** **

**UNITED STATES**

**SECURITIES AND EXCHANGECOMMISSION**

**WASHINGTON, D.C.  20549**

 

## ** **

## **Form 10-QSB**

 

 

 

| **x**  | ** ** | **QUARTERLY REPORT UNDER SECTION  13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|--------|------------|-----------------------------------------------------------------------------------------|
|   |       |                                                                                    |
|   |       | **For the quarterly period ended September 30, 2007**                                   |
|   |       |                                                                                    |
|   |       | **OR**                                                                                  |
|   |       |                                                                                    |
| **o**  | ** ** | **TRANSITION REPORT UNDER SECTION  13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |

 

**For the transition periodfrom            to          **

 

 

**Commission file number     0-28604**

 

 

**ENCISION INC.**

(Exact name of small business issuer asspecified in its charter)

 

 

| **Colorado**                                                    | ** **                                | **84-1162056**                        |
|-----------------------------------------------------------------|-------------------------------------------|---------------------------------------|
| (State  or other jurisdiction of incorporation or organization) | ** **                                | (I.R.S.  Employer Identification No.) |
|                                                            |                                      |                                  |
|                                                            | **6797 Winchester Circle**                |                                  |
|                                                            | **Boulder, Colorado 80301**               |                                  |
|                                                            | (Address  of principal executive offices) |                                  |
|                                                            |                                      |                                  |
|                                                            | **(303) 444-2600**                        |                                  |
|                                                            | (Issuer’s  telephone number)         |                                  |

 

 

Check whether the issuer (1) filed all reportsrequired to be filed by Section 13 of 15(d) of the Exchange Act during the past12 months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements for thepast 90 days.

Yes       x       No     o

 

Indicate by checkmark whetherthe registrant is a shell company (as defined in Rule 12b-2 of the ExchangeAct).

Yes    o      No  x

 

 

State the number of shares outstanding of eachof the issuer’s classes of common equity, as of the latest practicable date:

 

| Common  Stock, no par value | 6,447,100  Shares                  |
|-----------------------------|------------------------------------|
| (Class)                     | (outstanding  at October 31, 2007) |

 

Transitional Small Business Disclosure Format

Yes    o        No    x

 

 

 

----

 

**ENCISIONINC.**

 

**FORM10-QSB**

 

**For theQuarter Ended September 30, 2007**

 

 

**INDEX**

 

 

                                                                                                                                                                                                                

                                                                                                                                                                                                                

 
| **PART I.**  | **UNAUDITED FINANCIAL  INFORMATION** |   |
|--------------|-------------------------------------------|--------|
|         |                                      |   |   |   |
| ** **   | **ITEM1**                                 | -      | Condensed Interim Financial Statements: |   |
|         |                                      | -      | Condensed  Balance Sheets as of   September 30, 2007 and March 31, 2007 |   |
|         |                                      | -      | Condensed Statements of Operations for  the Three Months Ended September 30, 2007 and 2006 |   |
|         |                                      | -      | Condensed  Statements of Operations for  the Six Months Ended September 30, 2007 and 2006 |   |
|         |                                      | -      | Condensed  Statements of Cash Flows for  the Six Months Ended September 30, 2007 and 2006 |   |
|         |                                      | -      | Notes  to Condensed Interim Financial  Statements |   |
|         |                                      |   |   |   |
| ** **   | **ITEM 2**                                | -      | Management’s  Discussion and Analysis  of Financial Condition and Results of Operations |   |
|         |                                      |   |   |   |
| ** **   | **ITEM 3**                                | -      | Controls and  Procedures |   |
|         |                                      |   |   |   |
| **PART II.** | **OTHER INFORMATION**                     |   |
|         |                                      |   |   |   |
| ** **   | **ITEM 6**                                | -      | Exhibits |   |
|         |                                      |   |   |   |
| ** **   | **SIGNATURE**                             |   |   |   |

 

 

 

2

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

 

**ITEM 1  ****-****   CONDENSED INTERIM FINANCIAL STATEMENTS**

 

 

**Encision Inc.**

**Condensed Balance Sheets**

 
| ** **                                                                                                                                                                                                | ** ** | **September 30,  2007  (unaudited)** | ** ** | **March 31,  2007  (audited)** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------|------------|--------------------------------|------------|
| **ASSETS**                                                                                                                                                                                                | ** ** | ** **                           | ** ** | ** **                     | ** ** |
| Current assets:                                                                                                                                                                                           |       |                                 |       |                           |       |
| Cash and cash  equivalents                                                                                                                                                                                |       | $                                    | 59,419     |                           | $          | 436,403 |   |
| Accounts  receivable, net of allowance for doubtful accounts of $19,000 at September  30, 2007 and $23,500 at March 31, 2007                                                                              |       | 1,289,440                            |       | 1,194,373                      |       |
| Inventories, net  of reserve for obsolescence of $105,000 at September 30, 2007 and $80,000 at  March 31, 2007                                                                                            |       | 2,044,652                            |       | 1,764,227                      |       |
| Prepaid expenses                                                                                                                                                                                          |       | 108,343                              |       | 241,872                        |       |
| Total current  assets                                                                                                                                                                                     |       | 3,501,854                            |       | 3,636,875                      |       |
| Equipment, at  cost:                                                                                                                                                                                      |       |                                 |       |                           |       |
| Furniture,  fixtures and equipment                                                                                                                                                                        |       | 1,159,008                            |       | 1,084,260                      |       |
| Customer-site  equipment                                                                                                                                                                                  |       | 617,362                              |       | 612,553                        |       |
| Equipment-in-progress                                                                                                                                                                                     |       | 477,927                              |       | 233,357                        |       |
| Accumulated  depreciation                                                                                                                                                                                 |       | (1,500,927                           | )          | (1,413,656                     | )          |
| Equipment, net                                                                                                                                                                                            |       | 753,370                              |       | 516,514                        |       |
| Patents, net of  accumulated amortization of $110,574 at September 30, 2007 and $104,496 at March  31, 2007                                                                                               |       | 180,205                              |       | 153,066                        |       |
| Other assets                                                                                                                                                                                              |       | 67,471                               |       | 81,195                         |       |
| **TOTAL  ASSETS**                                                                                                                                                                                         |       | $                                    | 4,502,900  |                           | $          | 4,387,650 |   |
| **LIABILITIES  AND SHAREHOLDERS’ EQUITY**                                                                                                                                                            | ** ** | ** **                           | ** ** | ** **                     | ** ** |
| Current  liabilities:                                                                                                                                                                                     |       |                                 |       |                           |       |
| Accounts payable                                                                                                                                                                                          |       | $                                    | 613,841    |                           | $          | 620,814 |   |
| Accrued  compensation                                                                                                                                                                                     |       | 275,231                              |       | 295,994                        |       |
| Line of credit                                                                                                                                                                                            |       | 280,000                              |       | —                         |       |
| Other accrued  liabilities                                                                                                                                                                                |       | 576,899                              |       | 547,345                        |       |
| Total current  liabilities                                                                                                                                                                                |       | 1,745,971                            |       | 1,464,153                      |       |
| **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;  6,447,100 and 6,430,437 shares issued and outstanding at September 30, 2007  and March 31, 2007, respectively |       | 19,323,739                           |       | 19,202,785                     |       |
| Accumulated  (deficit)                                                                                                                                                                                    |       | (16,566,810                          | )          | (16,279,288                    | )          |
| Total  shareholders’ equity                                                                                                                                                                          |       | 2,756,929                            |       | 2,923,497                      |       |
| **TOTAL  LIABILITIES AND SHAREHOLDERS’ EQUITY**                                                                                                                                                      |       | $                                    | 4,502,900  |                           | $          | 4,387,650 |   |
|                                                                                                                                                                                                           |            |                                      |            |                                |            |  |  |  |  |

 

The accompanying notes tofinancial statements are an integral part of these condensed statements.

