**U. S. Securities and Exchange Commission**

**Washington,D.C.  20549**

 

**Form10-QSB**

 

**ý****        QUARTERLYREPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934**

 

**For thequarterly period ended December 31, 2004**

 

**For thetransition period from              to             **

 

**Commissionfile number   0-28604**

 

**ENCISION INC.**

(Exact name ofsmall business issuer 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)                            |

 

**Checkwhether the issuer (1) filed all reports required to be filed by Section 13 of15(d) of the Exchange Act during the past 12 months (or for such shorter periodthat the registrant was required to file such reports), and (2) has beensubject to such filing requirements for the past 90 days.**

 

**Yes        ****ý****            No      ****o          **

 

**State the number of sharesoutstanding of each of the issuer’s classes of common equity, as of the latestpracticable date:**

 

| **Common  Stock, No par value** | ** ** | **6,267,474  Shares**              |
|---------------------------------|------------|------------------------------------|
| Class                           |       | (outstanding at January  31, 2005) |

 

**Transitional Small BusinessDisclosure Format**

 

**Yes        ****o           No        ****ý         **

 

 

----

 

**ENCISIONINC.**

 

**FORM10-QSB**

 

**For theQuarter Ended December 31, 2004**

 

**INDEX**

 
| **PART I.**     | **UNAUDITED FINANCIAL INFORMATION** |   |
|-----------------|------------------------------------------|--------|
|            |                                     |   |   |   |
| **ITEM 1** | –                                   |   | Condensed  Interim Financial Statements: |   |
|            | –                                   |   | Condensed Balance Sheets as of  December 31, 2004 and March 31, 2004 |   |
|            | –                                   |   | Condensed Statements  of Operations for the Three Months Ended December 31, 2004 and 2003 |   |
|            | –                                   |   | Condensed  Statements of Operations for the Nine Months Ended December 31, 2004 and 2003 |   |
|            | –                                   |   | Condensed Statements  of Cash Flows for the Nine Months Ended December 31, 2004 and 2003 |   |
|            | –                                   |   | Notes  to Condensed Interim Financial Statements |   |
|            |                                     |   |   |   |
| **ITEM  2**     | –                                   |   | Management’s  Discussion and Analysis of Financial Condition and Results of Operations |   |
|            |                                     |   |   |   |
| **ITEM 3**      | –                                   |   | Controls and  Procedures |   |
|            |                                     |   |   |   |
| **PART II.**    | **OTHER INFORMATION**                    |   |
|            |                                     |   |   |   |
| **ITEM 6**      | –                                   |   | Exhibits |   |
|            |                                     |   |   |   |
| **SIGNATURE**   |                                     |   |

 

2

----

 

**PART I                FINANCIAL INFORMATION**

 

**ITEM 1 – CONDENSED INTERIMFINANCIAL STATEMENTS**

 

ENCISION INC.

 

CONDENSED BALANCE SHEETS

 
| ** **                                                                                                                              | ** ** | **December 31,  2004** | ** ** | **March 31,  2004** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|---------------------|------------|
| ** **                                                                                                                              | ** ** | **(unaudited)**        | ** ** | **(audited)**       | ** ** |
| ASSETS                                                                                                                                  |       |                   |       |                |       |
| Cash and cash  equivalents                                                                                                              |       | $                      | 1,287,343  |                | $          | 1,356,607 |   |
| Accounts  receivable, net of allowance for doubtful accounts of $41,500 and $62,000,  respectively                                      |       | 1,030,822              |       | 947,692             |       |
| Inventory, net  of reserve for obsolescence of $75,000 and $90,000, respectively                                                        |       | 1,111,860              |       | 1,060,251           |       |
| Prepaid expenses                                                                                                                        |       | 119,814                |       | 67,120              |       |
| Total current  assets                                                                                                                   |       | 3,549,839              |       | 3,431,670           |       |
|                                                                                                                                    |       |                   |       |                |       |
| EQUIPMENT, at  cost:                                                                                                                    |       |                   |       |                |       |
| Furniture,  fixtures and equipment                                                                                                      |       | 835,990                |       | 771,916             |       |
| Customer-site  equipment                                                                                                                |       | 488,883                |       | 436,550             |       |
| Less -  accumulated depreciation                                                                                                        |       | (1,018,770             | )          | (886,674            | )          |
| Equipment, net                                                                                                                          |       | 306,103                |       | 321,792             |       |
|                                                                                                                                    |       |                   |       |                |       |
| PATENTS, net of  accumulated amortization of $77,144 and $68,027, respectively                                                          |       | 108,643                |       | 117,760             |       |
| OTHER ASSETS                                                                                                                            |       | 20,210                 |       | 12,972              |       |
| Total assets                                                                                                                            |       | $                      | 3,984,795  |                | $          | 3,884,194 |   |
|                                                                                                                                    |       |                   |       |                |       |
| LIABILITIES AND SHAREHOLDERS’ EQUITY                                                                                               |       |                   |       |                |       |
|                                                                                                                                    |       |                   |       |                |       |
| CURRENT  LIABILITIES:                                                                                                                   |       |                   |       |                |       |
| Accounts payable                                                                                                                        |       | $                      | 469,136    |                | $          | 430,600 |   |
| Accrued  compensation                                                                                                                   |       | 91,500                 |       | 107,266             |       |
| Other accrued  liabilities                                                                                                              |       | 381,452                |       | 285,232             |       |
| Capitalized  lease obligation, current portion                                                                                          |       | 15,690                 |       | 15,690              |       |
| Total current  liabilities                                                                                                              |       | 957,778                |       | 838,788             |       |
|                                                                                                                                    |       |                   |       |                |       |
| LONG-TERM  LIABILITIES:                                                                                                                 |       |                   |       |                |       |
| Capitalized  lease obligation, less current portion                                                                                     |       | 3,923                  |       | 15,690              |       |
|                                                                                                                                    |       |                   |       |                |       |
| SHAREHOLDERS’  EQUITY:                                                                                                             |       |                   |       |                |       |
| Preferred stock,  no par value, 10,000,000 shares authorized, no shares issued or outstanding                                           |       | —                 |       | —              |       |
| Common stock, no  par value, 100,000,000 shares authorized, 6,267,474 (Dec. 31, 2004) and  5,845,526 (Mar. 31, 2004) shares outstanding |       | 18,770,038             |       | 18,285,991          |       |
| Accumulated  (deficit)                                                                                                                  |       | (15,746,944            | )          | (15,256,275         | )          |
| Total  shareholders’ equity                                                                                                        |       | 3,023,094              |       | 3,029,716           |       |
| Total  liabilities and shareholders’ equity                                                                                        |       | $                      | 3,984,795  |                | $          | 3,884,194 |   |

 

The accompanyingnotes are an integral part of these condensed financial statements.

 

3

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ENCISION INC.

 

CONDENSEDSTATEMENTS OF OPERATIONS

(Unaudited)

 
| ** **                                                                            | ** ** | **For the Three Months  Ended December 31,** | ** ** |
|---------------------------------------------------------------------------------------|------------|----------------------------------------------|------------|
| ** **                                                                            | ** ** | **2004**                                     | ** ** | **2003** | ** ** |
|                                                                                  |       |                                         |       |   |   |
| REVENUE, NET                                                                          |       | $                                            | 2,097,841  |   | $ | 1,790,849 |   |
| ** **                                                                            | ** ** | ** **                                   | ** ** | ** ** | ** ** |
| COST OF SALES                                                                         |       | 913,728                                      |       | 731,853 |   |
| Gross profit                                                                          |       | 1,184,113                                    |       | 1,058,996 |   |
|                                                                                  |       |                                         |       |   |   |
| OPERATING  EXPENSES:                                                                  |       |                                         |       |   |   |
| Sales and  marketing                                                                  |       | 799,552                                      |       | 639,563 |   |
| General and  administrative                                                           |       | 260,367                                      |       | 227,555 |   |
| Research and  development                                                             |       | 267,141                                      |       | 190,050 |   |
| Total operating  expenses                                                             |       | 1,327,060                                    |       | 1,057,168 |   |
| INCOME (LOSS)  FROM OPERATIONS                                                        |       | (142,947                                     | )          | 1,828 |   |
|                                                                                  |       |                                         |       |   |   |
| OTHER INCOME  (EXPENSE):                                                              |       |                                         |       |   |   |
| Interest income                                                                       |       | 4,177                                        |       | 2,033 |   |
| Other (expense),  net                                                                 |       | (4,548                                       | )          | (719 | ) |
| NET INCOME  (LOSS)                                                                    |       | $                                            | (143,318   | ) | $ | 3,142 |   |
|                                                                                  |       |                                         |       |   |   |
| NET INCOME  (LOSS) PER SHARE:                                                         |       |                                         |       |   |   |
| Basic and  diluted net income (loss) per common share                                 |       | $                                            | (0.02      | ) | $ | 0.00 |   |
|                                                                                  |       |                                         |       |   |   |
| Weighted average  shares used in computing basic net income (loss) per common share   |       | 6,267,474                                    |       | 5,785,121 |   |
|                                                                                  |       |                                         |       |   |   |
| Weighted average  shares used in computing diluted net income (loss) per common share |       | 6,267,474                                    |       | 6,254,499 |   |

 

The accompanyingnotes are an integral part of these condensed financial statements.

