** **

**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**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 December 31, 2007**                                                                                                        |
|       |       |                                                                                                                                                              |
|       |       | **OR**                                                                                                                                                            |
|       |       |                                                                                                                                                              |
| o          | ** ** | **TRANSITION  REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF  1934**                                                                |
|       |       |                                                                                                                                                              |
| ** ** | ** ** | **For  the transition period from                        to** |

 

**Commission file number  0-28604**

 

**ENCISION INC.**

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

 

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

 

**6797 Winchester Circle**

**Boulder, Colorado  80301**

(Address of principalexecutive offices)

 

**(303) 444-2600**

(Issuer’s telephone number)

 

Checkwhether the issuer (1) filed all reports required to be filed by Section 13of 15(d) of the Exchange Act during the past 12 months (or for suchshorter period that the registrant was required to file such reports), and (2) hasbeen subject to such filing requirements for the past 90 days.

Yes   x       No   o

 

Indicateby checkmark whether the registrant is a shell company (as defined in Rule 12b-2of the Exchange Act).

Yes  o       No   x

 

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

 

| Common Stock, no par value |   | 6,447,100 Shares                       |
|----------------------------|--------|----------------------------------------|
| (Class)                    |   | (outstanding at January 31, 2008) |

 

TransitionalSmall Business Disclosure Format

Yes  o       No   x

 

 

 

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**ENCISIONINC.**

 

**FORM 10-QSB**

 

**For the Quarter Ended December 31, 2007**

 

**INDEX**

 
| ** **        | ** **    | ** ** | ** **                                                                                      | **Page**   |
|-------------------|---------------|------------|-------------------------------------------------------------------------------------------------|------------|
| ** **        | ** **    | ** ** | ** **                                                                                      | **Number** |
|              |          |       |                                                                                            |       |
| **PART I.**  |          |       | **UNAUDITEDFINANCIAL INFORMATION**                                                              |       |
|              |          |       |                                                                                            |       |
| ** **        | **ITEM1**     | -          | Condensed Interim  Financial Statements:                                                        |       |
|              |          | -          | Condensed Balance Sheets as of  December 31, 2007 and March 31, 2007                  | 3          |
|              |          | -          | Condensed  Statements of Operations for  the Three Months Ended December 31, 2007 and 2006 | 4          |
|              |          | -          | Condensed  Statements of Operations for  the Nine Months Ended December 31, 2007 and 2006  | 5          |
|              |          | -          | Condensed Statements of Cash Flows for  the Nine Months Ended December 31, 2007 and 2006   | 6          |
|              |          | -          | Notes to Condensed  Interim Financial Statements                                                | 7          |
|              |          |       |                                                                                            |       |
| ** **        | **ITEM 2**    | -          | Management’s Discussion and Analysis  of Financial Condition and Results of Operations     | 11         |
| ** **        | ** **    |       |                                                                                            |       |
| ** **        | **ITEM 3**    | -          | Controls and  Procedures                                                                        | 16         |
|              |          |       |                                                                                            |       |
| **PART II.** |          |       | **OTHER INFORMATION**                                                                           |       |
|              |          |       |                                                                                            |       |
| ** **        | **ITEM 6**    | -          | Exhibits                                                                                        | 17         |
|              |          |       |                                                                                            |       |
| ** **        | **SIGNATURE** | 18         |

 

 

2

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

 

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

 

**Encision Inc.**

**Condensed Balance Sheets**

 
| ** **                                                                                                                                                                                                         | ** ** | **December 31,  2007  (unaudited)** | ** ** | **March 31,  2007  (audited)** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------------------|------------|-------------------------------------|------------|
| **ASSETS**                                                                                                                                                                                                         | ** ** | ** **                               | ** ** | ** **                          | ** ** |
| Current assets:                                                                                                                                                                                                    |       |                                     |       |                                |       |
| Cash and cash  equivalents                                                                                                                                                                                         |       | $                                        | 98,908     |                                | $          | 436,403 |   |
| Accounts  receivable, net of allowance for doubtful accounts of $18,500 at  December 31, 2007 and $23,500 at March 31, 2007                                                                              |       | 1,247,803                                |       | 1,194,373                           |       |
| Inventories, net  of reserve for obsolescence of $65,000 at December 31, 2007 and $80,000  at March 31, 2007                                                                                             |       | 2,091,735                                |       | 1,764,227                           |       |
| Prepaid expenses                                                                                                                                                                                                   |       | 104,525                                  |       | 241,872                             |       |
| Total current  assets                                                                                                                                                                                              |       | 3,542,971                                |       | 3,636,875                           |       |
| Equipment, at cost:                                                                                                                                                                                                |       |                                     |       |                                |       |
| Furniture,  fixtures and equipment                                                                                                                                                                                 |       | 1,725,460                                |       | 1,084,260                           |       |
| Customer-site  equipment                                                                                                                                                                                           |       | 639,950                                  |       | 612,553                             |       |
| Equipment-in-progress                                                                                                                                                                                              |       | 28,790                                   |       | 233,357                             |       |
| Accumulated  depreciation                                                                                                                                                                                          |       | (1,555,982                               | )          | (1,413,656                          | )          |
| Equipment, net                                                                                                                                                                                                     |       | 838,218                                  |       | 516,514                             |       |
| Patents, net of  accumulated amortization of $113,613 at December 31, 2007 and $104,496  at March 31, 2007                                                                                               |       | 185,573                                  |       | 153,066                             |       |
| Other assets                                                                                                                                                                                                       |       | 60,310                                   |       | 81,195                              |       |
| **TOTAL  ASSETS**                                                                                                                                                                                                  |       | $                                        | 4,627,072  |                                | $          | 4,387,650 |   |
| **LIABILITIES AND SHAREHOLDERS’ EQUITY**                                                                                                                                                                      | ** ** | ** **                               | ** ** | ** **                          | ** ** |
| Current liabilities:                                                                                                                                                                                               |       |                                     |       |                                |       |
| Accounts payable                                                                                                                                                                                                   |       | $                                        | 694,482    |                                | $          | 620,814 |   |
| Accrued  compensation                                                                                                                                                                                              |       | 210,003                                  |       | 295,994                             |       |
| Line of credit                                                                                                                                                                                                     |       | 280,000                                  |       | —                              |       |
| Other accrued  liabilities                                                                                                                                                                                         |       | 590,282                                  |       | 547,345                             |       |
| Total current  liabilities                                                                                                                                                                                         |       | 1,774,767                                |       | 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 December 31,  2007 and March 31, 2007, respectively |       | 19,360,079                               |       | 19,202,785                          |       |
| Accumulated  (deficit)                                                                                                                                                                                             |       | (16,507,774                              | )          | (16,279,288                         | )          |
| Total  shareholders’ equity                                                                                                                                                                                   |       | 2,852,305                                |       | 2,923,497                           |       |
| **TOTAL  LIABILITIES AND SHAREHOLDERS’ EQUITY**                                                                                                                                                               |       | $                                        | 4,627,072  |                                | $          | 4,387,650 |   |

 

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

 

 