 

 

3

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**Encision Inc.**

**Condensed Statements ofOperations**

**(Unaudited)**

 
| **Three Months Ended**                        | ** ** | **September 30,  2007** | ** ** | **September 30,  2006** | ** ** |
|-----------------------------------------------|------------|-------------------------|------------|-------------------------|------------|
| **NET  SALES**                                |       | $                       | 3,092,390  |                    | $          | 2,651,466 |   |
| **COST OF  SALES**                            |       | 1,166,453               |       | 952,637                 |       |
| **GROSS  PROFIT**                             |       | 1,925,937               |       | 1,698,829               |       |
| **OPERATING  EXPENSES:**                      | ** ** | ** **              | ** ** | ** **              | ** ** |
| Sales and  marketing                          |       | 1,236,871               |       | 1,070,931               |       |
| General and  administrative                   |       | 349,806                 |       | 366,717                 |       |
| Research and  development                     |       | 333,460                 |       | 249,122                 |       |
| Total operating expenses                      |       | 1,920,137               |       | 1,686,770               |       |
| **OPERATING  INCOME**                         |       | 5,800                   |       | 12,059                  |       |
| Interest income  (expense), net               |       | (10,138                 | )          | 10,912                  |       |
| Other income,  net                            |       | 12,175                  |       | 9,190                   |       |
| Interest and  other income (expense), net     |       | 2,037                   |       | 20,102                  |       |
| **INCOME  BEFORE PROVISION FOR INCOME TAXES** |       | 7,837                   |       | 32,161                  |       |
| Provision for  income taxes                   |       | —                  |       | —                  |       |
| **NET  INCOME**                               |       | $                       | 7,837      |                    | $          | 32,161 |   |
| Net income per  share—basic              |       | $                       | 0.00       |                    | $          | 0.01 |   |
| Net income per  share—diluted            |       | $                       | 0.00       |                    | $          | 0.00 |   |
| Weighted average  shares—basic           |       | 6,439,305               |       | 6,430,437               |       |
| Weighted average  shares—diluted         |       | 6,457,921               |       | 6,435,468               |       |

 

The accompanying notes tofinancial statements are an integral part of these condensed statements.

 

 

 

4

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**Encision Inc.**

**Condensed Statements of Operations**

**(Unaudited)**

 
| **Six Months Ended**                                 | ** ** | **September 30,  2007** | ** ** | **September 30,  2006** | ** ** |
|------------------------------------------------------|------------|-------------------------|------------|-------------------------|------------|
| **NET  SALES**                                       |       | $                       | 5,751,661  |                    | $          | 5,405,653 |   |
| **COST OF  SALES**                                   |       | 2,197,405               |       | 2,001,102               |       |
| **GROSS  PROFIT**                                    |       | 3,554,256               |       | 3,404,551               |       |
| **OPERATING  EXPENSES:**                             | ** ** | ** **              | ** ** | ** **              | ** ** |
| Sales and  marketing                                 |       | 2,450,729               |       | 2,143,085               |       |
| General and  administrative                          |       | 722,244                 |       | 678,115                 |       |
| Research and  development                            |       | 663,631                 |       | 474,230                 |       |
| Total operating  expenses                            |       | 3,836,604               |       | 3,295,430               |       |
| **OPERATING  INCOME (LOSS)**                         |       | (282,348                | )          | 109,121                 |       |
| Interest income  (expense), net                      |       | (15,000                 | )          | 19,322                  |       |
| Other income  (expense), net                         |       | 9,826                   |       | 7,307                   |       |
| Interest and  other income (expense), net            |       | (5,174                  | )          | 26,629                  |       |
| **INCOME  (LOSS) BEFORE PROVISION FOR INCOME TAXES** |       | (287,522                | )          | 135,750                 |       |
| Provision for  income taxes                          |       | —                  |       | —                  |       |
| **NET  INCOME (LOSS)**                               |       | $                       | (287,522   | )                       | $          | 135,750 |   |
| Net income  (loss) per share—basic and diluted  |       | $                       | (0.04      | )                       | $          | 0.02 |   |
| Weighted average  shares—basic                  |       | 6,435,720               |       | 6,415,174               |       |
| Weighted average  shares—diluted                |       | 6,435,720               |       | 6,434,109               |       |
|                                                      |            |                         |            |                         |            |  |  |  |  |

 

The accompanying notes tofinancial statements are an integral part of these condensed statements.

 

 

 

 

5

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**Encision Inc.**

**Condensed Statements of CashFlows**

**(Unaudited)**

 
| **Six months ended**                                                                  | ** ** | **September 30,  2007** | ** ** | **September 30,  2006** | ** ** |
|---------------------------------------------------------------------------------------|------------|-------------------------|------------|-------------------------|------------|
| Cash flows from  operating activities:                                                |       |                    |       |                    |       |
| Net income  (loss)                                                                    |       | $                       | (287,522   | )                       | $          | 135,750 |   |
| Adjustments to  reconcile net income (loss) to net cash used in operating activities: |       |                    |       |                    |       |
| Depreciation and  amortization                                                        |       | 93,349                  |       | 93,330                  |       |
| Stock-based  compensation expense related to stock options                            |       | 75,214                  |       | 94,654                  |       |
| Stock-based  interest expense related to warrants                                     |       | 6,254                   |       | —                  |       |
| Provision for  doubtful accounts, net                                                 |       | (4,500                  | )          | (14,500                 | )          |
| Provision for  inventory obsolescence                                                 |       | 25,000                  |       | 2,000                   |       |
| Change in  operating assets and liabilities:                                          |       |                    |       |                    |       |
| Accounts  receivable                                                                  |       | (90,567                 | )          | (130,568                | )          |
| Inventories                                                                           |       | (305,425                | )          | 15,920                  |       |
| Prepaid expenses  and other assets                                                    |       | 140,998                 |       | (107,379                | )          |
| Accounts payable                                                                      |       | (6,973                  | )          | 141,674                 |       |
| Accrued  compensation and other accrued liabilities                                   |       | 8,791                   |       | 45,116                  |       |
| Net cash  provided by (used in) operating activities                                  |       | (345,381                | )          | 275,997                 |       |
| Cash flows from  investing activities:                                                |       |                    |       |                    |       |
| Acquisition of  property and equipment                                                |       | (324,127                | )          | (60,612                 | )          |
| Patent costs                                                                          |       | (33,216                 | )          | (9,213                  | )          |
| Net cash used in  investing activities                                                |       | (357,343                | )          | (69,825                 | )          |
| Cash flows from  financing activities:                                                |       |                    |       |                    |       |
| Borrowings from  credit facility                                                      |       | 280,000                 |       | —                  |       |
| Proceeds from  the exercise of stock options                                          |       | 45,740                  |       | 61,948                  |       |
| Net cash  provided by financing activities                                            |       | 325,740                 |       | 61,948                  |       |
| Net increase  (decrease) in cash and cash equivalents                                 |       | (376,984                | )          | 268,120                 |       |
| Cash and cash  equivalents, beginning of fiscal year                                  |       | 436,403                 |       | 901,541                 |       |
| Cash and cash  equivalents, end of fiscal year                                        |       | $                       | 59,419     |                    | $          | 1,169,661 |   |

 

The accompanying notes tofinancial statements are an integral part of these condensed statements.

