ENCISION INC

For the quarter ended December 31, 2024, compared to the quarter ended December 31, 2023.

Net Product revenue. Net product revenue for the quarter ending December 31, 2024, was $1,457,402 compared to $1,561,103 for the quarter ending December 31, 2023, a decrease of 7%. 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 period. This reduction in procedural volume has, in turn, lowered the overall demand for our products.

Net Service revenue. Net service revenue for the quarter ended December 31, 2024, was $128,179 compared to $20,461 for the quarter ended December 31, 2023. The increase was because of the services performed under a Master Services Agreement with Vicarious Surgical Inc.

Gross profit. Gross profit for the quarter ended December 31, 2024, of $850,290 represented an increase of 17% from gross profit of $727,239 for the quarter ended December 31, 2023. Gross profit on product net revenue as a percentage of sales (gross margin) was 54% and 46% for the quarters ended December 31, 2024, and 2023. This increase is due to a price increase applied to our product line and higher operating efficiencies.

Sales and marketing expenses: Sales and marketing expenses of $377,153 for the quarter ended December 31, 2024, represented a decrease of 9% from sales and marketing expenses of $413,992 for the quarter ended December 31, 2023. The decrease was because of reduced sales commissions earned during the period.

General and administrative expenses. General and administrative expenses of $355,200 for the quarter ended December 31, 2024, represented an increase of 1% from general and administrative expenses of $351,569 for the quarter ended December 31, 2023.

Research and development expenses. Research and development expenses of $138,804 for the quarter ending December 31, 2024, represented a decrease of 8% compared to $151,077 for the quarter ending December 31, 2023. The decrease was due to a reduction in staff during the period and fluctuating resource allocation.

Net loss. Net loss was $24,668 for the quarter ending December 31, 2024, compared to net loss of $207,130 for the quarter ending December 31, 2023. The decrease in net loss was primarily because of the increase in the gross margin, a result of higher operating efficiencies.

For the nine months ended December 31, 2024, compared to the nine months ended December 31, 2023.

Net Product revenue. Net product revenue for the nine months ending December 31, 2024, was $4,703,181 compared to $4,927,069 for the nine months ending December 31, 2023, a decrease of 5%. The decrease in net product revenue is attributable to decreased demand for our products.

Net Service revenue. Net service revenue for the nine months ending December 31, 2024, was $268,718 compared to $134,269 for the nine months ending December 31, 2023. Net service revenue for the nine months ended December 31, 2023 was for engineering services performed under a Master Services Agreement with Vicarious Surgical Inc.

Gross profit. Gross profit for the nine months ending December 31, 2024, of $2,621,434 represented an increase of 7% from gross profit of $2,452,573 for the nine months ended December 31, 2023. Gross profit on product net revenue as a percentage of sales (gross margin) was 53% for the nine months ending December 31, 2024, and 48% for the nine months ending December 31, 2023. This increase is due to a price increase applied to our product line and higher operating efficiencies.

Sales and marketing expenses. Sales and marketing expenses of $1,258,870 for the nine months ending December 31, 2024, represented an increase of 2% from sales and marketing expenses of $1,236,770 for the nine months ended December 31, 2023.

General and administrative expenses. General and administrative expenses of $1,080,507 for the nine months ending December 31, 2024, represented a decrease of 2% from general and administrative expenses of $1,106,703 for the nine months ending December 31, 2023. The decrease was because of the decrease in outside accountants’ costs.

Research and development expenses. Research and development expenses of $433,500 for the nine months ending December 31, 2024, represented an increase of 3% compared to $420,351 for the nine months ending December 31, 2023. The increase was the result of an increase in allocations.

*Net loss.*Net loss was $172,890 for the nine months ending December 31, 2024, compared to net loss of $355,112 for the nine months ending December 31, 2023.

The results of operations for the three and nine months ending December 31, 2024, 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, the exercise of stock options to purchase our common stock, loans, and (in some periods) by operating profits. Common stock and additional paid-in capital totaled $24,405,321 from inception through December 31, 2024.

On August 4, 2020, we received $150,000 in loan funding from the U.S. Small Business Administration (“SBA”) under the Economic Injury Disaster Loan (“EIDL”) program administered by the SBA, which program was expanded pursuant to the CARES Act. The EIDL is evidenced by a promissory note dated August 1, 2021, in the original principal amount of $150,000 with the SBA, the lender. Under the terms of the Note, interest accrues on the outstanding principle 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.

During December 2020, we entered into a note agreement with U.S. Bank for $92,000. The note is for five years at a 5% interest rate and the proceeds were used to purchase equipment. The note is secured by the equipment.

During July 2022, we entered into a note agreement with U.S. Bank for $115,004. The note is for five years at a 6% interest rate and the proceeds were used to purchase equipment. The note is secured by the equipment.

On November 15, 2023, we entered into a loan and security agreement with Pathward, N.A. (formerly Crestmark Bank). The loan is due on demand and has no financial covenants. Under the agreement, we were provided with a line of credit that is not to exceed the lesser of $1,000,000 or 85% of eligible accounts receivable. The interest rate is the prime rate plus 0.5%, with a floor of 6.75%, plus a monthly maintenance fee of 0.4%, based on the average monthly loan balance. Interest is charged on a minimum loan balance of $300,000, a loan fee of 0.5% at closing and annually, and an exit fee of 3%, 2%, and 1% during years one, two, and three, respectively.

Our operations generated $146,854 of cash during the nine months ending December 31, 2024, on net revenue of $4,971,899. The amounts of cash generated by operations for the nine months ending December 31, 2024, are not necessarily indicative of the expected amounts of cash to be generated from or used in operations in fiscal year 2025. At December 31, 2024, we had $347,919 in cash available to fund future operations and a line of credit for up to $718,473, restricted by eligible account receivables. Our working capital was $1,075,328 at December 31, 2024 compared to $1,206,252 at March 31, 2024. Current liabilities were $1,611,323 at December 31, 2024, compared to $1,220,022 at March 31, 2024. We have a noncancelable lease agreement for our facilities at 6797 Winchester Circle, Boulder, Colorado. The lease expires October 31, 2026.

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 the 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 to determine 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 EIDL payment by fiscal year as of December 31, 2024, is as follows:

During December 2020, we entered into a note agreement with U.S. Bank for $92,000. The note is for five years at a 5% interest rate and the proceeds were used to purchase equipment. The note is secured by the equipment.

The minimum future U.S. Bank payment by fiscal year as of December 31, 2024, is as follows:

During July 2022, we entered into a note agreement with U.S. Bank for $118,970. The note is for five years at a 6% interest rate and the proceeds were used to purchase equipment. The note is secured by the equipment.

The minimum future principal U.S. Bank payment by fiscal year as of December 31, 2024, is as follows:

Aside from the line of credit, operating lease, EIDL loan, and U.S. Bank loans, we do not have any material contractual commitments requiring settlement in the future.

As of December 31, 2024, the following table shows our contractual obligations for the periods presented:

Our fiscal year 2025 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 for fiscal year 2024. 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, 2024, net operating loss carryforwards totaling approximately $8.9 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, 2025. We have not paid income taxes since our inception. The Tax Reform Act of 1986 and other income tax regulations contain provisions that 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 assets since inception due to our history of losses. Should we achieve sufficient, sustained income in the future, we may conclude that some or all 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 in 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 ongoing 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 our 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 record deferred revenue when funds are received prior to the recognition of the associated revenue. We record a contract liability to deferred revenue, which includes customer prepayments and is included in other accrued liabilities.

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 the 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 expenses 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.