3

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**Encision Inc.**

**Condensed Statements ofOperations**

**(Unaudited)**

 
| **Three Months Ended**                              | ** ** | **December 31,  2007** | ** ** | **December 31,  2006** | ** ** |
|-----------------------------------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| **NET SALES**                                       |       | $                           | 3,130,752  |                        | $          | 2,787,147 |   |
| **COST OF SALES**                                   |       | 1,103,185                   |       | 1,054,308                   |       |
| **GROSS PROFIT**                                    |       | 2,027,567                   |       | 1,732,839                   |       |
| **OPERATING EXPENSES:**                             | ** ** | ** **                  | ** ** | ** **                  | ** ** |
| Sales and  marketing                                |       | 1,304,732                   |       | 1,105,251                   |       |
| General and  administrative                         |       | 330,777                     |       | 378,359                     |       |
| Research and  development                           |       | 325,028                     |       | 310,083                     |       |
| Total operating  expenses                           |       | 1,960,537                   |       | 1,793,693                   |       |
| **OPERATING INCOME (LOSS)**                         |       | 67,030                      |       | (60,854                     | )          |
| Interest income  (expense), net                     |       | (8,293                      | )          | 12,407                      |       |
| Other income  (expense), net                        |       | 299                         |       | (611                        | )          |
| Interest and  other income (expense), net           |       | (7,994                      | )          | 11,796                      |       |
| **INCOME (LOSS) BEFORE PROVISION FOR INCOME TAXES** |       | 59,036                      |       | (49,058                     | )          |
| Provision for income taxes                          |       | —                      |       | —                      |       |
| **NET INCOME (LOSS)**                               |       | $                           | 59,036     |                        | $          | (49,058 | ) |
| Net income (loss) per share—basic and diluted  |       | $                           | 0.01       |                        | $          | (0.01 | ) |
| Weighted average shares—basic                  |       | 6,447,100                   |       | 6,430,437                   |       |
| Weighted average shares—diluted                |       | 6,450,709                   |       | 6,430,437                   |       |

 

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

 

 

4

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**Encision Inc.**

**Condensed Statements of Operations**

**(Unaudited)**

 
| **Nine Months Ended**                               | ** ** | **December 31,  2007** | ** ** | **December 31,  2006** | ** ** |
|-----------------------------------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| **NET SALES**                                       |       | $                           | 8,882,413  |                        | $          | 8,192,800 |   |
| **COST OF SALES**                                   |       | 3,300,591                   |       | 3,055,411                   |       |
| **GROSS PROFIT**                                    |       | 5,581,822                   |       | 5,137,389                   |       |
| **OPERATING EXPENSES:**                             | ** ** | ** **                  | ** ** | ** **                  | ** ** |
| Sales and  marketing                                |       | 3,755,460                   |       | 3,248,336                   |       |
| General and  administrative                         |       | 1,053,022                   |       | 1,056,473                   |       |
| Research and  development                           |       | 988,659                     |       | 784,313                     |       |
| Total operating  expenses                           |       | 5,797,141                   |       | 5,089,122                   |       |
| **OPERATING INCOME (LOSS)**                         |       | (215,319                    | )          | 48,267                      |       |
| Interest income  (expense), net                     |       | (23,292                     | )          | 31,729                      |       |
| Other income  (expense), net                        |       | 10,125                      |       | 6,696                       |       |
| Interest and  other income (expense), net           |       | (13,167                     | )          | 38,425                      |       |
| **INCOME (LOSS) BEFORE PROVISION FOR INCOME TAXES** |       | (228,486                    | )          | 86,692                      |       |
| Provision for income taxes                          |       | —                      |       | —                      |       |
| **NET INCOME (LOSS)**                               |       | $                           | (228,486   | )                           | $          | 86,692 |   |
| Net income (loss) per share—basic and diluted  |       | $                           | (0.04      | )                           | $          | 0.01 |   |
| Weighted average shares—basic                  |       | 6,439,527                   |       | 6,420,280                   |       |
| Weighted average shares—diluted                |       | 6,439,527                   |       | 6,434,704                   |       |

 

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

 

5

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**Encision Inc.**

**Condensed Statements ofCash Flows**

**(Unaudited)**

 
| **Nine months ended**                                                                 | ** ** | **December 31,  2007** | ** ** | **December 31,  2006** | ** ** |
|---------------------------------------------------------------------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| Cash flows from operating activities:                                                 | ** ** | ** **                  | ** ** | ** **                  | ** ** |
| Net income  (loss)                                                                    |       | $                           | (228,486   | )                           | $          | 86,692 |   |
| Adjustments to  reconcile net income (loss) to net cash used in operating activities: |       |                        |       |                        |       |
| Depreciation and  amortization                                                        |       | 151,443                     |       | 147,147                     |       |
| Stock-based  compensation expense related to stock options                            |       | 111,554                     |       | 138,539                     |       |
| Stock-based  interest expense related to warrants                                     |       | 9,381                       |       | 1,268                       |       |
| Provision for  doubtful accounts, net                                                 |       | (5,000                      | )          | (14,500                     | )          |
| Provision for  inventory obsolescence                                                 |       | (15,000                     | )          | 12,000                      |       |
| Change in  operating assets and liabilities:                                          |       |                        |       |                        |       |
| Accounts  receivable                                                                  |       | (48,430                     | )          | (154,086                    | )          |
| Inventories                                                                           |       | (312,508                    | )          | (133,438                    | )          |
| Prepaid expenses  and other assets                                                    |       | 148,850                     |       | (124,456                    | )          |
| Accounts payable                                                                      |       | 73,668                      |       | 383,303                     |       |
| Accrued  compensation and other accrued liabilities                                   |       | (43,054                     | )          | (20,537                     | )          |
| Net cash  provided by (used in) operating activities                                  |       | (157,582                    | )          | 321,932                     |       |
| Cash flows from investing activities:                                                 |       |                        |       |                        |       |
| Acquisition of  property and equipment                                                |       | (464,030                    | )          | (124,567                    | )          |
| Patent costs                                                                          |       | (41,623                     | )          | (10,880                     | )          |
| Net cash used in  investing activities                                                |       | (505,653                    | )          | (135,447                    | )          |
| 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                                  |       | (337,495                    | )          | 248,433                     |       |
| Cash and cash equivalents, beginning of period                                        |       | 436,403                     |       | 901,541                     |       |
| Cash and cash equivalents, end of period                                              |       | $                           | 98,908     |                        | $          | 1,149,974 |   |

 

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

 

 

6

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ENCISION INC.

 

NOTESTO CONDENSED INTERIM FINANCIAL STATEMENTS

 

DECEMBER 31, 2007

(Unaudited)

 

(1)                      ORGANIZATION AND NATURE OF BUSINESS

 

EncisionInc. is a medical device company that designs, develops, manufactures andmarkets patented surgical instruments that provide greater safety to patientsundergoing minimally-invasive surgery. We believe that our patented AEM®surgical instrument technology is changing the marketplace for electrosurgicaldevices and instruments by providing a solution to a patient safety risk inlaparoscopic surgery. Our sales to date have been made principally in theUnited States.

 

Weachieved profitable operations in fiscal years 2004 and 2003. However, in eachfiscal year prior to 2003 and in fiscal years 2005, 2006 and 2007, we incurredlosses and had an accumulated deficit of $16,507,774 at December 31, 2007.Operations have been financed primarily through the issuance of our commonstock.