 

4

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| ** **                                                                            | ** ** | **For the Nine Months****Ended December 31,** | ** ** |
|---------------------------------------------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                                                            | ** ** | **2004**                                      | ** ** | **2003** | ** ** |
| ** **                                                                            | ** ** | ** **                                    | ** ** | ** ** | ** ** |
| REVENUE, NET                                                                          |       | $                                             | 5,927,055  |   | $ | 5,372,808 |   |
|                                                                                  |       |                                          |       |   |   |
| COST OF SALES                                                                         |       | 2,531,576                                     |       | 2,236,571 |   |
| Gross profit                                                                          |       | 3,395,479                                     |       | 3,136,237 |   |
|                                                                                  |       |                                          |       |   |   |
| OPERATING  EXPENSES:                                                                  |       |                                          |       |   |   |
| Sales and  marketing                                                                  |       | 2,278,484                                     |       | 1,806,759 |   |
| General and  administrative                                                           |       | 950,653                                       |       | 685,177 |   |
| Research and  development                                                             |       | 657,552                                       |       | 570,474 |   |
| Total operating  expenses                                                             |       | 3,886,689                                     |       | 3,062,410 |   |
| INCOME (LOSS)  FROM OPERATIONS                                                        |       | (491,210                                      | )          | 73,827 |   |
|                                                                                  |       |                                          |       |   |   |
| OTHER INCOME  (EXPENSE):                                                              |       |                                          |       |   |   |
| Interest income                                                                       |       | 8,572                                         |       | 3,334 |   |
| Other (expense),  net                                                                 |       | (8,031                                        | )          | (7,279 | ) |
| NET INCOME  (LOSS)                                                                    |       | $                                             | (490,669   | ) | $ | 69,882 |   |
|                                                                                  |       |                                          |       |   |   |
| NET INCOME  (LOSS) PER SHARE:                                                         |       |                                          |       |   |   |
| Basic and  diluted net income (loss) per common share                                 |       | $                                             | (0.08      | ) | $ | 0.01 |   |
|                                                                                  |       |                                          |       |   |   |
| Weighted average  shares used in computing basic net income (loss) per common share   |       | 6,082,323                                     |       | 5,626,602 |   |
|                                                                                  |       |                                          |       |   |   |
| Weighted average  shares used in computing diluted net income (loss) per common share |       | 6,082,323                                     |       | 6,081,853 |   |

 

The accompanyingnotes are an integral part of these condensed financial statements.

 

5

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ENCISION INC.

 

CONDENSEDSTATEMENTS OF CASH FLOWS

(Unaudited)

 
| ** **                                                                                           | ** ** | **For the Nine Months  Ended December 31,** | ** ** |
|------------------------------------------------------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                                                                           | ** ** | **2004**                                    | ** ** | **2003** | ** ** |
|                                                                                                 |       |                                        |       |   |   |
| CASH FLOWS FROM  OPERATING ACTIVITIES:                                                               |       |                                        |       |   |   |
| Net income  (loss)                                                                                   |       | $                                           | (490,669   | ) | $ | 69,882 |   |
| Adjustments to  reconcile net income (loss) to net cash provided by (used in) operating  activities- |       |                                        |       |   |   |
| Depreciation and  amortization                                                                       |       | 141,213                                     |       | 137,703 |   |
| Provision for  bad debts                                                                             |       | (20,500                                     | )          | (6,000 | ) |
| Inventory  reserves                                                                                  |       | (15,000                                     | )          | 22,000 |   |
| Changes in  operating assets and liabilities-                                                        |       |                                        |       |   |   |
| Accounts  receivable                                                                                 |       | (62,630                                     | )          | 12,348 |   |
| Inventory                                                                                            |       | (36,609                                     | )          | (234,787 | ) |
| Other assets                                                                                         |       | (59,932                                     | )          | (138,962 | ) |
| Accounts payable                                                                                     |       | 38,536                                      |       | (27,886 | ) |
| Accrued  compensation and other accrued liabilities                                                  |       | 68,687                                      |       | (5,762 | ) |
| Net cash (used  in) operating activities                                                             |       | (436,904                                    | )          | (159,940 | ) |
|                                                                                                 |       |                                        |       |   |   |
| CASH FLOWS FROM  INVESTING ACTIVITIES:                                                               |       |                                        |       |   |   |
| Investment in  equipment                                                                             |       | (116,407                                    | )          | (218,695 | ) |
| Net cash (used  in) investing activities                                                             |       | (116,407                                    | )          | (218,695 | ) |
|                                                                                                 |       |                                        |       |   |   |
| CASH FLOWS FROM  FINANCING ACTIVITIES:                                                               |       |                                        |       |   |   |
| Proceeds from  the exercise of stock options                                                         |       | 484,047                                     |       | 49,513 |   |
| Proceeds from  the issuance of common stock                                                          |       | —                                      |       | 1,000,002 |   |
| Cost of the  issuance of common stock                                                                |       | —                                      |       | (44,099 | ) |
| Net cash  provided by financing activities                                                           |       | 484,047                                     |       | 1,005,416 |   |
|                                                                                                 |       |                                        |       |   |   |
| NET INCREASE  (DECREASE) IN CASH AND CASH EQUIVALENTS                                                |       | (69,264                                     | )          | 626,781 |   |
|                                                                                                 |       |                                        |       |   |   |
| CASH AND CASH  EQUIVALENTS, beginning of period                                                      |       | 1,356,607                                   |       | 585,552 |   |
| CASH AND CASH  EQUIVALENTS, end of period                                                            |       | $                                           | 1,287,343  |   | $ | 1,212,333 |   |

 

The accompanyingnotes are an integral part of these financial statements.

 

6

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ENCISION INC.

 

NOTES TO CONDENSEDINTERIM FINANCIAL STATEMENTS

 

DECEMBER 31, 2004

(Unaudited)

 

(1)           ORGANIZATION AND NATUREOF BUSINESS

 

Encision Inc. (the “Company”)is a medical device company that designs, develops, manufactures and marketspatented surgical instruments that provide greater safety to patientsundergoing minimally-invasive surgery. The Company believes its patented AEM®surgical instrument technology is changing the marketplace for electrosurgicaldevices and instruments by providing a solution to a patient safety risk inlaparoscopic surgery. The Company’s sales to date have been made principally inthe United States.

 

The Company achievedprofitable operations in fiscal 2004 and 2003, but in each fiscal year priorand in the nine months ended December 31, 2004, incurred losses and had anaccumulated (deficit) of ($15,746,944) at December 31, 2004. Operations havebeen financed primarily through issuance of common stock.

 

During fiscal years 2004and 2003, the Company achieved annual net income for the first time in itshistory. The Company’s strategic marketing and sales plan is designed to expandthe use of the Company’s products in surgically active hospitals in the UnitedStates. Management expects these efforts to result in continued revenueincreases for fiscal 2005.

 

On July 30, 2003 theCompany issued a total of 333,334 shares of its common stock to the WasatchMicro Cap Fund and the Wasatch Micro Cap Value Fund, for gross proceeds of$1,000,002. Funds managed by Wasatch Advisors, Inc. held shares of the Company’scommon stock, constituting less than 5% of the issued and outstanding shares ofits common stock, prior to that transaction.

 

(2)           SUMMARY OFSIGNIFICANT ACCOUNTING POLICIES

 

Use of Estimatesin the Preparation of Financial Statements

 

The preparation offinancial statements in conformity with accounting principles generallyaccepted in the United States requires management to make estimates andassumptions. Such estimates and assumptions affect the reported amounts ofassets and liabilities as well as disclosure of contingent assets andliabilities at the date of the financial statements and the reported amounts ofrevenue and expense during the reporting period. Actual results could differfrom those estimates.

 

Cash and CashEquivalents

 

For purposes of reportingcash flows, the Company considers all cash and highly liquid investments withan original maturity of three months or less to be cash equivalents.

 

Fair Value ofFinancial Instruments

 

The Company’s financialinstruments consist of cash and cash equivalents and short-term tradereceivables and payables.  The carryingvalues of cash and cash equivalents and short-term receivables and payablesapproximate their fair value due to their short maturities.

 

Concentration ofCredit Risk

 

The Company has nosignificant off-balance sheet concentrations of credit risk such as foreignexchange contracts, options contracts or other foreign hedging arrangements.The Company maintains the majority of its cash balances with two financialinstitutions in the form of demand deposits and money market funds.

 

Accounts receivables aretypically unsecured and are derived from transactions with and from entities inthe healthcare industry primarily located in the United States. Accordingly,the Company may be exposed to credit risk generally associated with thehealthcare industry. The Company maintains allowances for doubtful accounts forestimated losses resulting from the inability of its customers to make requiredpayments.

 

7

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The net accountsreceivable balance at December 31, 2004 of $1,030,822 included $82,039, orapproximately 8%, from one distributor. The net accounts receivable balance atMarch 31, 2004 of $947,692 included $48,212, or approximately 5%, from onedistributor.

 

Warranty Accrual

 

The Company provides forthe estimated cost of product warranties at the time revenue is recognized.While the Company engages in extensive product quality programs and processes,including actively monitoring and evaluating the quality of its componentsuppliers, the Company’s warranty obligation is based upon historicalexperience and is also affected by product failure rates and material usageincurred in correcting a product failure. Should actual product failure ratesor material usage costs differ from the Company’s estimates, revisions to theestimated warranty liability would be required.

