**U. S. Securities and ExchangeCommission**

**Washington,D.C.  20549**

## **Form10-QSB**

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

 

**For the quarterly period ended December 31, 2006**

**For the transition period from                   to**

**Commission file number 0-28604**

** **

**ENCISION INC.**

(Exact name ofRegistrant as specified in its charter)

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

 

**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       ****x****       No      ****o**

**Indicateby checkmark whether the registrant is a shell company (as defined in Rule12b-2 of the Exchange Act).****Yes      ****o****      No      ****x**

**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** |   | **6,430,437  Shares**              |
|--------------------------------|--------|------------------------------------|
| Class                          |   | (outstanding at  January 31, 2007) |

 

**Transitional Small BusinessDisclosure Format****Yes      ****o****      No      ****x**

 

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**ENCISIONINC.**

**FORM10-QSB**

**For theQuarter Ended December 31, 2006**

**INDEX**
| **PART I.**   | **UNAUDITED FINANCIAL  INFORMATION** |                                                                                        |
|---------------|--------------------------------------|---------------------------------------------------------------------------------------------|
| ** **    | ** **                           | ** **                                                                                  |   |
| **ITEM 1**    | —                               | Condensed  Interim Financial Statements:                                                    |   |
| ** **    |                                 |                                                                                        |   |
|          | —                               | Condensed  Balance Sheets as of December 31, 2006 and March 31, 2006                        |   |
|          |                                 |                                                                                        |   |
|          | —                               | Condensed  Statements of Operations for the Three Months Ended December 31, 2006 and  2005  |   |
|          |                                 |                                                                                        |   |
|          | —                               | Condensed  Statements of Operations for the Nine Months Ended December 31, 2006 and 2005    |   |
|          |                                 |                                                                                        |   |
|          | —                               | Condensed  Statements of Cash Flows for the Nine Months Ended December 31, 2006 and 2005    |   |
|          |                                 |                                                                                        |   |
|          | —                               | 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

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**PART I****                                                       FINANCIALINFORMATION**

**ITEM 1****       ****-****          CONDENSED INTERIMFINANCIAL STATEMENTS**

ENCISION INC.

CONDENSED BALANCE SHEETS
| ** **                                                                                                                                   | ** ** | **December 31,  2006** | ** ** | **March 31,  2006** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------|------------|--------------------------|------------|
| ** **                                                                                                                                   | ** ** | **(unaudited)**             | ** ** | **(audited)**            | ** ** |
| ASSETS                                                                                                                                       |       |                        |       |                     |       |
| CURRENT ASSETS:                                                                                                                              |       |                        |       |                     |       |
| Cash and cash  equivalents                                                                                                                   |       | $                           | 1,149,974  |                     | $          | 901,541 |   |
| Accounts  receivable, net of allowance for doubtful accounts of $23,500 and $38,000,  respectively                                           |       | 1,111,080                   |       | 942,494                  |       |
| Inventory, net  of reserve for obsolescence of $82,000 and $70,000, respectively                                                             |       | 1,520,286                   |       | 1,398,848                |       |
| Prepaid expenses                                                                                                                             |       | 177,236                     |       | 81,828                   |       |
|                                                                                                                                         |       |                        |       |                     |       |
| Total current assets                                                                                                                         |       | 3,958,576                   |       | 3,324,711                |       |
|                                                                                                                                         |       |                        |       |                     |       |
| EQUIPMENT, at cost:                                                                                                                          |       |                        |       |                     |       |
| Furniture,  fixtures and equipment                                                                                                           |       | 1,046,789                   |       | 935,899                  |       |
| Customer-site  equipment                                                                                                                     |       | 610,116                     |       | 596,439                  |       |
| Less -  accumulated depreciation                                                                                                             |       | (1,354,190                  | )          | (1,216,160               | )          |
|                                                                                                                                         |       |                        |       |                     |       |
| Equipment, net                                                                                                                               |       | 302,715                     |       | 316,178                  |       |
|                                                                                                                                         |       |                        |       |                     |       |
| PATENTS, net of  accumulated amortization of $104,456 and $92,339, respectively                                                              |       | 154,693                     |       | 152,930                  |       |
| OTHER ASSETS                                                                                                                                 |       | 52,531                      |       | 23,483                   |       |
|                                                                                                                                         |       |                        |       |                     |       |
| Total assets                                                                                                                                 |       | $                           | 4,468,515  |                     | $          | 3,817,302 |   |
|                                                                                                                                         |       |                        |       |                     |       |
| LIABILITIES AND  SHAREHOLDERS’ EQUITY                                                                                                   |       |                        |       |                     |       |
|                                                                                                                                         |       |                        |       |                     |       |
| CURRENT LIABILITIES:                                                                                                                         |       |                        |       |                     |       |
| Accounts payable                                                                                                                             |       | $                           | 683,069    |                     | $          | 299,766 |   |
| Accrued  compensation                                                                                                                        |       | 183,486                     |       | 228,913                  |       |
| Other accrued  liabilities                                                                                                                   |       | 581,839                     |       | 556,949                  |       |
|                                                                                                                                         |       |                        |       |                     |       |
| Total current  liabilities                                                                                                                   |       | 1,448,394                   |       | 1,085,628                |       |
|                                                                                                                                         |       |                        |       |                     |       |
| 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, 6,430,437 (December 31, 2006) and  6,398,146 (March 31, 2006) shares outstanding |       | 19,122,640                  |       | 18,920,885               |       |
| (Accumulated  deficit)                                                                                                                       |       | (16,102,519                 | )          | (16,189,211              | )          |
|                                                                                                                                         |       |                        |       |                     |       |
| Total  shareholders’ equity                                                                                                             |       | 3,020,121                   |       | 2,731,674                |       |
| Total liabilities and  shareholders’ equity                                                                                             |       | $                           | 4,468,515  |                     | $          | 3,817,302 |   |

 

The accompanying notesare an integral part of these condensed financial statements.

3

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ENCISION INC.

CONDENSED STATEMENTS OFOPERATIONS(Unaudited)
| ** **                                                                               | ** ** | **For the Three Months  Ended December 31,** | ** ** |
|------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------|------------|
| ** **                                                                               | ** ** | **2006**                                                              | ** ** | **2005** | ** ** |
| REVENUE, NET                                                                             |       | $                                                                     | 2,787,147  |   | $ | 2,116,936 |   |
|                                                                                     |       |                                                                  |       |   |   |
| COST OF SALES                                                                            |       | 1,054,308                                                             |       | 851,478 |   |
|                                                                                     |       |                                                                  |       |   |   |
| Gross profit                                                                             |       | 1,732,839                                                             |       | 1,265,458 |   |
|                                                                                     |       |                                                                  |       |   |   |
| OPERATING  EXPENSES:                                                                     |       |                                                                  |       |   |   |
| Sales and marketing                                                                      |       | 1,105,251                                                             |       | 924,958 |   |
| General and administrative                                                               |       | 378,359                                                               |       | 280,927 |   |
| Research and development                                                                 |       | 310,083                                                               |       | 218,667 |   |
|                                                                                     |       |                                                                  |       |   |   |
| Total operating expenses                                                                 |       | 1,793,693                                                             |       | 1,424,552 |   |
|                                                                                     |       |                                                                  |       |   |   |
| (LOSS) FROM  OPERATIONS                                                                  |       | (60,854                                                               | )          | (159,094 | ) |
|                                                                                     |       |                                                                  |       |   |   |
| OTHER INCOME  (EXPENSE):                                                                 |       |                                                                  |       |   |   |
| Interest income                                                                          |       | 12,407                                                                |       | 7,910 |   |
| Other income (expense), net                                                              |       | (611                                                                  | )          | (2,569 | ) |
|                                                                                     |       |                                                                  |       |   |   |
| NET (LOSS)                                                                               |       | $                                                                     | (49,058    | ) | $ | (153,753 | ) |
|                                                                                     |       |                                                                  |       |   |   |
| NET (LOSS) PER  SHARE:                                                                   |       |                                                                  |       |   |   |
| Basic and diluted net (loss) per common share                                            |       | $                                                                     | (0.01      | ) | $ | (0.02 | ) |
|                                                                                     |       |                                                                  |       |   |   |
| Weighted average  shares used in computing basic and diluted net (loss) per common share |       | 6,430,437                                                             |       | 6,391,389 |   |

 

The accompanying notesare an integral part of these condensed financial statements.