 

 

 

 

6

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ENCISIONINC.

 

 

NOTES TO CONDENSEDINTERIM FINANCIAL STATEMENTS

 

SEPTEMBER30, 2007

(Unaudited)

 

 

 

(1)       ORGANIZATION AND NATURE OF BUSINESS

 

Encision Inc. is a medical device company thatdesigns, develops, manufactures and markets patented surgical instruments thatprovide greater safety to patients undergoing minimally-invasive surgery. Webelieve that our patented AEM® surgical instrument technology ischanging the marketplace for electrosurgical devices and instruments byproviding a solution to a patient safety risk in laparoscopic surgery. Oursales to date have been made principally in the United States.

 

We achieved profitable operations in fiscalyears 2004 and 2003. However, in each fiscal year prior to 2003 and in fiscalyears 2005, 2006 and 2007, we incurred losses and had an accumulated deficit of$16,566,810 at September 30, 2007. Operations have been financed primarilythrough the issuance of our common stock.

 

Our strategic marketing and sales plan isdesigned to expand the use of our products in surgically active hospitals inthe United States. We expect these efforts to result in continued salesincreases for fiscal year 2008.

 

 

(2)      SUMMARY OF SIGNIFICANT ACCOUNTINGPOLICIES

 

            Basis of Presentation

 

The condensed interimfinancial statements included herein have been prepared by us, without audit,pursuant to the rules and regulations of the Securities and ExchangeCommission. Certain information and footnote disclosures normally included infinancial statements prepared in accordance with generally accepted accountingprinciples have been condensed or omitted pursuant to such rules andregulations, although we believe that the disclosures made are adequate to makethe information presented not misleading. The condensed interim financialstatements and notes thereto should be read in conjunction with the financialstatements and the notes thereto, included in our Annual Report to theSecurities and Exchange Commission for the fiscal year ended March 31, 2007,filed on Form 10-KSB on June 28, 2007.

 

The accompanying condensedinterim financial statements have been prepared, in all material respects, inconformity with the standards of accounting measurements set forth in AccountingPrinciples Board Opinion 28 and reflect, in the opinion of management, alladjustments necessary to summarize fairly the financial position and results ofoperations for such periods in accordance with accounting principles generallyaccepted in the United States of America. All adjustments are of a normal recurring nature. The results ofoperations for the most recent interim period are not necessarily indicative ofthe results to be expected for the full year.

 

            Use of Estimates in the Preparation of FinancialStatements

 

The preparation of financial statements inconformity with accounting principles generally accepted in the United Statesrequires us to make estimates and assumptions. Such estimates and assumptionsaffect the reported amounts of assets and liabilities as well as disclosure ofcontingent assets and liabilities at the date of the financial statements andthe reported amounts of sales and expense during the reporting period. Actualresults could differ from those estimates.

 

            Sales Recognition

 

Product sales are recordedwhen we ship the product and title has passed to the customer, provided that wehave evidence of a customer arrangement and can conclude that collection isprobable. Our shipping policy is FOB Shipping Point. We recognize sales 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.

 

            Concentration of Credit Risk

 

We have no significant off-balance sheetconcentrations of credit risk such as foreign exchange contracts, optionscontracts or other foreign hedging arrangements. We maintain the majority ofour cash balances with two financial institutions in the form of demanddeposits and money market funds.

 

Accounts receivable are typically unsecuredand are derived from transactions with and from entities in the healthcareindustry primarily located in the United States. Accordingly, we may be exposedto credit risk generally associated with the healthcare industry. We maintainallowances for doubtful accounts and for estimated losses resulting from theinability of our customers to make requiredpayments.

 

The net accounts receivable balance atSeptember 30, 2007 of $1,289,440 included no more than 8% from any onecustomer. The net accounts receivable balance at March 31, 2007 of $1,194,373included no more than 3% from any one customer.

 

 

7

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*           *Inventories

 

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

 

| ** **                       | ** ** | **September 30,  2007** | ** ** | **March 31,  2007** | ** ** |
|----------------------------------|------------|-------------------------|------------|---------------------|------------|
| Raw materials                    |       | $                       | 1,277,970  |                | $          | 1,166,607 |   |
| Finished goods                   |       | 871,682                 |       | 677,620             |       |
|                             |       | 2,149,652               |       | 1,844,227           |       |
| Less - Reserve  for obsolescence |       | (105,000                | )          | (80,000             | )          |
|                             |       | $                       | 2,044,652  |                | $          | 1,764,227 |   |

 

AccruedLiabilities

 

We have accrued $100,000related to warranty claims, $89,679 related to sales commissions and $78,815related to rent normalization and have included these amounts in accruedliabilities in the accompanying condensed balance sheet as of September 30,2007. We have accrued $100,000 related to warranty claims, $136,128 related tosales commissions and $96,822 related to rent normalization and have includedthese amounts in accrued liabilities in the accompanying condensed balancesheet as of March 31, 2007.

 

            Property and Equipment

 

Property and equipment arestated at cost, with depreciation computed over the estimated useful lives ofthe assets, generally three to seven years. Prior to fiscal year 2008, weutilized the double-declining method of depreciation for property and equipmentdue to the expected usage of the property and equipment over time. We expect tocontinue using this method throughout the life of such equipment. Manufacturingand production equipment acquired, but not depreciated, in fiscal year 2007 andmanufacturing and production equipment acquired after fiscal year 2007 aretechnologically different, and we will utilize the straight-line method ofdepreciation for this and other property and equipment starting April 1, 2007.This difference in depreciation methods utilized for manufacturing andproduction equipment is based on the technological differences of the equipmentand does not constitute a change in accounting principles.

 

            Income Taxes 

 

The provision for incometaxes is based on our estimated annualized effective tax rate for the year.Effective April 1, 2007, we adopted the provisions of FASB Interpretation No.48 (“FIN 48”), “Accounting for Uncertainty in Income Taxes — An Interpretationof FASB Statement No. 109.” FIN 48 provides detailed guidance for the financialstatement recognition, measurement and disclosure of uncertain tax positionsrecognized in the financial statements in accordance with SFAS No. 109. Taxpositions must meet a “more-likely-than-not” recognition threshold at theeffective date to be recognized upon the adoption of FIN 48 and in subsequentperiods. Upon the adoption of FIN 48, we had no unrecognized tax benefits.During the second quarter of 2007, we recognized no adjustments for uncertaintax benefits.

 

Deferred income tax assetsare adjusted by a valuation allowance, if necessary, to recognize future taxbenefits only to the extent, based on available evidence, it is more likelythan not such benefits will be realized. We recognize interest and penalties,if any, related to uncertain tax positions in general and administrative expenses.No interest or penalties related to uncertain tax positions were accrued atSeptember 30, 2007. We expect no material changes to unrecognized tax positionswithin the next twelve months.

 

            Research and Development Expenses

 

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

 

            Stock-Based Compensation Expense

 

On April 1, 2006, we adoptedStatement of Financial Accounting Standards 123 (revised 2004), “Share-BasedPayment” (“SFAS 123(R)”), which requires the measurement and recognition ofcompensation expense for all share-based payment awards made to employees anddirectors, including employee stock options based on estimated fair values.SFAS 123(R) supersedes our previous accounting under Accounting Principles BoardOpinion 25, “Accounting for Stock Issued to Employees” (“APB 25”) for periodsbeginning in fiscal year 2007. In March 2005, the Securities and ExchangeCommission issued Staff Accounting Bulletin 107 (“SAB 107”) relating to SFAS123(R). We have applied the provisions of SAB 107 in our adoption of SFAS123(R).

