Table ofContents

 

 

 

**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON, D.C.  20549**

 

**Form 10-Q**

 
| **x** | **QUARTERLY REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|-------|--------------------------------------------------------------------------------------------------------|

** **

**For the quarterly period ended September 30,2010**

 

**OR**

 
| **o** | **TRANSITION REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|-------|---------------------------------------------------------------------------------------------------------|

 

**For the transition period from                    to                   **

 

**Commission file number     0-28604**

 

**ENCISION INC.**

(Exact name of registrant as specified in itscharter)

 

| **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 principalexecutive offices)

 

**(303) 444-2600**

(Registrant’s telephonenumber)

 

Indicateby check mark whether the registrant (1) has filed all reports required tobe filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject tosuch filing requirements for the past 90 days. Yes  x  No  o

 

Indicateby check mark whether the registrant has submitted electronically and posted onits corporate Web site, if any, every Interactive Data File required to besubmitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 ofthis chapter) during the preceding 12 months (or for such shorter period thatthe registrant was required to submit and post such files).  Yes  o  No  o

 

Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated filer, a non-accelerated filer, or a smaller reportingcompany.  See the definitions of “largeaccelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2of the Exchange Act.

 

| Large accelerated filer o                     |   | Accelerated filer o         |
|-----------------------------------------------|--------|-----------------------------|
|                                          |   |                        |
| Non-accelerated filer o                       |   | Smaller reporting company x |
| (Do not check if a smaller reporting company) |   |                        |

 

Indicate by check mark whether the registrant is a shell company (asdefined in Rule 12b-2 of the Exchange Act).  Yes  o  No  x

 

Indicatethe number of shares outstanding of each of the issuer’s classes of commonequity, as of the latest practicable date:

 

| **Common Stock, no par value** | ** ** | **6,455,100 Shares**                   |
|--------------------------------|------------|----------------------------------------|
| (Class)                        |       | (outstanding at October 31, 2010) |

 

 

 

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**ENCISION INC.**

 

**FORM 10-Q**

 

**For the Three Months Ended September 30, 2010**

 

**INDEX**

 
| ** **        | ** **                | ** **                                                                                       | **Page**   |
|-------------------|---------------------------|--------------------------------------------------------------------------------------------------|------------|
| ** **        | ** **                | ** **                                                                                       | **Number** |
| ** **        | ** **                |                                                                                             |
| **PART I.**  | **FINANCIAL INFORMATION** |                                                                                             |
| ** **        | ** **                |                                                                                             |
| **ITEM1**         | -                         | Condensed  Interim Financial Statements:                                                         |       |
|              | -                         | Condensed  Balance Sheets as of September 30, 2010 and March 31, 2010                  | 3          |
|              | -                         | Condensed  Statements of Operations for the Three Months Ended September 30, 2010  and 2009 | 4          |
|              | -                         | Condensed  Statements of Operations for the Six Months Ended September 30, 2010 and  2009   | 5          |
|              | -                         | Condensed  Statements of Cash Flows for the Six Months Ended September 30, 2010 and  2009   | 6          |
|              | -                         | Notes to  Condensed Interim Financial Statements                                                 | 7          |
|              |                      |                                                                                             |       |
| **ITEM 2**        | -                         | Management’s  Discussion and Analysis of Financial Condition and Results of Operations      | 11         |
|              |                      |                                                                                             |       |
| **ITEM 4**        | -                         | Controls and Procedures                                                                          | 16         |
| ** **        |                      |                                                                                             |       |
| **PART II.** | **OTHER INFORMATION**     |                                                                                             |
| ** **        | ** **                |                                                                                             |
| **ITEM  6**       | -                         | Exhibits                                                                                         | 17         |
| ** **        |                      |                                                                                             |       |
| **SIGNATURE**     |                      | 18                                                                                               |

 

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**PART I****                  FINANCIAL INFORMATION**

 

**ITEM 1  ****-****  CONDENSEDINTERIM FINANCIAL STATEMENTS**

 

**Encision Inc.**

**Condensed Balance Sheets**

**(unaudited)**

 
| ** **                                                                                                                             | ** ** | **September 30,  2010** | ** ** | **March 31,  2010** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------|------------|--------------------------|------------|
| **ASSETS**                                                                                                                             |       |                         |       |                     |       |
| Current assets:                                                                                                                        |       |                         |       |                     |       |
| Cash and cash equivalents                                                                                                              |       | $                            | 155,027    |                     | $          | 113,735 |   |
| Accounts receivable, net of allowance for doubtful  accounts of $16,000 at September 30, 2010 and $12,500 at March 31,  2010 |       | 958,163                      |       | 1,286,075                |       |
| Inventories, net of reserve for obsolescence of  $70,000 at September 30, 2010 and $150,940 at March 31, 2010                |       | 2,531,460                    |       | 2,476,823                |       |
| Prepaid expenses                                                                                                                       |       | 70,228                       |       | 43,581                   |       |
| Total current assets                                                                                                                   |       | 3,714,878                    |       | 3,920,214                |       |
| Equipment, at cost:                                                                                                                    |       |                         |       |                     |       |
| Furniture, fixtures and equipment                                                                                                      |       | 2,459,960                    |       | 2,394,028                |       |
| Customer-site equipment                                                                                                                |       | 814,435                      |       | 778,761                  |       |
| Accumulated depreciation                                                                                                               |       | (2,104,961                   | )          | (2,024,448               | )          |
| Equipment, net                                                                                                                         |       | 1,169,434                    |       | 1,148,341                |       |
| Patents, net of accumulated amortization of  $150,940 at September 30, 2010 and $143,909 at March 31, 2010                   |       | 262,778                      |       | 265,988                  |       |
| Other assets                                                                                                                           |       | 18,946                       |       | 24,268                   |       |
| **TOTAL ASSETS**                                                                                                                       |       | $                            | 5,166,036  |                     | $          | 5,358,811 |   |
| **LIABILITIES AND SHAREHOLDERS’  EQUITY**                                                                                         |       |                         |       |                     |       |
| Current liabilities:                                                                                                                   |       |                         |       |                     |       |
| Accounts payable                                                                                                                       |       | $                            | 516,692    |                     | $          | 684,102 |   |
| Accrued compensation                                                                                                                   |       | 343,555                      |       | 404,789                  |       |
| Other accrued liabilities                                                                                                              |       | 292,639                      |       | 276,529                  |       |
| Total current liabilities                                                                                                              |       | 1,152,886                    |       | 1,365,420                |       |
| Long-term liabilities:                                                                                                                 |       |                         |       |                     |       |
| Line of credit                                                                                                                         |       | 581,263                      |       | 350,000                  |       |
| **Commitments and contingencies**                                                                                                      |       |                         |       |                     |       |
| Shareholders’ equity:                                                                                                             |       |                         |       |                     |       |
| Preferred stock, no par value: 10,000,000 shares  authorized; none issued and outstanding                                              |       | —                       |       | —                   |       |
| Common stock and additional paid-in capital, no  par value: 100,000,000 shares authorized; 6,455,100 shares issued and  outstanding    |       | 19,729,982                   |       | 19,677,322               |       |
| Accumulated (deficit)                                                                                                                  |       | (16,298,095                  | )          | (16,033,931              | )          |
| Total shareholders’ equity                                                                                                        |       | 3,431,887                    |       | 3,643,391                |       |
| **TOTAL LIABILITIES AND  SHAREHOLDERS’ EQUITY**                                                                                   |       | $                            | 5,166,036  |                     | $          | 5,358,811 |   |

 

Theaccompanying notes to financial statements are an integral part of thesecondensed statements.