 

Inventories

 

Inventories are stated atthe lower of cost (first-in, first-out basis) or market. The Company reducesinventory for estimated obsolete or unmarketable inventory equal to thedifference between the cost of inventory and the estimated market value basedupon assumptions about future demand and market conditions. If actual marketconditions are less favorable than those projected by management, additionalinventory write-downs may be required. Inventory consisted of the following:

 

| ** **                       | ** ** | **December 31,  2004** | ** ** | **March 31,  2004** | ** ** |
|----------------------------------|------------|------------------------|------------|---------------------|------------|
|                             |       |                   |       |                |       |
| Raw materials                    |       | $                      | 842,195    |                | $          | 724,553 |   |
| Finished goods                   |       | 344,665                |       | 425,698             |       |
|                             |       | 1,186,860              |       | 1,150,251           |       |
| Less - Reserve  for obsolescence |       | (75,000                | )          | (90,000             | )          |
|                             |       | $                      | 1,111,860  |                | $          | 1,060,251 |   |

 

Property andEquipment

 

Property and equipmentare stated at cost, with depreciation computed primarily on a double-decliningbasis over the estimated useful life of the asset, generally three to fiveyears. Company-owned AEM Monitors at customer sites are depreciated on adouble-declining basis for a period of 5 years. Leasehold improvements aredepreciated over the shorter of the remaining lease term or the estimateduseful life of the asset. Maintenance and repairs are expensed as incurred andmajor additions, replacements and improvements are capitalized.

 

Long-Lived Assets 

 

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

 

Patents

 

The costs of applying forpatents are capitalized and amortized on a straight-line basis over the lesserof the patent’s economic or legal life (17 years in the United States).Capitalized costs are expensed if patents are not granted. The Company reviewsthe carrying value of its patents periodically to determine whether the patentshave continuing value and such reviews could result in the conclusion that therecorded amounts have been impaired.

 

AccruedLiabilities

 

The Company has accrued$135,000 related to warranty claims and $92,954 related to sales commissionsand has included these amounts in accrued liabilities in the accompanyingbalance sheets as of December 31, 2004.

 

Income Taxes 

 

The Company accounts forincome taxes under the provisions of Statement of Financial AccountingStandards (“SFAS”) No. 109, “Accounting for Income Taxes” (“SFAS No. 109”).SFAS No. 109 requires recognition of deferred income tax assets and liabilities

 

8

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for the expected futureincome tax consequences, based on enacted tax laws, of temporary differencesbetween the financial reporting and tax bases of assets and liabilities. SFASNo. 109 also requires recognition of deferred tax assets for the expectedfuture tax effects of all deductible temporary differences, loss carryforwardsand tax credit carryforwards. Deferred tax assets are then reduced, if deemednecessary, by a valuation allowance for the amount of any tax benefits which,more likely than not based on current circumstances, are not expected to berealized. Should the Company achieve sufficient, sustained income in the future,the Company may conclude that some or all of the valuation allowance should bereversed.

 

RevenueRecognition

 

Revenue from productsales is recorded when the Company ships the product and title has passed tothe customer, provided that the Company has evidence of a customer arrangementand can conclude that collection is probable. The Company’s shipping policy isFOB Shipping Point. The Company recognizes revenue from sales to stockingdistributors when there is no right of return, other than for normal warrantyclaims. The Company has no ongoing obligations related to product sales, exceptfor normal warranty.

 

Research andDevelopment Expenses

 

The Company expensesresearch and development costs for products and processes as incurred.

 

Stock-BasedCompensation  

 

The Company has adoptedthe disclosure-only provisions of SFAS No. 123, “Accounting for Stock-BasedCompensation” (“SFAS No. 123”), and applies Accounting Principles Board OpinionNo. 25, “Accounting for Stock Issued to Employees” (“APB No. 25”), andrelated interpretations in accounting for stock options granted toemployees.  If the Company had accountedfor its stock-based compensation plans in accordance with SFAS 123, the Company’snet income or loss and pro forma net income or loss per basic and dilutedcommon share for the three months ended December 31, 2004 would have beenreported as follows:

 
| Three months  ended December 31, 2004                           |   |     |     |
|-----------------------------------------------------------------|--------|----------|----------|
| Net (Loss)                                                      |   |     |     |
| As Reported                                                     |   | $        | (143,318 | ) |
| Stock-based  compensation based upon estimated fair values      |   | (44,543  | )        |
| Pro forma                                                       |   | $        | (187,861 | ) |
| Pro Forma Net  Income (Loss) Per Basic and Diluted Common Share |   |     |     |
| As Reported                                                     |   | $        | (0.02    | ) |
| Pro Forma                                                       |   | $        | (0.03    | ) |
| Nine months  ended December 31, 2004                            |   |     |     |
| Net (Loss)                                                      |   |     |     |
| As Reported                                                     |   | $        | (490,669 | ) |
| Stock-based  compensation based upon estimated fair values      |   | (122,736 | )        |
| Pro forma                                                       |   | $        | (613,405 | ) |
| Pro Forma Net  Income (Loss) Per Basic and Diluted Common Share |   |     |     |
| As Reported                                                     |   | $        | (0.08    | ) |
| Pro Forma                                                       |   | $        | (0.10    | ) |
|                                                                 |        |          |          |  |  |

 

Segment Reporting

 

The Company has concludedthat it has one operating segment.

 

Basic and DilutedIncome and Loss per Common Share

 

Net income or loss pershare is calculated in accordance with SFAS No. 128, “Earnings Per Share” (“SFASNo. 128”). Under the provisions of SFAS No. 128, basic net income or loss percommon share is computed by dividing net income or loss for the period by theweighted average number of common shares outstanding for the period. Dilutednet income or loss per common share is computed by dividing the net income orloss for the period by the weighted average number of common and potentialcommon shares outstanding during the period if the effect of the potentialcommon shares is dilutive. As a result of the Company’s net loss for the threemonth and nine month periods ended December 31, 2004, all potentially dilutivesecurities would be anti-dilutive and thus, are excluded from diluted earningsper share.

 

9

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For the three monthperiod ended December 31, 2004, the Company had financial instruments that couldcreate future dilution to the Company’s common shareholders and are notcurrently classified as outstanding common shares of the Company. The commonstock number is based on specific conversion or issuance assumptions pursuantto the corresponding terms of each instrument. Potential stock issuanceexcluded from earnings per share because their effect was anti-dilutive are260,223 for the three and nine months ended December 31, 2004.

 

Inventory Costs

 

In November 2004, theFASB issued FASB Statement No. 151, which revised ARB No.43, relating toinventory costs. This revision is to clarify the accounting for abnormalamounts of idle facility expense, freight, handling costs and wasted material(spoilage). This Statement requires that these items be recognized as a currentperiod charge regardless of whether they meet the criterion specified in ARB43. In addition, this Statement requires the allocation of fixed productionoverheads to the costs of conversion be based on normal capacity of theproduction facilities. This Statement is effective for financial statements forfiscal years beginning after June 15, 2005. Earlier application is permittedfor inventory costs incurred during fiscal years beginning after the date ofthis Statement is issued. The Company believes this Statement will have noimpact on the financial statements of the Company once adopted.

 

Exchanges ofNonmonetary Assets

 

In December 2004, theFASB issued FASB Statement No. 153. This Statement addresses the measurement ofexchanges of nonmonetary assets. The guidance in APB Opinion No. 29, Accountingfor Nonmonetary Transactions, is based on the principle that exchanges ofnonmonetary assets should be measured based on the fair value of the assetsexchanged. The guidance in that Opinion, however, included certain exceptionsto that principle. This Statement amends Opinion 29 to eliminate the exceptionfor nonmonetary exchanges of similar productive assets and replaces it with ageneral exception for exchanges of nonmonetary assets that do not havecommercial substance. A nonmonetary exchange has commercial substance if thefuture cash flows of the entity are expected to change significantly as aresult of the exchange. This Statement is effective for financial statementsfor fiscal years beginning after June 15, 2005. Earlier application ispermitted for nonmonetary asset exchanges incurred during fiscal yearsbeginning after the date of this Statement is issued. The Company believes thisStatement will have no impact on the financial statements of the Company onceadopted.

 

Share-BasedPayments

 

In December 2004, theFASB issued a revision to FASB Statement No. 123, Accounting for Stock BasedCompensation. This Statement supersedes APB Opinion No. 25, Accounting forStock Issued to Employees, and its related implementation guidance.  This Statement establishes standards for theaccounting for transactions in which an entity exchanges its equity instrumentsfor goods or services. It also addresses transactions in which an entity incursliabilities in exchange for goods or services that are based on the fair valueof the entity’s equity instruments or that may be settled by the issuance ofthose equity instruments.  This Statementfocuses primarily on accounting for transactions in which an entity obtainsemployee services in share-based payment transactions. This Statement does notchange the accounting guidance for share-based payment transactions withparties other than employees provided in Statement 123 as originally issued andEITF Issue No. 96-18, “Accounting for Equity Instruments That Are Issued toOther Than Employees for Acquiring, or in Conjunction with Selling, Goods orServices.” This Statement does not address the accounting for employee shareownership plans, which are subject to AICPA Statement of Position 93-6,Employers’ Accounting for Employee Stock Ownership Plans.