 

We have adopted SFAS 123(R)using the modified prospective transition method, which requires theapplication of the accounting standard as of April 1, 2006, the first day ofour fiscal year 2007. Our financial statements as of and for the three and sixmonths ended September 30, 2007 and September 30, 2006 reflect the impact ofSFAS 123(R). In accordance with the modified prospective transition method, ourfinancial statements for prior periods have not been restated to reflect, anddo not include, the impact of SFAS 123(R). Stock-based compensation expenserecognized under SFAS 123(R) for the three and six months ended September 30,2007 was $36,340 and $75,214, respectively, which consisted of stock-basedcompensation expense related to employee stock options. Stock-basedcompensation expense related to employee stock options during the three and sixmonths ended September 30, 2006 was $47,327 and $94,654, respectively.

 

SFAS 123(R) requirescompanies to estimate the fair value of share-based payment awards on the dateof grant using an option-pricing model. The value of the portion of the awardthat is ultimately expected to vest is recognized as expense over the requisiteservice periods in our Statement of Operations. Prior to the adoption of SFAS123(R), we accounted for stock-based awards to employees and directors usingthe intrinsic value method in accordance with APB 25, as allowed underStatement of Financial Accounting Standards 123, “Accounting for Stock-BasedCompensation” 

 

 

8

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(“SFAS 123”). Under theintrinsic value method we did not recognize stock-based compensation expense inour Statements of Operations because the exercise price of our stock optionsgranted to employees and directors equaled the fair market value of theunderlying stock at the date of grant.

 

Stock-based compensationexpense recognized during the period is based on the value of the portion ofshare-based payment awards that is ultimately expected to vest during theperiod. The stock-based compensation expense recognized in our Statement ofOperations for the second quarter of fiscal year 2008 included compensationexpense for share-based payment awards granted prior to, but not yet vested asof September 30, 2007, based on the grant date fair value estimated inaccordance with the pro forma provisions of SFAS 123 and the compensationexpense for the share-based payment awards granted subsequent to July 30, 2005,which are also based on the grant date fair value estimated in accordance withthe provisions of SFAS 123(R). Compensation expense for all share-based paymentis recognized using the straight-line, single-option method. As stock-basedcompensation expense recognized in the Statements of Operations for the secondquarter of fiscal year 2008 is based on awards ultimately expected to vest, ithas been reduced for estimated forfeitures. SFAS 123(R) requires forfeitures tobe estimated at the time of grant and revised, if necessary, in subsequentperiods if actual forfeitures differ from those estimates. In our pro formainformation required under SFAS 123 for the periods prior to fiscal year 2007,we accounted for forfeitures as they occurred.

 

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

 

On November 10, 2005, theFinancial Accounting Standards Board (“FASB”) issued FASB Staff Position FAS123(R)-3 “Transition Election Related to Accounting for Tax Effects ofShare-Based Payment Awards.” We have elected to adopt the alternativetransition method provided in the FASB Staff Position for calculating the taxeffects of stock-based compensation pursuant to SFAS 123(R). The alternativetransition method includes simplified methods to establish the beginningbalance of the additional paid-in capital pool (“APIC pool”) related to the taxeffects of employee stock-based compensation and to determine the subsequentimpact on the APIC pool and Statements of Cash Flows of the tax effects ofemployee stock-based compensation awards that are outstanding upon adoption ofSFAS 123(R).

 

            Segment Reporting

 

We have concluded that we have one operatingsegment.

 

            Basic and Diluted Income and Loss per Common Share

 

Net income or loss per share is calculated inaccordance with SFAS 128, “Earnings Per Share” (“SFAS 128”). Under theprovisions of SFAS 128, basic net income or loss per common share is computedby dividing net income or loss for the period by the weighted average number ofcommon shares outstanding for the period. Diluted net income or loss per commonshare is computed by dividing the net income or loss for the period by theweighted average number of common and potential common shares outstandingduring the period, if the effect of the potential common shares is dilutive.

 

For the three and six month periods endedSeptember 30, 2007, we had currently-exercisable stock options outstanding thatcould create future dilution to our common shareholders but are not currentlyclassified as outstanding common shares. Our common stock number is based onspecific conversion or issuance assumptions pursuant to the corresponding termsof each instrument.

 

The following table presents the calculationof basic and diluted net income or loss per share:

 
| ** **                                  | ** ** | **Three Months Ended**  | ** ** | **Six Month Ended**     | ** ** |
|---------------------------------------------|------------|-------------------------|------------|-------------------------|------------|
| ** **                                  | ** ** | **September 30,  2007** | ** ** | **September 30,  2006** | ** ** | **September 30,  2007** | ** ** | **September 30,  2006** | ** ** |
| Net income  (loss)                          |       | $                       | 7,837      |                    | $          | 32,161 |   | $ | (287,522 | ) | $ | 135,750 |   |
| Weighted-average  shares — basic       |       | 6,439,305               |       | 6,430,437               |       | 6,435,720 |   | 6,415,174 |   |
| Effect of  dilutive potential common shares |       | 18,616                  |       | 5,031                   |       | — |   | 18,935 |   |
| Weighted-average  shares — diluted     |       | 6,457,921               |       | 6,435,468               |       | 6,435,720 |   | 6,434,109 |   |
| Net income  (loss) per share — basic   |       | $                       | 0.00       |                    | $          | 0.01 |   | $ | (0.04 | ) | $ | 0.02 |   |
| Net income (loss)  per share — diluted |       | $                       | 0.00       |                    | $          | 0.00 |   | $ | (0.04 | ) | $ | 0.02 |   |
| Antidilutive  employee stock options        |       | 147,750                 |       | 440,000                 |       | 385,000 |   | 120,000 |   |

 

 

(3)       COMMITMENTS AND CONTINGENCIES

 

We currently lease our facilities located at6797 Winchester Circle, Boulder, Colorado under noncancelable lease agreementsthrough August 14, 2009. The minimum future lease payments as of September 30,2007, by fiscal year, are as follows:

 

| **Fiscal Year**              | ** ** | **Amount** | ** ** |
|------------------------------|------------|------------|------------|
| 2008 (remaining  six months) |       | $          | 120,685    |   |
| 2009                         |       | 249,691    |       |
| 2010                         |       | 94,804     |       |
|                         |       | $          | 465,180    |   |

 

Ourminimum future equipment lease payments with General Electric CapitalCorporation as of September 30, 2007, by fiscal year, are as follows:

 

 

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| **Fiscal Year**              | ** ** | **Amount** | ** ** |
|------------------------------|------------|------------|------------|
| 2008 (remaining six  months) |       | $          | 50,937     |   |
| 2009                         |       | 101,873    |       |
| 2010                         |       | 101,873    |       |
| 2011                         |       | 101,873    |       |
| 2012                         |       | 101,873    |       |
| 2013                         |       | 101,873    |       |
| 2014                         |       | 8,488      |       |
|                         |       | $          | 568,790    |   |

 

We are subject to regulationby the United States Food and Drug Administration (“FDA”). The FDA providesregulations governing the manufacture and sale of our products and regularlyinspects us and other manufacturers to determine compliance with theseregulations. We believe that we were in substantial compliance with all knownregulations as of September 30, 2007. FDA inspections are conductedperiodically at the discretion of the FDA. Our latest inspection by the FDAoccurred in May 2004.

