Table ofContents

 

 

 

**UNITEDSTATES**

**SECURITIESAND 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 June 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) |   |                                   |

 

Indicateby check mark whether the registrant is a shell company (as defined in Rule 12b-2of 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 July 31, 2010) |

 

 

 

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**ENCISION INC.**

 

**FORM 10-Q**

 

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

 

**INDEX**

 
| ** **        | ** **    | ** **                | ** **                                                                                  | **Page**      |
|-------------------|---------------|---------------------------|---------------------------------------------------------------------------------------------|---------------|
| ** **        | ** **    | ** **                | ** **                                                                                  | **Number**    |
|              |          |                      |                                                                                        |          |
| **PART I.**  | ** **    | **FINANCIAL INFORMATION** |                                                                                        |
|              |          |                      |                                                                                        |          |
|              | **ITEM1**     | -                         | Condensed  Interim Financial Statements:                                                    |          |
|              |          |                      |                                                                                        |          |
|              |          | -                         | Condensed Balance Sheets  as of June 30, 2010 and March 31, 2010                  |   3 |
|              |          |                      |                                                                                        |          |
|              |          |                      |                                                                                        |          |
|              |          |                      |                                                                                        |          |
|              |          | -                         | Condensed  Statements of Operations for the Three Months Ended June 30, 2010 and  2009 |   4 |
|              |          |                      |                                                                                        |          |
|              |          |                      |                                                                                        |          |
|              |          |                      |                                                                                        |          |
|              |          | -                         | Condensed  Statements of Cash Flows for the Three Months Ended June 30, 2010 and  2009 |   5 |
|              |          |                      |                                                                                        |          |
|              |          |                      |                                                                                        |          |
|              |          |                      |                                                                                        |          |
|              |          | -                         | Notes to  Condensed Interim Financial Statements                                            |   6 |
|              |          |                      |                                                                                        |          |
|              |          |                      |                                                                                        |          |
|              |          |                      |                                                                                        |          |
|              | **ITEM 2**    | -                         | Management’s  Discussion and Analysis of Financial Condition and Results of Operations | 10            |
|              |          |                      |                                                                                        |          |
|              |          |                      |                                                                                        |          |
|              |          |                      |                                                                                        |          |
|              | **ITEM 4**    | -                         | Controls and  Procedures                                                                    | 15            |
|              |          |                      |                                                                                        |          |
| **PART II.** | ** **    | **OTHER INFORMATION**     |                                                                                        |
|              |          |                      |                                                                                        |          |
|              | **ITEM 6**    | -                         | Exhibits                                                                                    | 16            |
|              |          |                      |                                                                                        |          |
|              | **SIGNATURE** | 17                        |

 

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

 

**ITEM 1   –   CONDENSEDINTERIM FINANCIAL STATEMENTS**

 

