 31, 2022 NET REVENUE: Product $ 6,885,158 $ 6,914,678 Service 463,356 753,958 Total revenue 7,348,514 7,668,636 COST OF REVENUE: Product 3,313,620 3,509,158 Service 2,361 371,060 Total cost of revenue 3,315,981 3,880,218 GROSS PROFIT 4,032,533 3,788,418 OPERATING EXPENSES: Sales and marketing 2,032,415 2,084,110 General and administrative 1,486,796 1,381,087 Research and development 816,119 918,155 Total operating expenses 4,335,330 4,383,352 OPERATING (LOSS) ( 302,797 ) ( 594,934 ) OTHER INCOME (EXPENSE): Interest expense, net ( 19,529 ) ( 7,224 ) Extinguishment of debt income — 533,118 Other income, (expense) net ( 1,619 ) 3,446 Interest expense, extinguishment of debt income and other income, expense, net ( 21,148 ) 529,340 (LOSS) BEFORE PROVISION FOR INCOME TAXES ( 323,945 ) ( 65,594 ) Provision for income taxes — — NET LOSS) $ ( 323,945 ) $ ( 65,594 ) Net (loss) per share—basic and diluted $ ( 0.03 ) $ ( 0.01 ) Weighted average shares—basic 11,762,995 11,625,118 Weighted average shares—diluted 11,762,995 11,625,118 The accompanying notes to financial statements are an integral part of these statements. 26 Encision Inc. Statements of Shareholders’ Equity s Shares of Common Stock Common Stock and Additional Paid-in Capital Accumulated Deficit Total Shareholders’ Equity BALANCES AT MARCH 31, 2021 11,582,641 $ 24,265,831 $ ( 21,463,725 ) $ 2,802,106 Net loss — — ( 65,594 ) ( 65,594 ) Compensation expense related to equities — 40,853 — 40,863 Options exercised 136,902 ( 31,501 ) ( 31,511 ) 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 equities — 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 The accompanying notes to financial statements are an integral part of these statements. 27 Encision Inc. Statements of Cash Flows Years Ended March 31, 2023 March 31, 2022 Cash flows (used in) operating activities: Net (loss) $ ( 323,945 ) $ ( 65,594 ) Adjustments to reconcile net (loss) income to net cash (used in) operating activities: Extinguishment of debt income — ( 533,118 ) Write-off of tooling — 31,000 Depreciation and amortization 86,906 113,470 Stock-based compensation expense related to stock options 51,892 40,853 (Recovery from) doubtful accounts, net change — ( 35,000 ) Provision for (recovery from) for inventory obsolescence, net change 15,000 ( 34,000 ) Other income from release of account payable — — Change in operating assets and liabilities: Right of use asset, net ( 42,912 ) ( 28,414 ) Accounts receivable 26,902 163,456 Inventories ( 329,881 ) ( 105,187 ) Prepaid expenses and other assets ( 8,294 ) ( 31,435 ) Accounts payable ( 323,423 ) 187,293 Accrued compensation and other accrued liabilities ( 13,730 ) ( 147,756 ) Net cash (used in) operating activities ( 861,485 ) ( 444,432 ) Cash flows (used in) investing activities: Acquisition of property and equipment ( 173,269 ) ( 17,550 ) Patent costs ( 10,030 ) ( 17,851 ) Net cash (used in) investing activities ( 183,299 ) ( 35,401 ) Cash flows provided by (used in) financing activities: Borrowings from credit facility, net change 239,752 — Borrowings from (paydown of) secured notes 23,353 ( 13,360 ) Net proceeds (payments) from exercise of stock options 21,000 ( 31,501 ) Net cash provided by (used in) financing activities 284,105 ( 44,861 ) Net (decrease) in cash ( 760,679 ) ( 524,694 ) Cash, beginning of fiscal year 949,645 1,474,339 Cash, end of fiscal year $ 188,966 $ 949,645 Supplemental disclosure of non-cash investing activity information: Supplemental disclosures of cash flow information: Cash paid during the year for interest $ 19,529 $ 7,224 The accompanying notes to financial statements are an integral part of these statements. 28 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. We have an accumulated deficit of $ 21,853,264 at March 31, 2023. 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 2023, 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. In February 2023, we signed a Supplier Agreement (“Agreement”) with Human Xtensions (“Human X”). Under the Agreement, we will perform manufacturing services, which includes procuring materials, manufacturing, assembling, and testing products pursuant to detailed written specifications for Human X. Human X develops unmediated surgical systems that combine the capacity of robotics with the benefits of handheld tools and ergonomic bed mounts. We had (net loss) available to shareholders of $( 323,945 ) and $( 65,594 ) for the fiscal years ended March 31, 2023 and 2022, respectively. At March 31, 2023, we had $ 188,966 in cash available to fund future operations, and outstanding borrowings of $ 227,300 . In February 2021, we entered into an unsecured promissory note under the PPP for a principal amount of $ 533,118 . The PPP was established under the congressionally approved CARES Act. The term of the PPP loan is for two years with an interest rate of 1.0 % per year, which will be deferred for the first six months of the term of the loan. After the initial six-month deferral period, the loan requires monthly payments of principal and interest until maturity with respect to any portion of the PPP loan which is not forgiven. Under the terms of the CARES Act, a PPP loan recipient may apply for, and be granted, forgiveness for all or a portion of loans granted under the PPP. During the quarter ended September 30, 2021 we achieved the requirements for forgiveness of the loan and recognized extinguishment of debt income. We increased our pricing on products to mitigate somewhat our higher material costs. We have a new 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. 