UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 21549

 

Form 10-Q

 

[X]       QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

     For the quarterly period ended September 30, 2020

OR

[_]       TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

    For the transition period from __________ to________

 

Commission file number: 001-11789

 

ENCISION INC.

(Exact name of registrant as specified in its charter)

 

Colorado		84-1162056
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

 

6797 Winchester Circle

Boulder, Colorado 80301

(Address of principal executive offices)

 

(303) 444-2600

(Registrant’s telephone number)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes x No o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.  

 

Large accelerated filer [_]	Accelerated filer [_]
Non-accelerated filer [_]	Smaller reporting company [X]
(Do not check if a smaller reporting company)	Emerging growth company [_]

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  [_]

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o No x

 

Securities registered pursuant to Section 12(b) of the Securities Exchange Act of 1934:

Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, no par value	ECIA	OTC Bulletin Board

 

Securities registered under Section 12(g) of the Act: None

 

Common Stock, no par value	11,582,641 Shares
(Class)	(outstanding at October 31, 2020)

 

 

ENCISION INC.

 

FORM 10-Q

 

For the Three and Six Months Ended September 30, 2020

 

 

INDEX

 

			Page Number
PART I.   FINANCIAL INFORMATION
ITEM 1 - Condensed Interim Financial Statements:
	-       Condensed Balance Sheets as of September 30, 2020 and March 31, 2020		3
	-       Condensed Statements of Operations for the Three and Six Months Ended September 30, 2020 and 2019		4
	-       Condensed Statements of Cash Flows for the Six Months Ended September 30, 2020 and 2019		5
	-       Notes to Condensed Interim Financial Statements		6
ITEM 2 - Management’s Discussion and Analysis of Financial Condition and Results of Operations			12
ITEM 4 - Controls and Procedures			20
PART II.  OTHER INFORMATION
ITEM 6 - Exhibits			21
SIGNATURE			22

 

 

 

 

 

PART I FINANCIAL INFORMATION

 

ITEM 1 - Condensed Interim Financial Statements

 

Encision Inc.

Condensed Balance Sheets

(Unaudited)

 

		September 30, 2020				March 31,          2020
ASSETS
Current assets:
Cash and cash equivalents		$	1,007,192			$	385,132
Accounts receivable, net of allowance for doubtful accounts of $27,000 at September 30, 2020 and $58,000 at March 31, 2020			1,038,240				881,194
Inventories, net of reserve for obsolescence of $62,000 at September 30, 2020 and $39,000 at March 31, 2020			1,557,325				1,625,901
Prepaid expenses			70,882				72,639
Total current assets			3,673,639				2,964,866
Equipment, at cost:
Furniture, fixtures and equipment			2,969,584				3,130,640
Accumulated depreciation			(2,794,340	)			(2,923,482	)
Equipment, net			175,244				207,158
Right of use asset			1,192,787				1,317,057
Patents, net of accumulated amortization of $306,383 at September 30, 2020 and $291,337 at March 31, 2020			223,178				228,296
Other assets			20,495				19,548
TOTAL ASSETS		$	5,285,343			$	4,736,925
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable		$	297,229			$	444,823
Line of credit			416,506				370,498
Accrued compensation			194,303				218,806
Other accrued liabilities			187,094				96,077
Accrued lease liability			288,367				278,271
Total current liabilities			1,383,499				1,408,475
Long-term liability:
Accrued lease liability, net of current portion			1,082,608				1,144,432
Economic injury disaster loan			150,640				—
Unsecured promissory note			598,567				—
Total liabilities			3,215,314				2,552,907
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; 11,582,641 shares issued and outstanding at September 30, 2020 and March 31, 2020			24,249,007				24,232,477
Accumulated (deficit)			(22,178,978	)			(22,048,459	)
Total shareholders’ equity			2,070,029				2,184,018
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY		$	5,285,343			$	4,736,925

 

The accompanying notes to financial statements are an integral part of these condensed statements.

 

 

 

Encision Inc.

Condensed Statements of Operations

(Unaudited)

 

 

 

		Three Months Ended								Six Months Ended
		September 30, 2020				September 30, 2019				September 30, 2020				September 30, 2019
NET REVENUE:
Product		$	1,781,260			$	1,924,434			$	3,094,139			$	3,853,009
Service			99,148				—				133,836				—
Total revenue			1,880,408				1,924,434				3,227,975				3,853,009
COST OF REVENUE:
Product			841,381				875,440				1,524,729				1,871,043
Service			51,432				—				68,776				—
Total cost of revenue			892,813				875,440				1,593,505				1,871,043
GROSS PROFIT			987,595				1,048,994				1,634,470				1,981,966
OPERATING EXPENSES:
Sales and marketing			564,617				536,995				932,265				1,067,501
General and administrative			338,541				304,194				625,625				649,795
Research and development			162,455				172,668				304,062				408,811
Total operating expenses			1,065,613				1,013,857				1,861,952				2,126,107
OPERATING INCOME (LOSS)			(78,018	)			35,137				(227,482	)			(144,141	)
Interest expense, net			(17,154	)			(6,211	)			(34,633	)			(8,995	)
Other income, net			103,958				960				131,596				1,127
Interest expense and other income, net			86,804				(5,251	)			96,963				(7,868	)
INCOME (LOSS) BEFORE PROVISION FOR INCOME TAXES			8,786				29,886				(130,519	)			(152,009	)
Provision for income taxes			—				—				—				—
NET INCOME (LOSS)		$	8,786			$	29,886			$	(130,519	)		$	(152,009	)
Net income (loss) per share—basic and diluted		$	0.00			$	0.00			$	(0.01	)		$	(0.01	)
Weighted average shares—basic			11,582,641				11,558,355				11,582,641				11,558,355
Weighted average shares—diluted			11,745,161				11,592,074				11,582,641				11,558,355

 

 

 

 

The accompanying notes to financial statements are an integral part of these condensed statements.

 

 

 

 

 

 

 

Encision Inc.