 

Ourstrategic marketing and sales plan is designed to expand the use of ourproducts in surgically active hospitals in the United States. We expect theseefforts to result in continued sales increases for fiscal year 2008.

 

(2)                      SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

                                    Basis of Presentation

 

Thecondensed interim financial statements included herein have been prepared byus, without audit, pursuant to the rules and regulations of the Securitiesand Exchange Commission. Certain information and footnote disclosures normallyincluded in financial statements prepared in accordance with generally acceptedaccounting principles 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.

 

Theaccompanying condensed interim financial statements have been prepared, in allmaterial respects, in conformity with the standards of accounting measurementsset forth in Accounting Principles Board Opinion 28 and reflect, in the opinionof management, all adjustments necessary to summarize fairly the financialposition and results of operations for such periods in accordance withaccounting principles generally accepted in the United States.  All adjustments are of a normal recurringnature. The results of operations for the most recent interim period are notnecessarily indicative of the results to be expected for the full year.

 

                                    Use of Estimates in thePreparation of Financial Statements

 

Thepreparation of financial statements in conformity with accounting principlesgenerally accepted in the United States requires us to make estimates andassumptions. Such estimates and assumptions affect the reported amounts ofassets and liabilities as well as disclosure of contingent assets andliabilities at the date of the financial statements and the reported amounts ofsales and expense during the reporting period. Actual results could differ fromthose estimates.

 

                                    Sales Recognition

 

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

 

                                    Concentration of Credit Risk

 

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

 

Accountsreceivable are typically unsecured and are derived from transactions with andfrom entities in the healthcare industry primarily located in the UnitedStates. Accordingly, we may be exposed to credit risk generally associated withthe healthcare industry. We maintain allowances for doubtful accounts and forestimated losses resulting from the inability of our customers to make required payments.

 

Thenet accounts receivable balance at December 31, 2007 of $1,247,803included no more than 6% from any one customer. The net accounts receivablebalance at March 31, 2007 of $1,194,373 included no more than 3% from anyone customer.

 

 

7

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                                    Inventories

 

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

 

| ** **                      | ** ** | **December 31,** | ** ** | **March 31,** | ** ** |
|---------------------------------|------------|-----------------------|------------|--------------------|------------|
| ** **                      | ** ** | **2007**              | ** ** | **2007**           | ** ** |
|                            |       |                  |       |               |       |
| Raw materials                   |       | $                     | 1,095,715  |               | $          | 1,166,607 |   |
| Finished goods                  |       | 1,061,020             |       | 677,620            |       |
|                            |       | 2,156,735             |       | 1,844,227          |       |
| Less - Reserve for obsolescence |       | (65,000               | )          | (80,000            | )          |
|                            |       | $                     | 2,091,735  |               | $          | 1,764,227 |   |

 

                                Accrued Liabilities

 

Wehave accrued $75,000 related to warranty claims, $107,828 related to salescommissions and $68,852 related to rent normalization and have included theseamounts in accrued liabilities in the accompanying condensed balance sheet asof December 31, 2007. We have accrued $100,000 related to warranty claims,$136,128 related to sales commissions and $96,822 related to rent normalizationand have included these amounts in accrued liabilities in the accompanyingcondensed balance sheet as of March 31, 2007.

 

                                    Property and Equipment

 

Propertyand equipment are stated at cost, with depreciation computed over the estimateduseful lives of the assets, generally three to seven years. Prior to fiscalyear 2008, we utilized the double-declining method of depreciation for propertyand equipment due to the expected usage of the property and equipment overtime. We expect to continue using this method throughout the life of suchequipment. Manufacturing and production equipment acquired, but notdepreciated, in fiscal year 2007 and manufacturing and production equipmentacquired after fiscal year 2007 are technologically different, and, as aresult, since April 1, 2007 we have utilized, and will continue to utilizethe straight-line method of depreciation for this and other property andequipment. This difference in depreciation methods utilized for manufacturingand production equipment is based on the technological differences of theequipment and does not constitute a change in accounting principles.

 

                                    Income Taxes

 

Theprovision for income taxes is based on our estimated annualized effective taxrate for the year. Effective April 1, 2007, we adopted the provisions ofFASB Interpretation No. 48 (“FIN 48”), “Accounting for Uncertainty inIncome Taxes — An Interpretation of FASB Statement No. 109.” FIN 48provides detailed guidance for the financial statement recognition, measurementand disclosure of uncertain tax positions recognized in the financialstatements in accordance with SFAS No. 109. Tax positions must meet a “more-likely-than-not”recognition threshold at the effective date to be recognized upon the adoptionof FIN 48 and in subsequent periods. Upon the adoption of FIN 48, we had no unrecognizedtax benefits. During the third quarter of 2007, we recognized no adjustmentsfor uncertain tax benefits.

 

Deferredincome tax assets are adjusted by a valuation allowance, if necessary, torecognize future tax benefits only to the extent, based on available evidence,it is more likely than not such benefits will be realized. We recognizeinterest and penalties, if any, related to uncertain tax positions in generaland administrative expenses. No interest or penalties related to uncertain taxpositions were accrued at December 31, 2007. We expect no material changesto unrecognized tax positions within the next twelve months.

 

                                    Research and DevelopmentExpenses

 

Weexpense research and development costs for products and processes as incurred.

 

                                    Stock-Based Compensation Expense

 

OnApril 1, 2006, we adopted Statement of Financial Accounting Standards 123(revised 2004), “Share-Based Payment” (“SFAS 123(R)”), which requires themeasurement and recognition of compensation expense for all share-based paymentawards made to employees and directors, including employee stock options basedon estimated fair values. SFAS 123(R) supersedes our previous accountingunder Accounting Principles Board Opinion 25, “Accounting for Stock Issued toEmployees” (“APB 25”) for periods beginning in fiscal year 2007. In March 2005,the Securities and Exchange Commission issued Staff Accounting Bulletin 107 (“SAB107”) relating to SFAS 123(R). We have applied the provisions of SAB 107 in ouradoption of SFAS 123(R).

 

Wehave adopted SFAS 123(R) using the modified prospective transition method,which requires the application of the accounting standard as of April 1,2006, the first day of our fiscal year 2007. Our financial statements as of andfor the three and nine months ended December 31, 2007 and December 31,2006 reflect the impact of SFAS 123(R). In accordance with the modifiedprospective transition method, our financial statements for prior periods havenot been restated to reflect, and do not include, the impact of SFAS 123(R).Stock-based compensation expense recognized under SFAS 123(R) for thethree and nine months ended December 31, 2007 was $36,340 and $111,554,respectively, which consisted of stock-based compensation expense related toemployee stock options. Stock-based compensation expense related to employeestock options during the three and nine months ended December 31, 2006 was$43,885 and $138,539, respectively.

 

SFAS123(R) requires companies to estimate the fair value of share-basedpayment awards on the date of grant using an option-pricing model. The value ofthe portion of the award that is ultimately expected to vest is recognized asexpense over the requisite service periods in our Statement of 

 

 

8

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Operations.Prior to the adoption of SFAS 123(R), we accounted for stock-based awards toemployees and directors using the intrinsic value method in accordance with APB25, as allowed under Statement of Financial Accounting Standards 123, “Accountingfor Stock-Based Compensation” (“SFAS 123”). Under the intrinsic value method wedid not recognize stock-based compensation expense in our Statements ofOperations because the exercise price of our stock options granted to employeesand directors equaled the fair market value of the underlying stock at the dateof grant.