29 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, 2023. 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 net accounts receivable balance at March 31, 2023 of $ 947,623 included no more than 8% from any one customer. The net accounts receivable balance at March 31, 2022 of $ 1,024,370 included no more than 14% from any one customer. Warranty Accrual . We provide for the estimated cost of product warranties at the time sales are recognized. While we engage in extensive product quality programs and processes, including actively monitoring and evaluating the quality of our component suppliers, our warranty obligation is based upon historical experience and is also affected by product failure rates and material usage incurred in correcting a product failure. Should actual product failure rates or material usage costs differ from our estimates, revisions to the estimated warranty liability would be required. There was no warranty accrual at March 31, 2023. 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, 2023 and 2022, inventory consisted of the following: Schedule of inventory March 31, 2023 March 31, 2022 Raw materials $ 1,456,473 $ 1,083,387 Finished goods 493,729 536,934 Total gross inventories 1,950,202 1,620,321 Less reserve for obsolescence ( 51,000 ) ( 36,000 ) Total net inventories $ 1,899,202 $ 1,584,321 A summary of the activity in our inventory reserve for obsolescence is as follows: Summary of inventory reserve for obsolescence Years Ended March 31, 2023 March 31, 2022 Balance, beginning of year $ 36,000 $ 70,000 Provision for estimated obsolescence 49,917 17,578 Write-off of obsolete inventory ( 34,917 ) ( 51,578 ) Balance, end of year $ 51,000 $ 36,000 Property and Equipment . Property and equipment are stated at cost, with depreciation computed over the estimated useful lives of the assets, generally three to seven years. We use the straight-line method of depreciation for property and equipment. Leasehold improvements are depreciated over the shorter of the remaining lease term or the estimated useful life of the asset. Maintenance and repairs are expensed as incurred and major additions, replacements and improvements are capitalized. Depreciation expense for the years ended March 31, 2023 and 2022 was $ 59,290 and $ 62,970 , respectively. Long-Lived Assets . Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. A long-lived asset is considered impaired when estimated future cash flows related to the asset, undiscounted and without interest, are insufficient to recover the carrying amount of the asset. If deemed impaired, the long-lived asset is reduced to its estimated fair value. Long-lived assets to be disposed of are reported at the lower of their carrying amount or estimated fair value less cost to sell. 30 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, 2023 and 2022 is as follows: Summary of patents March 31, 2023 March 31, 2022 Patents issued $ 432,345 $ 496,901 Write off of obsolete patents ( 2,500 ) ( 86,239 ) Accumulated amortization ( 292,066 ) ( 265,762 ) Patents issued, net of accumulated amortization 137,779 144,900 Patent applications 37,733 52,138 Accumulated amortization ( 12,380 ) ( 16,319 ) Patent applications, net of accumulated amortization 25,353 35,819 Total net patents and patent applications $ 163,132 $ 180,719 The expected annual amortization expense related to patents and patent applications as of March 31, 2023, for the next five fiscal years, is as follows: Schedule of expected annual amortization expense Fiscal Year Amount 2024 $ 24,152 2025 22,293 2026 18,558 2027 20,985 Thereafter 77,144 Total $ 163,132 Other Accrued Liabilities . At March 31, 2023 and 2022, other accrued liabilities consisted of the following: Schedule of other accrued liabilities March 31, 2023 March 31, 2022 Sales commissions $ 34,668 29,157 Sales and use tax 12,769 13,967 Marketing fees 13,788 15,735 Payroll taxes, payroll 16,883 53,998 Miscellaneous 6,470 12,322 Total other accrued liabilities $ 84,578 $ 125,179 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. 31 The cumulative effect of adopting ASC 740 on April 1, 2007 has been recorded net in deferred tax assets, which resulted in no ASC 740 liability on the balance sheet. The total amount of unrecognized tax benefits as of the date of adoption was zero. There are open statutes of limitations for taxing authorities in federal and state jurisdictions to audit the Company’s tax returns from fiscal year ended March 31, 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. Because the Company has provided a full valuation allowance on all of its deferred tax assets, the adoption of ASC 740 had no impact on our effective tax rate. Revenue Recognition . 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 of our product revenue comes from multiple products within a line of medical devices. Our engineering service contracts are billed on a time and materials basis and revenue is recognized over time as the services are performed. 