Condensed Statements of Cash Flows

(Unaudited)

 

 

		Six Months Ended
		September 30, 2020				September 30, 2019
Operating activities:
Net (loss)		$	(130,519	)		$	(152,009	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization			47,323				79,918
Share-based compensation expense			16,530				15,365
(Recovery from) doubtful accounts, net			(31,000	)			(1,000	)
Provision for (recovery from) inventory obsolescence, net			23,000				(12,000	)
Other income from release of account payable			(56,435	)			—
Changes in operating assets and liabilities:
Right of use asset, net			72,542				20,128
Accounts receivable			(126,046	)			42,085
Inventories			45,576				141,582
Prepaid expenses and other assets			810				50,080
Accounts payable			(91,159	)			(265,744	)
Accrued compensation and other accrued liabilities			66,514				(121,846	)
Net cash (used in) operating activities			(162,864	)			(203,441	)
Investing activities:
Acquisition of property and equipment			(363	)			(42,547	)
Patent costs			(9,928	)			(3,528	)
Net cash (used in) investing activities			(10,291	)			(46,075	)
Financing activities:
Borrowings from credit facility, net change			46,008				93,045
Unsecured promissory note			598,567				—
EIDL loan			150,640				—
Net cash generated by financing activities			795,215				93,045
Net increase (decrease) in cash and cash equivalents			622,060				(156,471	)
Cash and cash equivalents, beginning of period			385,132				298,348
Cash and cash equivalents, end of period		$	1,007,192			$	141,877
Supplemental disclosure:
Right of use asset		$	1,257,390			$	1,214,983
Accrued lease liability		$	1,383,473			$	1,279,675
Interest paid		$	34,633			$	2,783

 

 

 

The accompanying notes to financial statements are an integral part of these condensed statements.

 

 

 

 

ENCISION INC.

 

NOTES TO CONDENSED INTERIM FINANCIAL STATEMENTS

 

SEPTEMBER 30, 2020

(Unaudited)

 

Note 1. ORGANIZATION AND NATURE OF BUSINESS

 

Encision Inc. is a medical device company that designs, develops, manufactures and markets patented surgical instruments that provide greater safety to, and saves lives of, patients undergoing minimally-invasive surgery. We believe that our patented AEM^® (Active Electrode Monitoring) surgical instrument technology is changing the marketplace for electrosurgical devices and instruments by providing a solution to a patient safety risk in laparoscopic surgery. Our sales to date have been made principally in the United States.

 

We have an accumulated deficit of $22,178,978 at September 30, 2020. A significant portion of our operating funds have been provided by issuances of our common stock and warrants, a line of credit, and the exercise of stock options to purchase our common stock. Shareholders’ equity decreased by $113,989 since March 31,2020 as a result of our loss of $130,519, and increased as a result of share-based compensation of $16,530. Should our liquidity be diminished in the future because of operating losses, we may be required to seek additional capital.

 

Our strategic marketing and sales plan is designed to expand the use of our products in surgically active hospitals and surgery centers in the United States.

 

We have been actively monitoring the novel coronavirus (“COVID-19”) situation and its impact globally. Our production facilities continued to operate during the year as they had prior to the COVID-19 pandemic with minimal change, other than for enhanced safety measures intended to prevent the spread of the virus. The remote working arrangements and travel restrictions imposed by various governments had limited impact on our ability to maintain operations during the year, as our manufacturing operations have generally been exempted from stay-at-home orders. However, we cannot predict the impact of the progression of the COVID-19 pandemic on future results due to a variety of factors, including the continued good health of our employees, the ability of suppliers to continue to operate and deliver, our ability and our customers to maintain operations, continued access to transportation resources, the changing needs and priorities of customers, any further government and/or public actions taken in response to the pandemic and ultimately the length of the pandemic. We will continue to closely monitor the COVID-19 pandemic in order to ensure the safety of our people and our ability to serve our customers and patients worldwide.

 

Note 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Basis of Presentation. The condensed interim financial statements included herein have been prepared by us, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles accepted in the United States (“GAAP”) have been condensed or omitted pursuant to such rules and regulations, although we believe that the disclosures made are adequate to make the information presented not misleading. The condensed interim financial statements and notes thereto should be read in conjunction with the financial statements and the notes thereto included in our Annual Report on Form 10-K for the fiscal year ended March 31, 2020, filed on June 12, 2020.

 

The accompanying condensed interim financial statements have been prepared, in all material respects, in conformity with the standards of accounting measurements and reflect, in the opinion of management, all adjustments necessary to summarize fairly the financial position and results of operations for such periods in accordance with GAAP. All adjustments are of a normal recurring nature. The results of operations for the most recent interim period are not necessarily indicative of the results to be expected for the full year.

 

Use of Estimates in the Preparation of Financial Statements. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions. Such estimates and assumptions affect the reported amounts of assets and liabilities as well as disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of sales and expense during the reporting period. Actual results could differ from those estimates.

 

 

 

Cash and Cash Equivalents. For purposes of reporting cash flows, we consider all cash and highly liquid investments with an original maturity of three months or less to be cash equivalents.

 

Fair Value of Financial Instruments. Our financial instruments consist of cash, cash equivalents, short-term trade receivables, payables, line of credit, EIDL loan and unsecured promissory note. The carrying values of cash, cash equivalents, trade receivables, payables, line of credit, EIDL loan and unsecured promissory note approximate their fair value due to their short maturities.

 

Concentration of Credit Risk. Financial instruments, which potentially subject us to concentrations of credit risk, consist of cash and cash equivalents, accounts receivable line of credit and unsecured promissory note. From time to time, the amount of cash on deposit with financial institutions may exceed the $250,000 federally insured limit at September 30, 2020. We believe that cash on deposit that exceeds $250,000 with financial institutions is financially sound and the risk of loss is minimal.

 

We have no significant off-balance sheet concentrations of credit risk such as foreign exchange contracts, options contracts or other foreign hedging arrangements. We maintain the majority of our cash balances with one financial institution in the form of demand deposits.

 

Accounts receivable are typically unsecured and are derived from transactions with and from entities in the healthcare industry primarily located in the United States. Accordingly, we may be exposed to credit risk generally associated with the healthcare industry. We maintain allowances for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. The net accounts receivable balance at September 30, 2020 of $1,038,240 and at March 31, 2020 of $881,194 included no more than 8% from any one customer.

 

Inventories. Inventories are stated at the lower of cost (first-in, first-out basis) or net realizable value. We reduce inventory for estimated obsolete or unmarketable inventory equal to the difference between the cost of inventory and the net realizable value based upon assumptions about future demand and market conditions. If actual market conditions are less favorable than those projected by management, additional inventory write-downs may be required. At September 30, 2020 and March 31, 2020, inventory consisted of the following:

 

		September 30, 2020				March 31, 2020
Raw materials		$	1,251,132			$	1,147,983
Finished goods			368,193				516,918
Total gross inventories			1,619,325				1,664,901
Less reserve for obsolescence			(62,000	)			(39,000	)
Total net inventories		$	1,557,325			$	1,625,901

 

Property and Equipment. Property and equipment are stated at cost, with depreciation computed over the estimated useful lives of the assets, generally five to seven years. Depreciation expense for the three and six months ended September 30, 2020 was $13,859 and $32,277, respectively, and for the three and six months ended September 30, 2019 was $30,388 and $66,722, respectively. We use the straight-line method of depreciation for property and equipment. Leasehold improvements are depreciated over the shorter of the remaining lease term or the estimated useful life of the asset. Maintenance and repairs are expensed as incurred and major additions, replacements and improvements are capitalized.