**Encision Inc.**

**Condensed Balance Sheets**

**(unaudited)**

 
| ** **                                                                                                                          | ** ** | **June 30,  2010** | ** ** | **March 31,  2010** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------|------------|--------------------------|------------|
| **ASSETS**                                                                                                                          |       |                    |       |                     |       |
| Current assets:                                                                                                                     |       |                    |       |                     |       |
| Cash and cash equivalents                                                                                                           |       | $                       | 154,781    |                     | $          | 113,735 |   |
| Accounts receivable, net of allowance for doubtful  accounts of $12,000 at June 30, 2010 and $12,500 at March 31, 2010    |       | 1,034,488               |       | 1,286,075                |       |
| Inventories, net of reserve for obsolescence of  $50,000 at June 30, 2010 and $150,940 at March 31, 2010                  |       | 2,640,771               |       | 2,476,823                |       |
| Prepaid expenses                                                                                                                    |       | 95,604                  |       | 43,581                   |       |
| Total current assets                                                                                                                |       | 3,925,644               |       | 3,920,214                |       |
| Equipment, at cost:                                                                                                                 |       |                    |       |                     |       |
| Furniture, fixtures and equipment                                                                                                   |       | 2,451,601               |       | 2,394,028                |       |
| Customer-site equipment                                                                                                             |       | 811,805                 |       | 778,761                  |       |
| Accumulated depreciation                                                                                                            |       | (2,040,995              | )          | (2,024,448               | )          |
| Equipment, net                                                                                                                      |       | 1,222,411               |       | 1,148,341                |       |
| Patents, net of accumulated amortization of  $147,424 at June 30, 2010 and $143,909 at March 31, 2010                     |       | 262,629                 |       | 265,988                  |       |
| Other assets                                                                                                                        |       | 31,807                  |       | 24,268                   |       |
| **TOTAL ASSETS**                                                                                                                    |       | $                       | 5,442,491  |                     | $          | 5,358,811 |   |
| **LIABILITIES AND SHAREHOLDERS’  EQUITY**                                                                                      |       |                    |       |                     |       |
| Current liabilities:                                                                                                                |       |                    |       |                     |       |
| Accounts payable                                                                                                                    |       | $                       | 633,897    |                     | $          | 684,102 |   |
| Accrued compensation                                                                                                                |       | 313,581                 |       | 404,789                  |       |
| Other accrued liabilities                                                                                                           |       | 294,118                 |       | 276,529                  |       |
| Line of credit                                                                                                                      |       | 650,000                 |       | —                   |       |
| Total current liabilities                                                                                                           |       | 1,891,596               |       | 1,365,420                |       |
| Long-term liabilities:                                                                                                              |       |                    |       |                     |       |
| Line of credit                                                                                                                      |       | —                  |       | 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 |       | 19,703,622              |       | 19,677,322               |       |
| Accumulated (deficit)                                                                                                               |       | (16,152,727             | )          | (16,033,931              | )          |
| Total shareholders’ equity                                                                                                     |       | 3,550,895               |       | 3,643,391                |       |
| **TOTAL LIABILITIES AND  SHAREHOLDERS’ EQUITY**                                                                                |       | $                       | 5,442,491  |                     | $          | 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**                              | ** ** | **June 30,  2010** | ** ** | **June 30,  2009** | ** ** |
|------------------------------------------------------|------------|-------------------------|------------|-------------------------|------------|
| **NET SALES**                                        |       | $                       | 2,912,621  |                    | $          | 3,173,660 |   |
| **COST OF SALES**                                    |       | 1,068,293               |       | 1,141,735               |       |
| **GROSS PROFIT**                                     |       | 1,844,328               |       | 2,031,925               |       |
| **OPERATING EXPENSES:**                              |       |                    |       |                    |       |
| Sales and marketing                                  |       | 1,185,808               |       | 1,198,813               |       |
| General and administrative                           |       | 395,907                 |       | 353,819                 |       |
| Research and development                             |       | 371,971                 |       | 300,989                 |       |
| Total operating expenses                             |       | 1,953,686               |       | 1,853,621               |       |
| **OPERATING INCOME (LOSS)**                          |       | (109,358                | )          | 178,304                 |       |
| Interest expense, net                                |       | (9,959                  | )          | (13,125                 | )          |
| Other income (expense), net                          |       | 521                     |       | (1,869                  | )          |
| Interest and other income (expense), net             |       | (9,438                  | )          | (14,994                 | )          |
| **INCOME (LOSS) BEFORE PROVISION  FOR INCOME TAXES** |       | (118,796                | )          | 163,310                 |       |
| Provision for income taxes                           |       | —                  |       | —                  |       |
| **NET INCOME (LOSS)**                                |       | $                       | (118,796   | )                       | $          | 163,310 |   |
| Net income (loss) per share—basic and diluted   |       | $                       | (0.02      | )                       | $          | 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)**

