ENCISION INC

Current report

We are a smaller reporting company as defined by Rule 12b-2 of the Exchange Act and are not required to provide the information required under this item.

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Certain statements contained in this section on Management’s Discussion and Analysis are not historical facts, including statements about 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 the Form 10-K for the fiscal year ended March 31, 2024.

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General

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Encision Inc., a medical device company based in Boulder, Colorado, has developed and markets innovative technology that provides unprecedented outcomes and patient safety in minimally-invasive surgery. Approximately one in every three surgeons may have a patient injury each year from preventable stray energy burns. We believe that the 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.

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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.

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The 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 preventing patient injury from stray energy burns. With the “shielded and monitored” instruments, surgeons can perform electrosurgical procedures more safely, effectively and economically than is possible using conventional instruments or alternative energy sources.

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The AEM system consists of shielded 5mm AEM Instruments and an AEM monitor. The AEM Instruments are designed to function identically to the conventional 5mm instruments that surgeons are familiar with, but with the added benefit of enhanced patient safety. The entire line of laparoscopic instruments has the integrated AEM design and includes the full range of instruments that are common in laparoscopic surgery today. The AEM monitor is compatible with most electrosurgical generators and can also be adapted for use in robotic systems. AEM Surgical Instruments provide enhanced patient safety, require no change in surgeon technique and are cost competitive. Thus, conversion to AEM Surgical Instruments is easy and economical.

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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.

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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, 2024. This revenue stream is expected to grow as the base of accounts using AEM technology expands. In addition, we intend to further develop disposable versions of more of our AEM products in order to meet market demands and expand our sales opportunities.

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We have an accumulated deficit of $22,693,269 at September 30, 2024. A significant portion of our operating funds have been provided by issuances of our common stock and warrants and the exercise of stock options to purchase our common stock, loans, and (in some periods) by operating profits. Should our liquidity be diminished in the future because of operating losses, we may be required to seek additional capital.

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During the six months ended September 30, 2024, we generated $192,699 of cash in our operating activities and used $42,559 for investments in property and equipment. At September 30, 2024, we had $230,014 in cash and at March 31, 2024 we had $42,509 in cash available to fund future operations, an increase of $187,505 from March 31, 2024. The increase to cash was principally the result of cash generated by operating activities and borrowing from our line of credit. Our working capital was $1,142,362 at September 30, 2024 compared to $1,206,252 at March 31, 2024.

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Historical Perspective

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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.

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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.

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Outlook

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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.

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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 2025. Our objectives for the remainder of fiscal year 2025 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.

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Possibility of Operating Losses: We have an accumulated deficit of $22,693,269 at September 30, 2024. A significant portion of our operating funds have been provided by issuances of our common stock and warrants and the exercise of stock options to purchase our common stock, loans, and (in some periods) by operating profits. Should our liquidity be diminished in the future because of operating losses, we may be required to seek additional capital. 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.

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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 2025. 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.

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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.

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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.

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

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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.

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Results of Operations

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For the quarter ended September 30, 2024 compared to the quarter ended September 30, 2023.

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Net Product revenue. Net product revenue for the quarter ended September 30, 2024 was $1,653,820 compared to $1,752,413 for the quarter ended September 30, 2023, a decrease of 6%. The decrease in net product revenue is primarily due to a reduction in the sales of disposable products, which suggests a decrease in the number of procedures performed during this perod. This reduction in procedural volume has, in turn, lowered the overall demand for our products.

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Net Service revenue. Net service revenue for the quarter ended September 30, 2024 was $101,568 compared to $73,978 for the quarter ended September 30, 2023. Increase was because of services performed under a Master Services Agreement with Vicarious Surgical Inc.

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Gross profit. Gross profit for the quarter ended September 30, 2024 of $828,482 represented a decrease of 4% from gross profit of $862,609 for the quarter ended September 30, 2023. Gross profit decreased because of a non-cash cost increase of $81,603 to inventory reserves for the quarter ended September 30, 2024. Gross profit on product net revenue as a percentage of sales (gross margin) was 47% for the quarters ended September 30, 2024 and 2023. If the cost increase to inventory reserve were excluded, then gross profit on net revenue would have been 52%.

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Sales and marketing expenses. Sales and marketing expenses of $458,480 for the quarter ended September 30, 2024 represented an increase of 18% from sales and marketing expenses of $389,342 for the quarter ended September 30, 2023. The increase was because of trade shows and commissions.

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General and administrative expenses. General and administrative expenses of $373,405 for the quarter ended September 30, 2024 represented an increase of 2% from general and administrative expenses of $366,377 for the quarter ended September 30, 2023.This increase was because of additional staffing needs.

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Research and development expenses. Research and development expenses of $155,515 for the quarter ended September 30, 2024 represented an increase of 54% compared to $100,854 for the quarter ended September 30, 2023. The increase was because of an increase of allocated resources for product development.

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*Net loss.*Net loss was $170,262 for the quarter ended September 30, 2024 compared to net loss of $7,529 for the quarter ended September 30, 2023. The increase to net loss was primarily because of the increase to inventory reserves and an increase to operating expenses.

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For the six months ended September 30, 2024 compared to the six months ended September 30, 2023.

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Net Product revenue. Net product revenue for the six months ended September 30, 2024 was $3,245,779 compared to $3,365,965 for the six months ended September 30, 2023, a decrease of 4%. The decrease of net product revenue is attributable to decreased demand for our products.

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Net Service revenue. Net service revenue for the six months ended September 30, 2024 was $140,539 compared to $113,809 for the six months ended September 30, 2023. Net service revenue for the six months ended September 30, 2023 was for engineering services performed under a Master Services Agreement with Vicarious Surgical Inc.

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Gross profit. Gross profit for the six months ended September 30, 2024 of $1,771,145 represented an increase of 3% from gross profit of $1,725,334 for the six months ended September 30, 2023. Gross profit on product net revenue as a percentage of sales (gross margin) was 52% for the six months ended September 30, 2024 and 50% for the six months ended September 30, 2023. Gross profit on net revenue increased because of higher operating efficiencies.

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Sales and marketing expenses. Sales and marketing expenses of $881,716 for the six months ended September 30, 2024 represented an increase of 7% from sales and marketing expenses of $822,778 for the six months ended September 30, 2023. The increase was the result of higher commissions.

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General and administrative expenses. General and administrative expenses of $725,310 for the six months ended September 30, 2024 represented a decrease of 4% from general and administrative expenses of $755,133 for the six months ended September 30, 2023. The decrease was because of decreased bad debt expense and outside accountants’ cost.

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Research and development expenses. Research and development expenses of $294,695 for the six months ended September 30, 2024 represented an increase of 9% compared to $269,274 for the six months ended September 30, 2023. The increase was the result of an increase to allocations.

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*Net loss.*Net loss was $148,222 for the six months ended September 30, 2024 compared to net loss of $147,983 for the six months ended September 30, 2023.

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The results of operations for the three and six months ended September 30, 2024 are not necessarily indicative of the results of operations for all or any part of the balance of the fiscal year.