 

Long-Lived Assets. Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. A long-lived asset is considered impaired when estimated future cash flows related to the asset, undiscounted and without interest, are insufficient to recover the carrying amount of the asset. If deemed impaired, the long-lived asset is reduced to its estimated fair value. Long-lived assets to be disposed of are reported at the lower of their carrying amount or estimated fair value less cost to sell.

 

Patents. The costs of applying for patents are capitalized and amortized on a straight-line basis over the lesser of the patent’s economic or legal life (20 years from the date of application in the United States). Capitalized costs are expensed if patents are not issued. We review the carrying value of our patents periodically to determine whether the patents have continuing value and such reviews could result in the conclusion that the recorded amounts have been impaired.

 

 

 

 

Income Taxes. We account for income taxes under the provisions of FASB Accounting Standards Codification (“ASC”) Topic 740, “Accounting for Income Taxes” (“ASC 740”). ASC 740 requires recognition of deferred income tax assets and liabilities for the expected future income tax consequences, based on enacted tax laws, of temporary differences between the financial reporting and tax bases of assets and liabilities. ASC 740 also requires recognition of deferred tax assets for the expected future tax effects of all deductible temporary differences, loss carryforwards and tax credit carryforwards. Deferred tax assets are then reduced, if deemed necessary, by a valuation allowance for the amount of any tax benefits, which, more likely than not based on current circumstances, are not expected to be realized. As a result, no provision for income tax is reflected in the accompanying statements of operations. Should we achieve sufficient, sustained income in the future, we may conclude that some or all of the valuation allowance should be reversed. We are required to make many subjective assumptions and judgments regarding our income tax exposures. At September 30, 2020, we had no unrecognized tax benefits, which would affect the effective tax rate if recognized and had no accrued interest, or penalties related to uncertain tax positions.

 

Revenue Recognition. We record revenue at a single point in time, when control is transferred to the customer, 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.

 

Research and Development Expenses. We expense research and development costs for products and processes as incurred.

 

Stock-Based Compensation. Stock-based compensation is presented in accordance with the guidance of ASC Topic 718, “Compensation – Stock Compensation” (“ASC 718”). Under the provisions of ASC 718, 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.

 

Stock-based compensation expense recognized under ASC 718 for the three and six months ended September 30, 2020 was $8,997 and $16,530, respectively, and the three and six months ended September 30, 2019 was $7,663 and $15,365, respectively, which consisted of stock-based compensation expense related to grants of employee stock options.

 

Segment Reporting. We have concluded that we have two operating segments.

 

Recent Accounting Pronouncements. We have reviewed all recently issued accounting pronouncements by the Financial Accounting Standards Board. There were no new material accounting standards issued in the quarter ended September 30, 2020 that impacted the Company.

 

 

 

Note 3. Basic and Diluted Income and Loss per Common Share

 

We report both basic and diluted net income (loss) per share. Basic net income or loss per common share is computed by dividing net income or loss for the period by the weighted average number of common shares outstanding for the period. Diluted net income or loss per common share is computed by dividing the net income or loss for the period by the weighted average number of common and potential common shares outstanding during the period if the effect of the potential common shares is dilutive. The shares used in the calculation of dilutive potential common shares exclude options to purchase shares where the exercise price was greater than the average market price of common shares for the period.

 

The following table presents the calculation of basic and diluted net loss per share:

 

		Three Months Ended								Six Months Ended
		September 30, 2020				September 30, 2019				September 20, 2020				September 30, 2019
Net income (loss)		$	8,786			$	29,886			$	(130,519	)		$	(152,009	)
Weighted-average basic shares outstanding			11,582,641				11,558,355				11,582,641				11,558,355
Effect of dilutive securities			162,520				33,719				—				—
Weighted-average diluted shares			11,745,161				11,592,074				11,582,641				11,558,355
Basic net income (loss) per share		$	0.00			$	0.00			$	(0.01	)		$	(0.01	)
Diluted net income (loss) per share		$	0.00			$	0.00			$	(0.01	)		$	(0.01	)
Antidilutive employee stock options and RSUs			913,480				958,567				1,076,000				992,286

Note 4. COMMITMENTS AND CONTINGENCIES

 

We have a noncancelable lease agreement for our facilities at 6797 Winchester Circle, Boulder, Colorado. The lease expires October 31, 2024.

 

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) ("ASU 2016-02"), which modified lease accounting for both lessees and lessors to increase transparency and comparability by recognizing lease assets and lease liabilities by lessees for those leases classified as either finance or operating leases under previous accounting standards and disclosing key information about leasing arrangements. We adopted Topic 842 on April 1, 2019, using the alternative modified transition method, which requires a cumulative effect adjustment, if any, to the opening balance of retained earnings to be recognized on the date of adoption with prior periods not restated. There was no cumulative effect adjustment recorded on April 1, 2019. The primary impact for us was the balance sheet recognition of right-of-use (“ROU”) assets and lease liabilities for operating leases as a lessee.

 

We determine if an arrangement contains a lease at inception. We currently do not have any finance leases. Operating lease ROU assets and operating lease liabilities are recognized based on the present value of the future minimum lease payments over the lease term at commencement date. ROU assets also include any initial direct costs incurred and any lease payments made at or before the lease commencement date, less lease incentives received. We use our incremental borrowing rate based on the information available at the commencement date in determining the lease liabilities as our leases do not provide an implicit rate. Lease expense is recognized on a straight-line basis over the lease term.

 

The minimum future lease payment, by fiscal year, as of September 30, 2020 is as follows:

 

Fiscal Year				Amount
	2021			$	174,000
	2022				357,667
	2023				372,167
	2024				386,667
	2025				232,139
	Total			$	1,522,640

 

On August 9, 2019, we entered into a loan and security agreement with Crestmark Bank. The loan is due on demand, has no financial covenants and is secured by all of our assets. 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 (3.25% at September 30, 2020) plus 1.5%, 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 $500,000, a loan fee of 1% annually, and an exit fee of 3%, 2% and 1% during years one, two and three, respectively. At September 30, 2020, we had borrowed $416,506 under our line of credit and $261,329 available to borrow under our line of credit.

On April 17, 2020, we entered into an unsecured promissory note under the Paycheck Protection Program (the “PPP”) for a principal amount of $598,567. The PPP was established under the recently congressionally approved Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”). The term of the PPP loan is for five 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. Such forgiveness will be determined based upon the use of loan proceeds for payroll costs, rent and utility costs, and the maintenance of employee and compensation levels. In the quarter that ends December 31, 2020, we will apply for loan forgiveness and, since we achieved the requirements for forgiveness, we believe that all of the $598,567 will be forgiven.

