Certain statements contained in this section are not historical facts, including
statements about our strategies and expectations about new and existing
products, market demand, acceptance of new and existing products, 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 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-K are strongly encouraged to review
the section entitled "Risk Factors".



Outlook




Installed Base of AEM Monitoring Equipment. We believe that we are gaining more
awareness in medico-legal circles and publications and from presentations at
medical meetings. We believe that improvement in the quality of sales
representatives carrying our AEM product line, along with increased marketing
efforts and the introduction of new products, may provide the basis for
increased sales and continuing profitable operations. However, these measures,
or any others that we may adopt, may not result in either increased sales or
continuing profitable operations.



Possibility of Operating Losses. We have an accumulated deficit of $21,529,319
at March 31, 2022. We have made significant strides toward improving our
operating results. However, due to the ongoing need to develop new products, the
need to develop, optimize and train our sales distribution network 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 in future periods.



Sales Growth. We expect to generate increased sales in the U.S. from sales to
new hospital customers and to grow AEM instrumentation sales to existing
accounts. In fiscal year 2023, we will focus on growing our AEM franchise
through a campaign focused on the clinical, economic and safety benefits of AEM
technology, a medico-legal initiative and our new AEM products. In addition,
prior years' efforts in vertical integration have given us three core
competencies - electrosurgery, instrument design, and manufacturing - which we
expect will allow us to increase sales from our strategic partnership
initiatives. Our goal is to offer our customers an AEM disposable counterpart
for each AEM reusable instrument.



16





Gross Margin. We believe that if our fiscal year 2023 revenues increase, then
our fiscal year 2023 gross profit and gross margin, as a percentage of revenue,
will increase due to a higher gross margin on product revenue as a result of an
increase in product produced.



Sales and Marketing Expenses. We continue our efforts to expand domestic and
international distribution capability, and we believe that sales and marketing
expenses will need to be maintained at a healthy level in order to expand our
market visibility and optimize the field sales capability of converting new
hospital customers to AEM technology. Sales and marketing expenses are expected
to increase as we increase our marketing efforts to support our direct sales
representatives. In fiscal year 2023, we expect to have six direct sales
managers. Each direct sales manager also manages a separate territory.



Manufacturing. We believe that we will be able to achieve cost reductions, and
provide better control over quality and consistency, by producing products on
our own. We manufacture our own disposable scissor inserts and are exploring
other products that we may manufacture internally.



Research and Development Expenses. Research and development expenses are
expected to increase to support expansion to our AEM product line, which will
further expand the instrument options for the surgeon. New refinements to AEM
product lines are planned for introduction in fiscal year 2023.



Results of Operations



Net Product revenue. Net product revenue for the fiscal year ended March 31,
2022 ("FY 22") was $6,914,678, and for the fiscal year ended March 31, 2021 ("FY
21"), net revenue was $7,010,657, a decrease of 1%. The decrease of AEM product
net revenue is attributable to business lost from hospitals that used AEM
technology during the year. Product revenue for the fiscal year ended March 31,
2022 decreased primarily as a result of the decrease in non-essential surgical
procedures performed during this period due to the COVID-19 pandemic. At March
31, 2022, we had approximately $136,000 of backorders due to a constraint by our
product vendors in supplying us with product materials.



Net Service revenue. Net service revenue for FY 22 was $753,958, and for FY 21
net service revenue was $527,177. 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 collaborated on the integration of AEM
technology into monopolar instrumentation produced by Auris Health for advanced
surgical applications. On August 23, 2021, we entered into a Supply Agreement
with Auris Health, Inc. On May 5, 2022, the parties mutually agreed to terminate
all of our agreements.



Gross profit.Gross profit in FY 22 was $3,788,418, which represented a decrease
of $116,685, or 3%, from gross profit in FY 21 of $3,905,103. Gross profit
margin was 49% of net revenue for FY 22 and 52% of net revenue for FY 21. Gross
profit decreased in FY 22 from FY 21 due principally to higher material costs.
Our supplier agreements with GPOs include fixed pricing, with no allowance for
inflationary pricing. Our product revenue from GPOs in FY 22 was approximately
82% of our total product revenue. In FY 22, we had increased product vendor
costs that were not allowed to be passed on to our GPO customers and resulted in
a compressed gross profit margin.