 

The results of operations forthe three or six months ended September 30, 2007 should not be taken as anindication of the results of operations for all or any part of the balance ofthe year.

 

(4)       VALUATIONAND EXPENSE INFORMATION UNDER SFAS 123(R)

 

On April 1, 2006, we adoptedSFAS 123(R), which requires the measurement and recognition of compensationexpense for all share-based payment awards made to our employees and directorsincluding employee stock options based on estimated fair values. The followingtable summarizes stock-based compensation expense related to employee stockoptions and employee stock purchases under SFAS 123(R) for the three and sixmonths ended September 30, 2007, which was allocated as follows:

 
| ** **                                                       | ** ** | **Three  Months Ended  September 30, 2007** | ** ** | **Three  Months Ended  September 30, 2006** | ** ** | **Six  Months Ended  September 30, 2007** | ** ** | **Six  Months Ended  September 30, 2006** | ** ** |
|------------------------------------------------------------------|------------|---------------------------------------------|------------|---------------------------------------------|------------|-------------------------------------------|------------|-------------------------------------------|------------|
| Sales and  marketing                                             |       | $                                           | 7,051      |                                        | $          | 10,588                                    |       | $                                         | 16,995     |   | $ | 21,176 |   |
| General and  administrative                                      |       | 24,806                                      |       | 28,240                                      |       | 49,612                                    |       | 56,480                                    |       |
| Research and  development                                        |       | 4,483                                       |       | 8,499                                       |       | 8,607                                     |       | 16,998                                    |       |
| Stock-based  compensation expense included in operating expenses |       | $                                           | 36,340     |                                        | $          | 47,327                                    |       | $                                         | 75,214     |   | $ | 94,654 |   |

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. Employee stock options for5,000 shares of stock were granted during the three and six months endedSeptember 30, 2007.

 

As of September 30, 2007,$303,000 of total unrecognized compensation costs related to nonvested stock isexpected to be recognized over a weighted-average period of three years.

 

 

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**ITEM 2  ****-****   MANAGEMENT’S DISCUSSION AND ANALYSIS OFFINANCIAL 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-QSB are strongly encouraged to review the section entitled *“Risk Factors”*in our Form 10-KSB for the year ended March31, 2007.

 

**General**

 

Encision Inc., a medical device company basedin Boulder, Colorado, has developed and launched innovative technology that isemerging as a standard of care in minimally-invasive surgery. We believe thatour 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.

 

We were founded to address marketopportunities created by the increase in minimally-invasive surgery (“MIS”) andsurgeons’ preference for using electrosurgery devices in these procedures. Theproduct opportunity was created by surgeons’ continued widespread demand forusing monopolar electrosurgery instruments, which, when used in laparoscopicsurgery, are susceptible to causing inadvertent collateral tissue damageoutside the surgeon’s field of view. The risk of unintended electrosurgicalburn injury to the patient in laparoscopic surgery has been well documented.This risk poses a threat to patient safety and creates liability exposure forsurgeons and hospitals that do not adequately address the issue.

 

Our patented AEM technology provides surgeonswith the desired tissue effects, while preventing stray electrosurgical energythat can cause unintended and unseen tissue injury. AEM LaparoscopicInstruments are equivalent to conventional instruments in functionality, butthey incorporate “active electrode monitoring” technology to dynamically andcontinuously monitor the flow of electrosurgical current, thereby helping toprevent patient injury. With our “shielded and monitored” instruments, surgeonsare able to perform electrosurgical procedures more safely and effectively thanwhen using conventional instruments. In addition, our AEM instruments are costcompetitive with conventional “non-shielded, non-monitored” instruments. Theresult is advanced patient safety at comparable cost and with no change insurgeon technique.

 

AEM technology has been recommended andendorsed by sources from all groups involved in minimally-invasive surgery.Surgeons, nurses, biomedical engineers, the medicolegal community, malpracticeinsurance carriers and electrosurgical device manufacturers advocate the use ofAEM technology. Recommendations from the malpractice insurance and medicolegal communitiescomplement the broad clinical endorsements AEM technology has garnered over thepast few years.

 

Adding further credibility to the benefits ofour AEM technology are our supplier agreements with Novation and Premier, twoof the largest Group Purchasing Organizations (GPOs) in the United States.Together, Novation and Premier represent over 3,000 hospitals which performover 50% of all surgery in the U.S. We believe that these GPO supplieragreements give further indication that AEM technology is gaining broaderacceptance in the market. We believe that having the nation’s leading medicalpurchasing groups recognize the value of our technology reflects the potentialimpact that AEM products can have in the market and in advancing patient safetyin surgery nationwide. These agreements do not involve purchase commitments,but we expect these relationships to expand the market visibility of AEMtechnology and to ease the procurement process for new hospital customers.

 

We have focused our marketing strategies todate on expanding the market awareness of the AEM technology and our broadindependent endorsements and have continued efforts to improve and expand theAEM product line. Accordingly, we are currently focusing on modernizing ouraccepted AEM instruments to include ergonomics and user functionalities forwhich surgeons have been expressing a preference. During fiscal year 2006, weannounced enTouchTM, anergonomically-designed handle for our articulating instruments, and we plan tointroduce new additions to the AEM product line in fiscal year 2008.

 

When a hospital changes to AEM technology, wereceive recurring sales from sales of replacement instruments. We believe thatthere is no directly competing technology to supplant AEM products once ahospital switches to our products. The replacement market of reusable anddisposable AEM products in hospitals that use our AEM technology represented over90% of our sales over the past three months. 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.

 

We achieved profitable operations in fiscalyears 2004 and 2003. However, in each fiscal year prior to 2003 and in fiscalyears 2005, 2006 and 2007, we incurred losses and had an accumulated deficit of$16,566,810 at September 30, 2007. Operations have been financed primarilythrough the issuance of our common stock.

 

During the six months ended September 30,2007, we used $345,381 of cash in our operations and used $324,127 forinvestments in equipment. As of September 30, 2007, we had $59,419 in cash andcash equivalents available to fund future operations, a decrease of $376,984from March 31, 2007. As of September 30, 2007, we have borrowed $280,000 fromour credit facility. Our working capital was $1,755,883 at September 30, 2007.

 

**HistoricalPerspective**

 

We were organized in 1991and spent several years developing the AEM monitoring system and protectivesheaths to adapt to conventional electrosurgical instruments. During thisperiod, we conducted product trials and applied for patents with the UnitedStates Patent Office and international patent agencies. Patents were issued tous in 1994, 1996, 1997, 1998 and 2002.

 

As we evolved, it became clear to us that ourAEM technology needed to be integrated into the standard laparoscopicinstrument design. As the development program proceeded, it also becameapparent that the merging of electrical and mechanical engineering skills inthe instrument 

11

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development process for our patented,integrated electrosurgical instruments was a complex and difficult task. As aresult, instruments with integrated AEM technology were not completed forseveral years. Prior to offering a full range of laparoscopic electrosurgicalinstrumentation, it was difficult for hospitals to commit to the AEM solution,as we did not have adequate comparable surgical instrument options to matchwhat surgeons demanded. As of fiscal year 2001, a sufficiently broad productline was available to provide hospital operating rooms with AEM instruments inmost of the designs common for laparoscopic surgery.

 

The launch of an expanded line of AEM instruments was accomplished overthe past two 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.Recommendations from the malpractice insurance and medicolegal communitiescomplement the broad clinical endorsements that AEM technology has garneredover the past few years.