 
| **Three  Months Ended**                                                                   | ** ** | **June 30,  2010** | ** ** | **June 30,  2009** | ** ** |
|-------------------------------------------------------------------------------------------|------------|-------------------------|------------|-------------------------|------------|
| Cash flows from operating activities:                                                     |       |                    |       |                    |       |
| Net income (loss)                                                                         |       | $                       | (118,796   | )                       | $          | 163,310 |   |
| Adjustments to reconcile net income (loss) to net  cash provided by operating activities: |       |                    |       |                    |       |
| Depreciation and amortization                                                             |       | 63,766                  |       | 62,850                  |       |
| Stock-based compensation expense related to stock  options                                |       | 26,300                  |       | 22,869                  |       |
| Stock-based interest expense related to warrants                                          |       | —                  |       | 3,127                   |       |
| Provision for doubtful accounts, net                                                      |       | (500                    | )          | —                  |       |
| Provision for inventory obsolescence, net                                                 |       | (100,940                | )          | (7,500                  | )          |
| Change in operating assets and liabilities:                                               |       |                    |       |                    |       |
| Accounts receivable                                                                       |       | 252,087                 |       | 28,605                  |       |
| Inventories                                                                               |       | (63,008                 | )          | 52,549                  |       |
| Prepaid expenses and other assets                                                         |       | (59,562                 | )          | (69,270                 | )          |
| Accounts payable                                                                          |       | (50,205                 | )          | (83,594                 | )          |
| Accrued compensation and other accrued liabilities                                        |       | (73,619                 | )          | (101,805                | )          |
| Net cash provided by (used in) operating  activities                                      |       | (124,477                | )          | 71,141                  |       |
| Cash flows from investing activities:                                                     |       |                    |       |                    |       |
| Acquisition of property and equipment                                                     |       | (134,321                | )          | (102,449                | )          |
| Patent costs                                                                              |       | (156                    | )          | (11,873                 | )          |
| Net cash (used in) investing activities                                                   |       | (134,477                | )          | (114,322                | )          |
| Cash flows from financing activities:                                                     |       |                    |       |                    |       |
| Borrowings from credit facility                                                           |       | 300,000                 |       | 84,058                  |       |
| Net cash provided by (used in) financing  activities                                      |       | 300,000                 |       | 84,058                  |       |
| Net increase in cash and cash equivalents                                                 |       | 41,046                  |       | 40,877                  |       |
| Cash and cash equivalents, beginning of period                                            |       | 113,735                 |       | 84,658                  |       |
| Cash and cash equivalents, end of period                                                  |       | $                       | 154,781    |                    | $          | 125,535 |   |

 

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

 

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ENCISION INC.

 

NOTES TO CONDENSED INTERIMFINANCIAL STATEMENTS

 

JUNE 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 $16,152,727 at June 30, 2010. Operatingfunds have been provided primarily by issuances of our common stock andwarrants, the exercise of stock options to purchase our common stock and, inrecent 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”). Certaininformation and footnote disclosures normally included in financial statementsprepared in accordance with generally accepted accounting principles acceptedin the United States (“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 and short-termreceivables and payables approximate their fair value due to their shortmaturities.

 

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 June 30, 2010. However, we believe that in theevent 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 June 30,2010 of $1,034,488 included no more than 5% 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 rates ormaterial usage costs differ from our estimates, revisions to the estimatedwarranty liability would be required.

 

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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 June 30, 2010 andMarch 31, 2010, inventory consisted of the following:

 
| ** **                    | ** ** | **June 30, 2010** | ** ** | **March 31, 2010** | ** ** |
|-------------------------------|------------|------------------------|------------|-------------------------|------------|
| Raw materials                 |       | $                      | 1,492,076  |                    | $          | 1,518,737 |   |
| Finished goods                |       | 1,198,695              |       | 1,109,026               |       |
| Total gross inventories       |       | 2,690,771              |       | 2,627,763               |       |
| Less reserve for obsolescence |       | (50,000                | )          | (150,940                | )          |
| Total net inventories         |       | $                      | 2,640,771  |                    | $          | 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 reviewedfor impairment 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. Should we achieve sufficient,sustained income in the future, we may conclude that more or all of thevaluation allowance should be reversed. We are required to make many subjectiveassumptions and judgments regarding our income tax exposures. At June 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 months ended June 30,2010 and 2009 was $26,300 and $22,869, respectively, which consisted ofstock-based compensation expense related to grants of employee stock options.