 

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**Encision Inc.**

**Condensed Statements ofOperations**

**(Unaudited)**

 
| **Three Months Ended**                     | ** ** | **September 30,  2010** | ** ** | **September 30,  2009** | ** ** |
|------------------------------------------------------|------------|------------------------------|------------|------------------------------|------------|
| **NET SALES**                                        |       | $                            | 2,865,799  |                         | $          | 3,215,610 |   |
| **COST OF SALES**                                    |       | 1,031,576                    |       | 1,270,592                    |       |
| **GROSS PROFIT**                                     |       | 1,834,223                    |       | 1,945,018                    |       |
| **OPERATING EXPENSES:**                              |       |                         |       |                         |       |
| Sales and marketing                                  |       | 1,075,664                    |       | 1,235,087                    |       |
| General and administrative                           |       | 396,968                      |       | 343,243                      |       |
| Research and development                             |       | 494,578                      |       | 304,853                      |       |
| Total operating expenses                             |       | 1,967,210                    |       | 1,883,183                    |       |
| **OPERATING INCOME (LOSS)**                          |       | (132,987                     | )          | 61,835                       |       |
| Interest expense, net                                |       | (12,824                      | )          | (11,688                      | )          |
| Other income (expense), net                          |       | 443                          |       | (3,702                       | )          |
| Interest and other income (expense), net             |       | (12,381                      | )          | (15,390                      | )          |
| **INCOME (LOSS) BEFORE PROVISION  FOR INCOME TAXES** |       | (145,368                     | )          | 46,445                       |       |
| Provision for income taxes                           |       | —                       |       | —                       |       |
| **NET INCOME (LOSS)**                                |       | $                            | (145,368   | )                            | $          | 46,445 |   |
| Net income (loss) per share—basic and diluted   |       | $                            | (0.02      | )                            | $          | 0.01 |   |
| Weighted average shares—basic and diluted       |       | 6,455,100                    |       | 6,455,100                    |       |

 

Theaccompanying notes to financial statements are an integral part of thesecondensed statements.

 

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**Encision Inc.**

**Condensed Statements ofOperations**

**(Unaudited)**

 

 
| **Six Months Ended**                       | ** ** | **September 30,  2010** | ** ** | **September 30,  2009** | ** ** |
|------------------------------------------------------|------------|------------------------------|------------|------------------------------|------------|
| **NET SALES**                                        |       | $                            | 5,778,420  |                         | $          | 6,389,270 |   |
| **COST OF SALES**                                    |       | 2,099,869                    |       | 2,412,327                    |       |
| **GROSS PROFIT**                                     |       | 3,678,551                    |       | 3,976,943                    |       |
| **OPERATING EXPENSES:**                              |       |                         |       |                         |       |
| Sales and marketing                                  |       | 2,261,471                    |       | 2,433,900                    |       |
| General and administrative                           |       | 792,876                      |       | 697,063                      |       |
| Research and development                             |       | 866,549                      |       | 605,842                      |       |
| Total operating expenses                             |       | 3,920,896                    |       | 3,736,805                    |       |
| **OPERATING INCOME (LOSS)**                          |       | (242,345                     | )          | 240,138                      |       |
| Interest expense, net                                |       | (22,783                      | )          | (24,813                      | )          |
| Other income (expense), net                          |       | 964                          |       | (5,570                       | )          |
| Interest and other income (expense), net             |       | (21,819                      | )          | (30,383                      | )          |
| **INCOME (LOSS) BEFORE PROVISION  FOR INCOME TAXES** |       | (264,164                     | )          | 209,755                      |       |
| Provision for income taxes                           |       | —                       |       | —                       |       |
| **NET INCOME (LOSS)**                                |       | $                            | (264,164   | )                            | $          | 209,755 |   |
| Net income (loss) per share—basic and diluted   |       | $                            | (0.04      | )                            | $          | 0.03 |   |
| Weighted average shares—basic and diluted       |       | 6,455,100                    |       | 6,455,100                    |       |

 

Theaccompanying notes to financial statements are an integral part of thesecondensed statements.

 

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**Encision Inc.**

**Condensed Statements ofCash Flows**

**(Unaudited)**

 
| **Six Months Ended**                                                            | ** ** | **September 30,  2010** | ** ** | **September 30,  2009** | ** ** |
|-------------------------------------------------------------------------------------------|------------|------------------------------|------------|------------------------------|------------|
| Cash flows from operating activities:                                                     |       |                         |       |                         |       |
| Net income (loss)                                                                         |       | $                            | (264,164   | )                            | $          | 209,755 |   |
| Adjustments to reconcile net income (loss) to net  cash provided by operating activities: |       |                         |       |                         |       |
| Depreciation and amortization                                                             |       | 131,248                      |       | 125,841                      |       |
| Stock-based compensation expense related to stock  options                                |       | 52,660                       |       | 46,772                       |       |
| Stock-based interest expense related to warrants                                          |       | —                       |       | 3,127                        |       |
| Provision for doubtful accounts, net                                                      |       | 3,500                        |       | 4,000                        |       |
| Provision for inventory obsolescence, net                                                 |       | (80,940                      | )          | (7,500                       | )          |
| Change in operating assets and liabilities:                                               |       |                         |       |                         |       |
| Accounts receivable                                                                       |       | 324,412                      |       | 21,907                       |       |
| Inventories                                                                               |       | 26,303                       |       | 84,387                       |       |
| Prepaid expenses and other assets                                                         |       | (21,325                      | )          | (28,066                      | )          |
| Accounts payable                                                                          |       | (167,410                     | )          | (83,362                      | )          |
| Accrued compensation and other accrued liabilities                                        |       | (45,124                      | )          | (49,039                      | )          |
| Net cash provided by (used in) operating  activities                                      |       | (40,840                      | )          | 327,822                      |       |
| Cash flows from investing activities:                                                     |       |                         |       |                         |       |
| Acquisition of property and equipment                                                     |       | (145,310                     | )          | (210,401                     | )          |
| Patent costs                                                                              |       | (3,821                       | )          | (56,227                      | )          |
| Net cash (used in) investing activities                                                   |       | (149,131                     | )          | (266,628                     | )          |
| Cash flows from financing activities:                                                     |       |                         |       |                         |       |
| Borrowings from credit facility                                                           |       | 231,263                      |       | 34,058                       |       |
| Net cash provided by (used in) financing  activities                                      |       | 231,263                      |       | 34,058                       |       |
| Net increase in cash and cash equivalents                                                 |       | 41,292                       |       | 95,252                       |       |
| Cash and cash equivalents, beginning of period                                            |       | 113,735                      |       | 84,658                       |       |
| Cash and cash equivalents, end of period                                                  |       | $                            | 155,027    |                         | $          | 179,910 |   |

 

Theaccompanying notes to financial statements are an integral part of these condensedstatements.