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ENCISION INC.

CONDENSED STATEMENTS OFOPERATIONS(Unaudited)
| ** **                                                                            | ** ** | **For the Nine Months  Ended December 31,** | ** ** |
|---------------------------------------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                                                            | ** ** | **2006**                                    | ** ** | **2005** | ** ** |
| REVENUE, NET                                                                          |       | $                                           | 8,192,800  |   | $ | 6,708,017 |   |
|                                                                                  |       |                                        |       |   |   |
| COST OF SALES                                                                         |       | 3,055,411                                   |       | 2,681,293 |   |
|                                                                                  |       |                                        |       |   |   |
| Gross profit                                                                          |       | 5,137,389                                   |       | 4,026,724 |   |
|                                                                                  |       |                                        |       |   |   |
| OPERATING  EXPENSES:                                                                  |       |                                        |       |   |   |
| Sales and marketing                                                                   |       | 3,248,336                                   |       | 2,724,507 |   |
| General and administrative                                                            |       | 1,056,473                                   |       | 884,672 |   |
| Research and development                                                              |       | 784,313                                     |       | 722,969 |   |
|                                                                                  |       |                                        |       |   |   |
| Total operating expenses                                                              |       | 5,089,122                                   |       | 4,332,148 |   |
|                                                                                  |       |                                        |       |   |   |
| INCOME (LOSS) FROM  OPERATIONS                                                        |       | 48,267                                      |       | (305,424 | ) |
|                                                                                  |       |                                        |       |   |   |
| OTHER INCOME  (EXPENSE):                                                              |       |                                        |       |   |   |
| Interest income                                                                       |       | 31,729                                      |       | 21,081 |   |
| Other (expense), net                                                                  |       | 6,696                                       |       | (12,221 | ) |
|                                                                                  |       |                                        |       |   |   |
| NET INCOME  (LOSS)                                                                    |       | $                                           | 86,692     |   | $ | (296,564 | ) |
|                                                                                  |       |                                        |       |   |   |
| NET INCOME  (LOSS) PER SHARE:                                                         |       |                                        |       |   |   |
| Basic and diluted net income (loss) per common share                                  |       | $                                           | 0.01       |   | $ | (0.05 | ) |
|                                                                                  |       |                                        |       |   |   |
| Weighted average shares used in computing basic net  income (loss) per common share   |       | 6,420,280                                   |       | 6,359,797 |   |
|                                                                                  |       |                                        |       |   |   |
| Weighted average  shares used in computing diluted net income (loss) per common share |       | 6,434,704                                   |       | 6,359,797 |   |

 

The accompanying notesare an integral part of these condensed financial statements.

5

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ENCISION INC.

CONDENSED STATEMENTS OFCASH FLOWS(Unaudited)
| ** **                                                                                        | ** ** | **For the Nine Months  Ended December 31,** | ** ** |
|---------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------|------------|
| ** **                                                                                        | ** ** | **2006**                                                             | ** ** | **2005** | ** ** |
| CASH FLOWS FROM  OPERATING ACTIVITIES:                                                            |       |                                                                 |       |   |   |
| Net income (loss)                                                                                 |       | $                                                                    | 86,692     |   | $ | (296,564 | ) |
| Adjustments to reconcile net income to net cash  provided by (used in) operating activities— |       |                                                                 |       |   |   |
| Depreciation and amortization                                                                     |       | 147,147                                                              |       | 133,487 |   |
| Stock-based compensation expense related to stock  options                                        |       | 138,539                                                              |       | — |   |
| Stock-based interest expense related to warrants                                                  |       | 1,268                                                                |       | — |   |
| Provision for bad debts                                                                           |       | (14,500                                                              | )          | 31,500 |   |
| Inventory reserves                                                                                |       | 12,000                                                               |       | (20,000 | ) |
| Changes in operating assets and liabilities—                                                 |       |                                                                 |       |   |   |
| Accounts receivable                                                                               |       | (154,086                                                             | )          | (171,736 | ) |
| Inventory                                                                                         |       | (133,438                                                             | )          | (395,310 | ) |
| Other assets                                                                                      |       | (124,456                                                             | )          | (38,519 | ) |
| Accounts payable                                                                                  |       | 383,303                                                              |       | (40,714 | ) |
| Accrued compensation and other accrued liabilities                                                |       | (20,537                                                              | )          | 158,805 |   |
| Net cash provided by (used in) operating activities                                               |       | 321,932                                                              |       | (639,051 | ) |
|                                                                                              |       |                                                                 |       |   |   |
| CASH FLOWS FROM  INVESTING ACTIVITIES:                                                            |       |                                                                 |       |   |   |
| Investment in equipment                                                                           |       | (124,567                                                             | )          | (157,215 | ) |
| Patent costs                                                                                      |       | (10,880                                                              | )          | (46,222 | ) |
| Net cash (used in) investing activities                                                           |       | (135,447                                                             | )          | (203,437 | ) |
|                                                                                              |       |                                                                 |       |   |   |
| CASH FLOWS FROM  FINANCING ACTIVITIES:                                                            |       |                                                                 |       |   |   |
| Proceeds from the exercise of stock options                                                       |       | 61,948                                                               |       | 95,950 |   |
| Net cash provided by financing activities                                                         |       | 61,948                                                               |       | 95,950 |   |
|                                                                                              |       |                                                                 |       |   |   |
| NET INCREASE  (DECREASE) IN CASH AND CASH EQUIVALENTS                                             |       | 248,433                                                              |       | (746,538 | ) |
|                                                                                              |       |                                                                 |       |   |   |
| CASH AND CASH  EQUIVALENTS, beginning of period                                                   |       | 901,541                                                              |       | 1,472,385 |   |
|                                                                                              |       |                                                                 |       |   |   |
| CASH AND CASH  EQUIVALENTS, end of period                                                         |       | $                                                                    | 1,149,974  |   | $ | 725,847 |   |

 

The accompanying notesare an integral part of these financial statements.

6

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ENCISION INC.

NOTES TO CONDENSED INTERIM FINANCIAL STATEMENTS

DECEMBER 31, 2006(Unaudited)

(1)                      ORGANIZATIONAND NATURE OF BUSINESS

Encision Inc. is amedical device company that designs, develops, manufactures and marketspatented surgical instruments that provide greater safety to patientsundergoing minimally-invasive surgery. We believe our patented AEM® surgical instrument technology is changing themarketplace for electrosurgical devices and instruments by providing a solutionto a patient safety risk in laparoscopic surgery. Our sales to date have beenmade principally in the United States.

We achieved profitableoperations in fiscal years 2004 and 2003. However, in each fiscal year prior to2003 and in fiscal years 2006 and 2005, we incurred losses and had anaccumulated deficit of $16,102,519 at December 31, 2006. Operations have beenfinanced primarily through the issuance of our common stock.