 

Stock-basedcompensation expense recognized during the period is based on the value of theportion of share-based payment awards that is ultimately expected to vestduring the period. The stock-based compensation expense recognized in ourStatement of Operations for the third quarter of fiscal year 2008 includedcompensation expense for share-based payment awards granted prior to, but notyet vested as of December 31, 2007, based on the grant date fair valueestimated in accordance with the pro forma provisions of SFAS 123 and thecompensation expense for the share-based payment awards granted subsequent to July 30,2005, which are also based on the grant date fair value estimated in accordancewith the provisions of SFAS 123(R). Compensation expense for all share-basedpayment is recognized using the straight-line, single-option method. Asstock-based compensation expense recognized in the Statements of Operations forthe third quarter of fiscal year 2008 is based on awards ultimately expected tovest, it has been reduced for estimated forfeitures. SFAS 123(R) requiresforfeitures to be estimated at the time of grant and revised, if necessary, insubsequent periods if actual forfeitures differ from those estimates. In ourpro forma information required under SFAS 123 for the periods prior to fiscalyear 2007, we accounted for forfeitures as they occurred.

 

Uponadoption of SFAS 123(R), we continued to use the Black-Scholes option-pricingmodel (“Black-Scholes model”) which we previously used for our pro formainformation required under SFAS 123. Our determination of fair value ofshare-based payment awards on the date of grant using an option-pricing modelis affected by our stock price as well as assumptions regarding a number ofhighly complex and subjective variables. These variables include, but are notlimited to, our expected stock price volatility over the term of the awards andactual and projected employee stock option exercise behaviors. Although thefair value of employee stock options is determined in accordance with SFAS 123(R) andSAB 107 using an option-pricing model, that value may not be indicative of thefair value observed in a willing buyer/willing seller market transaction.

 

OnNovember 10, 2005, the Financial Accounting Standards Board (“FASB”)issued FASB Staff Position FAS 123(R)-3 “Transition Election Related toAccounting for Tax Effects of Share-Based Payment Awards.” We have elected toadopt the alternative transition method provided in the FASB Staff Position forcalculating the tax effects of stock-based compensation pursuant to SFAS123(R). The alternative transition method includes simplified methods toestablish the beginning balance of the additional paid-in capital pool (“APICpool”) related to the tax effects of employee stock-based compensation and todetermine the subsequent impact on the APIC pool and Statements of Cash Flowsof the tax effects of employee stock-based compensation awards that areoutstanding upon adoption of SFAS 123(R).

 

                                    Segment Reporting

 

Wehave concluded that we have one operating segment.

 

                                    Basic and Diluted Income andLoss per Common Share

 

Netincome or loss per share is calculated in accordance with SFAS 128, “EarningsPer Share” (“SFAS 128”). Under the provisions of SFAS 128, basic net income orloss per common share is computed by dividing net income or loss for the periodby the weighted average number of common shares outstanding for the period.Diluted net income or loss per common share is computed by dividing the netincome or loss for the period by the weighted average number of common andpotential common shares outstanding during the period, if the effect of thepotential common shares is dilutive.

 

Forthe three and nine month periods ended December 31, 2007, we hadcurrently-exercisable stock options outstanding that could create futuredilution to our common shareholders but are not currently classified asoutstanding common shares. Our common stock number is based on specific conversionor issuance assumptions pursuant to the corresponding terms of each instrument.

 

Thefollowing table presents the calculation of basic and diluted net income orloss per share:

 
| ** **                                 | ** ** | **Three Months Ended**      | ** ** | **Nine Month Ended**        | ** ** |
|--------------------------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| ** **                                 | ** ** | **December 31,  2007** | ** ** | **December 31,  2006** | ** ** | **December 31,  2007** | ** ** | **December 31,  2006** | ** ** |
| Net income (loss)                          |       | $                           | 59,036     |                        | $          | (49,058 | ) | $ | (228,486 | ) | $ | 86,692 |   |
| Weighted-average shares — basic       |       | 6,447,100                   |       | 6,430,437                   |       | 6,439,527 |   | 6,420,280 |   |
| Effect of dilutive potential common shares |       | 3,609                       |       | —                      |       | — |   | 14,424 |   |
| Weighted-average shares — diluted     |       | 6,450,709                   |       | 6,430,437                   |       | 6,439,527 |   | 6,434,704 |   |
| Net income (loss) per share — basic   |       | $                           | 0.01       |                        | $          | (0.01 | ) | $ | (0.04 | ) | $ | 0.01 |   |
| Net income (loss) per share — diluted |       | $                           | 0.01       |                        | $          | (0.01 | ) | $ | (0.04 | ) | $ | 0.01 |   |
| Antidilutive employee stock options        |       | 381,391                     |       | 440,000                     |       | 385,000 |   | 425,576 |   |

 

(3)                      COMMITMENTS ANDCONTINGENCIES

 

Wecurrently lease our facilities located at 6797 Winchester Circle, Boulder,Colorado under noncancelable lease agreements through August 14, 2009. Theminimum future lease payments as of December 31, 2007, by fiscal year, areas follows:

 

| **Fiscal Year**               | ** ** | **Amount** | ** ** |
|-------------------------------|------------|------------|------------|
| 2008 (remaining three months) |       | $          | 60,343     |   |
| 2009                          |       | 249,691    |       |
| 2010                          |       | 94,804     |       |
|                          |       | $          | 404,838    |   |

 

9

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Our minimum future equipment lease payments withGeneral Electric Capital Corporation as of December 31, 2007, by fiscalyear, are as follows:

 

| **Fiscal Year**               | ** ** | **Amount** | ** ** |
|-------------------------------|------------|------------|------------|
| 2008 (remaining three months) |       | $          | 25,469     |   |
| 2009                          |       | 101,873    |       |
| 2010                          |       | 101,873    |       |
| 2011                          |       | 101,873    |       |
| 2012                          |       | 101,873    |       |
| 2013                          |       | 101,873    |       |
| 2014                          |       | 8,488      |       |
|                          |       | $          | 543,322    |   |

 

Weare subject to regulation by the United States Food and Drug Administration (“FDA”).The FDA provides regulations governing the manufacture and sale of our productsand regularly inspects us and other manufacturers to determine compliance withthese regulations. We believe that we were in substantial compliance with allknown regulations as of December 31, 2007. FDA inspections are conductedperiodically at the discretion of the FDA. Our latest inspection by the FDA occurredin May 2004.

 

Theresults of operations for the three and nine months ended December 31,2007 should not be taken as an indication of the results of operations for allor any part of the balance of the year.