 

**Outlook**

 

*Installed Base of AEM MonitoringEquipment*:  We believethat the installed base of AEM monitors has the potential for increasing salesas the inherent risks associated with monopolar laparoscopic electrosurgerybecome more widely acknowledged and as we focus on increasing our salesefficiency. We expect that the replacement sales of electrosurgical instrumentsand accessories will increase as additional hospitals adopt AEM technology. Weanticipate that the efforts to improve the quality of sales representativescarrying the AEM product line, along with increased marketing efforts and the introductionof next generation products, may provide the basis for increased sales andmaintaining profitable operations. However, these measures, or any others thatwe may adopt, may not result in either increased sales or maintainingprofitable operations. Furthermore, most of our next generation products are inthe early stages of development. Furtheradditions to the AEM product line are planned for introduction in fiscal year2008.

 

We believe that the uniqueperformance of the AEM technology and our breadth of independent endorsementsprovide an opportunity for continued market share growth. In our view, marketawareness and awareness of the clinical credibility of the AEM technology, aswell as awareness of our endorsements, are continually improving, and we expectthis awareness to benefit our sales efforts for the remainder of fiscal year2008. Our objectives in the remainder of fiscal year 2008 is to maintainexpense controls while optimizing sales execution in the field, to expandmarket awareness of the AEM technology and to maximize the number of additionalhospital accounts switching to AEM instruments while retaining existinghospital customers. In addition, acceptance of AEM products depends on surgeons’preference for our instruments, which depends on factors such as ergonomics andease of use in addition to the technological advantage of AEM products. Ifsurgeons prefer other instruments to our instruments, our business results willsuffer.

 

*Possibility of Operating Losses*:  We achieved profitable operations in fiscalyears 2004 and 2003. However, in each fiscal year prior to 2003 and in fiscalyears 2005, 2006 and 2007, we incurred losses and had an accumulated deficit of$16,566,810 at September 30, 2007. We have made strides toward improving ouroperating results. Due to the ongoing need to develop, optimize and train thedirect sales managers and the independent sales representative network, theneed to support the development of refinements to our product line, and theneed to increase sustained sales to a level adequate to cover fixed andvariable operating costs, we may operate at a net loss from time to time.Sustained losses, or our inability to generate sufficient cash flow fromoperations to fund our obligations, may result in a need to raise additionalcapital.

 

*Sales Growth*:  We expect to generate increased sales in theU.S. from sales to new hospital customers and from expanded sales in existinghospitals as our network of direct and independent sales representativesbecomes more efficient. We believe that the visibility and credibility of theindependent clinical endorsements for AEM technology will contribute to newhospital accounts and increase sales in fiscal year 2008. We also expect that supplier agreements with Novation and Premier,which together represent over 3,000 U.S. hospitals, will expose more hospitalsto the benefits of AEM technology and may stimulate new hospital accounts. Wealso 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.

 

We also have longer term initiatives in placeto improve our prospects.  We expect thatdevelopment of next generation versions of our AEM products will betterposition our products in the marketplace and improve our retention rate athospitals that have changed to AEM technology, enabling us to grow our sales. We may also explore overseas markets to assessopportunities for sales growth internationally. Finally, we intend toexplore opportunities to capitalize on our proven AEM technology via licensingarrangements and strategic alliances. These efforts to generate additionalsales and further the market penetration of our products are longer term innature and may not materialize. Even if we are able to successfully develop nextgeneration products or identify potential international markets or strategicpartners, we may not be able to capitalize on these opportunities.

 

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

 

*Sales and Marketing Expenses*: We continueour efforts to expand domestic and international distribution capability, and we believe that sales and marketing expenses willdecrease as a percentage of net sales with increasing sales volume.

 

*Research and Development Expenses*: Research and development expenses are expected toincrease modestly to support development of refinements to our AEM productline, which will further expand the instrument options for surgeons.

 

 

**Resultsof Operations**

 

*For the three months endedSeptember 30, 2007 compared to the three months ended September 30, 2006.*

 

*Net sales.*  Net sales for the quarter endedSeptember 30, 2007, was $3,092,390 compared to $2,651,466 for the quarter endedSeptember 30, 2006, an increase of 17%. The increase is attributable to theaddition of new hospital accounts, partially offset by business lost fromhospitals that previously changed to AEM technology. We opened nine newhospital accounts for AEM technology in the three months ended September 30,2007 versus eight new hospital accounts for AEM technology in the three monthsended September 30, 2006. We have changed and added new sales managers andindependent sales 

12

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representatives in aneffort to capitalize on identified market opportunities. It will take a numberof months before new sales managers and new independent sales representativesgenerate new hospital accounts, but we expect that the combination of these newadditions will provide the focus that is needed to achieve market gains.

 

*Gross profit*.  Gross profit for the quarterended September 30, 2007 of $1,925,937 represented an increase of 13% fromgross profit of $1,698,829 for the quarter ended September 30, 2006. Grossprofit as a percentage of sales (gross margins) decreased from 64% for thequarter ended September 30, 2006 to 62% for the quarter ended September 30,2007. Last year’s quarter ended September 30, 2006 included an approximately1.5% increase in gross margin that was attributed to a decrease in accruedliabilities related to warranty claims.

 

*Salesand marketing expenses*.  Salesand marketing expenses of $1,236,871 for the quarter ended September 30, 2007represented an increase of 15% from sales and marketing expenses of $1,070,931for the quarter ended September 30, 2006. Theincrease was a result of increased compensation for additional sales employeesand increases in sales samples and travel expenses. The increase in such costwas partially offset by decreased commissions for independent salesrepresentatives.

 

*General and administrativeexpenses*.  General andadministrative expenses of $349,806 for the quarter ended September 30, 2007represented a decrease of 5% from general and administrative expenses of$366,717 for the quarter ended September 30, 2006. The decrease was primarilythe result of a decrease in the allowance for doubtful accounts and a decreasein outside services and investor relations expense. The decrease in such costwas partially offset by increased legal fees.

 

*Research and developmentexpenses*.  Research anddevelopment expenses of $333,460 for the quarter ended September 30, 2007represented an increase of 34% compared to $249,122 for the quarter endedSeptember 30, 2006. The increase was a result of employing additional engineersand outside services.

 

*Net income.  *Net income was $7,837 for thequarter ended September 30, 2007 compared to net income of $32,161 for thequarter ended September 30, 2006. Net income was a result of increased salesincome that was partially reduced by increased operating expenses.

 

 

*For the six months endedSeptember 30, 2007 compared to the six months ended September 30, 2006.*

 

*Net sales.*  Net sales for the six monthsended September 30, 2007, was $5,751,661 compared to $5,405,653 for the sixmonths ended September 30, 2006, an increase of 6%. The increase isattributable to the decrease in hospitals orders for reusable instrumentscompared to orders placed one year ago and the addition of new hospitalaccounts, partially offset by business lost from hospitals that previouslychanged to AEM technology. We opened twenty-one new hospital accounts for AEMtechnology in the six months ended September 30, 2007 versus twenty-one newhospital accounts for AEM technology in the six months ended September 30,2006. We have changed and added new sales managers and independent salesrepresentatives in an effort to capitalize on identified market opportunities.It will take a number of months before new sales managers and new independentsales representatives generate new hospital accounts, but we expect that thecombination of these new additions will provide the focus that is needed toachieve market gains.

 

*Gross profit*.  Gross profit for the six monthsended September 30, 2007 of $3,554,256 represented an increase of 4% from grossprofit of $3,404,551 for the six months ended September 30, 2006. Gross profitas a percentage of sales (gross margins) decreased from 63% for the six monthsended September 30, 2006 to 62% for the six months ended September 30, 2007.