 

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ENCISION INC.

 

NOTES TO CONDENSED INTERIMFINANCIAL STATEMENTS

 

SEPTEMBER 30, 2010

(Unaudited)

 

Note1.   ORGANIZATION AND NATURE OFBUSINESS

 

EncisionInc. is a medical device company that designs, develops, manufactures andmarkets patented surgical instruments that provide greater safety to patientsundergoing minimally-invasive surgery. We believe that 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.

 

Wehave an accumulated deficit of $16,298,095 at September 30, 2010.Operating funds have been provided primarily by issuances of our common stockand warrants, the exercise of stock options to purchase our common stock and,in recent years, by operating profits. Our liquidity position has diminishedbecause of prior years’ operating losses, and we may be required to seekadditional capital in the future.

 

Ourstrategic marketing and sales plan is designed to expand the use of ourproducts in surgically active hospitals in the United States.

 

Note2.   SUMMARY OF SIGNIFICANT ACCOUNTINGPOLICIES

 

Basis of Presentation.  The condensed interim financial statementsincluded herein have been prepared by us, without audit, pursuant to the rules andregulations of the Securities and Exchange Commission (“SEC”). Certain informationand footnote disclosures normally included in financial statements prepared inaccordance with generally accepted accounting principles accepted in the UnitedStates (“GAAP”) 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 on Form 10-Kfor the fiscal year ended March 31, 2010, filed on June 4, 2010.

 

Theaccompanying condensed interim financial statements have been prepared, in allmaterial respects, in conformity with the standards of accounting measurementsand reflect, in the opinion of management, all adjustments necessary tosummarize fairly the financial position and results of operations for suchperiods in accordance with GAAP. 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 of financial statements inconformity with GAAP requires management 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 sales and expenseduring the reporting period. Actual results could differ from those estimates.

 

Cashand Cash Equivalents.  Forpurposes of reporting cash flows, we consider all cash and highly liquidinvestments with an original maturity of three months or less to be cashequivalents.

 

Fair Value of Financial Instruments.  Our financial instruments consist of cash andcash equivalents, short-term trade receivables and payables and a line ofcredit. The carrying values of cash and cash equivalents, short-term tradereceivables and payables approximate their fair value due to their shortmaturities. The interest rate associated with the line of credit is variableand based upon fluctuations of the prime rate, thus the carrying valueapproximates fair value.

 

Concentration of Credit Risk.  Financial instruments, which potentiallysubject us to concentrations of credit risk, consist of cash and cashequivalents, accounts receivable, accounts payable and a line of credit. Thecarrying value of all financial instruments approximates fair value. The amountof cash on deposit with financial institutions does not exceed the $250,000federally insured limit at September 30, 2010. However, we believe that inthe event that cash on deposit exceeds $250,000, the financial institutions arefinancially sound and the risk of loss is minimal.

 

We have no significant off-balance sheet concentrations of credit risksuch as foreign exchange contracts, options contracts or other foreign hedgingarrangements. We maintain the majority of our cash balances with one financialinstitution in the form of demand deposits.

 

Accounts receivable are typically unsecured and are derived fromtransactions with and from entities in the healthcare industry primarilylocated in the United States. Accordingly, we may be exposed to credit riskgenerally associated with the healthcare industry. We maintain allowances fordoubtful accounts for estimated losses resulting from the inability of ourcustomers to make required payments. The net accounts receivable balance at September 30,2010 of $958,163 included no more than 4% from any one customer. The netaccounts receivable balance at March 31, 2010 of $1,286,075 included nomore than 4% from any one customer.

 

Warranty Accrual.  Weprovide for the estimated cost of product warranties at the time sales arerecognized. While we engage in extensive product quality programs andprocesses, including actively monitoring and evaluating the quality of ourcomponent suppliers, our warranty obligation is based upon historicalexperience and is also affected by product failure rates and material usageincurred in correcting a product failure. Should actual product failure ratesor material usage costs differ from our estimates, revisions to the estimatedwarranty liability would be required.

 

Inventories.  Inventories are stated at the lower of cost(first-in, first-out basis) or market. We reduce inventory for estimatedobsolete or unmarketable inventory equal to the difference between the cost ofinventory and the estimated market value based upon assumptions about futuredemand and market conditions. If actual market conditions are less favorablethan those projected by management, additional inventory write-downs may berequired.  At September 30, 2010 andMarch 31, 2010, inventory consisted of the following:

 

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| ** **                    | ** ** | **September 30, 2010** | ** ** | **March 31, 2010** | ** ** |
|-------------------------------|------------|-----------------------------|------------|------------------------------|------------|
| Raw materials                 |       | $                           | 1,684,400  |                         | $          | 1,518,737 |   |
| Finished goods                |       | 917,060                     |       | 1,109,026                    |       |
| Total gross inventories       |       | 2,601,460                   |       | 2,627,763                    |       |
| Less reserve for obsolescence |       | (70,000                     | )          | (150,940                     | )          |
| Total net inventories         |       | $                           | 2,531,460  |                         | $          | 2,476,823 |   |

 

Propertyand Equipment. Property and equipment are stated at cost, withdepreciation computed over the estimated useful lives of the assets, generallythree to seven years. We use the straight-line method of depreciation forproperty and equipment. Leasehold improvements are depreciated over the shorterof the remaining lease term or the estimated useful life of the asset.Maintenance and repairs are expensed as incurred and major additions,replacements and improvements are capitalized.

 

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

 

Patents.  The costs of applying for patents arecapitalized and amortized on a straight-line basis over the lesser of thepatent’s economic or legal life (20 years from the date of application in theUnited States). Capitalized costs are expensed if patents are not issued. Wereview the carrying value of our patents periodically to determine whether thepatents have continuing value and such reviews could result in the conclusionthat the recorded amounts have been impaired.

 

Income Taxes.  Weaccount for income taxes under the provisions of Accounting StandardsCodification Topic 740, “Accounting for Income Taxes” (“ASC 740”). ASC 740requires recognition of deferred income tax assets and liabilities for theexpected future income tax consequences, based on enacted tax laws, oftemporary differences between the financial reporting and tax bases of assetsand liabilities. ASC 740 also requires recognition of deferred tax assets forthe expected future tax effects of all deductible temporary differences, losscarryforwards and tax credit carryforwards. Deferred tax assets are thenreduced, if deemed necessary, by a valuation allowance for the amount of anytax benefits which, more likely than not based on current circumstances, arenot expected to be realized. As a result, no provision for income tax isreflected in the accompanying statements of operations. Should we achievesufficient, sustained income in the future, we may conclude that some or all ofthe valuation allowance should be reversed. We are required to make manysubjective assumptions and judgments regarding our income tax exposures. At September 30,2010, we had no unrecognized tax benefits which would affect the effective taxrate if recognized and had no accrued interest or penalties related touncertain tax positions.