 

A public entity willinitially measure the cost of employee services received in exchange for anaward of liability instruments based on its current fair value; the fair valueof that award will be re-measured subsequently at each reporting date throughthe settlement date.  Changes in fairvalue during the requisite service period will be recognized as compensationcost over that period. A nonpublic entity may elect to measure its liabilityawards at their intrinsic value through the date of settlement.

 

The grant-date fair valueof employee share options and similar instruments will be estimated using theoption-pricing models adjusted for the unique characteristics of thoseinstruments (unless observable market prices for the same or similarinstruments are available).

 

Excess tax benefits, asdefined by this Statement, will be recognized as an addition topaid-in-capital. Cash retained as a result of those excess tax benefits will bepresented in the statement of cash flows as financing cash inflows. Thewrite-off of deferred tax assets relating to unrealized tax benefits associatedwith recognized compensation cost will be recognized as income tax expenseunless there are excess tax benefits from previous awards remaining in paid-incapital to which it can be offset.

 

The notes to thefinancial statements of both public and nonpublic entities will discloseinformation to assist users of financial information to understand the natureof share-based payment transactions and the effects of those transactions onthe financial statements.

 

10

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The effective date forpublic entities that file as small business issuers will be as of the beginningof the first interim or annual reporting period that begins after December 15,2005. The Company intends to comply with this Statement at the scheduledeffective date for the relevant financial statements of the Company.

 

(3)           COMMITMENTS ANDCONTINGENCIES

 

The Company currentlyleases its facilities under noncancelable lease agreements through August 14,2009 at 6797 Winchester Circle, Boulder, Colorado. The minimum future leasepayments are as follows:

 
| Year ended March  31, | ** ** | ** ** | ** ** |
|-----------------------|------------|------------|------------|
| 2005                  |       | —     |       |
| 2006                  |       | 86,826     |       |
| 2007                  |       | 154,179    |       |
| 2008                  |       | 166,930    |       |
| 2009                  |       | 172,685    |       |
| 2010                  |       | 65,566     |       |
|                  | ** ** | $          | 646,186    | ** ** |
|                       |            |            |            |  |

 

The Company had notifiedone of its distributors that it was in breach of its Distributor Agreement withthe Company in several respects, and that if the distributor did not cure thebreaches the Agreement may be terminated. The distributor had informed theCompany that it believed the Company’s interpretations of the Agreement wereincorrect. The distributor disputed the Company’s position and asserted thatthe Company had breached the Agreement. The dispute was proceeding inarbitration pursuant to the terms of the Agreement. On July 23, 2004, thedispute was resolved. During the first quarter ended June 30, 2004, the Companyhad expensed approximately $201,000, and as of December 31, 2004, there was nobalance in other accrued liabilities for this dispute.

 

The Company is subject toregulation by the United States Food and Drug Administration (“FDA”). The FDAprovides regulations governing the manufacture and sale of the Company’sproducts and regularly inspects the Company and other manufacturers todetermine their compliance with these regulations. As of December 31, 2004 theCompany believes it was in substantial compliance with all known regulations.FDA inspections are conducted periodically at the discretion of the FDA. TheCompany was last inspected in May 2004 and was notified of six potentialdeficiencies from that inspection, none of which the Company believes to bematerial.

 

The results of operationsfor the quarter ended December 31, 2004 should not be taken as an indication ofthe results of operations for all or any part of the balance of the year.

 

The net accountsreceivable balance at December 31, 2004 of $1,030,822 included $35,865 (3%) frominternational customers.

 

(4)           MANAGEMENT’SREPRESENTATIONS

 

The condensed interimfinancial statements included herein have been prepared by the Company, withoutaudit, pursuant to the rules and regulations of the Securities and ExchangeCommission. Certain information and footnote disclosures normally included infinancial statements prepared in accordance with generally accepted accountingprinciples have been condensed or omitted pursuant to such rules andregulations, although the Company believes that the disclosures made areadequate to make the information presented not misleading. The condensedinterim financial statements and notes thereto should be read in conjunctionwith the financial statements and the notes thereto, included in the Company’s AnnualReport to the Securities and Exchange Commission for the fiscal year endedMarch 31, 2004, filed on Form 10-KSB on June 29, 2004.

 

The accompanyingcondensed interim financial statements have been prepared, in all materialrespects, in conformity with the standards of accounting measurements set forthin Accounting Principles Board Opinion No. 28 and reflect, in the opinion ofmanagement, all adjustments necessary to summarize fairly the financialposition and results of operations for such periods in accordance withaccounting principles generally accepted in the United States of America.  All adjustments are of a normal recurringnature. The results of operations for the most recent interim period are notnecessarily indicative of the results to be expected for the full year.

 

11

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**ITEM 2  –  MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

 

Certain statements contained in this section on Management’s Discussionand Analysis are not historical facts, including statements about the Company’sstrategies and expectations about new and existing products, market demand,acceptance of new and existing products, technologies and opportunities, marketand industry segment growth, and return on investments in products and markets.These statements are forward looking statements within the meaning of thePrivate Securities Litigation Reform Act of 1995 and involve substantial risksand uncertainties that may cause actual results to differ materially from thoseindicated by the forward looking statements. All forward looking statements inthis section on Management’s Discussion and Analysis are based on informationavailable to the Company on the date of this document, and the Company assumesno obligation to update such forward looking statements. Readers of this Form10-QSB are strongly encouraged to review the section entitled *“Factors Which May Affect Future Performance and Financial Condition.”*

 

**General**

 

Encision Inc. (“Encision”or “the Company”), a medical device company based in Boulder, Colorado, hasdeveloped and launched innovative technology that is emerging as a standard ofcare in minimally-invasive surgery. The Company believes its patented AEM®Surgical Instruments are changing the marketplace for electrosurgical devicesand laparoscopic instruments by providing a solution to a well documentedpatient safety risk in laparoscopic surgery.

 

Encision was founded toaddress market opportunities created by the increase in minimally-invasivesurgery (“MIS”) and surgeons’ preference for using electrosurgery devices inthese procedures. The product opportunity was created by surgeons’ continuedwidespread demand for using monopolar electrosurgery instruments which, whenused in laparoscopic surgery, are susceptible to causing inadvertent collateraltissue damage outside the surgeon’s field of view. The risk of unintendedelectrosurgical burn injury to the patient in laparoscopic surgery has beenwell documented. This risk poses a threat to patient safety and createsliability exposure for surgeons and hospitals that do not adequately addressthe issue.

 

Encision’s patented AEMtechnology provides surgeons with the desired tissue effects, while preventingstray electrosurgical energy that can cause unintended and unseen tissueinjury. AEM Laparoscopic Instruments are equivalent to conventional instrumentsin functionality but they incorporate “active electrode monitoring” technologyto dynamically and continuously monitor the flow of electrosurgical current,thereby helping to prevent patient injury. With Encision’s “shielded andmonitored” instruments, surgeons are able to perform electrosurgical proceduresmore safely and effectively than is possible using conventional instruments. Inaddition, the AEM instruments are cost competitive with conventional “non-shielded,non-monitored” instruments. The result is advanced patient safety at comparablecost and with no change in surgeon technique.

 

AEM technology has beenrecommended and endorsed by sources from all groups involved inminimally-invasive surgery. Surgeons, nurses, biomedical engineers, themedicolegal community, malpractice insurance carriers and electrosurgicaldevice manufacturers advocate the use of AEM technology. The breadth ofendorsements continues to expand with the recognition of active electrodemonitoring technology as an *AORN Recommended Practice*by the Association of periOperative Registered Nurses and with insurance andmedicolegal endorsements.

 

The Company has focusedits marketing strategies to date on expanding the market awareness of the AEMtechnology and its broad independent endorsements, and has continued efforts toexpand the AEM product line. During the three months ended December 31, 2004,the Company evaluated its ongoing product development efforts and determinedthat the optimum allocation of development resources would be towards improvingexisting products to better address market opportunities, rather than expandingthe Company’s product line.  Accordingly,the Company is currently focusing on modernizing its accepted AEM instrumentsto include ergonomics and user functionalities for which surgeons have beenexpressing a preference. This coincides with the endorsements for AEMtechnology. Recommendations from the malpractice insurance and medicolegalcommunities complement the broad clinical endorsements AEM technology hasgarnered over the past few years.

 

Adding furthercredibility to the benefits of Encision’s AEM technology are the Company’s supplieragreements with Novation and Premier, two of the largest Group PurchasingOrganizations (GPO) in the United States. Together, Novation and Premierrepresent over 3,000 hospitals and over 50% of all surgery in the U.S.Management believes that these GPO supplier agreements give further indicationthat AEM technology is gaining broader acceptance in the market. Managementbelieves that having the nation’s leading medical purchasing groups recognizethe value of the Company’s technology reflects the potential impact that AEMinstruments products can have in the market and in advancing patient safety insurgery nationwide. These agreements do not involve purchase commitments butthe Company expects these relationships to expand the market visibility of AEMtechnology and smooth the procurement process for new hospital customers. TheCompany is currently in negotiations with an additional GPO that the Companybelieves could facilitate the Company’s access to a significant number ofadditional U.S. hospitals, although no definitive agreement with this GPO hasbeen reached.

 

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When a hospital changesto AEM technology it provides recurring revenue to the Company from sales ofreplacement instruments. Management believes that there is no directlycompeting technology to supplant AEM products once the hospital has changed.The replacement market of reusable and disposable AEM products in changedhospitals represents over 90% of Encision’s revenue over the past three monthsand this revenue stream is expected to grow as the base of newly changedhospitals continues to grow. In addition, the Company intends to developdisposable versions of more of its AEM products in order to meet market demandsand expand the Company’s revenue opportunities.