Our strategic marketingand sales plan is designed to expand the use of our products in surgicallyactive hospitals in the United States. We expect these efforts to result incontinued revenue increases for fiscal year 2007.

(2)                      SUMMARYOF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The condensed interimfinancial statements included herein have been prepared by us, without audit,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 we believe that the disclosures made are adequate to makethe information presented not misleading. The condensed interim financialstatements and notes thereto should be read in conjunction with the financialstatements and the notes thereto, included in our Annual Report to theSecurities and Exchange Commission for the fiscal year ended March 31, 2006,filed on Form 10-KSB on June 30, 2006.

The accompanying condensedinterim financial statements have been prepared, in all material respects, inconformity with the standards of accounting measurements set forth inAccounting 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.

Useof Estimates in the Preparation of Financial Statements

The preparation offinancial statements in conformity with accounting principles generallyaccepted in the United States requires us to make estimates and assumptions.Such estimates and assumptions affect the reported amounts of assets andliabilities as well as disclosure of contingent assets and liabilities at thedate of the financial statements and the reported amounts of revenue andexpense during the reporting period. Actual results could differ from thoseestimates.

Revenue Recognition

Revenue from productsales is recorded when we ship the product and title has passed to thecustomer, provided that we have evidence of a customer arrangement and canconclude that collection is probable. Our shipping policy is FOB ShippingPoint. We recognize revenue from sales to stocking distributors when there isno right of return, other than for normal warranty claims. We have no ongoingobligations related to product sales, except for normal warranty.

Concentrationof Credit Risk

We have no significantoff-balance sheet concentrations of credit risk such as foreign exchangecontracts, options contracts or other foreign hedging arrangements. We maintainthe majority of our cash balances with two financial institutions in the formof demand deposits and money market funds.

7

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Accounts receivable aretypically unsecured and are derived from transactions with and from entities inthe healthcare industry primarily located in the United States. Accordingly, wemay be exposed to credit risk generally associated with the healthcareindustry. We maintain allowances for doubtful accounts for estimated lossesresulting from the inability of ourcustomers to make required payments.

The net accountsreceivable balance at December 31, 2006 of $1,111,080 included no more than 4%from any one customer. The net accounts receivable balance at March 31, 2006 of$942,494 included no more than 4% from any one customer.

Inventories

Inventories are stated atthe lower of cost (first-in, first-out basis) or market. We reduce inventory for estimated obsolete orunmarketable inventory equal to the difference between the cost of inventoryand the estimated market value based upon assumptions about future demand andmarket conditions. If actual market conditions are less favorable than thoseprojected by management, additional inventory write-downs may be required. Inventoryconsisted of the following:

|                                  | ** ** | **December 31,  2006** | ** ** | **March 31,  2006** | ** ** |
|----------------------------------|------------|-----------------------------|------------|--------------------------|------------|
| Raw materials                    |       | $                           | 1,069,617  |                     | $          | 869,571 |   |
| Finished goods                   |       | 532,669                     |       | 599,277                  |       |
|                             |       | 1,602,286                   |       | 1,468,848                |       |
| Less - Reserve  for obsolescence |       | (82,000                     | )          | (70,000                  | )          |
|                             |       | $                           | 1,520,286  |                     | $          | 1,398,848 |   |

 

Accrued Liabilities

We have accrued $100,000related to warranty claims, $116,588 related to sales commissions and $105,346related to rent normalization and have included these amounts in accruedliabilities in the accompanying balance sheets as of December 31, 2006. We haveaccrued $135,000 related to warranty claims, $130,661 related to salescommissions and $122,781 related to rent normalization and have included theseamounts in accrued liabilities in the accompanying balance sheet as ofMarch 31, 2006.

Research and Development Expenses

We expense research anddevelopment costs for products and processes as incurred.

Stock-Based Compensation Expense

On April 1, 2006, weadopted Statement of Financial Accounting Standards No. 123 (revised 2004), “Share-BasedPayment,” (“SFAS 123(R)”) which requires the measurement and recognition ofcompensation expense for all share-based payment awards made to employees anddirectors including employee stock options based on estimated fair values. SFAS123(R) supersedes our previous accounting under Accounting Principles BoardOpinion No. 25, “Accounting for Stock Issued to Employees” (“APB 25”) forperiods beginning in fiscal year 2007. In March 2005, the Securities andExchange Commission issued Staff Accounting Bulletin No. 107 (“SAB 107”)relating to SFAS 123(R). We have applied the provisions of SAB 107 in ouradoption of SFAS 123(R).

We have adopted SFAS123(R) using the modified prospective transition method, which requires theapplication of the accounting standard as of April 1, 2006, the first day ofour fiscal year 2007. Our financial statements as of and for the three and ninemonths ended December 31, 2006 reflect the impact of SFAS 123(R). In accordancewith the modified prospective transition method, our financial statements forprior periods have not been restated to reflect, and do not include, the impactof SFAS 123(R). Stock-based compensation expense recognized under SFAS 123(R)for the three and nine months ended December 31, 2006 was $43,885 and $138,539,respectively, which consisted of stock-based compensation expense related toemployee stock options. There was no stock-based compensation expense relatedto employee stock options during the three and nine months ended December 31,2005.

SFAS 123(R) requirescompanies to estimate the fair value of share-based payment awards on the dateof grant using an option-pricing model. The value of the portion of the awardthat is ultimately expected to vest is recognized as expense over the requisiteservice periods in our Statement of Operations. Prior to the adoption of SFAS123(R), we accounted for stock-based awards to employees and directors usingthe intrinsic value method in accordance with APB 25 as allowed under Statementof Financial Accounting Standards No. 123, “Accounting for Stock-BasedCompensation” (“SFAS 123”). Under the intrinsic value method, no stock-basedcompensation expense had been recognized in our Statement of Operations becausethe exercise price of our stock options granted to employees and directorsequaled the fair market value of the underlying stock at the date of grant.

Stock-based compensationexpense recognized during the period is based on the value of the portion ofshare-based payment awards that is ultimately expected to vest during theperiod. Stock-based compensation expense recognized in our Statement ofOperations for the third quarter of fiscal year 2007 included compensationexpense for share-based payment awards granted prior to, but not yet 

8

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vested as of December 31,2006 based on the grant date fair value estimated in accordance with the proforma provisions of SFAS 123 and compensation expense for the share-basedpayment awards granted subsequent to July 30, 2005 based on the grant date fairvalue estimated in accordance with the provisions of SFAS 123(R). Compensationexpense for all share-based payment is recognized using the straight-linesingle-option method. As stock-based compensation expense recognized in theStatement of Operations for the third quarter of fiscal year 2007 is based onawards ultimately expected to vest, it has been reduced for estimatedforfeitures. SFAS 123(R) requires forfeitures to be estimated at the time ofgrant and revised, if necessary, in subsequent periods if actual forfeituresdiffer from those estimates. In our pro forma information required under SFAS123 for the periods prior to fiscal year 2007, we accounted for forfeitures asthey occurred.

Upon adoption of SFAS123(R), we continued to use the Black-Scholes option-pricing model (“Black-Scholesmodel”) which was previously used for our pro forma information required underSFAS 123. Our determination of fair value of share-based payment awards on thedate of grant using an option-pricing model is affected by our stock price aswell as assumptions regarding a number of highly complex and subjectivevariables. These variables include, but are not limited to our expected stockprice volatility over the term of the awards, and actual and projected employeestock option exercise behaviors. Although the fair value of employee stockoptions is determined in accordance with SFAS 123(R) and SAB 107 using anoption-pricing model, that value may not be indicative of the fair valueobserved in a willing buyer/willing seller market transaction.