 

 

 

On August 4, 2020, we received $150,000 in loan funding from the U.S. Small Business Administration (“SBA”) under the Economic Injury Disaster Loan (“EIDL”) program administered by the SBA, which program was expanded pursuant to the CARES Act. The EIDL is evidenced by a promissory note, dated August 1, 2020 in the original principal amount of $150,000 with the SBA, the lender. Under the terms of the Note, interest accrues on the outstanding principal at the rate of 3.75% per annum. The term of the Note is thirty years, though it may be payable sooner upon an event of default under the Note. Under the Note, we will be obligated to make equal monthly payments of principal and interest beginning on August 1, 2021 through the maturity date of August 1, 2050. The Note may be prepaid in part or in full, at any time, without penalty.

 

Aside from the operating lease, EIDL loan and promissory note, we do not have any material contractual commitments requiring settlement in the future.

 

We are subject to regulation by the United States Food and Drug Administration (“FDA”). The FDA provides regulations governing the manufacture and sale of our products and regularly inspects us and other manufacturers to determine compliance with these regulations. We believe that we were in substantial compliance with all known regulations at September 30, 2020. FDA inspections are conducted periodically at the discretion of the FDA. Our latest inspection by the FDA occurred in October 2019.

 

Note 5. SHARE-BASED COMPENSATION

 

The provisions of ASC 718-10-55 requires the measurement and recognition of compensation expense for all share-based payment awards made to our employees and directors, including employee stock options and RSUs, based on estimated fair values. The following table summarizes stock-based compensation expense related to employee stock options for the three and six months ended September 30, 2020 and 2019, which was allocated as follows:

 

		Three Months Ended								Six Months Ended
		September 30, 2020				September 30, 2019				September 30, 2020				September 30, 2019
Cost of sales		$	1,116			$	724			$	1,834			$	1,405
Sales and marketing			1,277				803				2,435				1,593
General and administrative			5,999				5,442				11,170				11,064
Research and development			605				694				1,091				1,303
Stock-based compensation expense		$	8,997			$	7,663			$	16,530			$	15,365

 

Share-based compensation cost for stock options is measured at the grant date, based on the fair value as calculated by the Black-Scholes-Merton ("BSM") option-pricing model. The BSM option-pricing model requires the use of actual employee exercise behavior data and the application of a number of assumptions, including expected volatility, risk-free interest rate and expected dividends. There were 70,000 stock options granted and 12,000 stock options forfeited during the three months ended September 30, 2020, and 90,000 stock options granted and 12,000 stock options forfeited during the six months ended September 30, 2020. There were 45,000 stock options granted and 33,000 stock options forfeited during the three months ended September 30, 2019, and 85,000 stock options granted and 83,000 stock options forfeited during the six months ended September 30, 2019.

 

As of September 30, 2020, approximately $123,000 of total unrecognized compensation costs related to nonvested stock options is expected to be recognized over a period of five years.

 

 

 

 

Note 6. RELATED PARTY TRANSACTION

 

We paid consulting fees of $14,500 and $29,103 during the three and six months ended September 30, 2020, respectively, and $16,500 and $36,594 to an entity owned by one of our directors during the three and six months ended September 30, 2019, respectively.

 

 

Note 7. SUBSEQUENT EVENTS

 

We evaluated all of our activity as of the date the condensed interim financial statements were issued and concluded that no subsequent events have occurred that would require recognition in our financial statements or disclosed in the notes to our condensed interim financial statements.

 

 

 

 

ITEM 2 - MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

Certain statements contained in this section on Management’s Discussion and Analysis are not historical facts, including statements about our strategies and expectations with respect to new and existing products, market demand, acceptance of new and existing products, marketing efforts, technologies and opportunities, market and industry segment growth, and return on investments in products and markets. These statements are forward looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and involve substantial risks and uncertainties that may cause actual results to differ materially from those indicated by the forward looking statements. All forward looking statements in this section on Management’s Discussion and Analysis are based on information available to us on the date of this document, and we assume no obligation to update such forward looking statements. Readers of this Form 10-Q are strongly encouraged to review the section entitled “Risk Factors” in our Form 10-K for the fiscal year ended March 31, 2020.

 

General

 

Encision Inc., a medical device company based in Boulder, Colorado, has developed and markets innovative technology that provides unprecedented outcomes and patient safety in minimally-invasive surgery. We believe that our patented Active Electrode Monitoring (“AEM®”) AEM EndoShield™ Burn Protection System is changing the marketplace for electrosurgical devices and laparoscopic instruments by providing a solution to a well-documented hazard unique to laparoscopic surgery. The Center for Medicare and Medicaid Services has published its Hospital-Acquired Condition Reduction Program. The program has begun to levy as much as a 1% penalty on Medicare reimbursements to hospitals in the lower quadrant of performance for selected quality indicators, including accidental puncture and laceration (“APL”). Examples of APL include the use of a cautery device (electrosurgery) or scissors to dissect a tissue plane that errantly causes an injury to underlying bowels. A Safety Communication was released by the FDA on May 29, 2018. It is on the FDA's website at: https://www.fda.gov/MedicalDevices/Safety/AlertsandNotices/ucm608637.htm. The Safety Communication states that, "In addition to serving as an ignition source, monopolar energy use can directly result in unintended patient burns from capacitive coupling and intra-operative insulation failure. If a monopolar electrosurgical unit (“ESU”) is used: Do not activate when near or in contact with other instruments.”

 

We address market opportunities created by the increase in minimally-invasive surgery (“MIS”) and surgeons’ use of electrosurgery devices in these procedures. The product opportunity exists in that monopolar electrosurgery instruments used in laparoscopic procedures provide excellent clinical results, but are also susceptible to causing inadvertent collateral tissue damage outside the surgeon’s field of view due to insulation failure and capacitive coupling. The risk of unintended electrosurgical burn injury to the patient in laparoscopic surgery has been well documented. This risk poses a threat to patient safety, including the risk of death, and creates liability exposure for surgeons and hospitals, as well as increased and preventable readmissions.

 

Our patented AEM technology provides surgeons with the desired tissue effects, while capturing stray electrosurgical energy that can cause unintended and unseen tissue injury that may result in death. AEM Surgical Instruments are equivalent to conventional instruments in size, shape, ergonomics, functionality and competitive pricing, but they incorporate “Active Electrode Monitoring” technology to dynamically and continuously monitor the flow of electrosurgical current, thereby helping to prevent patient injury. With our “shielded and monitored” instruments, surgeons are able to perform electrosurgical procedures more safely, effectively and economically than is possible using conventional instruments or alternative energy sources.

 

 

 

AEM technology has been recommended and endorsed by many groups involved in MIS. Surgeons, nurses, biomedical engineers, the medicolegal community, malpractice insurance carriers and electrosurgical device manufacturers advocate the use of AEM technology. We have focused our marketing strategies to date on expanding the market awareness of the AEM technology and our broad independent endorsements and have continued efforts to improve and expand the AEM technology penetration.