 

Prior to fiscal 2003 andin the nine months ended December 31, 2004, the Company incurred annual lossesfor most years since its inception, and has an accumulated (deficit) of($15,746,944) at December 31, 2004. Operations have been financed primarilythrough issuance of equity. The Company’s liquidity has stabilized after ahistory of operating losses. On July 30, 2003 the Company issued 333,334 sharesof its common stock to the Wasatch Micro Cap Fund and the Wasatch Micro CapValue Fund, for gross proceeds of $1,000,002. Funds managed by WasatchAdvisors, Inc. held shares of the Company’s common stock, constituting lessthan 5% of the issued and outstanding shares of its common stock, prior to thattransaction.

 

During the nine monthsended December 31, 2004, the Company used $436,904 of cash in its operationsand used $116,407 for investments in equipment (primarily capital equipmentowned by the Company at customer locations). As of December 31, 2004, theCompany had $1,287,343 in cash and cash equivalents available to fund futureoperations, a decrease of $69,264 from March 31, 2004. The Company’s workingcapital was $2,592,061 at December 31, 2004.

 

**Historical Perspective**

 

The Company was organizedin 1991 and spent several years developing the AEM monitoring system andprotective sheaths to adapt to conventional electrosurgical instruments. Duringthis period, the Company conducted product trials and applied for patents withthe United States Patent Office and with the International patent agencies.Patents were issued in 1994, 1996, 1997, 1998 and 2002.

 

As the Company evolved,it was clear to the Company that its ‘active electrode monitoring’ technologyneeded to be integrated into the standard laparoscopic instrument design. Asthe development program proceeded, it also became apparent that the merging ofelectrical and mechanical engineering skills in the instrument developmentprocess for the Company’s patented, integrated electrosurgical instruments wasa complex and difficult task. As a result, instruments with integrated AEMtechnology were not completed for several years. Prior to offering a full rangeof laparoscopic electrosurgical instrumentation, it was difficult for hospitalsto commit to the AEM solution, as the Company did not have adequate comparablesurgical instrument options to match what the surgeon demanded. As of fiscal2001, a sufficiently broad product line was available to provide hospitaloperating rooms with AEM Instruments in most of the designs common forlaparoscopic surgery.

 

The launch of an expandedline of AEM Laparoscopic Instruments was accomplished over the past two years.The Company is now turning its focus to developing next generation versions ofits AEM instruments to better meet market demands, particularly demand forimproved ergonomics and simplified user functionalities. This coincides withthe independent endorsements for AEM technology. Recommendations from themalpractice insurance and medicolegal communities complement the broad clinicalendorsements AEM technology has garnered over the past few years.

 

**Outlook**

 

*Installed Base of AEM MonitoringEquipment*:  The Companybelieves that the installed base of AEM monitors has the potential forincreasing as the inherent risks associated with monopolar laparoscopicelectrosurgery become more widely acknowledged and as the Company focuses onincreasing its sales efficiency. The Company expects that the replacement salesof electrosurgical instruments and accessories will increase as additionalhospitals adopt AEM technology. The Company believes that the efforts toimprove the quality of sales representatives carrying the AEM product line,along with increased marketing efforts and the introduction of next generationproducts, may provide the basis for increased revenue and returning toprofitable operations. However these measures, or any others that the Companymay adopt, may not result in either increased revenue or returning toprofitable operations. Furthermore, the Company’s next generation products arein the early stages of development and will not be available for sale until atleast fiscal 2006.

 

*Possibility of ContinuedOperating Losses: *Priorto fiscal 2003 and in the nine months ended December 31, 2004, the Companyincurred annual losses for most years since its inception and had anaccumulated (deficit) of ($15,746,944) as of December 31, 2004. The Company hasmade significant strides toward improving its operating results. Approximately$247,000 of cash was used in the Company’s activities in fiscal 2004. Due tothe ongoing need to develop, optimize and train the direct sales managers andthe independent sales representative network, the need to support developmentof refinements to our product line and the need to increase sustained revenuesto a level adequate to cover fixed and variable operating costs, the Companymay operate at a net loss from time to time. On July 30, 2003 the Companyissued a total of 333,334 shares of its common stock to the Wasatch Micro CapFund and the Wasatch Micro Cap Value Fund, for gross proceeds of $1,000,002.Funds managed by Wasatch Advisors, Inc. held shares of the Company’s commonstock, constituting less than 5% of the issued and outstanding shares of itscommon stock, prior to that transaction.

 

13

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*Revenue Growth*:  The Company expects to generate increasedrevenue in the U.S. from sales to new hospital customers and expanded sales inexisting hospitals as the network of direct and independent salesrepresentatives become more efficient. The Company believes that the visibilityand credibility of the independent clinical endorsements for AEM technologywill contribute to new hospital accounts and increased revenues in fiscal 2005.The Company also expects that supplier agreements with Novation and Premier,which together represent over 3,000 U.S. hospitals, and with a potentialadditional supplier agreement that the Company is currently pursuing, willexpose more hospitals to the benefits of AEM technology and may stimulate newhospital accounts and increased revenues. The Company also expects to increasemarket share gains through promotional programs of placing Company-owned AEMmonitors at no charge into hospitals that commit to standardize on AEMinstruments. However all of these efforts to increase market share and growrevenues will depend in part on the Company’s ability to expand the efficiencyand effective coverage range of its direct and independent salesrepresentatives.

 

The Company also haslonger term initiatives in place to improve the Company’s prospects.  The Company expects that development of nextgeneration versions of its AEM products will better position the products inthe marketplace and improve the Company’s retention rate at hospitals that havechanged to AEM technology, enabling the Company to grow its revenue. TheCompany may also explore overseas markets to assess opportunities for revenuegrowth internationally. Finally, the Company intends to explore opportunitiesto capitalize on its proven AEM technology via licensing arrangements andstrategic alliances. These efforts to generate additional revenue and furtherthe market penetration of the Company’s products are longer term in nature andmay not materialize.  Even if the Companyis able to successfully develop next generation products or identify potentialinternational markets or strategic partners, the Company may not be able tocapitalize on these opportunities.

 

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

 

*Sales and Marketing Expenses*:The Company continues its efforts to expand domestic and internationaldistribution capability and it believes that sales and marketing expenses willdecrease as a percentage of net revenue with increasing sales volume.

 

*Research and Development Expenses*:Research and development expenses are expected to increase modestly to supportdevelopment of refinements to our AEM product line, further expanding theinstrument options for the surgeon. New additions to the AEM product line areplanned for introduction in fiscal year 2006.

 

**Results of Operations**

 

*For the three months endedDecember 31, 2004 compared to the three months ended December 31, 2003.*

 

*Netrevenue*.  Revenue forthe quarter ended December 31, 2004, was $2,097,841, compared to $1,790,849 forthe quarter ended December 31, 2003, an increase of 17%. The increase is attributable to new hospital accountsand favorable trends in the mix of disposable products using our AEMtechnology, partially offset by business lost from hospitals that previouslychanged to AEM technology. The Company opened twelve new hospital accounts toAEM technology in the three months ended December 31, 2004 versus five newhospital accounts for AEM technology in the three months ended December 31,2003. New hospital prospectsremain strong and we have seen an increased rate of new hospital accountsduring the past three months. While itwill take a number of months before new sales managers and independent salesrepresentatives generate new hospital accounts, the combination of the newadditions is intended to provide the field focus necessary to achieve marketgains.

 

*Gross profit*.  The gross profit for the quarter endedDecember 31, 2004 of $1,184,113 increased by 12% from the quarter endedDecember 31, 2003 gross profit of $1,058,996. Gross profit as a percentage ofrevenue (gross margin) decreased from 59% for the quarter ended December 31,2003 to 56% in the quarter ended December 31, 2004. The decrease in grossmargin was primarily the result of additional inventory costs compared with oneyear ago. For the three months ended December 31, 2004, the Company provided$17,863 in AEM monitors at no charge to newly changed hospitals as part of asales incentive program.

 

*Sales and marketing expenses*.  Sales and marketing expenses of $799,552 forthe quarter ended December 31, 2004 increased by 25% compared to $639,563 forthe quarter ended December 31, 2003. The increase was a result of compensationfor increased sales employees and increased commissions as a result of higherrevenue.

 

*Generaland administrative expenses*. General and administrative expenses of $260,367 for the quarter endedDecember 31, 2004 increased by 14% compared to $227,555 for the quarter endedDecember 31, 2003. The increase is the result of increasesin compensation, legal fees, professional services and stock registration feescompared with one year ago.

 

*Researchand development expenses*. Research and development expenses of $267,141 for the quarter endedDecember 31, 2004 increased by 41% compared to $190,050 for the quarter endedDecember 31, 2003. The increase is a result of increases in compensation andrelocation costs for additional employees and professional services to supportdevelopment of refinements to our product line.

 

14

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*Net income (loss). *Net loss of $(143,318) forthe quarter ended December 31, 2004 compared to net income of $3,142 for thequarter ended December 31, 2003. The net loss was a result of total operatingexpenses, as explained above, that increased at a higher percentage than thepercentage increase of revenue.