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, 2023 and 2022 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 2023 and 2022 included compensation expense for share-based payment awards granted prior to, but not yet vested as of March 31, 2023, 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 2023 and 2022 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 2023 and 2022 was $ 51,892 and $ 40,853 , respectively, which consisted of stock-based compensation expense related to director and employee stock options. 32 Stock-based compensation expense related to director and employee stock options under ASC 718 for fiscal years 2022 and 2021 was allocated as follows: Schedule of stock-based compensation expense Years Ended March 31, 2023 March 31, 2022 Cost of sales $ 631 $ 619 Sales and marketing 7,009 6,067 General and administrative 39,630 30,955 Research and development 4,622 3,212 Stock-based compensation expense $ 51,892 $ 40,853 Segment Reporting . We have concluded that we have two operating segments, product and service. Product designs, develops, manufactures and markets patented surgical instruments. Service performs electrical engineering activities for external entities. Schedule of operating segments Year Ended March 31, 2023 Year Ended March 31, 2022 Product Service Total Product Service Total Net revenue $ 6,885,158 $ 463,356 $ 7,348,514 $ 6,914,678 $ 753,958 $ 7,668,636 Cost of revenue 3,313,620 2,361 3,315,981 3,509,158 371,060 3,880,218 Gross profit 3,571,538 460,995 4,032,533 3,405,520 382,898 3,788,418 Operating income (loss) ( 763,792 ) 460,995 ( 302,797 ) ( 977,832 ) 382,898 ( 594,934 ) Depreciation and amortization 86,906 — 86,906 113,470 — 113,470 Capital expenditures 173,269 — 173,269 17,550 — 17,550 Equipment and patents, net $ 466,409 $ — $ 466,409 $ 370,016 $ — $ 370,016 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 2023 and 2022, 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, 2023 March 31, 2022 Net income (loss) $ ( 323,945 ) $ ( 65,594 ) Weighted-average shares — basic 11,762,995 11,625,118 Effect of dilutive potential common shares — — Weighted-average shares — basic and diluted 11,762,995 11,625,118 Net loss per share — basic and diluted $ ( 0.03 ) $ ( 0.01 ) Antidilutive equity units 1,049,000 1,061,000 Recent Accounting Pronouncements . In June 2016, the FASB issued ASU 2016-13, “Measurement of Credit Losses on Financial Instruments”. ASU 2016-13 adds a current expected credit loss (“CECL”) impairment model to U.S. GAAP that is based on expected losses rather than incurred losses. Modified retrospective adoption is required with any cumulative-effect adjustment recorded to retained earnings as of the beginning of the period of adoption. ASU 2016-13 is effective for fiscal years beginning after December 15, 2019, excluding smaller reporting entities, which will be effective for fiscal years beginning after December 15, 2023. We will adopt ASU 2016-13 beginning April 1, 2023 and do not expect the application of the CECL impairment model to have a significant impact on our allowance for uncollectible amounts for accounts receivable. 33 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 155,000 and 270,000 shares of stock were granted during fiscal years 2023 and 2022, respectively. As of March 31, 2023, $ 194,000 of total unrecognized compensation costs related to nonvested stock is expected to be recognized over a period of five years. The assumptions for employee stock options are summarized as follows: Summary of assumptions for employee stock options Years Ended March 31, 2023 March 31, 2022 Risk-free interest rate 3.05 % to 4.29 % 0.8 % to 1.05 % Expected life (in years) 5.0 5.0 Expected volatility 87 % to 95 % 69 % to 76 % Expected dividend 0 % 0 % Cumulative compensation cost recognized in net income or loss with respect to options that are forfeited prior to vesting is adjusted as a reduction of compensation expense in the period of forfeiture. The volatility of the stock is based on the historical volatility for the period that approximates the expected lives of the options being valued. Fair value computations are highly sensitive to the volatility factor; the greater the volatility, the higher the computed fair value of options granted. The total fair value of options granted was computed to be approximately $ 56,600 and $ 213,000 , for the fiscal years ended March 31, 2023 and 2022, 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 $ 51,892 and $ 40,853 for fiscal years 2023 and 2022, 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, 2023 and 2022 is as follows: Summary of stock option activity STOCK OPTIONS OUTSTANDING Number Outstanding Weighted-Average Exercise Price per Share BALANCE AT MARCH 31, 2021 792,000 $ 0.40 Granted 270,000 1.36 Exercised ( 136,902 ) 0.32 Forfeited/expired ( 108,098 ) 0.27 Reclassified 244,000 0.52 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 34 The following table summarizes information about employee stock options outstanding and exercisable at March 31, 2023: 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 $0.32 - $0.35 320,000 0.4 $ 0.34 264,634 $ 0.34 $0.38 - $0.50 421,000 0.8 $ 0.42 225,352 $ 0.42 $0.54 - $1.40 446,000 4.3 $ 1.03 104,929 $ 1.22 1,049,000 2.0 $ 0.66 594,915 $ 0.53 The 1,049,000 options outstanding as of March 31, 2023 are nonqualified stock options. The exercise price of all options granted through March 31, 2023 has been equal to or greater than the fair market value, as determined by our Board of Directors or based upon publicly quoted market values of our common stock on the date of the grant. 