On November 10, 2005, theFinancial Accounting Standards Board (“FASB”) issued FASB Staff Position No.FAS 123(R)-3 “Transition Election Related to Accounting for Tax Effects ofShare-Based Payment Awards.” We have elected to adopt the alternativetransition method provided in the FASB Staff Position for calculating the taxeffects of stock-based compensation pursuant to SFAS 123(R). The alternativetransition method includes simplified methods to establish the beginningbalance of the additional paid-in capital pool (“APIC pool”) related to the taxeffects of employee stock-based compensation, and to determine the subsequentimpact on the APIC pool and Statements of Cash Flows of the tax effects ofemployee stock-based compensation awards that are outstanding upon adoption ofSFAS 123(R).

Segment Reporting

We have concluded that wehave one operating segment.

Basic and Diluted Income 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.

For the three monthperiod ended December 31, 2006, we had currently-exercisable stock optionsoutstanding that could create future dilution to our common shareholders andare not currently classified as our outstanding common shares. The common stocknumber is based on specific conversion or issuance assumptions pursuant to thecorresponding terms of each instrument. Potential stock issuance excluded fromearnings per share because their effect was anti-dilutive was 440,000 and425,576 for the three and nine months ended December 31, 2006, respectively.

The following is a tablethat reconciles the numerators and denominators of the basic and dilutedearnings per share:
| ** **                                                                        | ** ** | **For the Three Months Ended:** | ** ** |
|-----------------------------------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                                        | ** ** | **December 31, 2006**                     | ** ** | **December 31, 2005** | ** ** |
| ** **                                                                        | ** ** | **Income  (Loss)  (Numerator)**                     | ** ** | **Shares  (Denominator)** | ** ** | **Per-Share  Amount** | ** ** | **Income  (Loss)  (Numerator)** | ** ** | **Shares  (Denominator)** | ** ** | **Per-Share  Amount** | ** ** |
| Net income  (loss) Basic EPS Income (loss) available to common stockholders       |       | $                                                   | (49,058    | ) | 6,430,437 |   | $ | (0.01 | ) | $ | (153,753 | ) | 6,391,389 |   | $ | (0.02 | ) |
|                                                                              |       |                                                |       |   |   |   |   |   |   |   |   |   |   |
| Effect of  Dilutive Securities Stock Options                                      |       | —                                              |       | — |   |   |   | — |   | — |   |   |   |
|                                                                              |       |                                                |       |   |   |   |   |   |   |   |   |   |   |
| Diluted EPS Income  (loss) available to common stockholders + dilutive securities |       | $                                                   | (49,058    | ) | 6,430,437 |   | $ | (0.01 | ) | $ | (153,753 | ) | 6,391,389 |   | $ | (0.02 | ) |

 

9

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| ** **                                                                        | ** ** | **For the Nine Months Ended:** | ** ** |
|-----------------------------------------------------------------------------------|------------|----------------------------------------------------|------------|
| ** **                                                                        | ** ** | **December 31, 2006**                    | ** ** | **December 31, 2005** | ** ** |
| ** **                                                                        | ** ** | **Income  (Loss)   (Numerator)**              | ** ** | **Shares   (Denominator)** | ** ** | **Per-Share  Amount** | ** ** | **Income  (Loss)  (Numerator)** | ** ** | **Shares  (Denominator)** | ** ** | **Per-Share  Amount** | ** ** |
| Net income  (loss) Basic EPS Income (loss) available to common stockholders       |       | $                                                  | 86,692     |   | 6,420,280 |   | $ | 0.01 |   | $ | (296,564 | ) | 6,359,797 |   | $ | (0.05 | ) |
|                                                                              |       |                                               |       |   |   |   |   |   |   |   |   |   |   |
| Effect of  Dilutive Securities Stock Options                                      |       | —                                             |       | 14,424 |   |   |   | — |   | — |   |   |   |
|                                                                              |       |                                               |       |   |   |   |   |   |   |   |   |   |   |
| Diluted EPS Income  (loss) available to common stockholders + dilutive securities |       | $                                                  | 86,292     |   | 6,434,704 |   | $ | 0.01 |   | $ | (296,564 | ) | 6,359,797 |   | $ | (0.05 | ) |

 

 (3)                   COMMITMENTS AND CONTINGENCIES

We currently lease ourfacilities under noncancelable lease agreements through August 14, 2009 at 6797Winchester Circle, Boulder, Colorado. The minimum future lease payments as ofDecember 31, 2006 were as follows:

| Year ended March 31, | ** ** | ** ** | ** ** |
|-------------------------------------|------------|------------|------------|
| 2007                                |       | 38,545     |       |
| 2008                                |       | 166,930    |       |
| 2009                                |       | 172,685    |       |
| 2010                                |       | 65,566     |       |
| ** **                          | ** ** | $          | 443,726    | ** ** |
|                                     |            |            |            |  |

 

We are subject to regulationby the United States Food and Drug Administration (“FDA”). The FDA providesregulations governing the manufacture and sale of our products and regularlyinspects us and other manufacturers to determine compliance with theseregulations. As of December 31, 2006 we believe that we were in substantialcompliance with all known regulations. FDA inspections are conductedperiodically at the discretion of the FDA. We were last inspected in May 2004and were notified of six potential deficiencies from that inspection, none ofwhich we believe to be material.

The results of operationsfor the quarter ended December 31, 2006 should not be taken as an indication ofthe results of operations for all or any part of the balance of the year.

(4)                      VALUATION AND EXPENSE INFORMATION UNDER SFAS 123(R)

On April 1, 2006, we adopted SFAS 123(R), whichrequires the measurement and recognition of compensation expense for allshare-based payment awards made to our employees and directors includingemployee stock options based on estimated fair values. The following tablesummarizes stock-based compensation expense related to employee stock optionsand employee stock purchases under SFAS 123(R) for the three and nine months endedDecember 31, 2006 which was allocated as follows:

|                                                                 | ** ** | **Three Months Ended  December 31, 2006** | ** ** | **Nine Months Ended  December 31, 2006** | ** ** |
|-----------------------------------------------------------------|------------|---------------------------------------------------------------|------------|--------------------------------------------------------------|------------|
| Sales and  marketing                                            |       | $                                                             | 10,590     |                                                         | $          | 31,768 |   |
| General and  administrative                                     |       | 28,240                                                        |       | 84,718                                                       |       |
| Research and  development                                       |       | 5,055                                                         |       | 22,053                                                       |       |
| Stock-based compensation  expense included inoperating expenses |       | $                                                             | 43,885     |                                                         | $          | 138,539 |   |

 

There was no stock-based compensation expenserecognized for the three and nine months ended December 31, 2005, respectively.