 

*For the nine months endedDecember 31, 2004 compared to the nine months ended December 31, 2003.*

 

*Netrevenue*.  Revenue forthe nine months ended December 31, 2004, was $5,927,055, compared to $5,372,808for the nine months ended December 31, 2003, an increase of 10%. The increase is attributable to new hospital accountsand favorable trends in the mix of disposable products using our AEMtechnology, partially offset by business lost from hospitals that previouslychanged to AEM technology. The Company opened twenty seven new hospitalaccounts to AEM technology in the nine months ended December 31, 2004 versustwenty new hospitals that changed to AEM technology in the nine months endedDecember 31, 2003. New hospitalprospects remain strong and we have seen an increased rate of new hospitalaccounts during the past nine months.While it will take a number of months before new sales managers and independentsales representatives generate new hospital accounts, the combination of thenew additions is intended to provide the field focus necessary to achievemarket gains.

 

*Gross profit*.  The gross profit for the nine months endedDecember 31, 2004 of $3,395,479 increased by 8% from the nine months endedDecember 31, 2003 gross profit of $3,136,237. Gross profit as a percentage ofrevenue (gross margin) decreased to 57% for the nine months ended December 31,2004 compared to 58% in the nine months ended December 31, 2003. The decreasein gross margin was primarily the result of additional inventory costs comparedwith one year ago. For the nine months ended December 31, 2004, the Companyprovided $52,333 in AEM monitors at no charge to newly opened hospital accountsas part of a sales incentive program.

 

*Sales and marketing expenses*.  Sales and marketing expenses of $2,278,484for the nine months ended December 31, 2004 increased by 26% compared to$1,806,759 for the nine months ended December 31, 2003. The increase was aresult of compensation for increased sales employees, increased commissions asa result of higher revenue and resolution of an arbitration dispute. TheCompany had notified one of its distributors that it was in breach of itsDistributor Agreement with the Company in several respects, and that if thedistributor did not cure the breaches the Agreement may be terminated. Thedistributor had informed the Company that it believed the Company’sinterpretations of the Agreement were incorrect. The distributor disputed theCompany’s position and asserted that the Company had breached the Agreement.The dispute was proceeding in arbitration pursuant to the terms of theAgreement. On July 23, 2004, the dispute was resolved. During the first quarterended June 30, 2004, the Company had accrued approximately $201,000.

 

*Generaland administrative expenses*. General and administrative expenses of $950,653 for the nine monthsended December 31, 2004 increased by 39% compared to $685,177 for the ninemonths ended December 31, 2003. The increase is the result of increases in compensation, legal fees and professionalservices compared with one year ago.

 

*Researchand development expenses*. Research and development expenses of $657,552 for the nine months endedDecember 31, 2004 increased by 15% compared to $570,474 for the nine monthsended December 31, 2003. The increase is a result of increases in compensationand relocation costs for additional employees and professional services tosupport development of refinements to our product line.

 

*Net income (loss). *Net loss of $(490,669) forthe nine months ended December 31, 2004 compared to net income of $69,882 forthe nine months ended December 31, 2003. The net loss was a result of totaloperating expenses, as explained above, that increased at a higher percentagethan the percentage increase of revenue.

 

**Liquidity and Capital Resources**

 

To date, operating fundshave been provided primarily by sales of common stock and warrants to purchasethe Company’s common stock, which totaled $18,770,038 through December 31,2004, and, to a lesser degree, funds provided by sales of the Company’sproducts. On July 30, 2003 the Company issued a total of 333,334 shares of itscommon stock to the Wasatch Micro Cap Fund and the Wasatch Micro Cap ValueFund, for gross proceeds of $1,000,002. Funds managed by Wasatch Advisors, Inc.held shares of the Company’s common stock, constituting less than 5% of theissued and outstanding shares of its common stock, prior to that transaction.

 

The Company’s operationsused $436,904 of cash in the nine months ended December 31, 2004 on sales of$5,927,055 and used $159,940 of cash in the nine months ended December 31, 2003on sales of $5,372,808. Prior to fiscal 2003, the use of cash in our operationsresulted primarily from the funding of the Company’s annual net losses. Theseamounts of cash generated from and used in operations are not indicative of theexpected cash to be generated from or used in operations in FY 05. As ofDecember 31, 2004, the Company had $1,287,343 in cash and cash equivalentsavailable to fund future operations. Working capital was $2,592,061 at December31, 2004 compared to $2,592,882 at March 31, 2004. Current liabilities were$957,778 at December 31, 2004, compared to $838,788 at March 31, 2004.

 

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The Company has a leasefor its facilities under noncancelable lease agreements through August 14,2009. The minimum future lease payments are as follows:

 
| Year ended March  31, | ** ** | ** ** | ** ** |
|-----------------------|------------|------------|------------|
| 2005                  |       | —     |       |
| 2006                  |       | 86,826     |       |
| 2007                  |       | 154,179    |       |
| 2008                  |       | 166,930    |       |
| 2009                  |       | 172,685    |       |
| 2010                  |       | 65,566     |       |
|                  | ** ** | $          | 646,186    | ** ** |
|                       |            |            |            |  |

## ** **

Capital expenditures inthe nine months ended December 31, 2004 ($116,407) result primarily from thecapitalization of AEM monitors placed in hospitals under various promotionalprograms. Placing Company-owned AEM monitors into hospitals at no charge tofacilitate their use of AEM instruments is an initiative to accelerate newhospital accounts to AEM instruments. Under these promotional programs theCompany maintains ownership of the AEM monitor and the cost is capitalized anddepreciated as cost of sales over the projected five year life of the asset.

 

The Company’s fiscal year2005 (“FY 05”) operating plan is focused on increasing new hospital accounts toAEM products, retaining existing hospital customers, growing revenue,increasing gross profits and conserving cash. The Company also is investing inresearch and development efforts to develop next generation versions of the AEMproduct line. The Company can not predict with certainty the expected revenue,gross profit, net income or loss and usage of cash and cash equivalents for FY05. However, management believes that its cash resources will be sufficient tofund its operations for at least the next twelve months under its currentoperating plan. If management is unable to manage the Company’s businessoperations in line with budget expectations, it could have a material adverseeffect on the Company’s business viability, financial position, results ofoperations and cash flows. Further, if the Company is not successful insustaining profitability and remaining at least cash flow break-even,additional capital may be required to maintain ongoing operations.

 

The Company believes theunique performance of the AEM technology and its breadth of independentendorsements provides an opportunity for continued market share growth. TheCompany believes that the market awareness of the AEM technology and itsendorsements is continually improving and that this will benefit the salesefforts in FY 05. The Company believes that the Company entered FY 05 havingachieved improvements in the clinical credibility of its technology. TheCompany’s objective in the remainder of FY 05 is to maintain expense controlswhile optimizing sales execution in the field, expand market awareness of theAEM technology and maximize the number of additional hospital accounts to AEMinstruments, while retaining existing hospital customers. In addition,acceptance of AEM products depends on surgeons’ preference for our instruments,which depends on factors such as ergonomics and ease of use in addition to ourtechnological advantage. If surgeons prefer other instruments to ours due tothese factors, our business results will suffer.

 

**IncomeTaxes**

 

As of March 31, 2004, netoperating loss carryforwards totaling approximately $15,300,000 are availableto reduce taxable income in the future. The net operating loss carryforwardsexpire, if not previously utilized, at various dates beginning in the year2006. The Company has not paid income taxes since its inception. The Tax ReformAct of 1986 and other income tax regulations contain provisions which may limitthe net operating loss carryforwards available to be used in any given year, ifcertain events occur, including changes in ownership interests. The Company hasestablished a valuation allowance for the entire amount of its deferred taxasset since inception due to its history of losses. Should the Company achievesufficient, sustained income in the future, the Company may conclude that someor all of the valuation allowance should be reversed.

 

## **Contractual Obligations**

## ** **

Aside from its operatinglease commitments, the Company does not have any material contractualcommitments requiring settlement in the future.

 

## **AtDecember 31, 2004, the Company’s commitments under these obligations were asfollows:**

## ** **

| ** **            | ** ** | **Operating Leases** | ** ** |
|-----------------------|------------|----------------------|------------|
| Year ended March  31, | ** ** | ** **           | ** ** |
| 2005                  |       | —               |       |
| 2006                  |       | 86,826               |       |
| 2007                  |       | 154,179              |       |
| 2008                  |       | 166,930              |       |
| 2009                  |       | 172,685              |       |
| 2010                  |       | 65,566               |       |
|                  | ** ** | $                    | 646,186    | ** ** |
|                       |            |                      |            |  |

## ** **

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## **Critical Accounting Policies and Estimates**

## ** **

Our discussion andanalysis of our financial condition and results of operations are based uponour financial statements, which have been prepared in accordance withaccounting principles generally accepted in the United States. The preparationof these financial statements requires us to make estimates and judgments thataffect the reported amounts of assets, liabilities, revenue and expenses, and relateddisclosure of contingent assets and liabilities. On an on-going basis, weevaluate our estimates, including those related to bad debts, inventories,sales returns, warranty, contingencies and litigation. We base our estimates onhistorical experience and on various other assumptions that are believed to bereasonable under the circumstances, the results of which form the basis formaking judgments about the carrying values of assets and liabilities that arenot readily apparent from other sources. Actual results may differ from theseestimates under different assumptions or conditions. We believe the followingcritical accounting policies involve our more significant judgments andestimates used in the preparation of our financial statements.