 

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

 

OnApril 1, 2006, we adopted SFAS 123(R), which requires the measurement andrecognition of compensation expense for all share-based payment awards made toour employees and directors including employee stock options based on estimatedfair values. The following table summarizes stock-based compensation expenserelated to employee stock options and employee stock purchases under SFAS 123(R) forthe three and nine months ended December 31, 2007, which was allocated asfollows:

 
| ** **                                                       | ** ** | **Three Months Ended  December 31, 2007** | ** ** | **Three Months Ended  December 31, 2006** | ** ** | **Nine Months Ended  December 31, 2007** | ** ** | **Nine Months Ended  December 31, 2006** | ** ** |
|------------------------------------------------------------------|------------|------------------------------------------------|------------|------------------------------------------------|------------|-----------------------------------------------|------------|-----------------------------------------------|------------|
| Sales and marketing                                              |       | $                                              | 7,051      |                                           | $          | 10,590                                        |       | $                                             | 24,046     |   | $ | 31,768 |   |
| General and administrative                                       |       | 24,806                                         |       | 28,240                                         |       | 74,418                                        |       | 84,718                                        |       |
| Research and development                                         |       | 4,483                                          |       | 5,055                                          |       | 13,090                                        |       | 22,053                                        |       |
| Stock-based  compensation expense included in operating expenses |       | $                                              | 36,340     |                                           | $          | 43,885                                        |       | $                                             | 111,554    |   | $ | 138,539 |   |

 

The Black-Scholes model requires the use of actual employee exercisebehavior data and the application of a number of assumptions, includingexpected volatility, risk-free interest rate and expected dividends. Employeestock options for 5,000 shares of stock were granted during the three and ninemonths ended December 31, 2007.

 

Asof December 31, 2007, $286,000 of total unrecognized compensation costsrelated to nonvested stock is expected to be recognized over a weighted-averageperiod of three years.

 

 

10

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

 

Certain statements contained in this section on Management’s Discussionand Analysis are not historical facts, including statements about ourstrategies and expectations with respect to new and existing products, marketdemand, acceptance of new and existing products, marketing efforts,technologies and opportunities, market and industry segment growth, and returnon investments in products and markets. These statements are forward lookingstatements within the meaning of the Private Securities Litigation Reform Actof 1995 and involve substantial risks and uncertainties that may cause actualresults to differ materially from those indicated by the forward lookingstatements. All forward looking statements in this section on Management’sDiscussion and Analysis are based on information available to us on the date ofthis document, and we assume no obligation to update such forward lookingstatements. Readers of this Form 10-QSB are strongly encouraged to reviewthe section entitled *“Risk Factors”*inour Form 10-KSB for the year ended March 31, 2007.

 

**General**

 

EncisionInc., a medical device company based in Boulder, Colorado, has developed andlaunched innovative technology that is emerging as a standard of care inminimally-invasive surgery. We believe that our patented AEM®Surgical Instruments are changing the marketplace for electrosurgical devicesand laparoscopic instruments by providing a solution to a well documentedpatient safety risk in laparoscopic surgery.

 

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

 

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

 

AEMtechnology has been recommended and endorsed by sources from all groupsinvolved in minimally-invasive surgery. Surgeons, nurses, biomedical engineers,the medicolegal community, malpractice insurance carriers and electrosurgicaldevice manufacturers advocate the use of AEM technology. Recommendations fromthe malpractice insurance and medicolegal communities complement the broadclinical endorsements AEM technology has garnered over the past few years.

 

Addingfurther credibility to the benefits of our AEM technology are our supplieragreements with Novation and Premier, two of the largest Group PurchasingOrganizations (GPOs) in the United States. Together, Novation and Premierrepresent over 3,000 hospitals which perform over 50% of all surgery in theU.S. We believe that these GPO supplier agreements give further indication thatAEM technology is gaining broader acceptance in the market. We believe thathaving the nation’s leading medical purchasing groups recognize the value ofour technology reflects the potential impact that AEM products can have in themarket and in advancing patient safety in surgery nationwide. These agreementsdo not involve purchase commitments, but we expect these relationships toexpand the market visibility of AEM technology and to ease the procurementprocess for new hospital customers.

 

Wehave focused our marketing strategies to date on expanding the market awarenessof the AEM technology and our broad independent endorsements and have continuedefforts to improve and expand the AEM product line. Accordingly, we arecurrently focusing on modernizing our accepted AEM instruments to includeergonomics and user functionalities for which surgeons have been expressing apreference. During fiscal year 2006, we announced enTouchTM, an ergonomically-designed handle for our articulatinginstruments, and we plan to introduce new additions to the AEM product line infiscal year 2008.

 

Whena hospital changes to AEM technology, we receive recurring sales from sales ofreplacement instruments. We believe that there is no directly competingtechnology to supplant AEM products once a hospital switches to our products.The replacement market of reusable and disposable AEM products in hospitalsthat use our AEM technology represented over 90% of our sales over the pastthree months. This sales stream is expected to grow as the base of hospitalsthat switch to AEM technology continues to grow. In addition, we intend todevelop disposable versions of more of our AEM products in order to meet marketdemands and expand our sales opportunities.

 

Weachieved profitable operations in fiscal years 2004 and 2003. However, in eachfiscal year prior to 2003 and in fiscal years 2005, 2006 and 2007, we incurredlosses and had an accumulated deficit of $16,507,774 at December 31, 2007.Operations have been financed primarily through the issuance of our commonstock.

 

Duringthe nine months ended December 31, 2007, we used $157,582 of cash in ouroperations and used $464,030 for investments in equipment. As of December 31,2007, we had $98,908 in cash and cash equivalents available to fund futureoperations, a decrease of $337,495 from March 31, 2007. As of December 31,2007, we have borrowed $280,000 from our credit facility. Our working capitalwas $1,768,204 at December 31, 2007.

 

**Historical Perspective**

 

We were organized in 1991 and spent several yearsdeveloping the AEM monitoring system and protective sheaths to adapt toconventional electrosurgical instruments. During this period, we conducted producttrials and applied for patents with the United States Patent Office andinternational patent agencies. Patents were issued to us in 1994, 1996, 1997,1998 and 2002.

 

Aswe evolved, it became clear to us that our AEM technology needed to beintegrated into the standard laparoscopic instrument design. As the developmentprogram proceeded, it also became apparent that the merging of electrical andmechanical engineering skills in the instrument 

 

 

11

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developmentprocess for our patented, integrated electrosurgical instruments was a complexand difficult task. As a result, instruments with integrated AEM technologywere not completed for several years. Prior to offering a full range oflaparoscopic electrosurgical instrumentation, it was difficult for hospitals tocommit to the AEM solution, as we did not have adequate comparable surgicalinstrument options to match what surgeons demanded. As of fiscal year 2001, asufficiently broad product line was available to provide hospital operatingrooms with AEM instruments in most of the designs common for laparoscopicsurgery.

 

The launch of an expanded line of AEM instruments was accomplished overthe past 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**

 

*InstalledBase of AEM Monitoring Equipment*:  We believe that the installed base of AEM monitorshas the potential for increasing sales as the inherent risks associated withmonopolar laparoscopic electrosurgery become more widely acknowledged and as wefocus on increasing our sales efficiency. We expect that the replacement salesof electrosurgical instruments and accessories will increase as additionalhospitals adopt AEM technology. We anticipate that the efforts to improve thequality of sales representatives carrying the AEM product line, along withincreased marketing efforts and the introduction of next generation products,may provide the basis for increased sales and maintaining profitableoperations. However, these measures, or any others that we may adopt, may notresult in either increased sales or maintaining profitable operations.Furthermore, most of our next generation products are in the early stages ofdevelopment. Further additions to theAEM product line are planned for introduction in fiscal year 2008.