 

Sales Recognition.  Sales from product sales are recorded when weship the product and title has passed to the customer, provided that we haveevidence of a customer arrangement and can conclude that collection isprobable. Our shipping policy is FOB Shipping Point. We recognize revenue fromsales to stocking distributors when there is no right of return, other than fornormal warranty claims. We have no ongoing obligations related to productsales, except for normal warranty.

 

Researchand Development Expenses.  Weexpense research and development costs for products and processes as incurred.

 

Stock-BasedCompensation.  Stock-basedcompensation is presented in accordance with the guidance of ASC Topic 718, “Compensation— Stock Compensation” (“ASC 718”). Under the provisions of ASC 718, companiesare required to estimate the fair value of share-based payment awards on thedate of grant using an option-pricing model. The value of the portion of theaward that is ultimately expected to vest is recognized as expense over therequisite service periods in our statement of operations.

 

Stock-basedcompensation expense recognized under ASC 718 for the three and six monthsended September 30, 2010 was $26,360 and $52,660, respectively, and forthe three and six months ended September 30, 2009 was $23,903 and $46,772,respectively, which consisted of stock-based compensation expense related togrants of employee stock options.

 

SegmentReporting.  We haveconcluded that we have one operating segment.

 

RecentAccounting Pronouncements.  We have reviewed all recently issued, but notyet effective, accounting pronouncements and do not believe the future adoptionof any such pronouncements may be expected to cause a material impact on ourfinancial condition or the results of our operations.

 

Note3.   BASIC AND DILUTED INCOME AND LOSSPER COMMON SHARE

 

Wereport both basic and diluted net income (loss) per share. Basic net income orloss per common share is computed by dividing net income or loss for the periodby the weighted average number of common shares outstanding for the period.Diluted net income or loss per common share is computed by dividing the netincome or loss for the period by the weighted average number of common andpotential common shares outstanding during the period if the effect of thepotential common shares is dilutive. The shares used in the calculation ofdilutive potential common shares exclude options to purchase shares where theexercise price was greater than the average market price of common shares forthe period. We had a net loss for the three and six months ended September 30,2010, and accordingly, any outstanding common share equivalents would beanti-dilutive.

 

Thefollowing table presents the calculation of basic and diluted net income (loss)per share:

 

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| ** **                                           | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|------------------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                           | ** ** | **September 30,  2010**     | ** ** | **September 30,  2009**   | ** ** | **September 30,  2010** | ** ** | **September 30,  2009** | ** ** |
| Net income (loss)                                    |       | $                                | (145,368   | )                              | $          | 46,445 |   | $ | (264,164 | ) | $ | 209,755 |   |
| Weighted-average shares — basic                 |       | 6,455,100                        |       | 6,455,100                      |       | 6,455,100 |   | 6,455,100 |   |
| Effect of dilutive potential common shares           |       | —                           |       | —                         |       | — |   | — |   |
| Weighted-average shares — diluted               |       | 6,455,100                        |       | 6,455,100                      |       | 6,455,100 |   | 6,455,100 |   |
| Net income (loss) per share — basic and diluted |       | $                                | (0.02      | )                              | $          | 0.01 |   | $ | (0.04 | ) | $ | 0.03 |   |
| Antidilutive employee stock options                  |       | 535,000                          |       | 590,000                        |       | 535,000 |   | 590,000 |   |

 

Note4.   COMMITMENTS AND CONTINGENCIES

 

Wecurrently lease our facilities at 6797 Winchester Circle, Boulder, Coloradounder noncancelable lease agreements through July 31, 2014. The minimumfuture lease payment, by fiscal year, as of September 30, 2010 is asfollows:

 
| **Fiscal Year**       | ** ** | **Amount** | ** ** |
|----------------------------|------------|------------|------------|
| 2011(six months remaining) |       | 123,633    |       |
| 2012                       |       | 254,629    |       |
| 2013                       |       | 262,281    |       |
| 2014                       |       | 270,221    |       |
| 2015                       |       | 90,966     |       |
| Total                      |       | $          | 1,001,730  |   |
|                            |            |            |            |  |

 

Ourminimum future equipment lease payments with General Electric CapitalCorporation as of September 30, 2010, by fiscal year, are as follows:

 
| **Fiscal Year**       | ** ** | **Amount** | ** ** |
|----------------------------|------------|------------|------------|
| 2011(six months remaining) |       | 50,937     |       |
| 2012                       |       | 101,873    |       |
| 2013                       |       | 101,873    |       |
| 2014                       |       | 8,488      |       |
| Total                      |       | $          | 263,171    |   |
|                            |            |            |            |  |

 

OnNovember 4, 2009, we signed a second amendment to our credit facilityagreement with Silicon Valley Bank (“Silicon”), effective November 10,2009. The terms of the credit facility include a line of credit for $2,000,000for two years at an interest rate calculated at Silicon’s prime rate, which was4% at September 30, 2010, plus 1.25%, subject to increase upon a default.The credit facility is secured by any and all of our properties, rights andassets. Our borrowing under the credit facility is limited by our eligiblereceivables and inventory at the time of borrowing. The credit facilityrequires us to meet certain financial covenants. As of June 30, 2010, wefailed to meet the minimum defined quick debt ratio covenant. As a result,Silicon requires additional financial reporting and restricts our borrowings tothe beginning of each week instead of when needed. Also, as of July 31,2010, we failed to meet our financial covenant regarding net income. On September 30,2010, we entered into an amendment to our credit facility agreement withSilicon, pursuant to which our interest rate increases to Silicon’s prime rateplus 2.5% during such time as we fail to meet the minimum defined quick debtratio covenant, at which time our interest rate will return to Silicon’s primerate plus 1.25%. In connection with the amendment we paid Silicon a one-timefee of $2,500. As of September 30, 2010, we had borrowed $581,263 from thecredit facility and, under our eligible receivables and inventory limit, had anadditional $765,000 available to borrow.

 

Asidefrom the operating leases and credit facility commitments, we do not have anymaterial contractual commitments requiring settlement in the future.

 

Weare subject to regulation by the United States Food and Drug Administration (“FDA”).The FDA provides regulations governing the manufacture and sale of our productsand regularly inspects us and other manufacturers to determine compliance withthese regulations. We believe that we were in substantial compliance with allknown regulations as of September 30, 2010. FDA inspections are conductedperiodically at the discretion of the FDA. Our latest inspection by the FDAoccurred in November 2009.