Sales and marketing expenses. Sales and marketing expenses were $2,084,110 in FY
22, an increase of $63,675, or 3%, from $2,020,435 in FY 21. The increase was
the result of increased advertising, trade shows and travel. The increase was
partially offset by lower sales samples.



General and administrative expenses. General and administrative expenses were
$1,381,087 in FY 22, an increase of $4,320, or 0%, from $1,376,767 in FY 21. The
increase was the result of increased insurance costs. The net increase was
partially offset by decreased outside services.



17





Research and development expenses. Research and development expenses were
$918,155 in FY 22, an increase of $348,613 or 61%, from $$569,542 in FY 21. The
increase was the result of increased test and prototype materials, outside
services and a write-off of tooling, all of which relate to the development

of
new products.

Other income, net. Other income, net of $134,935 for FY 21 included a tariff refund of $75,161 and a non-cash reduction of accounts payables of $56,435.

Net income and loss. Net loss in FY 22 of $65,594 represented a loss increase of $650,328 compared to FY 21 net income of $584,734. The loss increase was principally the result of decreased gross profit and increased operating expenses, as discussed above.

Liquidity and Capital Resources





To date, operating funds have been provided primarily by issuances of our common
stock and warrants, the exercise of stock options to purchase our common stock,
loans and, in some years, by operating profits. To date, common stock and
additional paid in capital totaled $24,275,183 from our inception through March
31, 2022. Our operations used $444,432 and provided $219,946 of cash in FY 22
and FY 21, respectively, on net revenue of $7,668,636 and $7,537,834 in FY 22
and FY 21, respectively. Working capital was $2,325,331 at March 31, 2022
compared to $2,921,743 at March 31, 2021. The decrease in working capital was
primarily caused by the FY 22 net loss. Current liabilities were $1,276,391 at
March 31, 2022 compared to $1,176,251 at March 31, 2021.



During January 2021, we canceled our relationship with Crestmark Bank. We had no
borrowings and incurred a $20,000 exit fee. 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 of $774 beginning on August 1, 2023 through
the maturity date of August 1, 2050. The Note may be prepaid in part or in full,
at any time, without penalty. During January 2021, 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. 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 Consolidated Appropriations Act of 2020, enacted December
27, 2020. 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 ended December 31, 2020, we achieved
the requirements for forgiveness, all of the $598,567 was forgiven, and we
recognized the forgiveness as extinguishment of debt income of $598,567. On
February 8, 2021, we entered into a second unsecured promissory note under the
PPP for a principal amount of $533,118. During the quarter that ended September
30, 2021, we achieved the requirements for forgiveness of the second note, and
we recognized the forgiveness as extinguishment of debt income of $533,118.



We believe that the unique performance of AEM technology and our breadth of
independent endorsements provide an opportunity for market share growth. We
believe that the market awareness of AEM technology and its endorsements is
continually improving and that this will benefit revenue efforts in FY 23. We
believe that we enter FY 23 having achieved improvements in the clinical
credibility of our technology. Our FY 23 operating plan is focused on growing
revenue, increasing gross profits, increasing research and development costs
while increasing profits and positive cash flows. We cannot predict with
certainty the expected revenue, gross profit, net income or loss and usage of
cash, cash equivalents and restricted cash for FY 23. We believe that cash
resources and borrowing capacity will be sufficient to fund our operations for
at least the next twelve months under our current operating plan. If we are
unable to manage business operations in line with our budget expectations, it
could have a material adverse effect on business viability, financial position,
results of operations and cash flows. Further, if we are not successful in
sustaining profitability and remaining at least cash flow break-even, additional
capital may be required to maintain ongoing operations.