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The table below reflects net income and diluted netincome per share for the three months ended December 31, 2006 compared with thepro forma information for the three months ended December 31, 2005 as follows:

|                                                                                                     | ** ** | **Three Months Ended December 31,** | ** ** |
|-----------------------------------------------------------------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                                                                                          | ** ** | **2006**                                                | ** ** | **2005** | ** ** |
| Net income  (loss)—as reported for the prior period (1)                                        |       | N/A                                                     |       | $ | (153,753 | ) |
| Stock-based  compensation expense related toemployee stock options (2)                              |       | $                                                       | 43,885     |   | $ | 53,672 |   |
| Net income  (loss), including the effect of stock-based compensation expense (3)                    |       | $                                                       | (49,058    | ) | $ | (207,425 | ) |
| Diluted net income  (loss) per share—as reported for the prior period (1)                      |       | N/A                                                     |       | $ | (0.02 | ) |
| Diluted net income  (loss) per share, including the effect of stock-based compensation expense  (3) |       | $                                                       | (0.01      | ) | $ | (0.03 | ) |

 

|                                                                                                     | ** ** | **Nine Months Ended December 31,** | ** ** |
|-----------------------------------------------------------------------------------------------------|------------|--------------------------------------------------------|------------|
| ** **                                                                                          | ** ** | **2006**                                               | ** ** | **2005** | ** ** |
| Net income  (loss)—as reported for the prior period (1)                                        |       | N/A                                                    |       | $ | (296,564 | ) |
| Stock-based  compensation expense related toemployee stock options (2)                              |       | $                                                      | 138,539    |   | $ | 163,620 |   |
| Net income  (loss), including the effect of stock-based compensation expense (3)                    |       | $                                                      | 86,692     |   | $ | (460,184 | ) |
| Diluted net  income (loss) per share—as reported for the prior  period (1)                     |       | N/A                                                    |       | $ | (0.05 | ) |
| Diluted net income  (loss) per share, including the effect of stock-based compensation expense  (3) |       | $                                                      | 0.01       |   | $ | (0.07 | ) |

----

(1)    Net income and net income per share prior tofiscal year 2007 did not include stock-based compensation expense for employeestock options under SFAS 123 because we did not adopt the recognitionprovisions of SFAS 123.

(2)    Stock-based compensation expense prior tofiscal year 2007 is calculated based on the pro forma application of SFAS 123. 

(3)    Net incomeand net income per share prior to fiscal year 2007 represents pro formainformation based on SFAS 123.

Upon adoption of SFAS 123(R) and prior to theadoption of SFAS 123(R), the value of each employee stock option was estimatedon the date of grant using the Black-Scholes model for the purpose of financialinformation in accordance with SFAS 123.

Theuse of a Black-Scholes model requires the use of actual employee exercisebehavior data and the use of a number of assumptions including expectedvolatility, risk-free interest rate and expected dividends. No employee stockoptions were granted during the three months ended December 31, 2006. Employeestock options for 40,000 shares of stock were granted during the nine monthsended December 31, 2006.

As of December 31, 2006,$507,000 of total unrecognized compensation costs related to nonvested stock isexpected to be recognized over a weighted-average period of three years.

Recent Accounting Pronouncements

In June 2006, theFinancial Accounting Standards Board issued Interpretation No. 48, “Accountingfor Uncertainty in Income Taxes” (“FIN 48”). This Interpretation clarifies theaccounting for uncertainty in income taxes recognized in a company’s financialstatements in accordance with SFAS No. 109, “Accounting for Income Taxes.”FIN 48 prescribes recognition and measurement threshold and measurementattribute for the financial statement recognition and measurement of a taxposition taken or expected to be taken in a tax return. FIN 48 is effective forfiscal years beginning after December 15, 2006. The Company is currentlyevaluating the effects that FIN 48 will have on its accounting for income taxpractices.

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

Certain statementscontained in this section on Management’s Discussion and Analysis are nothistorical facts, including statements about our strategies and expectationsabout new and existing products, market demand, acceptance of new and existingproducts, technologies and opportunities, market and industry segment growth,and return on investments in products and markets. These statements are forwardlooking statements within the meaning of the Private Securities LitigationReform Act of 1995 and involve substantial risks and uncertainties that maycause actual results to differ materially from those indicated by the forwardlooking statements. All forward looking statements in this section onManagement’s Discussion and Analysis are based on information available to uson the date of this document, and we assume no obligation to update suchforward looking statements. Readers of this Form 10-QSB are strongly encouragedto review the section entitled *“Risk Factors.”*

**General**

Encision Inc., a medicaldevice company based in Boulder, Colorado, has developed and launchedinnovative technology that is emerging as a standard of care inminimally-invasive surgery. We believe that our patented AEM® Surgical Instruments are changing themarketplace for electrosurgical devices and laparoscopic instruments byproviding a solution to a well documented patient safety risk in laparoscopicsurgery.

We were 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.

Our 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 our “shielded and monitored”instruments, surgeons are able to perform electrosurgical procedures moresafely and effectively than when using conventional instruments. In addition,our 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. Recommendations fromthe malpractice insurance and medicolegal communities complement the broadclinical endorsements AEM technology has garnered over the past few years.

Adding furthercredibility to the benefits of our AEM technology are our supplier agreementswith Novation and Premier, two of the largest Group Purchasing Organizations “GPOs”in the United States. Together, Novation and Premier represent over 3,000hospitals which perform over 50% of all surgery in the U.S. We believe thatthese GPO supplier agreements give further indication that AEM technology isgaining broader acceptance in the market. We believe that having the nation’sleading medical purchasing groups recognize the value of our technologyreflects the potential impact that AEM products can have in the market and inadvancing patient safety in surgery nationwide. These agreements do not involvepurchase commitments, but we expect these relationships to expand the marketvisibility of AEM technology and to ease the procurement process for newhospital customers.

We have focused ourmarketing strategies to date on expanding the market awareness of the AEMtechnology and our broad independent endorsements, and have continued effortsto improve and expand the AEM product line. Accordingly, we are currentlyfocusing on modernizing our accepted AEM instruments to include ergonomics anduser functionalities for which surgeons have been expressing a preference.During fiscal year 2006, we announced enTouchTM,an ergonomically-designed handle for our articulating instruments, and furthernew additions to the AEM product line are planned for introduction in fiscalyear 2007.

When a hospital changesto AEM technology we receive recurring revenue from sales of replacementinstruments. We believe that there is no directly competing technology tosupplant AEM products once a hospital switches to our products. The replacementmarket of reusable and disposable AEM products in changed hospitals representsover 90% of Encision’s revenue over the past three months. This revenue streamis expected to grow as the base of newly changed hospitals continues to grow.In addition, we intend to develop disposable versions of more of our AEMproducts in order to meet market demands and expand our revenue opportunities.

We achieved profitableoperations in fiscal years 2004 and 2003. However, in each fiscal year prior to2003 and in fiscal years 2006 and 2005, we incurred losses and had anaccumulated deficit of $16,102,519 at December 31, 2006. Operations have beenfinanced primarily through the issuance of our common stock.

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During the nine monthsended December 31, 2006, we generated $321,932 of cash from our operations andused $124,567 for investments in equipment. As of December 31, 2006, we had $1,149,974in cash and cash equivalents available to fund future operations, an increaseof $248,433 from March 31, 2006. Our working capital was $2,510,182 at December31, 2006.

**HistoricalPerspective**

Wewere organized in 1991 and spent several years developing the AEM monitoringsystem and protective sheaths to adapt to conventional electrosurgicalinstruments. During this period, we conducted product trials and applied forpatents with the United States Patent Office and with international patentagencies. Patents were issued to us in 1994, 1996, 1997, 1998 and 2002.

As we evolved, it becameclear to us that our ‘active electrode monitoring’ technology needed to beintegrated into the standard laparoscopic instrument design. As the developmentprogram proceeded, it also became apparent that the merging of electrical andmechanical engineering skills in the instrument development process for ourpatented, integrated electrosurgical instruments was a complex and difficulttask. As a result, instruments with integrated AEM technology were notcompleted for several years. Prior to offering a full range of laparoscopicelectrosurgical instrumentation, it was difficult for hospitals to commit tothe AEM solution, as we did not have adequate comparable surgical instrumentoptions to match what surgeons demanded. As of fiscal year 2001, a sufficientlybroad product line was available to provide hospital operating rooms with AEMinstruments in most of the designs common for laparoscopic surgery.