 

Webelieve that the unique performance of the AEM technology and our breadth ofindependent endorsements provide an opportunity for continued market sharegrowth. In our view, market awareness and awareness of the clinical credibilityof the AEM technology, as well as awareness of our endorsements, arecontinually improving, and we expect this awareness to benefit our salesefforts for the remainder of fiscal year 2008. Our objectives in the remainderof fiscal year 2008 is to maintain expense controls while optimizing salesexecution in the field, to expand market awareness of the AEM technology and tomaximize the number of additional hospital accounts switching to AEMinstruments while retaining existing hospital customers. In addition,acceptance of AEM products depends on surgeons’ preference for our instruments,which depends on factors such as ergonomics and ease of use in addition to thetechnological advantage of AEM products. If surgeons prefer other instrumentsto our instruments, our business results will suffer.

 

*Possibilityof Operating Losses*:  We achievedprofitable operations in fiscal years 2004 and 2003. However, in each fiscalyear prior to 2003 and in fiscal years 2005, 2006 and 2007, we incurred lossesand had an accumulated deficit of $16,507,774 at December 31, 2007. Wehave made strides toward improving our operating results. Due to the ongoingneed to develop, optimize and train the direct sales managers and theindependent sales representative network, the need to support the developmentof refinements to our product line, and the need to increase sustained sales toa level adequate to cover fixed and variable operating costs, we may operate ata net loss from time to time. Sustained losses, or our inability to generatesufficient cash flow from operations to fund our obligations, may result in aneed to raise additional capital.

 

*SalesGrowth*:  We expect to generate increasedsales in the U.S. from sales to new hospital customers and from expanded salesin existing hospitals as our network of direct and independent salesrepresentatives becomes more efficient. We believe that the visibility andcredibility of the independent clinical endorsements for AEM technology willcontribute to new hospital accounts and increase sales in fiscal year 2008. We also expect that supplier agreementswith Novation and Premier, which together represent over 3,000 U.S. hospitals,will expose more hospitals to the benefits of AEM technology and may stimulatenew hospital accounts. We also expect to increase market share throughpromotional programs of placing our AEM monitors at no charge into hospitalsthat commit to standardize AEM instruments. However, all of these efforts toincrease market share and grow sales will depend in part on our ability toexpand the efficiency and effective coverage range of our direct and independentsales representatives.

 

Wealso have longer term initiatives in place to improve our prospects.  We expect that development of next generationversions of our AEM products will better position our products in themarketplace and improve our retention rate at hospitals that have changed toAEM technology, enabling us to grow our sales. We may also explore overseas markets to assess opportunities for salesgrowth internationally. Finally, we intend to explore opportunities tocapitalize on our proven AEM technology via licensing arrangements andstrategic alliances. These efforts to generate additional sales and further themarket penetration of our products are longer term in nature and may notmaterialize. Even if we are able to successfully develop next generationproducts or identify potential international markets or strategic partners, wemay not be able to capitalize on these opportunities.

 

*GrossProfit and Gross Margins*:  Grossprofit and gross margins can be expected to fluctuate from quarter to quarteras a result of product sales mix and sales volume. Gross margins on productsmanufactured or assembled by us are expected to improve at higher levels ofproduction and sales.

 

*ManufacturingEquipment.*  We expect toincrease gross profit and gross margins from manufacturing our scissor insertsinternally. We began manufacturing our scissor inserts in the third quarter offiscal year 2008.

 

*Salesand Marketing Expenses*: We continue our efforts to expand domesticand international distribution capability, andwe believe that sales and marketing expenses will decrease as a percentage ofnet sales with increasing sales volume.

 

*Researchand Development Expenses*: Researchand development expenses are expected to increase modestly to supportdevelopment of refinements to our AEM product line, which will further expandthe instrument options for surgeons.

 

**Results of Operations**

 

*For thethree months ended December 31, 2007 compared to the three months ended December 31,2006.*

 

 

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*Net sales.* Net sales for the quarter ended December 31, 2007, was $3,130,752compared to $2,787,147 for the quarter ended December 31, 2006, anincrease of 12%. The increase is attributable to the addition of new hospitalaccounts, partially offset by business lost from hospitals that previouslychanged to AEM technology. We opened nine new hospital accounts for AEMtechnology in the three months ended December 31, 2007 versus nine newhospital accounts for AEM technology in the three months ended December 31,2006. 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 independent salesrepresentatives generate new hospital accounts, but we expect that thecombination of these new additions will provide the focus that is needed toachieve market gains.

 

*Gross profit*.  Gross profit for the quarter ended December 31,2007 of $2,027,567 represented an increase of 17% from gross profit of$1,732,839 for the quarter ended December 31, 2006. Gross profit as apercentage of sales (gross margins) increased from 62% for the quarter ended December 31,2006 to 65% for the quarter ended December 31, 2007. This year’s quarterended December 31, 2007 included an approximately 1% increase in grossmargin that was attributed to a decrease in accrued liabilities related towarranty claims.

 

*Sales and marketing expenses*.  Sales and marketing expenses of $1,304,732for the quarter ended December 31, 2007 represented an increase of 18%from sales and marketing expenses of $1,105,251 for the quarter ended December 31,2006. The increase was a result of increasedcompensation for additional sales employees and increases in sales samples andtravel expenses. The increase in such cost was partially offset by decreasedcommissions for independent sales representatives.

 

*General and administrative expenses*.  General and administrative expenses of$330,777 for the quarter ended December 31, 2007 represented a decrease of13% from general and administrative expenses of $378,359 for the quarter ended December 31,2006. The decrease was primarily the result of last year’s quarter ended December 31,2006 one-time expense of approximately $73,000 relating to the costs ofobtaining equity capital financing, a project that was subsequently abandonedafter we obtained a $2,000,000 line of credit facility from SVB Silicon ValleyBank. The decrease in expenses during the quarter ended December 31, 2007was partially offset by increased compensation and outside services. Excludingthe one-time expense of approximately $73,000 during the quarter ended December 31,2006, general and administrative expenses for the quarter ended December 31,2007 increased 8% from the quarter ended December 31, 2006.

 

*Research and development expenses*.  Research and development expenses of $325,028for the quarter ended December 31, 2007 represented an increase of 5%compared to $310,083 for the quarter ended December 31, 2006. The increasewas a result of compensation and inventory and test material usage.

 

*Netincome.  *Net income was $59,036 forthe quarter ended December 31, 2007 compared to net loss of $49,058 forthe quarter ended December 31, 2006. Net income was a result of increasedsales income that was partially reduced by increased operating expenses.

 

*For thenine months ended December 31, 2007 compared to the nine months ended December 31,2006.*

 

*Net sales.* Net sales for the nine months ended December 31, 2007, was$8,882,413 compared to $8,192,800 for the nine months ended December 31,2006, an increase of 8%. The increase is attributable to the decrease inhospitals orders for reusable instruments compared to orders placed one year agoand the addition of new hospital accounts, partially offset by business lostfrom hospitals that previously changed to AEM technology. We opened 30 newhospital accounts for AEM technology in the nine months ended December 31,2007 versus 30 new hospital accounts for AEM technology in the nine monthsended December 31, 2006. We have changed and added new sales managers andindependent sales representatives in an effort to capitalize on identifiedmarket opportunities. It will take a number of months before new sales managersand new independent sales representatives generate new hospital accounts, butwe expect that the combination of these new additions will provide the focusthat is needed to achieve market gains.