 

SegmentReporting.  We haveconcluded that we have one operating segment.

 

RecentlyAccounting 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 months ended June 30, 2010,and accordingly, any outstanding common share equivalents would beanti-dilutive.

 

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

 
| ** **                                 | ** ** | **Three Months Ended**  | ** ** |
|--------------------------------------------|------------|-------------------------|------------|
| ** **                                 | ** ** | **June 30,  2010** | ** ** | **June 30,  2009** | ** ** |
| Net income (loss)                          |       | $                       | (118,796   | ) | $ | 163,310 |   |
| Weighted-average shares — basic       |       | 6,455,100               |       | 6,455,100 |   |
| Effect of dilutive potential common shares |       | —                  |       | — |   |
| Weighted-average shares — diluted     |       | 6,455,100               |       | 6,455,100 |   |
| Net income (loss) per share — basic   |       | $                       | (0.02      | ) | $ | 0.03 |   |
| Net income (loss) per share — diluted |       | $                       | (0.02      | ) | $ | 0.03 |   |
| Antidilutive employee stock options        |       | 570,000                 |       | 580,000 |   |

 

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 June 30, 2010 is as follows:

 
| **Fiscal  Year**            | ** ** | **Amount** | ** ** |
|-----------------------------|------------|------------|------------|
| 2011(nine months remaining) |       | 185,448    |       |
| 2012                        |       | 254,629    |       |
| 2013                        |       | 262,281    |       |
| 2014                        |       | 270,221    |       |
| 2015                        |       | 90,966     |       |
| Total                       |       | $          | 1,063,545  |   |
|                             |            |            |            |  |

 

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

 
| **Fiscal  Year**            | ** ** | **Amount** | ** ** |
|-----------------------------|------------|------------|------------|
| 2011(nine months remaining) |       | 76,405     |       |
| 2012                        |       | 101,873    |       |
| 2013                        |       | 101,873    |       |
| 2014                        |       | 8,488      |       |
| Total                       |       | $          | 288,639    |   |
|                             |            |            |            |  |

 

OnNovember 4, 2009, we signed a second amendment to our credit facilityagreement with Silicon Valley Bank, effective November 10, 2009. The termsof the credit facility include a line of credit for $2,000,000 for two years atan interest rate calculated at the prime rate plus 1.25%, subject to increaseupon a default. The credit facility is secured by any and all of our properties,rights and assets. Our borrowing under the credit facility is limited by oureligible receivables and inventory at the time of borrowing. The creditfacility requires us to meet certain financial covenants. In June 2010, wefailed to meet the minimum defined quick debt ratio covenant. As a result, thelender may impose a monthly maintenance fee, 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. Silicon Valley Bank may have the right tocertain remedies upon our failure to meet our financial covenant, including anincrease to the interest rate.As of June 30, 2010, we had borrowed$650,000 from the credit facility and, under our eligible receivables andinventory limit, had an additional $747,000 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 June 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 months ended June 30, 2010 and 2009, whichwas allocated as follows:

 
| ** **                       | ** ** | **Three Months Ended**  | ** ** |
|----------------------------------|------------|-------------------------|------------|
| ** **                       | ** ** | **June 30,  2010** | ** ** | **June 30,  2009** | ** ** |
| Cost of sales                    |       | $                       | 823        |   | $ | 810 |   |
| Sales and marketing              |       | 3,268                   |       | 4,857 |   |
| General and administrative       |       | 18,487                  |       | 13,026 |   |
| Research and development         |       | 3,722                   |       | 4,176 |   |
| Stock-based compensation expense |       | $                       | 26,300     |   | $ | 22,869 |   |

 

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 months ended June 30, 2010.

 

Asof June 30, 2010, $369,000 of total unrecognized compensation costsrelated to nonvested stock options is expected to be recognized over a periodof five years.