The launch of anexpanded line of AEM instruments was accomplished over the past two years. Weare now turning our focus to developing next generation versions of our AEMinstruments to better meet market demands, particularly demand for improvedergonomics and simplified user functionalities. This strategy coincides withthe independent endorsements for our AEM technology. Recommendations from themalpractice insurance and medicolegal communities complement the broad clinicalendorsements that AEM technology has garnered over the past few years. Duringfiscal year 2006, we announced the introduction of enTouch, anergonomically-designed handle for our articulating instruments, and further newadditions to the AEM product line are planned for introduction in fiscal year2007.

**Outlook**

*Installed Base of AEM MonitoringEquipment*:  We believethat the installed base of AEM monitors has the potential for increasingrevenue as the inherent risks associated with monopolar laparoscopicelectrosurgery become more widely acknowledged and as we focus on increasingour sales efficiency. We expect that the replacement sales of electrosurgicalinstruments and accessories will increase as additional hospitals adopt AEMtechnology. We anticipate that the efforts to improve the quality of sales representativescarrying the AEM product line, along with increased marketing efforts and theintroduction of next generation products, may provide the basis for increasedrevenue and maintaining profitable operations. However, these measures, or anyothers that we may adopt, may not result in either increased revenue ormaintaining profitable operations. Furthermore, most of our next generationproducts are in the early stages of development. Further additions to the AEM product line are planned forintroduction in fiscal year 2007.

We believe that theunique performance of the AEM technology and our breadth of independentendorsements provides an opportunity for continued market share growth. In ourview, market awareness and awareness to the clinical credibility of the AEMtechnology, as well as awareness of our endorsements, are continuallyimproving, and we expect this awareness to benefit our sales efforts for theremainder of fiscal year 2007. Our objective in the remainder of fiscal year2007 is to maintain expense controls while optimizing sales execution in thefield, to expand market awareness of the AEM technology and to maximize thenumber of additional hospital accounts switching to AEM instruments, whileretaining existing hospital customers. In addition, acceptance of AEM productsdepends on surgeons’ preference for our instruments, which depends on factorssuch as ergonomics and ease of use in addition to the technological advantageof AEM products. If surgeons prefer other instruments to our instruments, ourbusiness results will suffer.

*Possibility of Operating Losses*:  We achieved profitable operations in fiscalyears 2004 and 2003. However, in fiscal years prior to 2003 and in fiscal years2006 and 2005 we incurred losses and had an accumulated deficit of $16,102,519at December 31, 2006. We have made strides toward improving our operatingresults. Due to the ongoing need to develop, optimize and train the directsales managers and the independent sales representative network, the need tosupport the development of refinements to our product line and the need toincrease sustained revenues to a level adequate to cover fixed and variableoperating costs, we may operate at a net loss from time to time. Sustainedlosses, or our inability to generate sufficient cash flow from operations tofund our obligations, may result in a need to raise additional capital.

*Revenue Growth*:  We expect to generate increased revenue inthe U.S. from sales to new hospital customers and from expanded sales inexisting hospitals as our network of direct and independent salesrepresentatives become more efficient. We believe that the visibility andcredibility of the independent clinical endorsements for AEM technology willcontribute to new hospital accounts and increase revenues in fiscal year 2007. We also expect that supplier agreementswith Novation and Premier, which together represent over 3,000 U.S. hospitals,will expose more hospitals to the benefits of AEM technology and may stimulatenew hospital accounts. We also expect to increase market share throughpromotional programs of placing our AEM monitors at no charge into hospitalsthat commit to standardize AEM instruments. However, all of these efforts toincrease market share and grow revenues will depend in part on our ability toexpand the efficiency and effective coverage range of our direct andindependent sales representatives.

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We also have longer terminitiatives in place to improve our prospects. We expect that development of next generation versions of our AEMproducts will better position our products in the marketplace and improve ourretention rate at hospitals that have changed to AEM technology, enabling us togrow our revenue. We may also exploreoverseas markets to assess opportunities for revenue growth internationally.Finally, we intend to explore opportunities to capitalize on our proven AEMtechnology via licensing arrangements and strategic alliances. These efforts togenerate additional revenue and further the market penetration of our productsare longer term in nature and may not materialize. Even if we are able tosuccessfully develop next generation products or identify potentialinternational markets or strategic partners, we may not be able to capitalizeon these opportunities.

*Gross Profit and Gross Margins*:  Gross profit and gross margins can beexpected to fluctuate from quarter to quarter, as a result of product sales mixand sales volume. Gross margins on products manufactured or assembled by us areexpected to improve at higher levels of production and sales.

*Sales and Marketing Expenses*:We continue our efforts to expand domestic and international distributioncapability, and we believe that sales andmarketing expenses will decrease as a percentage of net revenue with increasingsales volume.

*Research and Development Expenses*:Research and development expenses areexpected to increase modestly to support development of refinements to our AEMproduct line, further expanding the instrument options for surgeons. Furtheradditions to the AEM product line are planned for introduction in fiscal year2007.

**Resultsof Operations**

*For the three months endedDecember 31, 2006 compared to the three months ended December 31, 2005.*

*Net revenue.*  Revenuefor the quarter ended December 31, 2006, was $2,787,147 compared to $2,116,936for the quarter ended December 31, 2005, an increase of 32%. The increase isattributable to the addition of new hospital accounts, partially offset bybusiness lost from hospitals that previously changed to AEM technology. Weopened nine new hospital accounts for AEM technology in the three months endedDecember 31, 2006 versus five new hospital accounts for AEM technology in thethree months ended December 31, 2005. We have changed and added new salesmanagers and independent sales representatives in an effort to capitalize onidentified market opportunities. It will take a number of months before newsales managers and new independent sales representatives generate new hospitalaccounts, but we expect that the combination of these new additions willprovide the focus that is needed to achieve market gains.

*Gross profit*.  Grossprofit for the quarter ended December 31, 2006 of $1,732,839 representedan increase of 37% from gross profit of $1,265,458 for the quarter ended December31, 2005. Gross profit as a percentage of revenue (gross margins) increasedfrom 60% for the quarter ended December 31, 2005 to 62% for the quarter endedDecember 31, 2006. The increase in grossmargins was primarily the result of higher levels of production, while themanufacturing process became more efficient compared with one year ago. Forthe three months ended December 31, 2006, we provided $1,051 in AEM monitors atno charge to newly changed hospitals as part of a sales incentive program.

*Sales andmarketing expenses*. Sales and marketing expenses of $1,105,251 for the quarter endedDecember 31, 2006 represented an increase of 19% from sales and marketingexpenses of $924,958 for the quarter ended December 31, 2005. The increase was a result of increasedcompensation for increased sales employees and increased commissions as aresult of higher revenue.

*Generaland administrative expenses*. General and administrative expenses of $378,359 for the quarter endedDecember 31, 2006 represented an increase of 35% from general andadministrative expenses of $280,927 for the quarter ended December 31, 2005.The increase was primarily the result of a one-time expense of approximately$73,000 relating to the costs of obtaining equity capital financing, a projectthat was subsequently abandoned after we obtained a $2,000,000 line of creditfacility from SVB Silicon Valley Bank, and an increasein stock-based compensation expense, which was not required to be recognized inthe prior year’s quarterly results. Excluding the one-time expense ofapproximately $73,000, general and administrative expenses for the quarterended December 31, 2006 increased 9% from the quarter ended December 31, 2005.

*Researchand development expenses*. Research and development expenses of $310,083 for the quarter endedDecember 31, 2006 represented an increase of 42% compared to $218,667 for thequarter ended December 31, 2005. The increase was a result of employingadditional engineers and outside services.

