Table of Contents

 

 

 

**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON,D.C.  20549**

 

## **Form 10-Q**

## ** **

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

 

**For the quarterly period ended June 30,2009**

 

**OR**

 

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

 

**For the transition period from                    to                     **

 

**Commission file number     0-28604**

 

**ENCISION INC.**

(Exact name of registrant as specified in itscharter)

 

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

 

**6797 Winchester Circle**

**Boulder, Colorado 80301**

(Address of principalexecutive offices)

 

**(303) 444-2600**

(Registrant’s telephonenumber)

 

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

 

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

 

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

 

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

 

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

 

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

 

| **Common  Stock, no par value** | ** ** | **6,455,100  Shares**               |
|---------------------------------|------------|-------------------------------------|
| (Class)                         |       | (outstanding at July 31, 2009) |

 

 

 

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**ENCISION INC.**

 

**FORM 10-Q**

 

**For the Three Months Ended June 30, 2009**

 

**INDEX**

 
| ** **        | ** **                | **Page**                                                                                     |
|-------------------|---------------------------|----------------------------------------------------------------------------------------------|
| ** **        | ** **                | **Number**                                                                                   |
| ** **        | ** **                |                                                                                         |
| **PART I.**  | **FINANCIAL INFORMATION** |                                                                                         |
| ** **        | ** **                |                                                                                         |
| **ITEM1**         | -                         | Condensed Interim Financial  Statements:                                                     |   |
|              | -                         | Condensed Balance Sheets as of June 30, 2009 and  March 31, 2009                   | 3 |
|              | -                         | Condensed Statements of  Operations for the Three  Months Ended June 30, 2009 and 2008  | 4 |
|              | -                         | Condensed Statements of Cash  Flows for the Three Months  Ended June 30, 2009 and 2008  | 5 |
|              | -                         | Notes to  Condensed Interim Financial Statements                                             | 6 |
|              |                      |                                                                                         |   |
| **ITEM 2**        | -                         | Management’s  Discussion and Analysis of  Financial Condition and Results of Operations | 11 |
| ** **        |                      |                                                                                         |   |
| **ITEM 4**        | -                         | Controls and  Procedures                                                                     | 16 |
| ** **        |                      |                                                                                         |   |
| **PART II.** | **OTHER INFORMATION**     |                                                                                         |
| ** **        | ** **                |                                                                                         |
| **ITEM 6**        | -                         | Exhibits                                                                                     | 17 |
| ** **        |                      |                                                                                         |   |
| **SIGNATURE**     | 18                        |

 

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

 

**ITEM 1 ****-**** CONDENSED INTERIM FINANCIALSTATEMENTS**

 