 

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Note6.   RELATED PARTY TRANSACTION

 

Wepaid consulting fees of $17,110 and $18,520 to an entity owned by one of ourdirectors during the three months ended June 30, 2010 and 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’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF 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 the marketplacefor electrosurgical devices and laparoscopic instruments by providing asolution 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 groups involvedin MIS. Surgeons, nurses, biomedical engineers, the medicolegal community,malpractice insurance carriers and electrosurgical device manufacturersadvocate the use of AEM technology. Recommendations from the malpracticeinsurance and medicolegal communities complement the broad clinicalendorsements 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 threemonths ended June 30, 2010. This sales stream is expected to grow as thebase of hospitals that switch to AEM technology continues to grow. In addition,we intend to develop disposable versions of more of our AEM products in orderto meet market demands and expand our sales opportunities.

 

Wehave an accumulated deficit of $16,152,727 at June 30, 2010. Operatingfunds have been provided primarily by issuances of our common stock andwarrants, the exercise of stock options to purchase our common stock and, inrecent years, by operating profits. Our liquidity has diminished because ofprior years’ operating losses, and we may be required to seek additionalcapital in the future.

 

Duringthe three months ended June 30, 2010, we used $168,181 of cash from our operationsand used $90,617 for investments in equipment. As of June 30, 2010, we had$154,781 in cash and cash equivalents available to fund future operations, anincrease of $41,046 from March 31, 2010. As of June 30, 2010, weborrowed $650,000 from our $2,000,000 amended credit facility, an increase of$300,000 from March 31, 2010. Our working capital was $2,684,048 at June 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. 

Asa 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 as additionalhospitals adopt AEM technology. We anticipate that the efforts to improve thequality of sales representatives carrying the AEM product line, along with theintroduction of next generation products, may provide the basis for increasedsales and profitable operations. However, these measures, or any others that wemay adopt, may not result in either increased sales or profitable operations.Furthermore, most of our next generation products are in the early stages ofdevelopment.

 

Webelieve that the unique performance of the AEM technology and our breadth ofindependent endorsements provide an opportunity for continued market sharegrowth. In our view, 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 $16,152,727 at June 30, 2010. Operating funds havebeen 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 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 and increase sales infiscal year 2011. We also expect that supplier agreements with Novation andPremier, which together represent over 3,000 U.S. hospitals, will expose morehospitals to the benefits of AEM technology and may stimulate new hospitalaccounts. During the three months ended June 30, 2010, we signed anagreement with HealthTrust Purchasing Group, LP, a group purchasingorganization. Also, during the three months ended June 30, 2010, we signedagreements with distributors in the United Kingdom, Ireland and Austria.We also expect to increase market share through promotional programs of placingour AEM monitors at no charge into hospitals that commit to standardize AEMinstruments. However, all of these efforts to increase market share and growsales will depend in part on our ability to expand the efficiency and effectivecoverage range of our direct and independent 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 explore overseasmarkets to assess opportunities for sales growth internationally. Finally, weintend to explore opportunities to capitalize on our proven AEM technology vialicensing arrangements and strategic alliances. These efforts to generateadditional sales and further the market penetration of our products are longerterm in nature and may not materialize. Even if we are able to successfullydevelop next generation products or identify potential international markets orstrategic partners, we may not be able to capitalize on these opportunities.

 

*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.

 

*Sales andMarketing Expenses*: We continue our efforts to expand domestic andinternational distribution capability, and we believe that sales and marketingexpenses will decrease as a percentage of net sales with increasing salesvolume.

 

*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 June 30, 2010 compared to the three months ended June 30,2009.*

 

*Netsales.*  Net sales for the quarter endedJune 30, 2010 were $2,912,621 compared to $3,173,660 for the quarter endedJune 30, 2009, a decrease of 8%. The decrease is attributable to weaknessin the medical device industry and by business lost from hospitals thatpreviously changed to AEM technology. This was partially offset by addition ofnew hospital accounts. We opened two new hospital accounts for AEM technologyin the three months ended June 30, 2010 versus six new hospital accountsfor AEM technology in the three months ended June 30, 2009. We have addedsales employees in an effort to capitalize on identified market opportunities.It will take a number of months before new sales employees generate newhospital accounts, but we expect that these new accounts will provideadditional recurring sales.