 

Note 5.   SHARE-BASEDCOMPENSATION

 

Theprovisions of FASB Accounting Standards Codification (ASC) 718-10-55 requiresthe measurement and recognition of compensation expense for all share-basedpayment awards made to our employees and directors, including employee stockoptions, based on estimated fair values. The following table summarizesstock-based compensation expense related to employee stock options and employeestock purchases for the three and six months ended September 30, 2010 and2009, which was allocated as follows:

 
| ** **                       | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|----------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                       | ** ** | **September 30,  2010**     | ** ** | **September 30,  2009**   | ** ** | **September 30,  2010** | ** ** | **September 30,  2009** | ** ** |
| Cost of sales                    |       | $                                | 823        |                           | $          | 810 |   | $ | 1,646 |   | $ | 1,620 |   |
| Sales and marketing              |       | 3,268                            |       | 5,891                          |       | 6,536 |   | 10,748 |   |
| General and administrative       |       | 18,547                           |       | 13,026                         |       | 37,034 |   | 26,052 |   |
| Research and development         |       | 3,722                            |       | 4,176                          |       | 7,444 |   | 8,352 |   |
| Stock-based compensation expense |       | $                                | 26,360     |                           | $          | 23,903 |   | $ | 52,660 |   | $ | 46,772 |   |

 

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TheBlack-Scholes model requires the use of actual employee exercise behavior dataand the application of a number of assumptions, including expected volatility,risk-free interest rate and expected dividends. No stock options were grantedduring the three and six months ended September 30, 2010.

 

Asof September 30, 2010, $343,000 of total unrecognized compensation costsrelated to nonvested stock options is expected to be recognized over a periodof five years.

 

Note6.   RELATED PARTY TRANSACTION

 

Wepaid consulting fees of $15,274 and $32,384 to an entity owned by one of ourdirectors during the three and six months ended September 30, 2010,respectively, and $14,420 and $29,190 during the three and six months ended September 30,2009, respectively.

 

Note7.   SUBSEQUENT EVENTS

 

Weevaluated all of our activity and concluded that no subsequent events haveoccurred that would require recognition in our financial statements ordisclosed in the notes to our financial statements.

 

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**ITEM 2 ****-**** MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTSOF OPERATIONS**

 

Certainstatements contained in this section on Management’s Discussion and Analysisare not historical facts, including statements about our strategies andexpectations with respect to new and existing products, market demand,acceptance of new and existing products, marketing efforts, technologies andopportunities, market and industry segment growth, and return on investments inproducts and markets. These statements are forward looking statements withinthe meaning of the Private Securities Litigation Reform Act of 1995 and involvesubstantial risks and uncertainties that may cause actual results to differmaterially from those indicated by the forward looking statements. All forwardlooking statements in this section on Management’s Discussion and Analysis arebased on information available to us on the date of this document, and weassume no obligation to update such forward looking statements. Readers of thisForm 10-Q are strongly encouraged to review the section entitled *“Risk Factors”*in our Form 10-K for the fiscal yearended March 31, 2010.

 

**General**

 

EncisionInc., a medical device company based in Boulder, Colorado, has developed andlaunched innovative 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 by providinga solution to a well documented patient safety risk in laparoscopic surgery.

 

Wewere founded to address market opportunities created by the increase inminimally-invasive surgery (“MIS”) and surgeons’ preference for usingelectrosurgery devices in these procedures. The product opportunity was createdby surgeons’ continued widespread demand for using monopolar electrosurgeryinstruments, which, when used in laparoscopic surgery, are susceptible tocausing inadvertent collateral tissue damage outside the surgeon’s field ofview. The risk of unintended electrosurgical burn injury to the patient inlaparoscopic surgery has been well documented. This risk poses a threat topatient safety and creates liability exposure for surgeons and hospitals thatdo not adequately address the issue.

 

Ourpatented AEM technology provides surgeons with the desired tissue effects,while preventing stray electrosurgical energy that can cause unintended andunseen tissue injury. AEM Laparoscopic Instruments are equivalent toconventional instruments in functionality, but they incorporate “activeelectrode monitoring” technology to dynamically and continuously monitor theflow of electrosurgical current, thereby helping to prevent patient injury.With our “shielded and monitored” instruments, surgeons are able to performelectrosurgical procedures more safely and effectively than when usingconventional instruments. In addition, our AEM instruments are cost competitivewith conventional “non-shielded, non-monitored” instruments. The result isadvanced patient safety at comparable cost and with no change in surgeontechnique.

 

AEMtechnology has been recommended and endorsed by sources from various groupsinvolved in MIS. Numerous surgeons, nurses, biomedical engineers, members ofthe medicolegal 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.

 

Wealso have supplier agreements with Novation and Premier, two of the largestGroup Purchasing Organizations (GPOs) in the United States. Together, Novationand Premier represent over 3,000 hospitals which perform over 50% of allsurgery in the U.S. We believe that these GPO supplier agreements give furtherindication that AEM technology is gaining broader acceptance in the market. Webelieve that having the nation’s leading medical purchasing groups recognizethe value of our technology reflects the potential impact that AEM products canhave in the market and in advancing patient safety in surgery nationwide. Theseagreements do not involve purchase commitments, but we expect theserelationships to expand the market visibility of AEM technology and to ease theprocurement process for new hospital customers.

 

Wehave focused our marketing strategies to date on expanding the market awarenessof the AEM technology and our broad independent endorsements and have continuedefforts to improve and expand the AEM product line. Accordingly, we arecurrently focusing on updating our accepted AEM instruments to includeergonomics and user functionalities for which surgeons have been expressing apreference. We plan to introduce new additions to the AEM product line infiscal year 2011.

 

Whena hospital changes to AEM technology, we receive recurring sales from sales ofreplacement instruments. We believe that there is no directly competingtechnology to supplant AEM products once a hospital switches to our products.The replacement market of reusable and disposable AEM products in hospitalsthat use our AEM technology represented over 90% of our sales during the threeand six months ended September 30, 2010. This sales stream is expected togrow as the base of hospitals that switch to AEM technology 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 sales opportunities.

 

Wehave an accumulated deficit of $16,298,095 at September 30, 2010.Operating funds have been provided primarily by issuances of our common stockand warrants, the exercise of stock options to purchase our common stock and,in recent years, by operating profits. Our liquidity position has diminishedbecause of prior years’ operating losses, and we may be required to seekadditional capital in the future.

 

Duringthe six months ended September 30, 2010, we used $40,840 of cash from ouroperations and used $145,310 of cash for investments in equipment. As of September 30,2010, we had $155,027 in cash and cash equivalents available to fund futureoperations, an increase of $41,292 from March 31, 2010. As of September 30,2010, we borrowed $581,263 from our $2,000,000 amended credit facility, anincrease of $231,263 from March 31, 2010. Our working capital was$2,561,992 at September 30, 2010 compared to $2,554,794 at March 31,2010.

 

**Historical Perspective**

 

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 international patent agencies.Patents were issued to us in 1994, 1996, 1997, 1998, 2002 and 2009.

 

Aswe evolved, it became clear to us that our AEM 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 

 

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AEMtechnology were not completed for several years. Prior to offering a full rangeof laparoscopic electrosurgical instrumentation, it was difficult for hospitalsto commit to the AEM solution, as we did not have adequate comparable surgicalinstrument options to meet surgeons’ demands. As of fiscal year 2005, asufficiently broad product line was available to provide hospital operatingrooms with AEM instruments in most of the designs common for laparoscopicsurgery.