 

When a hospital or surgery center changes to AEM technology, we receive recurring revenue from sales of replacement instruments. We believe that there is no directly competing technology to supplant AEM products. The replacement market of reusable and disposable AEM products in hospitals and surgery centers that use our AEM technology represented over 90% of our product revenue during the three and six months ended September 30, 2020. This revenue stream is expected to grow as the base of accounts using AEM technology expands. In addition, we intend to further develop disposable versions of more of our AEM products in order to meet market demands and expand our sales opportunities.

 

We have an accumulated deficit of $22,178,978 at September 30, 2020. A significant portion of our operating funds have been provided by issuances of our common stock and warrants, a line of credit, and the exercise of stock options to purchase our common stock. Should our liquidity be diminished in the future because of operating losses, we may be required to seek additional capital.

 

During the six months ended September 30, 2020, we used $162,864 of cash in our operating activities and used $363 for investments in property and equipment. As of September 30, 2020, we had $1,007,192 in cash and cash equivalents available to fund future operations, an increase of $622,060 from March 31, 2020. Our working capital was $2,290,140 at September 30, 2020 compared to $1,556,391 at March 31, 2020. The increase to working capital was principally the result of obtaining an unsecured promissory note and an EIDL loan, which are classified as long-term liabilities.

 

Historical Perspective

 

We were organized in 1991 and spent several years developing the AEM monitoring system and protective sheaths to adapt to conventional electrosurgical instruments. We have invested heavily in an effort to protect our valuable technology, and, as a result of this effort, we have been issued 16 unexpired relevant patents that together form a significant intellectual property position. Our patents relate to the basic shielding and monitoring technologies that we incorporate into our AEM products.

 

Our AEM Surgical Instruments have been engineered to provide a seamless transition for surgeons switching from conventional laparoscopic instruments. AEM technology has been integrated into instruments that have the same look, feel and functionality as conventional instruments that surgeons have been using for years. The AEM product line encompasses the full range of instrument sizes, types and styles favored by surgeons. Additionally, we continue to improve quality and add to the product line. These additions include more disposable versions, the introduction of hand-activated instruments, our enhanced scissors, our eEdge™ scissors, our EM3 AEM Monitor, our AEM EndoShield Burn Protection System and the recent introduction of our AEM 2X enTouch® Scissors. Hospitals can make a complete and smooth conversion to our product line, thereby advancing patient safety in MIS with optimal convenience.

 

Outlook

 

Installed Base of AEM Monitoring Equipment: We believe that sales of our installed base of AEM products will increase as the inherent risks associated with monopolar laparoscopic electrosurgery become more widely acknowledged and as we focus on increasing our sales efficiency and continue to enhance our product line. We expect that the replacement sales of electrosurgical instruments and accessories will also increase as additional facilities adopt AEM technology. We anticipate that the efforts to improve the productivity of sales representatives carrying the AEM product line, along with the introduction of next generation products, may provide the basis for increased sales and profitable operations. However, these measures, or any others that we may adopt, may not result in either increased sales or profitable operations.

 

 

 

We believe that the unique performance of the AEM technology and our breadth of independent endorsements provide an opportunity for continued market share growth. In our view, market awareness and awareness of the clinical credibility of the AEM technology, as well as awareness of our endorsements, are improving, and we expect this awareness to benefit our sales efforts for the remainder of fiscal year 2021. Our objectives for the remainder of fiscal year 2021 are to optimize sales execution, to expand market awareness of the AEM technology and to maximize the number of additional hospital and surgery center accounts switching to AEM instruments while retaining existing customers. In addition, acceptance of AEM products depends on surgeons’ preference for our instruments, which depends on factors such as ergonomics, quality and ease of use in addition to the technological and safety advantages of AEM products. If surgeons prefer other instruments to our instruments, our business results will suffer.

 

We have been actively monitoring the COVID-19 situation and its impact. Our primary objectives have remained the same throughout the pandemic: to support the safety of our team members and their families and continue to support patients. Our production facility continued to operate during the year as they had prior to the COVID-19 pandemic with very little change, other than for enhanced safety measures intended to prevent the spread of the virus. Our capital and financial resources, including overall liquidity, remain strong. The remote working arrangements and travel restrictions imposed by various governments had limited impact on our ability to maintain operations during the year, as our manufacturing operation has generally been exempted from stay-at-home orders. However, we cannot predict the impact of the progression of the COVID-19 pandemic on future results due to a variety of factors, including the continued good health of our employees, the ability of suppliers to continue to operate and deliver, our ability and our customers to maintain operations, continued access to transportation resources, the changing needs and priorities of customers, any further government and/or public actions taken in response to the pandemic and ultimately the length of the pandemic. We will continue to closely monitor the COVID-19 pandemic in order to ensure the safety of our people and our ability to serve our customers and patients worldwide.

 

We have entered into a Master Services Agreement with Auris Health, Inc. (“Auris Health”). Auris Health is a part of the Johnson & Johnson family of companies. Under the agreement, we will collaborate on the integration of AEM technology into monopolar instrumentation produced by Auris Health for advanced surgical applications. This work is ongoing.

 

Possibility of Operating Losses: We have an accumulated deficit of $22,178,978 at September 30, 2020. A significant portion of our operating funds have been provided by issuances of our common stock and warrants, a line of credit, and the exercise of stock options to purchase our common stock. Should our liquidity be diminished in the future because of operating losses, we may be required to seek additional capital. We have made strides toward improving our operating results but due to the ongoing need to develop, optimize and train our direct sales managers and the independent sales representative network, the need to support the development of refinements to our product line, and the need to increase sustained sales to a level adequate to cover fixed and variable operating costs, we may operate at a net loss. Sustained losses, or our inability to generate sufficient cash flow from operations to fund our obligations, may result in a need to raise additional capital.

 

Revenue Growth: We expect to generate increased product revenue in the U.S. from sales to new customers and from expanded sales to existing customers as the medical device industry stabilizes and our network of direct and independent sales representatives becomes more efficient. We believe that the visibility and credibility of the independent clinical endorsements for AEM technology will contribute to new accounts and increased product revenue in fiscal year 2021. We also expect to increase market share through promotional programs of placing our AEM monitors at no charge into hospitals that commit to standardize with AEM instruments. However, all of these efforts to increase market share and grow product revenue will depend in part on our ability to expand the efficiency and effective coverage range of our direct and independent sales representatives, as well as maintain and in some cases, improve the quality of our product offerings. The omission or delay of elective surgeries would negatively impact the extent and timing of revenue growth. Service revenue represents design, development and product supply revenue from our agreements with strategic partners.