18





We have explored and are continuing to explore options to provide additional
financing to fund future operations as well as other possible courses of action.
Such actions include, but are not limited to, securing a larger credit facility,
sales of debt or equity securities (which may result in dilution to existing
shareholders), licensing of technology, strategic alliances and other similar
actions. There can be no assurance that we will be able to obtain additional
funding (if needed) through a sale of our common stock or loans from financial
institutions or other third parties or through any of the actions discussed
above on terms acceptable to us or at all. If we cannot sustain profitable
operations and additional capital is unavailable, lack of liquidity could have a
material adverse effect on our business viability, financial position, results
of operations and cash flows.



Income Taxes



As of March 31, 2022, net operating loss carryforwards totaling approximately
$7.7 million were available to reduce taxable income in the future. The net
operating loss carryforwards expire, if not previously utilized, at various
dates beginning in fiscal year 2023. 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 our
ownership. 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.

Off-Balance Sheet Financing Arrangements

We do not utilize variable interest entities or other off-balance sheet financial arrangements.





Contractual Obligations



Effective November 9, 2017, we extended our noncancelable lease agreement
through July 31, 2024, and further extended it through October 31, 2024, for our
facilities at 6797 Winchester Circle, Boulder, Colorado. Lease expense was
$357,644 for the fiscal year ended March 31, 2022 and $322,961 for the fiscal
year ended March 31, 2021. The minimum future lease payment, by fiscal year, as
of March 31, 2022 is as follows:



Fiscal Year         Amount
   2023           $   357,667
   2023               372,167
   2024               386,667
   2025               232,139
   Total          $ 1,348,640
On August 4, 2020, we received $150,000 in loan funding from the U.S. Small
Business Administration ("SBA") under the Economic Injury Disaster Loan ("EIDL")
program administered by the SBA, which program was expanded pursuant to the
CARES Act. The EIDL is evidenced by a promissory note, dated August 1, 2021 in
the original principal amount of $150,000 with the SBA, the lender. Under the
terms of the Note, interest accrues on the outstanding principal at the rate of
3.75% per annum. The term of the Note is thirty years, though it may be payable
sooner upon an event of default under the Note. Under the Note, we will be
obligated to make equal monthly payments of principal and interest of $731
beginning on August 1, 2022 through the maturity date of August 1, 2050. The
Note may be prepaid in part or in full, at any time, without penalty.



The minimum future EIDL payment, by fiscal year, as of March 31, 2022 is as
follows:



Fiscal Year       Amount
  2023               1,997
  2023               3,091
  2024               3,208
  2025               3,331
  2026               3,457
  Thereafter       136,916
  Total          $ 152,000

During January 2022, 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.





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The minimum future U.S. Bank payment, by fiscal year, as of March 31, 2022 is as
follows:



Fiscal Year        Amount
   2023             18,400
   2023             18,400
   2024             18,400
   2025             18,400
   2026             15,060
   Total          $ 88,660






                                                         Payment due by period
                                                  Less
                                                 than  1                                     More than 5
Contractual obligations          Totals           year         1-3 years      3-5 years         years
Lease obligations              $ 1,348,640     $   357,667     $  758,834     $  232,139     $        -
EIDL note                          152,000           1,997          6,299          6,788         136,916
U.S. Bank note                      88,660          18,400         36,800         33,460              -
Totals                         $ 1,589,300     $   378,064     $  801,933     $  272,387     $   136,916

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

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, warranty, 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 product 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.



20





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 warranty. The warranty
accrual is based upon 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 market 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. Any write-downs of inventory
would reduce our reported net income during the period in which such write-downs
were applied.



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 achieve
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 three to seven years. We use the
straight-line method of depreciation for property and equipment. Leasehold
improvements are depreciated over the shorter of the remaining lease term or the
estimated useful life of the asset. Maintenance and repairs are expensed as
incurred and major additions, replacements and improvements are capitalized.



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 lives 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.



Stock-based compensation is presented in accordance with the guidance of
Financial Accounting Standards Board ("FASB") Accounting Standards Codification
("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 made to employees and directors including employee
stock options based on estimated fair values 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.

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