 

The launch of an expanded line of AEM instruments was accomplished overthe past four years. We are now turning our focus to developing next generationversions of our AEM instruments to better meet market demands, particularly thedemand for improved ergonomics and simplified user functionalities. Thisstrategy coincides with the independent endorsements of our AEM technology andthe recommendations from the malpractice insurance and medicolegal communities.

 

**Outlook**

 

*InstalledBase of AEM Monitoring Equipment*:  We believe that sales of our installed baseof AEM monitors will increase sales as the inherent risks associated withmonopolar laparoscopic electrosurgery become more widely acknowledged and as wefocus on increasing our sales efficiency. We expect that the replacement salesof electrosurgical instruments and accessories will also increase, providedthat the number of additional hospitals adopting AEM technology exceeds thenumber of hospitals discontinuing their use of AEM technology. We anticipatethat the efforts to improve the quality of sales representatives carrying theAEM product line, along with the introduction of next generation products, mayprovide the basis for increased sales and profitable operations. However, thesemeasures, or any others that we may adopt, may not result in either increasedsales or profitable operations. Furthermore, most of our next generationproducts are in the early stages of development.

 

Webelieve that the unique performance of the AEM technology and our breadth ofindependent endorsements provide an opportunity for continued market sharegrowth. We believe market awareness and awareness of the clinical credibilityof the AEM technology, as well as awareness of our endorsements, arecontinually improving, and we expect this awareness to benefit our salesefforts for the remainder of fiscal year 2011. Our objectives in the remainderof fiscal year 2011 are to maintain expense controls while optimizing salesexecution in the field, to expand market awareness of the AEM technology and tomaximize the number of additional hospital accounts switching to AEMinstruments while retaining existing hospital customers. In addition,acceptance of AEM products depends on surgeons’ preference for our instruments,which depends on factors such as ergonomics and ease of use in addition to thetechnological advantage of AEM products. If surgeons prefer other instrumentsto our instruments, our business results will suffer.

 

*Possibilityof Operating Losses*:  We have anaccumulated deficit of $16,298,095 at September 30, 2010. Operating fundshave been provided primarily by issuances of our common stock and warrants, theexercise of stock options to purchase our common stock and, in recent years, byoperating profits. Our liquidity position has diminished because of prior years’operating losses, and we may be required to seek additional capital in thefuture. We have made strides toward improving our operating results but due tothe ongoing need to develop, optimize and train our direct sales managers andthe independent sales representative network, the need to support thedevelopment of refinements to our product line, and the need to increasesustained sales to a level adequate to cover fixed and variable operatingcosts, we may operate at a net loss. Sustained losses, or our inability togenerate sufficient cash flow from operations to fund our obligations, mayresult in a need to raise additional capital.

 

*SalesGrowth*:  Our sales growth has decreasedfrom weakness in the medical device industry as a result of a decrease in thenumber of laparoscopic procedures. We expect to generate increased sales in theU.S. from sales to new hospital customers and from expanded sales in existinghospitals as the medical device industry stabilizes and our network of directand independent sales representatives becomes more efficient. We believe thatthe visibility and credibility of the independent clinical endorsements for AEMtechnology will contribute to new hospital accounts in fiscal year 2011. Wealso expect that supplier agreements with Novation and Premier, which togetherrepresent over 3,000 U.S. hospitals, will expose more hospitals to the benefitsof AEM technology and may stimulate new hospital accounts. In the first quarterof our fiscal year 2011, we signed an agreement with HealthTrust PurchasingGroup, LP, a group purchasing organization. Also, in the first quarter of ourfiscal year 2011, we signed agreements with distributors in the United Kingdom, Irelandand Austria. We also expect to increase market share through promotionalprograms in which we place our AEM monitors at no charge into hospitals thatcommit to standardize AEM instruments. However, all of these efforts toincrease market share and grow sales will depend in part on our ability toexpand the efficiency and effective coverage range of our direct andindependent sales representatives.

 

Wealso have longer term initiatives in place to improve our prospects.  We expect that development of next generationversions of our AEM products will better position our products in themarketplace and improve our retention rate at hospitals that have changed toAEM technology, enabling us to grow our sales. We may also continue to exploreoverseas markets to assess opportunities for sales growth internationally.Finally, we intend to explore opportunities to capitalize on our proven AEMtechnology via licensing arrangements and strategic alliances. These efforts togenerate additional sales 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 potential internationalmarkets or strategic partners, we may not be able to capitalize on theseopportunities.

 

*GrossProfit and Gross Margins*: Gross profit and gross margins can be expected to fluctuate from quarterto quarter as a result of product sales mix and sales volume. Gross margins onproducts manufactured or assembled by us are expected to improve at higherlevels of production and sales.

 

*ManufacturingEquipment:*  As salesincrease, we expect to increase gross profit and gross margins by manufacturingour scissor inserts internally. We began manufacturing our scissor inserts inthe third quarter of fiscal year 2009. Recently, we added a controlledenvironment room for product packaging that resulted in packaging cost savings.

 

*Salesand Marketing Expenses*: We continue our efforts to expand domesticand international distribution capability, and we believe that sales andmarketing expenses will decrease as a percentage of net sales with increasingsales volume.

 

*Researchand Development Expenses*: Research and development expenses areexpected to increase to support development of refinements to our AEM productline, which will further expand the instrument options for surgeons.

 

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**Results of Operations**

 

*For thethree months ended September 30, 2010 compared to the three months ended September 30,2009.*

 

*Netsales.*  Net sales for the quarter endedSeptember 30, 2010 were $2,865,799 compared to $3,215,610 for the quarterended September 30, 2009, a decrease of 11%. The decrease is attributableto weakness in the medical device industry and business lost from hospitalsthat previously changed to AEM technology. This was partially offset by theaddition of new hospital accounts. We opened four new hospital accounts for AEMtechnology in the three months ended September 30, 2010 versus three newhospital accounts for AEM technology in the three months ended September 30,2009.

 

*Grossprofit*.  Gross profit for the quarterended September 30, 2010 of $1,834,223 represented a decrease of 6% fromgross profit of $1,945,018 for the quarter ended September 30, 2009. Grossprofit as a percentage of sales (gross margins) increased from 60.5% for thequarter ended September 30, 2009 to 64% for the quarter ended September 30,2010. The gross profit margin increase from the second quarter of fiscal year2010 was due to an increase, as a percentage of sales, of higher gross marginsales, especially our disposable scissor inserts, and our recently addedcontrolled environment room for product packaging that resulted in packagingcost savings.

 

*Sales and marketing expenses*.  Sales and marketing expenses of $1,075,664for the quarter ended September 30, 2010 represented a decrease of 13%from sales and marketing expenses of $1,235,087 for the quarter ended September 30,2009. The decrease was a result of reduced compensation of our direct salesrepresentatives due to a reduced number of direct sales representatives andreduced commissions on reduced sales, decreased commissions for independentsales representatives, reduced sample costs and reduced travel and meal costs.