 

We also have longer-term initiatives in place to improve our prospects. We expect that development of next generation versions of our AEM products will better position our products in the marketplace and improve our retention rate at hospitals and surgery centers that have changed to AEM technology, enabling us to grow our sales. We are exploring overseas markets to assess opportunities for sales growth internationally. Finally, we intend to explore opportunities to capitalize on our proven AEM technology via licensing arrangements and strategic alliances. These efforts to generate additional sales and further the market penetration of our products are longer term in nature and may not materialize. Even if we are able to successfully develop next generation products or identify potential international markets or strategic partners, we may not be able to capitalize on these opportunities.

 

Gross Profit and Gross Margins: Gross profit and gross margins can be expected to fluctuate from quarter to quarter as a result of product sales mix, sales volume and service revenue. Gross margins on products manufactured or assembled by us are expected to improve at higher levels of production and sales.

 

 

 

Sales and Marketing Expenses: We continue to refine our domestic and international distribution capability, and we believe that sales and marketing expenses will decrease as a percentage of net sales with increasing sales volume.

 

Research and Development Expenses: Research and development expenses are expected to increase to support quality improvement efforts and development of refinements to our AEM product line and new products, which will further expand options for surgeons and hospitals.

 

Results of Operations

 

For the quarter ended September 30, 2020 compared to the quarter ended September 30, 2019.

 

Net Product revenue. Net product revenue for the quarter ended September 30, 2020 was $1,781,260 compared to $1,924,434 for the quarter ended September 30, 2019, a decrease of 7%. The decrease of AEM product net revenue is attributable to business lost from hospitals that used AEM technology during the quarter, principally as a result of COVID-19. Product revenue for the quarter ended September 30, 2020 decreased primarily as a result of the decrease in non-essential surgical procedures performed during this period due to the COVID-19 pandemic.

 

Net Service revenue. Net service revenue for the quarter ended September 30, 2020 was $99,148 compared to none for the quarter ended September 30, 2019. Net service revenue was for engineering services performed under a Master Services Agreement with Auris Health, Inc. (“Auris Health”). Auris Health is a part of the Johnson & Johnson family of companies. Under the agreement, we will collaborate on the integration of AEM technology into monopolar instrumentation produced by Auris Health for advanced surgical applications. The engineering services are ongoing.

Gross profit. Gross profit for the quarter ended September 30, 2020 of $987,595 represented a decrease of 6% from gross profit of $1,048,994 for the quarter ended September 30, 2019. Gross profit decreased in line with decreased revenue. Gross profit as a percentage of sales (gross margins) was 52.5% for the quarter ended September 30, 2020 and 54.5% for the quarter ended September 30, 2019. The gross margin decrease from last year’s quarter was primarily the result of fewer units produced, thereby resulting in a higher labor and overhead cost per unit.

Sales and marketing expenses. Sales and marketing expenses of $564,617 for the quarter ended September 30, 2020 represented an increase of 5% from sales and marketing expenses of $536,995 for the quarter ended September 30, 2019. The increase was the result of higher compensation, higher commission rates for exceeding quotas and sales samples for the recent introduction of our AEM 2X enTouch® scissors. The increase was partially reduced by reduced advertising, trade shows and product samples.

 

General and administrative expenses. General and administrative expenses of $338,541 for the quarter ended September 30, 2020 represented an increase of 11% from general and administrative expenses of $304,194 for the quarter ended September 30, 2019. The increase was the result of an increase to compensation.

 

Research and development expenses. Research and development expenses of $162,455 for the quarter ended September 30, 2020 represented a decrease of 6% compared to $172,668 for the quarter ended September 30, 2019. The decrease was the result of an allocation of expenses from research and development resources to the Auris Health project.

 

Other income, net. Other income, net of $103,958 for the quarter ended September 30, 2020 included a tariff refund of $47,521 and a non-cash reduction of accounts payables of $56,435.

 

Net income. Net income was $8,786 for the quarter ended September 30, 2020 compared to net income of $29,886 for the quarter ended September 30, 2019. The net income decrease was principally a result of lower revenue, lower gross profit and higher total operating expenses, as explained above.

 

For the six months ended September 30, 2020 compared to the six months ended September 30, 2019.

 

Net Product revenue. Net product revenue for the six months ended September 30, 2020 was $3,094,139 compared to $3,853,009 for the six months ended September 30, 2019, a decrease of 20%. The decrease of AEM product net revenue is attributable to business lost from hospitals that used AEM technology during the six months, principally as a result of COVID-19 . Product revenue for the six months ended September 30, 2020 decreased primarily as a result of the decrease in non-essential surgical procedures performed during this period due to the COVID-19 pandemic, especially in our first quarter.

 

 

 

Net Service revenue. Net service revenue for the six months ended September 30, 2020 was $133,836 compared to none for the six months ended September 30, 2019. Net service revenue was for engineering services performed under a Master Services Agreement with Auris Health, Inc. (“Auris Health”). Auris Health is a part of the Johnson & Johnson family of companies. Under the agreement, we will collaborate on the integration of AEM technology into monopolar instrumentation produced by Auris Health for advanced surgical applications. The engineering services are ongoing.

 

Gross profit. Gross profit for the six months ended September 30, 2020 of $1,634,470 represented a decrease of 18% from gross profit of $1,981,966 for the quarter ended September 30, 2019. Gross profit decreased in line with decreased revenue. Gross profit as a percentage of sales (gross margins) was 51% for the six months ended September 30, 2020 and 2019.

 

Sales and marketing expenses. Sales and marketing expenses of $932,265 for the six months ended September 30, 2020 represented a decrease of 13% from sales and marketing expenses of $1,067,501 for the six months ended September 30, 2019. The decrease was the result of lower trade shows, advertising and travel.

 

General and administrative expenses. General and administrative expenses of $625,625 for the six months ended September 30, 2020 represented a decrease of 4% from general and administrative expenses of $649,795 for the quarter ended September 30, 2019. The decrease was the result of lower outside services.

 

Research and development expenses. Research and development expenses of $304,062 for the six months ended September 30, 2020 represented a decrease of 26% compared to $408,811 for the quarter ended September 30, 2019. The decrease was the result of lower compensation and an allocation of expenses from research and development resources to the Auris Health project.

 

Other income, net. Other income, net of $131,596 for the six months ended September 30, 2020 included a tariff refund of $75,161 and a non-cash reduction of accounts payables of $56,435.

 

Net loss. Net loss was $130,519 for the six months ended September 30, 2020 compared to net loss of $152,009 for the six months ended September 30, 2019. The net loss decrease was principally a result of lower total operating expenses and higher other income, and partially reduced by lower revenue and lower gross profit, as explained above.

 

The results of operations for the three and six months ended September 30, 2020 are not necessarily indicative of the results of operations for all or any part of the balance of the fiscal year.