 

*Grossprofit*.  Gross profit for the quarterended June 30, 2010 of $1,844,328 represented a decrease of 9% from grossprofit of $2,031,925 for the quarter ended June 30, 2009. Gross profit asa percentage of sales (gross margins) decreased from 64% for the quarter ended June 30,2009 to 63.3% for the quarter ended June 30, 2010. The gross profit margindecrease from the first quarter of fiscal year 2009 was due to decreased salesthat resulted in higher overhead costs per unit of sales.

 

*Sales and marketing expenses*.  Sales and marketing expenses of $1,185,808for the quarter ended June 30, 2010 represented a decrease of 1% fromsales and marketing expenses of $1,198,813 for the quarter ended June 30,2009. The decrease was a result of decreased commissions for independent salesrepresentatives. The decrease in such costs was partially offset by increasedrecruiting costs, increased travel and outside service costs.

 

*Generaland administrative expenses*.  General and administrative expenses of$395,907 for the quarter ended June 30, 2010 represented an increase of12% from general and administrative expenses of $353,819 for the quarter ended June 30,2009. The increase was the result of an increase in outside service expense.

 

*Researchand development expenses*.  Researchand development expenses of $371,971 for the quarter ended June 30, 2010represented an increase of 24% compared to $300,989 for the quarter ended June 30,2009. The increase was the result of an increase in temporary help expense andoutside services for the development of future new products. The increase insuch costs was partially offset by decreased compensation and test materials.

 

*Netloss. *Net loss was $118,796 forthe quarter ended June 30, 2010 compared to net income of $163,310 for thequarter ended June 30, 2009. The net income decrease was a result of adecrease in sales, gross profit and increased operating expenses, as discussedabove.

 

Theresults of operations for the three months ended June 30, 2010 should notbe taken as an indication of the results of operations for all or any part ofthe 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. To date, operating funds totaled$19,703,622 from our inception through June 30, 2010.

 

OnNovember 4, 2009, we signed a second amendment to our credit facilityagreement with Silicon Valley Bank, effective November 10, 2009. The termsof the credit facility include a line of credit for $2,000,000 for two years atan interest rate calculated at prime rate plus 1.25%, subject to increase upona default. The credit facility is secured by any and all of our properties,rights and assets. Our borrowing under the credit facility is limited by oureligible receivables and inventory at the time of borrowing. The creditfacility requires us to meet certain financial covenants. In June 2010, wefailed to meet the minimum defined quick debt ratio covenant. As a result, thelender may impose a monthly maintenance fee, 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. Silicon Valley Bank may have the right tocertain remedies upon our failure to meet our financial covenant, including anincrease to the interest rate.As of June 30, 2010, we had borrowed$650,000 from the credit facility and, under our eligible receivables andinventory limit, had an additional $747,000 available to borrow.

 

Ouroperations used $124,477 of cash during the three months ended June 30,2010 on net sales of $2,912,621. Cash was used principally by net loss andinventory increase and adjustment. Cash used was partially offset by cashprovided by accounts receivables. The amounts of cash provided by and used inoperations for the three months ended June 30, 2010 are not indicative ofthe expected amounts of cash to be generated from or used in operations infiscal year 2011. During the three months ended June 30, 2010, we invested$134,321 in the acquisition of property and equipment. As of June 30,2010, we had $154,781 in cash and cash equivalents available to fund futureoperations and had borrowed $650,000 from our credit facility. Working capitalwas $2,034,048 at June 30, 2010 compared to $2,554,794 at March 31,2010. Current liabilities were $1,891,596 at June 30, 2010, compared to$1,365,420 at March 31, 2010. The increase in current liabilities at June 30,2010 was caused, principally, by classifying our line of credit from along-term liability to a current liability. The increase in current liabilitieswas partially offset by reducing 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 our commonstock, loans from financial institutions or other third parties, or any of theactions 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.