 

*Generaland administrative expenses*.  General and administrative expenses of$396,968 for the quarter ended September 30, 2010 represented an increaseof 16% from general and administrative expenses of $343,243 for the quarterended September 30, 2009. The increase was the result of an increase in outsideconsulting expense.

 

*Researchand development expenses*. Research and development expenses of $494,578 for the quarter ended September 30,2010 represented an increase of 62% compared to $304,853 for the quarter ended September 30,2009. The increase was the result of an increase in temporary help expense andoutside services for the development of future new products and inventoryusage. The increase in such costs was partially offset by decreasedcompensation and tooling costs.

 

*Netloss. *Net loss was $145,368 forthe quarter ended September 30, 2010 compared to net income of $46,445 forthe quarter ended September 30, 2009. The net income decrease was a resultof a decrease in sales, gross profit and increased operating expenses, asdiscussed above.

 

*For thesix months ended September 30, 2010 compared to the six months ended September 30,2009.*

 

*Netsales.*  Net sales for the six monthsended September 30, 2010 were $5,778,420 compared to $6,389,270 for thesix months ended September 30, 2009, a decrease of 10%. The decrease isattributable to weakness in the medical device industry and business lost fromhospitals that previously changed to AEM technology. This was partially offsetby the addition of new hospital accounts. We opened six new hospital accountsfor AEM technology in the six months ended September 30, 2010 versus ninenew hospital accounts for AEM technology in the six months ended September 30,2009.

 

*Grossprofit*.  Gross profit for the sixmonths ended September 30, 2010 of $3,678,551 represented a decrease of 8%from gross profit of $3,976,943 for the six months ended September 30,2009. Gross profit as a percentage of sales (gross margins) increased from62.2% for the six months ended September 30, 2009 to 63.7% for the sixmonths ended September 30, 2010. The gross profit margin increase from thefirst six months of fiscal year 2010 was due to an increase, as a percentage ofsales, of higher gross margin sales.

 

*Sales and marketing expenses*.  Sales and marketing expenses of $2,261,471for the six months ended September 30, 2010 represented a decrease of 7%from sales and marketing expenses of $2,433,900 for the six months ended September 30,2009. The decrease was a result of reduced compensation of our direct salesrepresentatives due to a reduced number of direct sales representatives andreduced commissions on reduced sales, decreased commissions for independentsales representatives, reduced sample costs and reduced travel and meal costs.

 

*Generaland administrative expenses*.  General and administrative expenses of$792,876 for the six months ended September 30, 2010 represented anincrease of 14% from general and administrative expenses of $697,063 for thesix months ended September 30, 2009. The increase was the result of anincrease in outside consulting expense.

 

*Researchand development expenses*. Research and development expenses of $866,549 for the six months ended September 30,2010 represented an increase of 43% compared to $605,842 for the six monthsended September 30, 2009. The increase was the result of an increase intemporary help expense and outside services for the development of future newproducts and inventory usage. The increase in such costs was partially offsetby decreased compensation and tooling costs.

 

*Net loss. *Net loss was $264,164 forthe six months ended September 30, 2010 compared to net income of $209,755for the six months ended September 30, 2009. The net income decrease was aresult of a decrease in sales, gross profit and increased operating expenses,as discussed above.

 

Theresults of operations for the three and six months ended September 30,2010 should not be taken as an indication of the results of operations for allor any part of the balance of the fiscal year.

 

**Liquidity and Capital Resources**

 

Todate, operating funds have been provided primarily by issuances of our commonstock and warrants, the exercise of stock options to purchase our common stockand, in recent years, by operating profits. Operating funds totaled $19,729,982from our inception through September 30, 2010.

 

OnNovember 4, 2009, we signed a second amendment to our credit facilityagreement with Silicon, effective November 10, 2009. The terms of thecredit facility include a line of credit for $2,000,000 for two years at an interestrate calculated at Silicon’s prime rate, which was 4% at September 30,2010, plus 1.25%, subject to increase upon a default. The credit facility issecured by any and all of our properties, rights and assets. Our borrowing 

 

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underthe credit facility is limited by our eligible receivables and inventory at thetime of borrowing. The credit facility requires us to meet certain financialcovenants. As of June 30, 2010, we failed to meet the minimum definedquick debt ratio covenant. As a result, Silicon requires additional financialreporting and restricts our borrowings to the beginning of each week instead ofwhen needed. Also, as of July 31, 2010, we failed to meet our financialcovenant regarding net income. On September 30, 2010, we entered into anamendment to our credit facility agreement with Silicon, pursuant to which ourinterest rate increases to Silicon’s prime rate plus 2.5% during such time aswe fail to meet the minimum defined quick debt ratio covenant, at which timeour interest rate will return to Silicon’s prime rate plus 1.25%. In connectionwith the amendment we paid Silicon a one-time fee of $2,500. As of September 30,2010, we had borrowed $581,263 from the credit facility and, under our eligiblereceivables and inventory limit, had an additional $765,000 available toborrow.

 

Ouroperations used $40,840 of cash during the six months ended September 30,2010 on net sales of $5,778,420. Cash was used principally by our net loss andaccounts payable payments. Cash used was partially offset by cash provided byaccounts receivables. The amount of cash provided by and used in operations forthe six months ended September 30, 2010 are not indicative of the expectedamount of cash to be generated from or used in operations in fiscal year 2011.During the six months ended September 30, 2010, we invested $145,310 inthe acquisition of property and equipment. As of September 30, 2010, wehad $155,027 in cash and cash equivalents available to fund future operationsand had borrowed $581,263 outstanding under our credit facility. Workingcapital was $2,561,992 at September 30, 2010 compared to $2,554,794 at March 31,2010. Current liabilities were $1,152,886 at September 30, 2010, comparedto $1,365,420 at March 31, 2010. The decrease in current liabilities at September 30,2010 was caused by reduced accounts payable and accrued compensation.

 

Ifwe are not successful in maintaining profitability and positive cash flow,additional capital may be required to maintain ongoing operations. We haveexplored and are continuing to explore options to provide additional financingto fund future operations as well as other possible courses of action. Suchactions include, but are not limited to, securing additional lines of credit,sales of debt or equity securities (which may result in dilution to existingshareholders), licensing of technology, strategic alliances and other similaractions. There can be no assurance that we will be able to obtain additionalfunding (if needed), on acceptable terms or at all, 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.