**Encision Inc.**

**Condensed Balance Sheets**

**(unaudited)**

 
| ** **                                                                                                                                                                                                  | ** ** | **June 30,********2009** | ** ** | **March 31,********2009** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------|------------|--------------------------------|------------|
| **ASSETS**                                                                                                                                                                                                  |       |                          |       |                           |       |
| Current assets:                                                                                                                                                                                             |       |                          |       |                           |       |
| Cash and cash equivalents                                                                                                                                                                                   |       | $                             | 125,535    |                           | $          | 84,658 |   |
| Accounts receivable, net of allowance for doubtful  accounts of $9,000 at June 30, 2009 andMarch 31, 2009                                                                                         |       | 1,235,146                     |       | 1,263,751                      |       |
| Inventories, net of reserve for obsolescence of  $47,500 at June 30, 2009 and $55,000 atMarch 31, 2009                                                                                            |       | 2,459,549                     |       | 2,504,598                      |       |
| Prepaid expenses                                                                                                                                                                                            |       | 109,845                       |       | 36,541                         |       |
| Total current assets                                                                                                                                                                                        |       | 3,930,075                     |       | 3,889,548                      |       |
| Equipment, at cost:                                                                                                                                                                                         |       |                          |       |                           |       |
| Furniture, fixtures and equipment                                                                                                                                                                           |       | 2,091,263                     |       | 2,003,337                      |       |
| Customer-site equipment                                                                                                                                                                                     |       | 681,694                       |       | 667,171                        |       |
| Accumulated depreciation                                                                                                                                                                                    |       | (1,888,755                    | )          | (1,830,273                     | )          |
| Equipment, net                                                                                                                                                                                              |       | 884,202                       |       | 840,235                        |       |
| Patents, net of accumulated amortization of  $133,352 at June 30, 2009 and $128,994 at March 31, 2009                                                                                             |       | 223,306                       |       | 215,801                        |       |
| Other assets                                                                                                                                                                                                |       | 17,344                        |       | 24,505                         |       |
| **TOTAL ASSETS**                                                                                                                                                                                            |       | $                             | 5,054,927  |                           | $          | 4,970,089 |   |
| **LIABILITIES AND SHAREHOLDERS’  EQUITY**                                                                                                                                                              |       |                          |       |                           |       |
| Current liabilities:                                                                                                                                                                                        |       |                          |       |                           |       |
| Accounts payable                                                                                                                                                                                            |       | $                             | 661,544    |                           | $          | 745,138 |   |
| Accrued compensation                                                                                                                                                                                        |       | 311,335                       |       | 405,906                        |       |
| Other accrued liabilities                                                                                                                                                                                   |       | 360,032                       |       | 367,266                        |       |
| Line of credit                                                                                                                                                                                              |       | 275,000                       |       | 190,942                        |       |
| Total current liabilities                                                                                                                                                                                   |       | 1,607,911                     |       | 1,709,252                      |       |
|                                                                                                                                                                                                        |       |                          |       |                           |       |
| **Commitments and contingencies**                                                                                                                                                                           |       |                          |       |                           |       |
| ** **                                                                                                                                                                                                  |       |                          |       |                           |       |
| Shareholders’ equity:                                                                                                                                                                                  |       |                          |       |                           |       |
| Preferred stock, no par value: 10,000,000 shares  authorized; none issued and outstanding                                                                                                                   |       | —                        |       | —                         |       |
| Common stock and additional paid-in capital, no par  value: 100,000,000 shares authorized;6,455,100 and 6,455,100 shares issued and  outstanding at June 30, 2009 andMarch 31, 2009, respectively |       | 19,582,495                    |       | 19,559,626                     |       |
| Accumulated (deficit)                                                                                                                                                                                       |       | (16,135,479                   | )          | (16,298,789                    | )          |
| Total shareholders’ equity                                                                                                                                                                             |       | 3,447,016                     |       | 3,260,837                      |       |
| **TOTAL LIABILITIES AND  SHAREHOLDERS’ EQUITY**                                                                                                                                                        |       | $                             | 5,054,927  |                           | $          | 4,970,089 |   |

 

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

 

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**Encision Inc.**

**Condensed Statements ofOperations**

**(Unaudited)**

 
| **Three Months Ended**                               | ** ** | **June 30,********2009** | ** ** | **June 30,********2008** | ** ** |
|------------------------------------------------------|------------|-------------------------------|------------|-------------------------------|------------|
| **NET SALES**                                        |       | $                             | 3,173,660  |                          | $          | 3,093,966 |   |
| **COST OF SALES**                                    |       | 1,141,735                     |       | 1,229,546                     |       |
| **GROSS PROFIT**                                     |       | 2,031,925                     |       | 1,864,420                     |       |
| **OPERATING EXPENSES:**                              |       |                          |       |                          |       |
| Sales and marketing                                  |       | 1,198,813                     |       | 1,374,152                     |       |
| General and administrative                           |       | 353,819                       |       | 366,909                       |       |
| Research and development                             |       | 300,989                       |       | 288,754                       |       |
| Total operating expenses                             |       | 1,853,621                     |       | 2,029,815                     |       |
| **OPERATING INCOME (LOSS)**                          |       | 178,304                       |       | (165,395                      | )          |
| Interest expense, net                                |       | (13,125                       | )          | (18,672                       | )          |
| Other income (expense), net                          |       | (1,869                        | )          | 19,766                        |       |
| Interest and other income (expense), net             |       | (14,994                       | )          | 1,094                         |       |
| **INCOME (LOSS) BEFORE PROVISION  FOR INCOME TAXES** |       | 163,310                       |       | (164,301                      | )          |
| Provision for income taxes                           |       | —                        |       | —                        |       |
| **NET INCOME (LOSS)**                                |       | $                             | 163,310    |                          | $          | (164,301 | ) |
| Net income (loss) per share—basic and diluted   |       | $                             | 0.03       |                          | $          | (0.03 | ) |
| Weighted average shares—basic and diluted       |       | 6,455,100                     |       | 6,449,774                     |       |

 

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

 