 

We maintain allowancesfor doubtful accounts for estimated losses resulting from the inability of itscustomers to make required payments. If the financial condition of ourcustomers were to deteriorate, resulting in an impairment of their ability tomake payments, additional allowances may be required, which would increase ourexpenses during the periods in which any such allowances were made. The amountrecorded as a provision for bad debt in each period is based upon ourassessment of the likelihood that we will be paid on our outstandingreceivables, based on customer-specific as well as general considerations. Tothe extent that our estimates prove to be too high, and we ultimately collect areceivable previously determined to be impaired, we may record a reversal ofthe provision in the period of such determination.

 

We provide for theestimated cost of product warranties at the time revenue is recognized. Whilewe engage in extensive product quality programs and processes, includingactively monitoring and evaluating the quality of its component suppliers, wehave experienced some costs related to warranty. The warranty accrual is basedupon historical experience and is adjusted based on current experience. Shouldactual warranty experience differ from our estimates, revisions to theestimated warranty liability would be required.

 

We reduce inventory forestimated obsolete or unmarketable inventory equal to the difference betweenthe cost of inventory and the estimated market value based upon assumptionsabout future demand and market conditions. If actual market conditions are lessfavorable than those projected by management, additional inventory write-downsmay be required. Any write-downs of inventory would reduce our reported netincome during the period in which such write-downs were applied. To the extentthat our estimates prove to be too high, and we ultimately utilize or sellinventory previously determined to be impaired, we may record a reversal of theprovision in the period of such determination.

 

We recognize deferredincome tax assets and liabilities for the expected future income taxconsequences, based on enacted tax laws, of temporary differences between thefinancial reporting and tax bases of assets and liabilities. Deferred taxassets are then reduced, if deemed necessary, by a valuation allowance for theamount of any tax benefits which, more likely than not based on currentcircumstances, are not expected to be realized. Should we achieve sufficient,sustained income in the future, we may conclude that all or some of thevaluation allowance should be reversed

 

We depreciate ourproperty and equipment primarily on a double-declining basis over the estimateduseful life of the asset, generally three to five years. Our owned, consignmentAEM Monitors are depreciated on a double-declining basis for a period of 5years. Leasehold improvements are depreciated over the shorter of the remaininglease term or the estimated useful life of the asset. Maintenance and repairsare expensed as incurred and major additions, replacements and improvements arecapitalized.

 

We amortize our patentcosts over their estimated useful lives, which is typically the remainingstatutory life. From time to time, we may be required to adjust these livesbased on advances in technology, competitor actions, and the like. We reviewthe recorded amounts of patents at each period end to determine if theircarrying amount is still recoverable based on our expectations regarding salesof related products. Such an assessment, in the future, may result in aconclusion that the assets are impaired, with a corresponding charge againstearnings.

 

**Factors Which May Affect FuturePerformance and Financial Condition**:

 

You should carefullyconsider the risk factors described below. If any of the following risk factorsactually occur, the Company’s business, prospects, financial condition orresults of operations would likely suffer. In such case, the trading price ofthe Company’s common stock could fall resulting in the loss of all or part ofyour investment. You should look at all these risk factors in total. Some 

 

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risk factors may stand ontheir own. Some risk factors may affect (or be affected by) other risk factors.You should not assume the Company has identified these connections. You shouldnot assume that the Company will always update these and future risk factors ina timely manner. The Company is not undertaking any obligation to update theserisk factors to reflect events or circumstances after the date of this reportor to reflect the occurrence of unanticipated events.

 

Among the factors thatcould cause future results and financial condition to be materially differentfrom expectations are:

 

*1.             Our products may not be accepted by the market*.  The success of our products and our financialcondition depends on the acceptance of AEM products by the medical community incommercially viable quantities during fiscal year 2005 and beyond. We cannotpredict how quickly or how broadly AEM products will be accepted by the medicalcommunity. We need to continually educate the marketplace about the**potential hazards involved in the use of conventionalelectrosurgical products during minimally-invasive surgical procedures and theexpected benefits associated with the use of AEM products. If we areunsuccessful in educating the marketplace about our technology and the hazardsof conventional instruments, we will not create sufficient demand by hospitalsand surgeons for AEM products and our financial condition, results ofoperations and cash flows could be adversely affected.

 

*2.             We need to continually develop and train our network ofindependent sales representatives and expand our distribution efforts in orderto be successful.* Our attempts to develop and trainadditional direct sales representatives and a network of independent salesrepresentatives in the U.S. and to expand our international distributionefforts may take longer than expected and may result in considerable amounts ofretraining effort as the additional direct sales representatives andindependent sales representatives change their product lines, product focus andpersonnel. We may not be able to obtain full coverage of the U.S. by direct andindependent sales representatives as quickly as anticipated. The independentsales representative network has inherent flaws and inefficiencies, which caninclude conflicts of interest and competing products. Optimizing the quality ofthe network and the performance of independent sales representatives in theU.S. is an ongoing challenge. We may also encounter difficulties in developingour international presence due to regulatory issues and our ability tosuccessfully develop international distribution options. Our inability toexpand direct sales representatives and our network of independent salesrepresentatives and optimize their performance could adversely affect ourfinancial results.

 

*3.             We may need additional funding to support ouroperations.* We were**formed in 1991and have incurred losses of over $15 million since that date. We have primarilyfinanced research, development, and operational activities with sales of ourcommon stock. At December 31, 2004, we had $1,287,343 in cash available to fundfuture operations. During FY 2004, we issued a total of 333,334 shares of ourcommon stock to the Wasatch Micro Cap Fund and the Wasatch Micro Cap ValueFund, for gross proceeds of $1,000,002. Funds managed by Wasatch Advisors, Inc.held shares of our common stock, constituting less than 5% of the issued andoutstanding shares of common stock, prior to that transaction. We may haveprofitable operations in FY 2005 but there is no guarantee we will do so. Wemay find that investment in sales and marketing initiatives, merited by marketopportunity, may result in the Company operating at a net loss from quarter toquarter.  We may also find ourselves at acompetitive disadvantage due to our constrained liquidity.

 

*4.             We may not be able to compete successfully againstcurrent manufacturers of conventional (“unshielded, unmonitored”)electrosurgical instruments or against competitors who manufacture productsthat are based on surgical technologies that are alternatives to monopolarelectrosurgery. *Theelectrosurgical products market is intensely competitive. We expect thatmanufacturers of “unshielded, unmonitored” electrosurgical instruments willresist any loss of market share that might result from the presence of our “shieldedand monitored” instruments in the marketplace. We also believe thatmanufacturers of products that are based upon surgical technologies that arealternatives to monopolar electrosurgery are our competitors. Thesetechnologies include bipolar electrosurgery, the harmonic scalpel and lasers.The alternative technologies may gain market share and new competitivetechnologies may be developed and introduced. Most of our competitors andpotential competitors have significantly greater financial, technical, productdevelopment, marketing and other resources than we do. Most of our competitorsalso currently have substantial installed customer bases in the medicalproducts market and have significantly greater market recognition. As a resultof these factors, our competitors may be able to respond more quickly to new oremerging technologies and changes in customer requirements or to devote greaterresources to the development, promotion and sale of their products. It ispossible that new competitors or new alliances among competitors may emerge andrapidly acquire significant market share. The competitive pressures we face maymaterially adversely affect our financial position, results of operations andcash flows, and this may hinder our ability to respond to competitive threats.

 

*5.             If we do not continually enhance our products and keeppace with rapid technological changes, we may not be able to attract and retaincustomers.*****Our futuresuccess and financial performance will depend in part on our ability to meetthe increasingly sophisticated needs of customers through the timelydevelopment and successful introduction of product upgrades, enhancements andnew products. These upgrades, enhancements and new products are subject tosignificant technical risks. The medical device market is subject to rapidtechnological change, resulting in frequent new product introductions andenhancements of existing products, as well as the risk of product obsolescence.While we are currently developing new products and enhancing our existingproduct lines, we may not be successful in completing the development of thenew products or enhancements. In addition, we must respond effectively totechnological changes by continuing to enhance our existing products toincorporate emerging or evolving standards. We may not be successful indeveloping and marketing product enhancements or new products that respond totechnological changes or evolving industry standards. We may experiencedifficulties that could delay or prevent the successful development,introduction and marketing of those products, and our new products and productenhancements may not adequately meet the requirements of the 

 

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marketplace and achievecommercially viable levels of market acceptance. If any potential new products,upgrades, or enhancements are delayed, or if any potential new products,upgrades, or enhancements experience quality problems or do not achieve suchmarket acceptance, or if new products make our existing products obsolete, ourfinancial position, results of operations and cash flows would be materiallyadversely affected.

 

*6.             If government regulations change or if we fail to complywith existing and/or new regulations, we might miss market opportunities andexperience increased costs and limited growth.*  The research, manufacturing, marketing anddistribution of our products in the United States and other countries aresubject to extensive regulation by numerous governmental authorities including,but not limited to, the U. S. Food and Drug Administration. Under the FederalFood, Drug and Cosmetic Act, medical devices must receive clearance from the U.S. Food and Drug Administration through the Section 510(k) pre-marketnotification process or through the more lengthy pre-market approval processbefore they can be sold in the United States. The process of obtaining requiredregulatory approvals is lengthy and has required the expenditure of substantialresources. There can be no assurance that we will be able to continue to obtainthe necessary approvals. As part of our strategy, we also intend to pursuecommercialization of our products in international markets. Our products aresubject to regulations that vary from country to country. The process ofobtaining foreign regulatory approvals in certain countries can be lengthy andrequire the expenditure of substantial resources. We may not be able to obtainnecessary regulatory approvals or clearances on a timely basis or at all, anddelays in receipt of or failure to receive such approvals or clearances, orfailure to comply with existing or future regulatory requirements would have amaterial adverse effect on our financial position, results of operations andcash flows.