 

Wecurrently lease our facilities at 6797 Winchester Circle, Boulder, Coloradounder noncancelable lease agreements through July 31, 2014. The minimumfuture lease payment by fiscal year as of September 30, 2010 is asfollows:

 
| **Fiscal Year**       | ** ** | **Amount** | ** ** |
|----------------------------|------------|------------|------------|
| 2011(six months remaining) |       | 123,633    |       |
| 2012                       |       | 254,629    |       |
| 2013                       |       | 262,281    |       |
| 2014                       |       | 270,221    |       |
| 2015                       |       | 90,966     |       |
| Total                      |       | $          | 1,001,730  |   |
|                            |            |            |            |  |

 

Ourminimum future equipment lease payments with General Electric CapitalCorporation as of September 30, 2010, by fiscal year, are as follows:

 
| **Fiscal Year**       | ** ** | **Amount** | ** ** |
|----------------------------|------------|------------|------------|
| 2011(six months remaining) |       | 50,937     |       |
| 2012                       |       | 101,873    |       |
| 2013                       |       | 101,873    |       |
| 2014                       |       | 8,488      |       |
| Total                      |       | $          | 263,171    |   |
|                            |            |            |            |  |

 

Asof September 30, 2010, the following table shows our contractualobligations for the periods presented:

 
| ** **                       | ** ** | **Payment due by period** | ** ** |
|----------------------------------|------------|------------------------------------------|------------|
| **Contractual obligations** | ** ** | **Totals**                               | ** ** | **Less than 1 year** | ** ** | **1-3 years** | ** ** | **3-5 years** | ** ** | **More than 5 years** | ** ** |
| Line of credit obligations       |       | $                                        | 581,263    |   | $ | — |   | $ | 581,263 |   | $ | — |   | $ | — |   |
| Operating lease obligations      |       | 1,264,901                                |       | 352,821 |   | 626,579 |   | 285,501 |   | — |   |
| Total                            |       | $                                        | 1,846,164  |   | $ | 352,821 |   | $ | 1,207,842 |   | $ | 285,501 |   | $ | — |   |

 

Asidefrom the operating leases and credit facility commitments, we do not have anymaterial contractual commitments requiring settlement in the future.

 

Ourfiscal year 2011 operating plan is focused on increasing new hospital accounts,retaining existing hospital customers, growing sales, increasing gross profitsand conserving cash. We are investing in research and development efforts todevelop next generation versions of the AEM product line. We have invested in manufacturingproperty and equipment to manufacture disposable scissors inserts internallyand reduce our cost of sales. We have invested in a controlled environment roomfor product packaging to reduce our packaging costs. We cannot predict withcertainty the expected sales, gross profit, net income or loss and usage ofcash and cash equivalents for fiscal year 2011. However, we believe that ourcash resources and credit facility will be sufficient to fund our operationsfor at least the next twelve months. If we are unable to manage our businessoperations in line with budget expectations, it could have a material adverseeffect on our business viability, financial position, results of operations andcash flows. If we are not successful in continuing profitability and positivecash flow, additional capital may be required to maintain ongoing operations.

 

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**Income Taxes**

 

Asof March 31, 2010, net operating loss carryforwards totaling approximately$14.5 million are available to reduce taxable income in the future. The netoperating loss carryforwards expire, if not previously utilized, at variousdates beginning in the fiscal year ending March 31, 2011. Approximately$1.3 million of net operating loss carryforward is due to expire at March 31,2011. We have not paid income taxes since our inception. The Tax Reform Act of1986 and other income tax regulations contain provisions which may limit thenet operating loss carryforwards available to be used in any given year ifcertain events occur, including changes in ownership interests. We haveestablished a valuation allowance for the entire amount of our deferred taxasset since inception due to our history of losses. Should we achievesufficient, sustained income in the future, we may conclude that some or all ofthe valuation allowance should be reversed. If some or all of the valuationallowance were reversed, then, to the extent of the reversal, a tax benefitwould be recognized which would result in an increase to income.

 

**Critical Accounting 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, sales 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 ourfinancial statements.

 

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 sales arerecognized. While we engage in extensive product quality programs and processes,including actively monitoring and evaluating the quality of our componentsuppliers, we have experienced some costs related to warranties. The warrantyaccrual is based on historical experience and is adjusted based on currentexperience. Should actual warranty experience differ from our estimates,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 basedon 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.

 

Werecognize deferred income tax assets and liabilities for the expected futureincome tax consequences, based on enacted tax laws, of temporary differencesbetween the financial reporting and tax bases of assets and liabilities.Deferred tax assets are then reduced, if deemed necessary, by a valuationallowance for the amount of any tax benefits which, more likely than not basedon current circumstances, are not expected to be realized. Should we maintainsufficient, sustained income in the future, we may conclude that all or some ofthe valuation allowance should be reversed.

 

Propertyand equipment are stated at cost, with depreciation computed over the estimateduseful lives of the assets, generally three to seven years. We use thestraight-line method of depreciation for property and equipment. Leaseholdimprovements are depreciated over the shorter of the remaining lease term orthe estimated useful life of the asset. Maintenance and repairs are expensed asincurred and major additions, replacements and improvements 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 useful lives of our patents based on advances in technology, competitoractions, and the like. We review the recorded amounts of patents at each periodend to determine if their carrying amount is still recoverable based on ourexpectations regarding sales of related products. Such an assessment, in thefuture, may result in a conclusion that the assets are impaired, with acorresponding charge against earnings.

 

Wecurrently estimate forfeitures for stock-based compensation expense related toemployee stock options at 9% and evaluate the forfeiture rate quarterly. Otherassumptions that are used in calculating stock-based compensation expenseinclude risk-free interest rate, expected life, expected volatility andexpected dividend.

 

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**ITEM 4 ****-****  CONTROLS AND PROCEDURES**

 

(a) We have carried out an evaluation under the supervision and with theparticipation of our management, including our Chief Executive Officer andPrincipal Accounting and Financial Officer, of the effectiveness of ourdisclosure controls and procedures (as defined in Rules 13a-15(e) and15d-15(e) of the Securities and Exchange Act of 1934 (the “Exchange Act”)).Based upon that evaluation, the Chief Executive Officer and the PrincipalAccounting and Financial Officer concluded that, as of September 30, 2010,our disclosure controls and procedures were effective.

 

(b) During the quarter ended September 30, 2010, there were no changes in ourinternal control over financial reporting or in other factors that havematerially affected, or are reasonably likely to materially affect, ourinternal control over financial reporting.

 

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

 

**ITEM****6**                                                      **EXHIBITS**

 

The following exhibits are filed with this report on Form 10-Q orare 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 referencefrom Current Report on Form 8-K dated October 30, 2009).

 

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        Silicon Valley Bank Amendment to Loan Documents(filed herewith).

 

31.1        Certification of Chief Executive Officer under Rule 13a-14(a) ofthe Exchange Act (filed herewith).

 

31.2        Certification of Principal Financial and AccountingOfficer under Rule 13a-14(a) of the Exchange Act (filed herewith).

 

32.1        Certifications of Periodic Reports pursuant to Section 906of the Sarbanes-Oxley Act of 2002 (filed herewith).

 

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**SIGNATURE**

 

Pursuant to the requirements of the Exchange Act, the registrant hasduly caused this report to be signed on its behalf by the undersigned thereuntoduly authorized.

 

 
| Encision  Inc.         |   |                                     |
|------------------------|--------|------------------------------------------|
|                   |   |                                     |
|                   |   |                                     |
| October 28,  2010 |   | /s/  Marcia McHaffie                     |
| Date                   |   | Marcia  McHaffie                         |
|                   |   | Controller                               |
|                   |   | Principal  Accounting Officer & |
|                   |   | Principal  Financial Officer             |

 

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