 

Liquidity and Capital Resources

 

To date, a significant portion of our operating funds have been provided by issuances of our common stock and warrants, a line of credit, and the exercise of stock options to purchase our common stock. Common stock and additional paid in capital totaled $24,249,007 from inception through September 30, 2020.

On August 9, 2019, we entered into a loan and security agreement with Crestmark Bank. The loan is due on demand, has no financial covenants and is secured by all of our assets. 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 1.5%, 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 $500,000, a loan fee of 1% annually, and an exit fee of 3%, 2% and 1% during years one, two and three and six, respectively. At September 30, 2020, we had cash and cash equivalents of $1,007,192, borrowings of $598,567 under an unsecured promissory note, $150,640 under an EIDL loan and $416,506 under our line of credit, and $261,329 available to borrow under our line of credit.

On April 17, 2020, we entered into an unsecured promissory note under the PPP for a principal amount of $598,567. The PPP was established under the recently congressionally approved Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”). The term of the PPP loan is for five 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. Such forgiveness will be determined based upon the use of loan proceeds for payroll costs, rent and utility costs, and the maintenance of employee and compensation levels.

 

 

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 in the original principal amount of $150,000 with the SBA, the lender. Under the terms of the Note, interest accrues on the outstanding principal at the rate of 3.75% per annum. The term of the Note is thirty years, though it may be payable sooner upon an event of default under the Note. Under the Note, we will be obligated to make equal monthly payments of principal and interest beginning on August 1, 2021 through the maturity date of August 1, 2050. The Note may be prepaid in part or in full, at any time, without penalty.

Our operations used $162,864 of cash during the six months ended September 30, 2020 on net revenue of $3,227,975. Cash was principally used by the net loss. The amounts of cash used by operations for the six months ended September 30, 2020 are not necessarily indicative of the expected amounts of cash to be generated from or used in operations in fiscal year 2021. At September 30, 2020, we had $1,007,192 in cash and cash equivalents available to fund future operations. Our working capital was $2,290,140 at September 30, 2020 compared to $1,556,391 at March 31, 2020. The increase to working capital was principally the result of obtaining an unsecured promissory note and an EIDL loan, both of which are classified as long-term liabilities. Current liabilities were $1,383,499 at September 30, 2020 compared to $1,408,475 at March 31, 2020.

 

We have a noncancelable lease agreement for our facilities at 6797 Winchester Circle, Boulder, Colorado. The lease expires October 31, 2024.

 

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) (“ASU 2016-02”), which modified lease accounting for both lessees and lessors to increase transparency and comparability by recognizing lease assets and lease liabilities by lessees for those leases classified as operating leases under previous accounting standards and disclosing key information about leasing arrangements. The primary impact for us was the balance sheet recognition of right-of-use (“ROU”) assets and lease liabilities for operating leases as a lessee.

 

Operating lease ROU assets and operating lease liabilities are recognized based on the present value of the future minimum lease payments over the lease term at commencement date. ROU assets also include any initial direct costs incurred and any lease payments made at or before the lease commencement date, less lease incentives received. We use our incremental borrowing rate based on the information available at the commencement date in determining the lease liabilities as our leases do not provide an implicit rate. Lease expense is recognized on a straight-line basis over the lease term.

 

The minimum future lease payment, by fiscal year, as of September 30, 2020 is as follows:

 

Fiscal Year				Amount
	2021			$	174,000
	2022				357,667
	2023				372,167
	2024				386,667
	2025				232,139
	Total			$	1,522,640

 

Aside from the operating lease and EIDL loan, we do not have any material contractual commitments requiring settlement in the future.

 

As of September 30, 2020, the following table shows our contractual obligations for the periods presented:

 

		Payment due by period
Contractual obligations		Totals				Less than 1 year				1-3 years				3-5 years				More than 5 years
Operating lease obligations		$	1,522,640			$	352,834			$	744,335			$	425,471			$	—
Line of credit			416,506				416,506				—				—				—
Unsecured promissory note			598,567				—				—				598,567				—
EIDL loan			150,640				494				6,180				6,660				137,306
Total		$	2,688,353			$	769,834			$	750,515			$	1,030,698			$	137,306

 

 

 

 

Our fiscal year 2021 operating plan is focused on increasing new accounts, retaining existing customers, growing revenue, increasing gross profits and conserving cash. We are investing in research and development efforts to develop next generation versions of the AEM product line. We have invested in manufacturing property and equipment to manufacture disposable scissors inserts internally and to reduce our cost of product revenue. We cannot predict with certainty the expected revenue, gross profit, net income or loss and usage of cash, cash equivalents or restricted cash for fiscal year 2021. If we are unable to manage our business operations in line with budget expectations, it could have a material adverse effect on our business viability, financial position, results of operations and cash flows.

 

Income Taxes

 

As of March 31, 2020, net operating loss carryforwards totaling approximately $8.2 million are available to reduce taxable income in the future. The net operating loss carryforwards expire, if not previously utilized, at various dates beginning in the fiscal year ending March 31, 2021. We have not paid income taxes since our inception. The Tax Reform Act of 1986 and other income tax regulations contain provisions which may limit the net operating loss carryforwards available to be used in any given year if certain events occur, including changes in ownership interests. We have established a valuation allowance for the entire amount of our deferred tax asset since inception due to our history of losses. Should we achieve sufficient, sustained income in the future, we may conclude that some or all of the valuation allowance should be reversed. If some or all of the valuation allowance were reversed, then, to the extent of the reversal, a tax benefit would be recognized which would result in an increase to net income.

 

Critical Accounting Policies and Estimates

 

Our discussion and analysis of our financial condition and results of operations are based upon our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, sales and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our estimates, including those related to bad debts, inventories, sales returns, contingencies and litigation. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. We believe the following critical accounting policies affect the more significant judgments and estimates used in the preparation of our financial statements.

 

We record revenue at a single point in time, when control is transferred to the customer, which is consistent with past practice. We will continue to apply our current business processes, policies, systems and controls to support recognition and disclosure. Our shipping policy is FOB Shipping Point. We recognize revenue from sales to stocking distributors when there is no right of return, other than for normal warranty claims. We have no ongoing obligations related to product sales, except for normal warranty obligations. We evaluated the requirement to disaggregate revenue, and concluded that substantially all of its revenue comes from multiple products within a line of medical devices. Our engineering service contracts are billed on a time and materials basis and revenue is recognized over time as the services are performed.

 

We maintain allowances for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. If the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances would be required, which would increase our expenses during the periods in which any such allowances were made. The amount recorded as a provision for bad debts in each period is based upon our assessment of the likelihood that we will be paid on our outstanding receivables, based on customer-specific as well as general considerations. To the extent that our estimates prove to be too high, and we ultimately collect a receivable previously determined to be impaired, we may record a reversal of the provision in the period of such determination.