*Net income (loss).  *Net loss was $49,058 forthe quarter ended December 31, 2006 compared to net loss of $153,753 for thequarter ended December 31, 2005. The decreased loss was a result of increasedrevenue and higher gross margin.

*For the nine months endedDecember 31, 2006 compared to the nine months ended December 31, 2005.*

*Net revenue.*  Revenuefor the nine months ended December 31, 2006, was $8,192,800 compared to$6,708,017 for the nine months ended December 31, 2005, an increase of 22%. Theincrease is attributable to the addition of new hospital accounts, partiallyoffset by business lost from hospitals that previously changed to AEMtechnology. We opened 30 new hospital accounts for AEM technology in the ninemonths ended December 31, 2006 versus 29 new hospital accounts for AEMtechnology in the nine months ended December 31, 2005. 

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Wehave changed and added new sales managers and independent sales representativesin an effort to capitalize on identified market opportunities. It will take anumber of months before new sales managers and new independent salesrepresentatives generate new hospital accounts, but we expect that thecombination of these new additions will provide the focus that is needed toachieve market gains.

*Gross profit*.  Grossprofit for the nine months endedDecember 31, 2006 of $5,137,389 represented an increase of 28% from grossprofit of $4,026,724 for the nine monthsended December 31, 2005. Gross profit as a percentage of revenue (grossmargins) increased from 60% for the ninemonths ended December 31, 2005 to 63% for the nine months ended December 31, 2006. The increase in gross margins was primarily the result of higher levelsof production, while the manufacturing process became more efficient comparedwith one year ago. For the ninemonths ended December 31, 2006, we provided $13,677 in AEM monitors atno charge to newly changed hospitals as part of a sales incentive program.

*Sales andmarketing expenses*. Sales and marketing expenses of $3,248,336 for the nine months ended December 31, 2006 representedan increase of 19% from sales and marketing expenses of $2,724,507 for the nine months ended December 31, 2005. The increase was a result of increasedcompensation for increased sales employees, increased commissions as a resultof higher revenue, increased sales samples and outside marketing services.These increases were partially offset by reduced catalog printing costs.

*Generaland administrative expenses*. General and administrative expenses of $1,056,473 for the nine months ended December 31, 2006represented an increase of 19% from general and administrative expenses of$884,672 for the nine months endedDecember 31, 2005. The increase was primarily the result of an increase in stock-based compensation expense, whichwas not required to be recognized in the prior year’s quarterly results, aone-time expense of approximately $73,000 relating to the costs of obtainingequity capital financing, a project that was subsequently abandoned after weobtained a $2,000,000 line of credit facility from SVB Silicon Valley Bank, and outside services. These increases were partially offset by reduced bad debt expense.

*Researchand development expenses*. Research and development expenses of $784,313 for the nine months ended December 31, 2006represented an increase of 8% compared to $722,969 for the nine months ended December 31, 2005. Theincrease was a result of stock-based compensation expense related to stockoptions and temporary help.

*Net income (loss).  *Net income was $86,692 forthe nine months ended December 31,2006 compared to net (loss) of $(296,564) for the nine months ended December 31, 2005. The improvement was a resultof increased revenue and increased gross margin.

**Liquidityand Capital Resources**

To date, operating fundshave been provided primarily by sales of our common stock and of warrants topurchase our common stock, which together totaled $19,122,640 through December31, 2006, and, to a lesser degree by funds provided by sales of our products.

OnNovember 10, 2006, we entered into a credit facility agreement with SiliconValley Bank. The terms of the credit facility include a line of credit for$2,000,000 for three years at an interest rate calculated at prime rate plus1.25%. In connection with the credit facility, we issued warrants to SiliconValley Bank to purchase 28,000 shares of our common stock at a per share priceof $2.75. Our borrowing under the credit facility is limited by our eligiblereceivables and inventory at the time of borrowing.

Our operations provided$321,932 of cash in the nine months endedDecember 31, 2006 on sales of $8,192,800. Prior to fiscal year 2003 and infiscal years 2006 and 2005, the use of cash in our operations resultedprimarily from the funding of annual net losses. These amounts of cashgenerated from and used in operations are not indicative of the expected cashto be generated from or used in operations in fiscal year 2007. As of December31, 2006, we had $1,149,974 in cash and cash equivalents available to fundfuture operations. Working capital was $2,510,182 at December 31, 2006 comparedto $2,239,083 at March 31, 2006. Current liabilities were $1,448,394 atDecember 31, 2006, compared to $1,085,628 at March 31, 2006.

If we are not successfulin obtaining profitability and positive cash flow, additional capital may berequired to maintain ongoing operations. We have explored and are continuing toexplore options to provide additional financing to fund future operations aswell as other possible courses of action. Such actions include, but are not limitedto, securing further lines of credit, sales of debt or equity securities (whichmay result in dilution to existing shareholders), licensing of technology,strategic alliances and other similar actions. There can be no assurance thatwe will be able to obtain additional funding (if needed) through a sale of ourcommon stock, loans from financial institutions or other third parties or anyof the actions discussed above. If we cannot sustain profitable operations andadditional capital is unavailable, lack of liquidity could have a materialadverse effect on our business viability, financial position, results ofoperations and cash flows.

We lease our facilitiesunder a noncancelable lease agreement with minimum future lease payments as ofDecember 31, 2006 as follows:

| Year ended March 31, | ** ** | ** ** | ** ** |
|-------------------------------------|------------|------------|------------|
| 2007                                |       | 38,545     |       |
| 2008                                |       | 166,930    |       |
| 2009                                |       | 172,685    |       |
| 2010                                |       | 65,566     |       |
|                                | ** ** | $          | 443,726    | ** ** |
|                                     |            |            |            |  |

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Capital expenditures of$124,567 in the nine months endedDecember 31, 2006 include the $13,677 capital expenditure associated withplacing AEM monitors in hospitals under various promotional programs. Placingour AEM monitors into hospitals at no charge to facilitate a hospital’s use ofAEM instruments is an initiative to accelerate new hospital accounts. Underthese promotional programs we maintain ownership of the AEM monitor, and thecost is capitalized and depreciated as cost of sales over the projected fiveyear life of the asset.

Our fiscal year 2007operating plan is focused on increasing new hospital accounts, retainingexisting hospital customers, growing revenue, increasing gross profits andconserving cash. We also are investing in research and development efforts todevelop next generation versions of the AEM product line. We can not predictwith certainty the expected revenue, gross profit, net income or loss and usageof cash and cash equivalents for fiscal year 2007. However, we believe that ourcash resources will be sufficient to fund our operations for at least the nexttwelve months. If we are unable to manage our business operations in line withbudget expectations, it could have a material adverse effect on our businessviability, financial position, results of operations and cash flows. If we arenot successful in achieving profitability and positive cash flow, additionalcapital may be required to maintain ongoing operations.

**Income Taxes**

As of March 31, 2006, netoperating loss carryforwards totaling approximately $16,500,000 are availableto reduce taxable income in the future. The net operating loss carryforwardsexpire, if not previously utilized, at various dates beginning in the fiscalyear ended March 31, 2008. We have not paid income taxes since our inception.The Tax Reform Act of 1986 and other income tax regulations contain provisionswhich may limit the net operating loss carryforwards available to be used inany given year, if certain events occur, including changes in ownershipinterests. We have established a valuation allowance for the entire amount ofour deferred tax asset since inception due to our history of losses. Should weachieve sufficient, sustained income in the future, we may conclude that someor all of the valuation allowance should be reversed. If some or all of thevaluation allowance were reversed, then, to the extent of the reversal, a taxbenefit would be recognized which would result in an increase to income.