 

*7.             If we fail to comply with the extensive regulatoryrequirements governing the manufacturing of our products, we could be subjectto fines, suspensions or withdrawals of regulatory approvals, product recalls,suspension of manufacturing, operating restrictions and/or criminalprosecution.* The manufacturing of our products is subject toextensive regulatory requirements administered by the Food and DrugAdministration and other regulatory bodies. Inspection of our manufacturingfacilities and processes can be conducted at any time, without prior notice, bythe agencies. The FDA inspected our facilities in May, 2004 and identified sixpotential deficiencies, which we are in the process of addressing. In addition,future changes in regulations or interpretations made by the Food and DrugAdministration or other regulatory bodies, with possible retroactive effect,could adversely affect us. Changes in existing regulations or adoption of newregulations or policies could prevent us from obtaining, or affect the timingof, future regulatory approvals or clearances. We may not be able to obtainnecessary regulatory approvals or clearances on a timely basis in the future,or at all. Delays in receipt of, failure to receive such approvals orclearances and/or failure to comply with existing or future regulatoryrequirements would have a material adverse effect on our financial position,results of operations and cash flows.

 

*8.             Our current patents, trade secrets and know-how may notprovide a competitive advantage, the pending applications may not result inpatents being issued, and our competitors may design around any patents issuedto us.* Our success will continue to depend in part on ourability to maintain patent protection for our products and processes, topreserve our trade secrets and to operate without infringing the proprietaryrights of third parties. We have four issued U.S. patents on severaltechnologies embodied in our AEM Monitoring System, AEM Instruments and relatedaccessories and we have applied for additional U.S. patents. In addition, wehave four issued foreign patents. The validity and breadth of claims coveragein medical technology patents involve complex legal and factual questions andmay be highly uncertain. Also, patents may not protect our proprietaryinformation and know-how or provide adequate remedies for us in the event ofunauthorized use or disclosure of such information, and others may be able todevelop, independently, such information. There has been substantial litigationregarding patent and other intellectual property rights in the medical deviceindustry. Litigation may be necessary to enforce patents issued to us, toprotect trade secrets or know-how owned by us, to defend us against claimedinfringement of the rights of others or to determine the ownership, scope orvalidity of our proprietary rights or those of others. Any such claims mayrequire us to incur substantial litigation expenses and to divert substantialtime and effort of management personnel and could substantially decrease theamount of capital available for our operations. An adverse determination inlitigation involving the proprietary rights of others could subject us tosignificant liabilities to third parties, could require us to seek licensesfrom third parties, and could prevent us from manufacturing, selling or usingour products. The occurrence of any such actual or threatened litigation or theeffect on our business of such litigation may materially adversely affect ourfinancial position, results of operations and cash flows. Additionally, ourassessment that a patent is no longer of value could result in a significantcharge against our earnings.

 

*9.             We depend on single source suppliers for certain of thekey components and sub-contractors to provide much of our products used in themanufacturing of our products.  The lossof a supplier or limitation in supply from existing suppliers could have amaterial adverse effect on our ability to manufacture our products until a newsource of supply is located.* Although we believe that thereare alternative suppliers, any interruption in the supply of key componentscould have a material adverse effect on us. A sudden increase in customerdemand may create a backorder situation as lead times for some of our criticalmaterials are in excess of 12 weeks.****We rely onsubcontractors to provide products, either in the form of finished goods orsub-assemblies that we then assemble and test. While these sub-contractorsreduce our total cost of manufacturing, they may not be as responsive toincreased demand as we would be if we had our manufacturing capacity entirely in-house,which may limit our growth strategy and revenues.

 

*10.          The potential fluctuation in future quarterly results maycause our stock price to fluctuate.*  We expect that our operating results couldfluctuate significantly from quarter to quarter in the future and will dependupon a number of factors, many of which are outside our control. These factorsinclude the extent to which our AEM technology and related accessories gainmarket acceptance; 

 

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our investments inmarketing, sales, research and development and administrative personnelnecessary to support growth; our ability to expand our market share; actions ofcompetitors and general economic conditions. The market value of our commonstock has dramatically fluctuated in the past and is likely to fluctuate in thefuture. Any deviation could have an immediate and significant negative impacton the market price of our stock.

 

*11.          Our common stock is thinly traded, the prices at which ittrades are volatile and the buying or selling actions of a few shareholders mayadversely affect our stock price. *AtDecember 31, 2004, we had a public float of 3,416,996 shares, or 55% of ouroutstanding common stock. The average number of shares traded in any given dayover the past year has been relatively small compared to the public float.Thus, the actions of a few shareholders either buying or selling shares of ourcommon stock may adversely affect the price of the shares. Historically, thinlytraded securities such as our common stock have experienced extreme price andvolume fluctuations that do not necessarily relate to operating performance.

 

*12.          Our insurance coverage for product liability claims is upto $5,000,000.* We**face aninherent business risk of exposure to product liability claims in the eventthat the use of our products is alleged to have resulted in adverse effects toa patient. We maintain a general liability insurance policy up to the amount of$5,000,000 that includes coverage for product liability claims. Liabilityclaims may be excluded from the policy, may exceed the coverage limits of thepolicy, or the insurance may not continue to be available on commerciallyreasonable terms or at all. Consequently, a product liability claim or otherclaim with respect to uninsured liabilities or in excess of insured liabilitiescould have a material adverse effect on our financial position, results ofoperations and cash flows.

 

*13.          We depend on revenue from some major customers*.  We depend on revenue that is generated fromhospitals’ ongoing usage of the AEM surgical instruments. In FY 2004, wegenerated revenue from over 350 hospitals that have changed to AEM products,but no hospital customer contributed more than 2% to the total revenues. Weutilize a small number of stocking distributors, which sell AEM products tomultiple hospital customers. In FY 2004, we generated revenue of $437,307 (6%)from one of these distributors.  While itis infrequent that a hospital customer stops using AEM instruments after theychange, a loss of ongoing revenue from a hospital customer could have amaterial adverse effect on our revenues and cash flows.

 

*14.          We depend on certain key personnel.* Weare highly dependent on a limited number of key management personnel, particularlyour CEO and President, John R. Serino, and our Chairman of the Board and VicePresident of Business Development, Roger C. Odell. Our loss of key personnel todeath, disability or termination, or our inability to hire and retain qualifiedpersonnel, could have a material adverse effect on our financial position,results of operations and cash flow.

 

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**ITEM 3 – CONTROLS AND PROCEDURES**

 

(a) The Company hascarried out an evaluation under the supervision and with the participation ofthe Company’s management, including the Company’s Chief Executive Officer andPrincipal Accounting Officer, of the effectiveness of the Company’s disclosurecontrols and procedures (as defined in Rules 13a-14(c) and 15d-14c of theSecurities and Exchange Act of 1934 (the “Exchange Act”)). Based upon thatevaluation, the Chief Executive Officer and the Principal Accounting Officerconcluded as of December 31, 2004 that the Company’s disclosure controls andprocedures were effective in ensuring that information required to be disclosedby the Company under the Exchange Act was recorded, processed, summarized andreported within the time periods specified under the Exchange Act rules andforms.

 

(b) There were nosignificant changes in the Company’s internal controls or in other factors thatcould significantly affect the Company’s disclosure controls and proceduressubsequent to the date of the evaluation discussed above, nor any significantdeficiencies or material weaknesses in such disclosure controls, internalcontrols and procedures requiring corrective actions. As a result no correctiveactions were taken.

 

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**PART II.****                                         OTHERINFORMATION**

 
| **ITEM 1**           | **LEGAL PROCEEDINGS – Not  applicable** |
|----------------------|----------------------------------------------|
|                 |                                         |
| **ITEM 2**           | Not Applicable                               |
|                 |                                         |
| **ITEM 3**           | Not Applicable                               |
|                 |                                         |
| **ITEM 4**–     | Exhibit – Proxy Count                   |
|                 |                                         |
| **ITEM 5**–     | Not Applicable                               |
|                 |                                         |
| **ITEM 6****–** | EXHIBITS                                     |
|                 |                                         |
|                 | 31.1                                         | Certification of Chief  Executive Officer under Rule 13a-14(a) |
|                 | 31.2                                         | Certification of  Principal Financial Officer under Rule 13a-14(a) |
|                 | 32.1                                         | Certification of  Periodic Reports pursuant to Sarbanes-Oxley Act of 2002 |

 

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**SIGNATURE**

 

Pursuantto the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934,Encision has duly caused this report to besigned on its behalf by the undersigned thereunto duly authorized.

 

 
| **Name**            | ** ** | **Title** | ** **                      | **Date** |
|---------------------|------------|-----------|---------------------------------|----------|
|                |       |      |                            |     |
|                |       |      |                            |     |
| /s/ Marcia McHaffie |       |      | Controller                      |     | February 11, 2005 |
| Marcia McHaffie     |       |      | (Principal  Accounting Officer) |     |   |

 

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