 

*Salesand marketing expenses*.  Salesand marketing expenses of $2,450,729 for the six months ended September 30,2007 represented an increase of 14% from sales and marketing expenses of$2,143,085 for the six months ended September 30, 2006. The increase was a result of increased compensation for additional salesemployees and increases in sales samples and travel expenses. The increase insuch cost was partially offset by decreased commissions for independent salesrepresentatives.

 

*General and administrativeexpenses*.  General andadministrative expenses of $722,244 for the six months ended September 30, 2007represented an increase of 7% from general and administrative expenses of$678,115 for the six months ended September 30, 2006. The increase wasprimarily the result of an increase in bank service charges and legal fees.

 

*Research and developmentexpenses*.  Research anddevelopment expenses of $663,631 for the six months ended September 30, 2007represented an increase of 40% compared to $474,230 for the six months endedSeptember 30, 2006. The increase was a result of employing additionalengineers, outside services and test or prototype materials.

 

*Net income or loss.  *Net loss was $287,522 for thesix months ended September 30, 2007 compared to net income of $135,750 for thesix months ended September 30, 2006. Net loss was a result of an increase insales that was affected by a reduced profit margin and increased operatingexpenses.

 

 

**Liquidityand Capital Resources**

 

To date, operating funds have been providedprimarily by sales of our common stock and of warrants to purchase our commonstock, which together totaled $19,323,739 through September 30, 2007, and, to alesser degree, by funds provided by sales of our products.

 

On November 10, 2006, we entered into a creditfacility agreement with Silicon Valley Bank. The terms of the credit facilityinclude a line of credit for $2,000,000 for three years at an interest ratecalculated at prime rate plus 1.25%. In connection with the credit facility, weissued warrants to Silicon Valley Bank to purchase 28,000 shares of our commonstock at a per share price of $2.75. Our borrowing under the credit facility islimited by our eligible receivables and inventory at the time of borrowing. Asof September 30, 2007, we have borrowed $280,000 from this facility.

 

Our operations used $345,381 of cash in the six months ended September 30, 2007 on netsales of $5,751,661. Prior to fiscal year 2003 and in fiscal years 2005, 2006and 2007, the use of cash in our operations resulted primarily from the fundingof annual net losses. These amounts of cash generated from and used inoperations are not indicative of the expected cash to be generated from or usedin operations in fiscal year 2008. For the 

 

 

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six months ended September 30, 2007, weinvested $324,127 in the acquisition of property and equipment, of which$244,570 was for manufacturing equipment and associated costs(equipment-in-progress). As of September 30, 2007, we had $59,419 in cash andcash equivalents available to fund future operations and have borrowed $280,000from our credit facility. Working capital was $1,755,883 at September 30, 2007compared to $2,172,722 at March 31, 2007. Current liabilities were $1,745,971at September 30, 2007, compared to $1,464,153 at March 31, 2007.

 

If we are not successful in obtainingprofitability and positive cash flow, additional capital may be required tomaintain ongoing operations. We have explored and are continuing to exploreoptions to provide additional financing to fund future operations as well asother possible courses of action. Such actions include, but are not limited to,securing further lines of credit, sales of debt or equity securities (which mayresult in dilution to existing shareholders), licensing of technology,strategic alliances and other similar actions. There can be no assurance thatwe will be able to obtain additional funding (if needed), on acceptable termsor at all, through a sale of our common stock, loans from financial institutionsor other third parties, or any of the actions discussed above. If we cannotsustain profitable operations, and additional capital is unavailable, lack ofliquidity could have a material adverse effect on our business viability,financial position, results of operations and cash flows.

 

We currently lease our facilities located at6797 Winchester Circle, Boulder, Colorado under noncancelable lease agreementsthrough August 14, 2009. The minimum future lease payments as of September 30,2007, by fiscal year, are as follows:

 

| **Fiscal Year**              | ** ** | **Amount** | ** ** |
|------------------------------|------------|------------|------------|
| 2008 (remaining  six months) |       | $          | 120,685    |   |
| 2009                         |       | 249,691    |       |
| 2010                         |       | 94,804     |       |
|                         |       | $          | 465,180    |   |

 

Ourminimum future equipment lease payments with General Electric CapitalCorporation as of September 30, 2007, by fiscal year, are as follows:

 

| **Fiscal Year**              | ** ** | **Amount** | ** ** |
|------------------------------|------------|------------|------------|
| 2008 (remaining  six months) |       | $          | 50,937     |   |
| 2009                         |       | 101,873    |       |
| 2010                         |       | 101,873    |       |
| 2011                         |       | 101,873    |       |
| 2012                         |       | 101,873    |       |
| 2013                         |       | 101,873    |       |
| 2014                         |       | 8,488      |       |
|                         |       | $          | 568,790    |   |

 

Our fiscal year 2008 operating plan is focusedon increasing new hospital accounts, retaining existing hospital customers,growing sales, increasing gross profits and conserving cash. We are investingin research and development efforts to develop next generation versions of theAEM product line. We are also investing in manufacturing property and equipmentto manufacture disposable scissors inserts internally and reduce our cost ofsales. We cannot predict with certainty the expected sales, gross profit, netincome or loss and usage of cash and cash equivalents for fiscal year 2008.However, we believe that our cash resources and credit facility will besufficient to fund our operations for at least the next twelve months. If weare unable to manage our business operations in line with budget expectations,it could have a material adverse effect on our business viability, financialposition, results of operations and cash flows. If we are not successful inachieving profitability and positive cash flow, additional capital may berequired to maintain ongoing operations.

 

**Income Taxes**

 

As of March 31, 2007, net operating losscarryforwards totaling approximately $16,400,000 are available to reducetaxable income in the future. The net operating loss carryforwards expire, ifnot previously utilized, at various dates beginning in the fiscal year endedMarch 31, 2008. We have not paid income taxes since our inception. The TaxReform Act of 1986 and other income tax regulations contain provisions whichmay limit the net operating loss carryforwards available to be used in anygiven year if certain events occur, including changes in ownership interests.We have established a valuation allowance for the entire amount of our deferredtax asset 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**

 

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

 

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

 

 

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We provide for theestimated cost of product warranties at the time sales is recognized. While weengage in extensive product quality programs and processes, including activelymonitoring and evaluating the quality of our component suppliers, we haveexperienced some costs related to warranty. The warranty accrual is based uponhistorical experience and is adjusted based on current experience. Shouldactual warranty experience differ from our estimates, revisions to theestimated warranty liability would be required.

 

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

 

We recognize deferred income tax assets andliabilities for the expected future income tax consequences, based on enactedtax laws, of temporary differences between the financial reporting and taxbases of assets and liabilities. Deferred tax assets are then reduced, ifdeemed necessary, by a valuation allowance for the amount of any tax benefitswhich, more likely than not based on current circumstances, are not expected tobe realized. Should we achieve sufficient, sustained income in the future, wemay conclude that all or some of the valuation allowance should be reversed.

 

Property and equipment are stated at cost,with depreciation computed over the estimated useful lives of the assets,generally three to seven years. Prior to fiscal year 2008, we utilized thedouble-declining method of depreciation for property and equipment due to theexpected usage of the property and equipment over time. This method is expectedto continue throughout the life of the equipment. Manufacturing and productionequipment acquired, but not depreciated, in fiscal year 2007 and manufacturingand production equipment acquired after fiscal 2007 is a different technologyand we will utilize the straight-line method of depreciation for this and otherproperty and equipment starting April 1, 2007. This difference in depreciationmethods utilized for manufacturing and production equipment is based on thetechnological differences of the equipment and does not constitute a change inaccounting principle. Maintenance and repairs are expensed as incurred andmajor additions, replacements and improvements are capitalized.