## **CriticalAccounting Policies and Estimates**

Ourdiscussion and analysis of our financial condition and results of operationsare based upon our financial statements, which have been prepared in accordancewith accounting principles generally accepted in the United States. Thepreparation of these financial statements requires us to make estimates andjudgments that affect the reported amounts of assets, liabilities, revenue andexpenses, and related disclosure of contingent assets and liabilities. On anon-going basis, we evaluate our estimates, including those related to baddebts, inventories, sales returns, warranty, contingencies and litigation. Webase our estimates on historical experience and on various other assumptionsthat are believed to be reasonable under the circumstances, the results ofwhich form the basis for making judgments about the carrying values of assetsand liabilities that are not readily apparent from other sources. Actualresults may differ from these estimates under different assumptions orconditions. We believe the following critical accounting policies affect themore significant judgments and estimates used in the preparation of our financialstatements.

Wemaintain allowances for doubtful accounts for estimated losses resulting fromthe inability of our customers to make required payments. If the financialcondition of our customers were to deteriorate, resulting in an impairment oftheir ability to make payments, additional allowances would be required, whichwould increase our expenses during the periods in which any such allowanceswere made. The amount recorded as a provision for bad debts in each period isbased upon our assessment of the likelihood that we will be paid on ouroutstanding receivables, based on customer-specific as well as generalconsiderations. To the extent that our estimates prove to be too high, and weultimately collect a receivable previously determined to be impaired, we mayrecord a reversal of the provision in the period of such determination.

Weprovide for the estimated cost of product warranties at the time revenue isrecognized. While we engage in extensive product quality programs andprocesses, including actively monitoring and evaluating the quality of ourcomponent suppliers, we have experienced some costs related to warranty. Thewarranty accrual is based upon historical experience and is adjusted based oncurrent experience. Should actual warranty experience differ from ourestimates, revisions to the estimated warranty liability would be required.

Wereduce inventory 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. Any write-downs of inventory wouldreduce our reported net income during the period in which such write-downs wereapplied. To the extent that our estimates prove to be too high, and weultimately utilize or sell inventory previously determined to be impaired, wemay record a reversal of the provision 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.

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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,customer-site AEM Monitors are depreciated on a double-declining basis for aperiod of 5 years. Leasehold improvements are depreciated over the shorter ofthe remaining lease term or the estimated useful life of the asset. Maintenanceand repairs are expensed as incurred and major additions, replacements andimprovements are capitalized.

Weamortize our patent costs over their estimated useful lives, which is typicallythe remaining statutory life. From time to time, we may be required to adjustthese lives based on advances in technology, competitor actions, and the like.We review the recorded amounts of patents at each period end to determine iftheir carrying amount is still recoverable based on our expectations regardingsales of related products. Such an assessment, in the future, may result in aconclusion that the assets are impaired, with a corresponding charge againstearnings.

Wecurrently estimate forfeitures for stock-based compensation expense related toemployee stock options at 7% and evaluate the forfeiture rate quarterly.

**Risk Factors**

Wewish to caution you that there are risks and uncertainties that could cause ouractual results to be materially different from those indicated byforward-looking statements that we make from time to time in filings with theSecurities and Exchange Commission, news releases, reports, proxy statements,registration statements and other written communications, as well as oralforward-looking statements made from time to time by our representatives. Theserisks and uncertainties include, but are not limited to, those listed in ourAnnual Report on Form 10-KSB for the year ended March 31, 2006. These risks anduncertainties and additional risks and uncertainties not presently known to usor that we currently deem immaterial may cause our business, financialcondition, operating results and cash flows to be materially adverselyaffected. Except for the historical information contained herein, the mattersdiscussed in this analysis are forward looking statements that involve risksand uncertainties, including but not limited to general business conditions andother factors which are often beyond our control. We do not undertake anyobligation to update forward-looking statements except as required by law.

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**ITEM 3****       ****-   CONTROLSAND PROCEDURES**

(a) We have carried outan evaluation under the supervision and with the participation of ourmanagement, including our Chief Executive Officer and Principal Accounting andFinancial Officer, of the effectiveness of our disclosure controls andprocedures (as defined in Rules 13a-15(e) and 13d-15e of the Securities andExchange Act of 1934 (the “Exchange Act”)). Based upon that evaluation, theChief Executive Officer and the Principal Accounting and Financial Officerconcluded as of December 31, 2006 that our disclosure controls and procedureswere effective in ensuring that information required to be disclosed by usunder the Exchange Act was recorded, processed, summarized and reported withinthe time periods specified under the Exchange Act rules and forms.

(b) During the quarterended December 31, 2006, there were no changes in our internal control overfinancial reporting or in other factors that have materially affected, or arereasonably likely to materially affect, our internal control over financialreporting, nor were there any significant deficiencies or material weaknessesin such disclosure controls and procedures or internal control over financialreporting requiring corrective actions. As a result no corrective actions weretaken.

**ITEM 5****       ****-   OTHERINFORMATION**

(b) There have been nomaterial changes to the procedures by which security holders may recommendnominees to our board of directors.

 

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**PART II.**                                                **OTHER INFORMATION**

** **

** **

**ITEM****6**                                                        EXHIBITS

The following exhibitsare attached to this report on Form 10QSB or are incorporated by reference:

| 3.1  |   | Articles of  Incorporation of the Company, as amended. (Incorporated by reference from  Registration Statement #333-4118-D dated June 25, 1996).                                          |   |
|------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|
| 3.2  |   | Bylaws of the Company.  (Incorporated by reference from Registration Statement #333-4118-D dated June  25, 1996).                                                                         |   |
| 4.1  |   | Form of certificate for  shares of Common Stock. (Incorporated by reference from Registration  Statement #333-4118-D dated June 25, 1996).                                                |   |
| 10.1 |   | Lease Agreement dated  June 3, 2004 between Encision Inc. and DaPuzzo Investment Group, LLC  (Incorporated by reference from Quarterly Report on Form 10-QSB filed on  August 12, 2004).  |   |
| 10.2 |   | Encision Inc. 1991  Stock Option Plan, as amended. (Incorporated by reference from Registration  Statement #333-4118-D dated June 25, 1996).                                              |   |
| 10.3 |   | Encision Inc. 1997  Stock Option Plan. (Incorporated by reference from Proxy Statement dated July  15, 1997).                                                                             |   |
| 10.4 |   | Loan and Security  Agreement dated November 10, 2006 between Encision Inc. and Silicon Valley  Bank (Incorporated by reference from Current Report on Form 8-K dated  November 16, 2006). |   |
| 31.1 |   | Certification of Chief  Executive Officer under Rule 13a-14(a)                                                                                                                            |   |
| 31.2 |   | Certification of  Principal Financial and Accounting Officer under Rule 13a-14(a)                                                                                                         |   |
| 32.1 |   | Certification of Periodic Reports pursuant to Sarbanes-Oxley Act of  2002                                                                                                                 |   |

 

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**SIGNATURE**

In accordance with the requirements of the Securities Exchange Act of1934, the registrant has caused this report to be signed on its behalf by theundersigneds thereunto duly authorized.

 
| Name          |   | **Title** |   | **Date** |
|---------------|--------|-----------|--------|----------|
|          |   |      |   |     |
|          |   |      |   |     |
| Encision Inc. |   |      |   |     |

 

 
|        | /s/ Marcia  McHaffie |   | Controller                         |   | February 13,  2006 |
|--------|----------------------|--------|------------------------------------|--------|--------------------|
|   | Marcia McHaffie      |   | Principal Accounting Officer & |   |               |
|   |                 |   | Principal Financial Officer        |   |               |

 

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