 

*Gross profit*.  Gross profit for the nine months ended December 31,2007 of $5,581,822 represented an increase of 9% from gross profit of$5,137,389 for the nine months ended December 31, 2006. Gross profit as apercentage of sales (gross margins) was 63% for both the nine months ended December 31,2007 and the nine months ended December 31, 2006.

 

*Sales and marketing expenses*.  Sales and marketing expenses of $3,755,460for the nine months ended December 31, 2007 represented an increase of 16%from sales and marketing expenses of $3,248,336 for the nine months ended December 31,2006. The increase was a result of increasedcompensation for additional sales employees and increases in sales samples andtravel expenses. The increase in such cost was partially offset by decreasedcommissions for independent sales representatives.

 

*General and administrative expenses*.  General and administrative expenses of$1,053,022 for the nine months ended December 31, 2007 represented a smalldecrease from general and administrative expenses of $1,056,473 for the ninemonths ended December 31, 2006. The decrease was primarily the result oflast year’s quarter ended December 31, 2006 one-time expense ofapproximately $73,000 relating to the costs of obtaining equity capitalfinancing, a project that was subsequently abandoned after we obtained a$2,000,000 line of credit facility from SVB Silicon Valley Bank. The decreasein expenses was offset by increased compensation, legal fees and outsideservices. Excluding last year’s quarter one-time expense of approximately $73,000,general and administrative expenses for the nine months ended December 31,2006 increased 7% from the nine months ended December 31, 2006.

 

*Research and development expenses*.  Research and development expenses of $988,659for the nine months ended December 31, 2007 represented an increase of 26%compared to $784,313 for the nine months ended December 31, 2006. Theincrease was a result of compensation of employing additional engineers,outside services and test or prototype materials.

 

*Netincome or loss.  *Net loss was$228,486 for the nine months ended December 31, 2007 compared to netincome of $86,692 for the nine months ended December 31, 2006. Net losswas a result of an increase in sales that was offset by increased operatingexpenses.

 

 

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**Liquidity and Capital Resources**

 

Todate, operating funds have been provided primarily by sales of our common stockand of warrants to purchase our common stock, which together totaled$19,360,079 through December 31, 2007, and, to a lesser degree, by fundsprovided by sales of our products.

 

OnNovember 10, 2006, we entered into a credit facility agreement withSilicon Valley Bank. The terms of the credit facility include a line of creditfor $2,000,000 for three years at an interest rate calculated at prime rateplus 1.25%. In connection with the credit facility, we issued warrants toSilicon Valley Bank to purchase 28,000 shares of our common stock at a pershare price of $2.75. Our borrowing under the credit facility is limited by oureligible receivables and inventory at the time of borrowing. As of December 31,2007, we have borrowed $280,000 from this facility.

 

Ouroperations used $157,582 of cash in the ninemonths ended December 31, 2007 on net sales of $8,882,413. Prior tofiscal year 2003 and in fiscal years 2005, 2006 and 2007, the use of cash inour operations resulted primarily from the funding of annual net losses. Theseamounts of cash generated from and used in operations are not indicative of theexpected cash to be generated from or used in operations in fiscal year 2008.For the nine months ended December 31, 2007, we invested $464,030 in theacquisition of property and equipment. As of December 31, 2007, we had$98,908 in cash and cash equivalents available to fund future operations and haveborrowed $280,000 from our credit facility. Working capital was $1,768,204 at December 31,2007 compared to $2,172,722 at March 31, 2007. Current liabilities were$1,774,767 at December 31, 2007, compared to $1,464,153 at March 31,2007.

 

Ifwe are not successful in obtaining profitability and positive cash flow,additional capital may be required to maintain ongoing operations. We haveexplored and are continuing to explore options to provide additional financingto fund future operations as well as other possible courses of action. Suchactions include, but are not limited to, securing further lines of credit,sales of debt or equity securities (which may result in dilution to existingshareholders), licensing of technology, strategic alliances and other similaractions. There can be no assurance that we will be able to obtain additionalfunding (if needed), on acceptable terms or at all, through a sale of ourcommon stock, loans from financial institutions or other third parties, or anyof the actions discussed above. If we cannot sustain profitable operations, andadditional capital is unavailable, lack of liquidity could have a materialadverse effect on our business viability, financial position, results ofoperations and cash flows.

 

Wecurrently lease our facilities located at 6797 Winchester Circle, Boulder,Colorado under noncancelable lease agreements through August 14, 2009. Theminimum future lease payments as of December 31, 2007, by fiscal year, areas follows:

 

| **Fiscal Year**               | ** ** | **Amount** | ** ** |
|-------------------------------|------------|------------|------------|
| 2008 (remaining three months) |       | $          | 60,343     |   |
| 2009                          |       | 249,691    |       |
| 2010                          |       | 94,804     |       |
|                          |       | $          | 404,838    |   |

## ** **

Our minimum future equipment lease payments withGeneral Electric Capital Corporation as of December 31, 2007, by fiscalyear, are as follows:

 

| **Fiscal Year**               | ** ** | **Amount** | ** ** |
|-------------------------------|------------|------------|------------|
| 2008 (remaining three months) |       | $          | 25,469     |   |
| 2009                          |       | 101,873    |       |
| 2010                          |       | 101,873    |       |
| 2011                          |       | 101,873    |       |
| 2012                          |       | 101,873    |       |
| 2013                          |       | 101,873    |       |
| 2014                          |       | 8,488      |       |
|                          |       | $          | 543,322    |   |

 

Ourfiscal year 2008 operating plan is focused on increasing new hospital accounts,retaining existing hospital customers, growing sales, increasing gross profitsand conserving cash. We are investing in research and development efforts todevelop next generation versions of the AEM product line. We are also investingin manufacturing property and equipment to manufacture disposable scissorsinserts internally and reduce our cost of sales. We cannot predict withcertainty the expected sales, gross profit, net income or loss and usage ofcash and cash equivalents for fiscal year 2008. However, we believe that ourcash resources and credit facility will be sufficient to fund our operationsfor at least the next twelve months. If we are unable to manage our businessoperations in line with budget expectations, it could have a material adverseeffect on our business viability, financial position, results of operations andcash flows. If we are not successful in achieving profitability and positivecash flow, additional capital may be required to maintain ongoing operations.

 

**Income Taxes**

 

Asof March 31, 2007, net operating loss carryforwards totaling approximately$16,400,000 are available to reduce taxable income in the future. The netoperating loss carryforwards expire, if not previously utilized, at variousdates beginning in the fiscal year ended March 31, 2008. We have not paidincome taxes since our inception. The Tax Reform Act of 1986 and other incometax regulations contain provisions which may limit the net operating losscarryforwards available to be used in any given year if certain events occur,including changes in ownership interests. We have established a valuationallowance for the entire amount of our deferred tax asset since inception dueto our history of losses. Should we achieve sufficient, sustained income in thefuture, we may conclude that some or all of the valuation allowance should bereversed. If some or all of the valuation allowance were reversed, then, to theextent of the reversal, a tax benefit would be recognized which would result inan increase to income.