4. Commitments and Contingencies We have a noncancelable lease agreement for our facilities at 6797 Winchester Circle, Boulder, Colorado. The lease expires October 31, 2024. 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. 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, 2023. For the years ended March 31, 2023 and 2022, 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, 2023: Schedule of principal U.S. Bank payment Fiscal Year Amount 2024 386,667 2025 232,139 Total operating lease payments 618,806 Less imputed interest ( 25,313 ) Total operating lease liabilities $ 593,493 Weighted-average remaining lease term 1.5 years Weighted-average discount rate 5.0 % On February 8, 2021, we entered into a second unsecured promissory note under the PPP for a principal amount of $ 533,118 . This was our second PPP loan. During the quarter that ended September 30, 2021, we achieved the requirements for forgiveness of the second note and recognized the forgiveness as extinguishment of debt income of $ 533,118 . On November 15, 2022, we entered into a loan and security agreement with Pathward, N.A. (formerly Crestmark 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 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. 35 The minimum future EIDL payment, by fiscal year, as of March 31, 2023 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 The minimum future U.S. Bank payment, by fiscal year, as of March 31, 2023 is as follows: Schedule of principal U.S. Bank payment Fiscal Year Amount 2024 18,400 2025 18,400 2026 16,867 Total $ 53,667 During September 2022, we entered into a note agreement with U.S. Bank for $ 115,004 . The note is for five 5 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 December 31, 2022 is as follows: Schedule of principal U.S. Bank payment Fiscal Year Amount 2024 23,000 2025 23,000 2026 23,000 Thereafter 36,090 Total $ 105,090 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, 2023, 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, 2023 and 2022. 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, 2023 March 31, 2022 Current: Federal $ — $ — State — — Total current — — Deferred: Federal ( 12,000 ) ( 52,000 ) State ( 1,000 ) ( 10,000 ) Total deferred ( 13,000 ) ( 62,000 ) Valuation allowance 13,000 62,000 Total $ — $ — 36 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, 2023 March 31, 2022 Expected income tax rate $ ( 68,000 ) $ ( 14,000 ) State income taxes, net of federal tax benefit ( 13,000 ) ( 3,000 ) PPP forgiveness — ( 133,000 ) Other permanent differences 12,000 10,000 Research credits — ( 9,000 ) Change in valuation allowance 69,000 149,000 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, 2023 March 31, 2022 Other deferred assets $ 42,000 $ 58,000 Valuation allowance ( 42,000 ) ( 58,000 ) Current deferred tax assets — — Credits and net operating loss carryforwards 1,829,000 2,303,000 Valuation allowance ( 1,829,000 ) ( 2,303,000 ) Long-term deferred tax assets — — Total deferred tax assets — — Valuation allowance — — Long-term deferred tax liabilities — — Total deferred tax liabilities — — Net deferred tax assets (liabilities) $ — $ — The primary components of our deferred tax assets are described below: Years Ended March 31, 2023 March 31, 2022 Differences in reporting long-term assets $ 42,000 $ 58,000 Credits and net operating loss carryforwards 1,829,000 2,303,000 Less valuation allowance ( 1,871,000 ) ( 2,361,000 ) 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, 2023, we had approximately $ 7.3 million of net operating loss carryovers for tax purposes. Additionally, we have approximately $ 376,000 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, 2024. In fiscal years ended after March 31, 2023, net operating losses expire at various dates through March 31, 2043 . Our net operating loss carryovers at March 31, 2023 include $455,000 in income tax deductions related to stock options which will be tax effected and the benefit will be reflected as a credit to additional paid-in capital when realized. As such, these deductions are not reflected in our deferred tax assets. The Internal Revenue Code contains provisions, which may limit the net operating loss carryforwards available to be used in any given year if certain events occur, including significant changes in ownership interests. 37 6. Major Customers/Suppliers We depend on sales that are generated from hospitals’ ongoing usage of AEM surgical instruments. In fiscal year 2023, 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 $ 55,715 and $ 71,908 to an entity owned by one of our directors in fiscal years 2023 and 2022, 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. 38 Item 9 . Changes In and Disagreements with Accountants on Accounting and Financial Disclosure. None.