 

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

 

We currently estimateforfeitures for stock-based compensation expense related to employee stockoptions at 7% and evaluate the forfeiture rate quarterly.

 

**RecentDevelopments**

 

On July 16, 2007, wereceived a letter from AMEX stating that we were not in compliance with Section1003(a)(ii) of the Amex Company Guide due to stockholders’ equity of less than$4,000,000 and losses from continuing operations and/or net losses in three outof four of its most recent fiscal years. On August 15, 2007, we provided AMEXwith information regarding our plan of compliance and financial projections.Based on a review of this information and conversations between AMEX Staff andour representatives, AMEX agreed to extend the period by which we must regaincompliance with its listing standards to January 16, 2009. We will be subjectto periodic review by the AMEX Staff regarding our compliance plan during theextension period. Failure to make progress consistent with the plan couldresult in commencement of immediate delisting proceedings by AMEX.

 

At the Annual Meeting ofShareholders on August 2, 2007, the shareholders approved the Encision Inc.2007 Stock Option Plan (the “2007 Plan”). On April 12, 2007, the board ofdirectors approved the 2007 Plan, subject to shareholder approval. The numberof common shares reserved for issuance under the 2007 Plan is 700,000, subjectto adjustment for dividend, stock split or other relevant changes in ourcapitalization.

 

On October 24, 2007, theboard of directors approved and adopted amended bylaws of the Company. Theprincipal amendments include: increasing the required minimum number of directorsof the Company from three directors to five directors; (ii) permittingelectronic notices to the directors regarding special meetings; and (iii)eliminating the requirement that the officers of the Company include one ormore Vice-Presidents.

 

**Risk Factors**

 

We wish to caution you thatthere are risks and uncertainties that could cause our actual results to bematerially different from those indicated by forward looking statements that wemake from time to time in filings with the Securities and Exchange Commission,news releases, reports, proxy statements, registration statements and otherwritten communications, as well as oral forward looking statements made fromtime to time by our representatives. These risks and uncertainties include, butare not limited to, those listed in our Annual Report on Form 10-KSB for theyear ended March 31, 2007. These risks and uncertainties and additional risksand uncertainties not presently known to us or that we currently deemimmaterial may cause our business, financial condition, operating results andcash flows to be materially adversely affected. Except for the historicalinformation contained herein, the matters discussed in this analysis areforward looking statements that involve risks and uncertainties, including butnot limited to general business conditions and other factors which are oftenbeyond our control. We do not undertake any obligation to update forwardlooking statements except as required by law.

 

 

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**ITEM 3  ****-****   CONTROLS AND PROCEDURES**

 

(a) We have carried out an evaluation underthe supervision and with the participation of our management, including ourChief Executive Officer and Principal Accounting and Financial Officer, of theeffectiveness of our disclosure controls and procedures (as defined in Rules13a-15(e) and 15d-15e of the Securities and Exchange Act of 1934 (the “ExchangeAct”)). Based upon that evaluation, the Chief Executive Officer and thePrincipal Accounting and Financial Officer concluded that, as of September 30,2007, our disclosure controls and procedures were effective in ensuring thatinformation required to be disclosed by us under the Exchange Act was recorded,processed, summarized and reported within the time periods specified under theExchange Act rules and forms.

 

(b) During the quarter ended September 30,2007, there were no changes in our internal control over financial reporting orin other factors that have materially affected, or are reasonably likely tomaterially affect, our internal control over financial reporting, nor werethere any significant deficiencies or material weaknesses in such disclosurecontrols and procedures or internal control over financial reporting requiringcorrective actions. As a result, no corrective actions were taken.

 

 

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

 

 

**ITEM 4**                   Submissionof Matters to a Vote of Security Holders

 

                                At our AnnualMeeting of shareholders on August 2, 2007 the following actions were taken:

 

| (i)  The  following persons were elected director of Encision Inc. for terms expiring  in 2008:                                  |       |
|---------------------------------------------------------------------------------------------------------------------------------------|------------|
|                                                                                                                                  |       |   |   |   |   |
| ** **                                                                                                                            | ** ** | **Votes  For** | ** ** | **Votes  Withheld** | ** ** |
| Bruce L. Arfmann                                                                                                                      |       | 5,782,756 |   | 242,392 |   |
| Robert H. Fries                                                                                                                       |       | 5,607,020 |   | 418,128 |   |
| Vern D.  Kornelsen                                                                                                                    |       | 5,607,080 |   | 418,068 |   |
| David W. Newton                                                                                                                       |       | 5,682,780 |   | 342,368 |   |
| Roger C. Odell                                                                                                                        |       | 5,682,938 |   | 342,210 |   |
| John R. Serino                                                                                                                        |       | 5,608,029 |   | 417,119 |   |
| George A.  Stewart                                                                                                                    |       | 5,782,469 |   | 242,679 |   |
|                                                                                                                                  |       |   |   |   |   |
| (ii)  Approval  of the 2007 Stock Option Plan:                                                                                   |       |
|                                                                                                                                  |       |   |   |   |   |
| Votes for                                                                                                                             |       | 4,010,033 |   |   |   |
| Votes against                                                                                                                         |       | 218,276 |   |   |   |
| Abstentions                                                                                                                           |       | 98,284 |   |   |   |
| Non-votes                                                                                                                             |       | 1,698,555 |   |   |   |
|                                                                                                                                  |       |   |   |   |   |
| (iii)  Ratification  of appointment of Gordon, Hughes & Banks, LLP to serve as Company’s  Independent Auditors in 2008: |       |
|                                                                                                                                  |       |   |   |   |   |
| Votes for                                                                                                                             |       | 5,848,734 |   |   |   |
| Votes against                                                                                                                         |       | 161,900 |   |   |   |
| Abstentions                                                                                                                           |       | 14,514 |   |   |   |

 

 

**ITEM****6**                   EXHIBITS

 

The following exhibits are attached to this report on Form 10-QSB or areincorporated by reference:

 

3.1              Articles of Incorporation ofthe Company, as amended (incorporated by reference from Registration Statement#333-4118-D dated June 25, 1996).

3.2              Bylaws of the Company(incorporated by reference from Current Report on Form 8-K dated October 30,2007).

4.1              Form of certificate forshares of Common Stock (incorporated by reference from Registration Statement#333-4118-D dated June 25, 1996).

10.1        Encision Inc. 2007 StockOption Plan (incorporated by reference from Proxy Statement dated June 29,2007).

31.1        Certification of ChiefExecutive Officer under Rule 13a-14(a).

31.2        Certification of PrincipalFinancial and Accounting Officer under Rule 13a-14(a).

32.1        Certification of PeriodicReports pursuant to Sarbanes-Oxley Act of 2002.

 

 

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**SIGNATURE**

 

 

 

Inaccordance with the requirements of the Exchange Act, the registrant causedthis report to be signed on its behalf by the undersigned, thereunto dulyauthorized.

 

 
| Encision Inc.     |                                |
|-------------------|-------------------------------------|
|              |                                |
|              |                                |
|              |                                |
| November 13, 2007 |                                |    /s/ Marcia McHaffie |
| Date              | Marcia McHaffie                     |
|              | Controller                          |
|              | Principal Accounting  Officer & |
|              | Principal Financial Officer         |
|                   |                                     |  |

 

 

 

 

 

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