 

## **Critical Accounting Policies and Estimates**

## ** **

Our discussion and analysis of our financial conditionand results of operations are based upon our financial statements, which havebeen prepared in accordance with accounting principles generally accepted inthe United States. The preparation of these financial statements requires us tomake estimates 

14

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and judgments that affect the reported amounts of assets,liabilities, sales and expenses, and related disclosure of contingent assetsand liabilities. On an on-going basis, we evaluate our estimates, includingthose related to bad debts, inventories, sales returns, warranty, contingenciesand litigation. We base our estimates on historical experience and on variousother assumptions that are believed to be reasonable under the circumstances,the results of which form the basis for making judgments about the carryingvalues of assets and liabilities that are not readily apparent from othersources. Actual results may differ from these estimates under differentassumptions or conditions. We believe the following critical accountingpolicies affect the more significant judgments and estimates used in thepreparation of our financial statements.

 

We maintain allowances for doubtful accounts for estimatedlosses resulting from the inability of our customers to make required payments.If the financial condition of our customers were to deteriorate, resulting inan impairment of their ability to make payments, additional allowances would berequired, which would increase our expenses during the periods in which anysuch allowances were made. The amount recorded as a provision for bad debts ineach period is based upon our assessment of the likelihood that we will be paidon our outstanding receivables, based on customer-specific as well as generalconsiderations. To the extent that our estimates prove to be too high, and weultimately collect a receivable previously determined to be impaired, we mayrecord a reversal of the provision in the period of such determination.

 

We provide for the estimated cost of product warrantiesat the time sales is recognized. While we engage in extensive product qualityprograms and processes, including actively monitoring and evaluating thequality of our component suppliers, we have experienced some costs related towarranty. The warranty accrual is based upon historical experience and isadjusted based on current experience. Should actual warranty experience differfrom our estimates, revisions to the estimated warranty liability would berequired.

 

We reduce inventory for estimated obsolete orunmarketable inventory equal to the difference between the cost of inventoryand the estimated market value based upon assumptions about future demand andmarket conditions. If actual market conditions are less favorable than thoseprojected by management, additional inventory write-downs may be required. Anywrite-downs of inventory would reduce our reported net income during the periodin which such write-downs were applied. To the extent that our estimates proveto be too high, and we ultimately utilize or sell inventory previouslydetermined to be impaired, we may record a reversal of the provision in theperiod of such determination.

 

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

 

Propertyand equipment are stated at cost, with depreciation computed over the estimateduseful lives of the assets, generally three to seven years. Prior to fiscalyear 2008, we utilized the double-declining method of depreciation for propertyand equipment due to the expected usage of the property and equipment overtime. This method is expected to continue throughout the life of the equipment.Manufacturing and production equipment acquired, but not depreciated, in fiscalyear 2007 and manufacturing and production equipment acquired after fiscal 2007is a different technology 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 principle. Maintenance andrepairs are expensed as incurred and major additions, replacements andimprovements are capitalized.

 

We amortize our patent costs over their estimated usefullives, which is typically the remaining statutory life. From time to time, wemay be required to adjust these lives based on advances in technology, competitoractions, and the like. We review the recorded amounts of patents at each periodend to determine if their carrying amount is still recoverable based on ourexpectations regarding sales of related products. Such an assessment, in thefuture, may result in a conclusion that the assets are impaired, with acorresponding charge against earnings.

 

We currently estimate forfeitures for stock-basedcompensation expense related to employee stock options at 7% and evaluate theforfeiture rate quarterly.

 

**Recent Developments**

 

On July 16, 2007, we received a letter from AMEXstating that we were not in compliance with Section 1003(a)(ii) ofthe Amex Company Guide due to stockholders’ equity of less than $4,000,000 andlosses from continuing operations and/or net losses in three out of four of itsmost recent fiscal years. On August 15, 2007, we provided AMEX withinformation regarding our plan of compliance and financial projections. Basedon a review of this information and conversations between AMEX Staff and our representatives,AMEX agreed to extend the period by which we must regain compliance with itslisting standards to January 16, 2009. We will be subject to periodicreview by the AMEX Staff regarding our compliance plan during the extensionperiod. Failure to make progress consistent with the plan could result incommencement of immediate delisting proceedings by AMEX.

 

**Risk Factors**

 

Wewish to caution you that there are risks and uncertainties that could cause ouractual results to be materially different from those indicated by forwardlooking statements that we make from time to time in filings with theSecurities and Exchange Commission, news releases, reports, proxy statements,registration statements and other written communications, as well as oral forwardlooking statements made from time to time by our representatives. These risksand uncertainties include, but are not limited to, those listed in our AnnualReport on Form 10-KSB for the year ended March 31, 2007. These risksand uncertainties and additional risks and uncertainties not presently known tous or that we currently deem immaterial may cause our business, financialcondition, operating results and cash flows to be materially adverselyaffected. Except for the historical information contained herein, the mattersdiscussed in this analysis are forward looking statements that involve risksand uncertainties, including but not limited to general business conditions andother factors which are often beyond our control. We do not undertake any obligationto update forward looking statements except as required by law.

 

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

 

(a) Wehave carried out an evaluation under the supervision and with the participationof our management, including our Chief Executive Officer and PrincipalAccounting and Financial Officer, of the effectiveness of our disclosurecontrols and procedures (as defined in Rules 13a-15(e) and 15d-15e ofthe Securities and Exchange Act of 1934 (the “Exchange Act”)). Based upon thatevaluation, the Chief Executive Officer and the Principal Accounting andFinancial Officer concluded that, as of December 31, 2007, our disclosurecontrols and procedures were effective in ensuring that information required tobe disclosed by us under the Exchange Act was recorded, processed, summarizedand reported within the time periods specified under the Exchange Act rules andforms.

 

(b) Duringthe quarter ended December 31, 2007, there were no changes in our internalcontrol over financial reporting or in other factors that have materiallyaffected, or are reasonably likely to materially affect, our internal controlover financial reporting, nor were there any significant deficiencies ormaterial weaknesses in such disclosure controls and procedures or internalcontrol over financial reporting requiring corrective actions. As a result, nocorrective actions were taken.

 

 

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

 

**ITEM****6**                                                        EXHIBITS

 

                                                                                                The followingexhibits are attached to this report on Form 10-QSB or are incorporated byreference:

 

3.1              Articles ofIncorporation of the Company, as amended (incorporated by reference fromRegistration Statement #333-4118-D dated June 25, 1996).

 

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

 

4.1              Form ofcertificate for shares of Common Stock (incorporated by reference fromRegistration Statement #333-4118-D dated June 25, 1996).

 

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

 

31.2        Certification of Principal Financial and AccountingOfficer under Rule 13a-14(a).

 

32.1        Certification of Periodic Reports pursuant toSarbanes-Oxley Act of 2002.

 

 

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**SIGNATURE**

 

In accordance with the requirements of the Exchange Act, the registrantcaused this report to be signed on its behalf by the undersigned, thereuntoduly authorized.

 
| Encision  Inc.          |                                     |
|-------------------------|------------------------------------------|
|                    |                                     |
| February 11,  2008 | /s/  Marcia McHaffie                     |
| Date                    | Marcia  McHaffie                         |
|                    | Controller                               |
|                    | Principal  Accounting Officer & |
|                    | Principal  Financial Officer             |

 

 

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