 

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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 June 30, 2010 is as follows:

 
| **Fiscal  Year**            | ** ** | **Amount** | ** ** |
|-----------------------------|------------|------------|------------|
| 2011(nine months remaining) |       | 185,448    |       |
| 2012                        |       | 254,629    |       |
| 2013                        |       | 262,281    |       |
| 2014                        |       | 270,221    |       |
| 2015                        |       | 90,966     |       |
| Total                       |       | $          | 1,063,545  |   |
|                             |            |            |            |  |

 

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

 
| **Fiscal  Year**            | ** ** | **Amount** | ** ** |
|-----------------------------|------------|------------|------------|
| 2011(nine months remaining) |       | 76,405     |       |
| 2012                        |       | 101,873    |       |
| 2013                        |       | 101,873    |       |
| 2014                        |       | 8,488      |       |
| Total                       |       | $          | 288,639    |   |
|                             |            |            |            |  |

 

Asof June 30, 2010, the following table shows our contractual obligationsfor 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   |       | $                         | 650,000    |   | $ | — |   | $ | 650,000 |   | $ | — |   | $ | — |   |
| Operating lease obligations  |       | 1,352,184                 |       | 350,939 |   | 707,613 |   | 293,632 |   | — |   |
| Total                        |       | $                         | 2,002,184  |   | $ | 350,939 |   | $ | 1,357,613 |   | $ | 293,632 |   | $ | — |   |

 

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 inmanufacturing property and equipment to manufacture disposable scissors insertsinternally and reduce our cost of sales. We cannot predict with certainty theexpected sales, gross profit, net income or loss and usage of cash and cashequivalents for fiscal year 2011. However, we believe that our cash resourcesand credit facility will be sufficient to fund our operations for at least thenext twelve months. If we are unable to manage our business operations in linewith budget expectations, it could have a material adverse effect on ourbusiness viability, financial position, results of operations and cash flows.If we are not successful in continuing profitability and positive cash flow,additional capital may be required to maintain ongoing operations.

 

**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. We have not paidincome taxes since our inception. The Tax Reform Act of 1986 and other incometax regulations contain provisions which may limit the net operating losscarryforwards available to be used in any given year if certain events occur,including changes in ownership interests. We have established a valuationallowance for the entire amount of our deferred tax asset since inception dueto our history of losses. Should we achieve sufficient, sustained income in thefuture, we may conclude that some or all of the valuation allowance should bereversed. If some or all of the valuation allowance were reversed, then, to theextent of the reversal, a tax benefit would be recognized which would result inan 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 general considerations.To the extent that our estimates prove to be too high, and we ultimatelycollect a receivable previously determined to be impaired, we may record areversal 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 andprocesses, including actively monitoring and evaluating the quality of ourcomponent suppliers, we have experienced some costs related to warranties. Thewarranty accrual is based on historical experience and is adjusted based oncurrent experience. Should actual warranty experience differ from ourestimates, revisions to the estimated warranty liability would be required.

 

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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 would reduceour 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.

 

**SubsequentEvent**

 

Underour credit facility agreement with Silicon Valley Bank, we are required to meetcertain financial covenants. As of July 31, 2010, we failed to meet ourfinancial covenant regarding net income. Silicon Valley Bank may have the rightto certain remedies upon our failure to meet our financial covenant, includingan increase to the interest rate.

 

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**ITEM 4   –   CONTROLSAND 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 June 30, 2010, ourdisclosure controls and procedures were effective.

 

(b) During the quarter ended June 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).

 

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.

 

| August 11,  2010 |   |   | /s/  Marcia McHaffie                     |   |
|-----------------------|--------|--------|------------------------------------------|--------|
| Date                  |   |   | Marcia  McHaffie                         |   |
|                  |   |   | Controller                               |   |
|                  |   |   | Principal  Accounting Officer & |   |
|                  |   |   | Principal  Financial Officer             |   |

 

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