 

We provide for the estimated cost of product warranties at the time sales are recognized. While we engage in extensive product quality programs and processes, including actively monitoring and evaluating the quality of our component suppliers, we have experienced some costs related to warranties. The warranty accrual is based on historical experience and is adjusted based on current experience. Should actual warranty experience differ from our estimates, revisions to the estimated warranty liability would be required.

 

 

 

We reduce inventory for estimated obsolete or unmarketable inventory equal to the difference between the cost of inventory and the estimated realizable value based on assumptions about future demand and market conditions. If actual market conditions are less favorable than those projected by management, additional inventory write-downs may be required. Any write-downs of inventory would reduce our reported net income during the period in which such write-downs were applied. To the extent that our estimates prove to be too high, and we ultimately utilize or sell inventory previously determined to be impaired, we may record a reversal of the provision in the period of such determination.

 

We recognize deferred income tax assets and liabilities for the expected future income tax consequences, based on enacted tax laws, of temporary differences between the financial reporting and tax bases of assets and liabilities. Deferred tax assets are then reduced, if deemed necessary, by a valuation allowance for the amount of any tax benefits, which, more likely than not based on current circumstances, are not expected to be realized. Should we maintain sufficient, sustained income in the future, we may conclude that all or some of the valuation allowance should be reversed.

 

Property and equipment are stated at cost, with depreciation computed over the estimated useful lives of the assets, generally five to seven years. We use the straight-line method of depreciation for property and equipment. Leasehold improvements are depreciated over the shorter of the remaining lease term or the estimated useful life of the asset. Maintenance and repairs are expensed as incurred and major additions, replacements and improvements are capitalized.

 

We amortize our patent costs over their estimated useful lives, which is typically the remaining statutory life. From time to time, we may be required to adjust these useful lives of our patents based on advances in technology, competitor actions, and the like. We review the recorded amounts of patents at each period end to determine if their carrying amount is still recoverable based on our expectations regarding sales of related products. Such an assessment, in the future, may result in a conclusion that the assets are impaired, with a corresponding charge against earnings.

 

We currently estimate forfeitures for stock-based compensation expense related to employee stock options at 40% and evaluate the forfeiture rate quarterly. Other assumptions that are used in calculating stock-based compensation expense include risk-free interest rate, expected life, expected volatility and expected dividend.

 

 

 

 

ITEM 4 - CONTROLS AND PROCEDURES

 

Management’s Evaluation of Disclosures Controls and Procedures

 

Our management, comprised of our Chief Executive Officer (CEO) and Principal Financial and Accounting Officer (PFAO) evaluated the effectiveness of our disclosure controls and procedures as of September 30, 2020. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Based on that evaluation, and taking the matters described below into account, the Company’s CEO and PFAO have concluded that our disclosure controls and procedures over financial reporting were not effective during reporting period ended September 30, 2020.

 

Management’s Report on Internal Control Over Financial Reporting

 

Our management is responsible for establishing and maintaining adequate internal control over our financial reporting. “Internal control over financial reporting” is defined in Rule 13a-15(f) or 15d-15(f) under the Exchange Act as a process designed by, or under the supervision of, a company’s principal executive and principal financial officers and effected by a company’s board of directors, management and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements in accordance with U.S. generally accepted accounting principles and includes those policies and procedures that:

●  pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of a company;

●  provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S. generally accepted accounting principles and that receipts and expenditures of a company are being made only in accordance with authorizations of management and directors of a company; and

● provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of a company’s assets that could have a material effect on the financial statements.

 

A material weakness is a control deficiency, or combination of control deficiencies, such that there is a reasonable possibility that a material misstatement of the annual or interim financial statements will not be prevented or detected on a timely basis.

 

Our internal control system was designed to provide reasonable assurance to our management and board of directors regarding the preparation and fair presentation of published financial statements. All internal control systems, no matter how well designed, have inherent limitations, which may not prevent or detect misstatements. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

 

Based upon our evaluation of internal controls, our management determined that our controls over financial reporting were not adequate, specifically as it relates to our entity-level control environment, which inhibits management’s ability to ensure complex accounting calculations are performed correctly. As such, our CEO and PFAO have concluded that our disclosure controls and procedures contain a material weakness as of the end of the period covered by this Report. Because of the material weaknesses identified, a reasonable possibility exists that a material misstatement in our financial statements will not be prevented or detected on a timely basis. While our internal controls are established and followed, it is clear by the identified weaknesses that they were not operating as they should be. Management believes that this was the case due to our limited staff. However, our Chief Executive Officer and our Principal Financial and Accounting Officer, believe that the financial statements included in this quarterly report on Form 10-Q present, in all material respects, our financial position, results of operations and cash flows for the periods presented, in conformity with U.S. GAAP.

 

This Quarterly Report on Form 10-Q does not include an attestation report of our independent registered public accounting firm regarding internal control over financial reporting due to an exemption provided by the Dodd-Frank Wall Street Reform and Consumer Protection Act, or the Dodd-Frank Act, enacted into law in July 2010. The Dodd-Frank Act provides smaller public companies and debt-only issuers with a permanent exemption from the requirement to obtain an external audit on the effectiveness of internal financial reporting controls provided in Section 404(b) of the Sarbanes- Oxley Act. We are a smaller reporting company and are eligible for this exemption under the Dodd-Frank Act. We will continue to monitor the effectiveness of our internal control over financial reporting in the areas affected by the facts described above and employ any additional tools and resources deemed necessary to ensure that our financial statements are fairly stated in all material respects.

 

 

 

PART II. OTHER INFORMATION

 

 

ITEM 6 - Exhibits

 

The following exhibits are filed with this report on Form 10-Q or are incorporated by reference:

 

10.1

Economic Injury Disaster Loan dated as of August 1, 2020 (incorporated by reference to Exhibit 10.2 to our Quarterly Report on Form 10-Q filed on August 14, 2020).

31.1

Certification of President and CEO under Rule 13a-14(a) of the Exchange Act (filed herewith).

31.2

Certification of Principal Financial and Accounting Officer under Rule 13a-14(a) of the Exchange Act (filed herewith).

32.1

Certifications of President and CEO and Principal Financial and Accounting Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith).

101

The following materials from Encision Inc.’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2020, formatted in XBRL (Extensible Business Reporting Language): (i) the unaudited Condensed Balance Sheets, (ii) the unaudited Condensed Statements of Income, (iii) the unaudited Condensed Statements of Cash Flows, and (iv) Notes to Condensed Financial Statements, tagged at Level I.

 

 

*

Filed herewith.

 

SIGNATURE

 

 

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

	ENCISION INC.
Dated: November 13, 2020
	By:	/s/ Mala Ray
		Mala Ray Controller Principal Accounting Officer & Principal Financial Officer