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**Encision Inc.**

**Condensed Statements ofCash Flows**

**(Unaudited)**

 
| **Three Months Ended**                                                                    | ** ** | **June 30,********2009** | ** ** | **June 30,********2008** | ** ** |
|-------------------------------------------------------------------------------------------|------------|-------------------------------|------------|-------------------------------|------------|
| Cash flows from operating activities:                                                     |       |                          |       |                          |       |
| Net income (loss)                                                                         |       | $                             | 163,310    |                          | $          | (164,301 | ) |
| Adjustments to reconcile net income (loss) to net  cash provided by operating activities: |       |                          |       |                          |       |
| Depreciation and amortization                                                             |       | 62,850                        |       | 51,148                        |       |
| Stock-based compensation expense related to stock  options                                |       | 22,869                        |       | 39,003                        |       |
| Stock-based interest expense related to warrants                                          |       | 3,127                         |       | 3,127                         |       |
| Provision for doubtful accounts, net                                                      |       | —                        |       | (2,500                        | )          |
| Provision for inventory obsolescence, net                                                 |       | (7,500                        | )          | (15,000                       | )          |
| Change in operating assets and liabilities:                                               |       |                          |       |                          |       |
| Accounts receivable                                                                       |       | 28,605                        |       | 181,705                       |       |
| Inventories                                                                               |       | 52,549                        |       | 235,863                       |       |
| Prepaid expenses and other assets                                                         |       | (69,270                       | )          | (44,845                       | )          |
| Accounts payable                                                                          |       | (83,594                       | )          | 74,296                        |       |
| Accrued compensation and other accrued liabilities                                        |       | (101,805                      | )          | (168,539                      | )          |
| Net cash provided by operating activities                                                 |       | 71,141                        |       | 189,957                       |       |
| Cash flows from investing activities:                                                     |       |                          |       |                          |       |
| Acquisition of property and equipment                                                     |       | (102,449                      | )          | (49,753                       | )          |
| Patent costs                                                                              |       | (11,873                       | )          | (3,540                        | )          |
| Net cash (used in) investing activities                                                   |       | (114,322                      | )          | (53,293                       | )          |
| Cash flows from financing activities:                                                     |       |                          |       |                          |       |
| Borrowings from (paydown of) credit facility                                              |       | 84,058                        |       | (173,124                      | )          |
| Proceeds from the exercise of stock options                                               |       | —                        |       | 11,520                        |       |
| Net cash provided by (used in) financing activities                                       |       | 84,058                        |       | (161,604                      | )          |
| Net increase (decrease) in cash and cash  equivalents                                     |       | 40,877                        |       | (24,940                       | )          |
| Cash and cash equivalents, beginning of period                                            |       | 84,658                        |       | 70,995                        |       |
| Cash and cash equivalents, end of period                                                  |       | $                             | 125,535    |                          | $          | 46,055 |   |

 

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

 

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ENCISION INC.

 

NOTES TO CONDENSED INTERIMFINANCIAL STATEMENTS

 

JUNE 30, 2009

(Unaudited)

 

(1)       ORGANIZATIONAND 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 themarketplace for electrosurgical devices and instruments by providing a solutionto a patient safety risk in laparoscopic surgery. Our sales to date have beenmade principally in the United States.

 

Wehave, except for fiscal years 2009, 2004 and 2003 when we achieved profitableoperations, incurred losses since our inception and have an accumulated deficitof $16,135,479 at June 30, 2009. Operations have been financed primarilythrough issuances of our common stock and warrants to purchase our common stockand, to a lesser extent, profits from operations. Our liquidity hassubstantially diminished because of such continuing operating losses, and wemay be required to seek additional capital in the future.

 

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

 

(2)       SUMMARYOF SIGNIFICANT ACCOUNTING POLICIES

 

Basis of Presentation.  The condensed interim financial statementsincluded herein have been prepared by us, without audit, pursuant to the rules andregulations of the Securities and Exchange Commission. Certain information andfootnote disclosures normally included in financial statements prepared inaccordance with generally accepted accounting principles accepted in the UnitedStates have been condensed or omitted pursuant to such rules and regulations,although we believe that the disclosures made are adequate to make theinformation presented not misleading. The condensed interim financialstatements and notes thereto should be read in conjunction with the financialstatements and the notes thereto included in our Annual Report on Form 10-K forthe fiscal year ended March 31, 2009, filed on June 29, 2009.

 

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.

 

Useof Estimates in the Preparation of Financial Statements.  The preparation of financial statements inconformity with accounting principles generally accepted in the United Statesrequires management to make estimates and assumptions. Such estimates andassumptions affect the reported amounts of assets and liabilities and thedisclosure of contingent assets and liabilities at the date of the financialstatements and the reported amounts of sales and expense during the reportingperiod. Actual results could differ from those estimates.

 

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

 

FairValue of Financial Instruments.  In September 2006, the Financial AccountingStandards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”)157, “Fair Value Measurements”, which became effective with respect tofinancial assets and liabilities as well as other assets and liabilitiescarried at fair value on a recurring basis for fiscal years beginning after November15, 2007.  We adopted SFAS 157 as of April1, 2008 for financial assets and liabilities and other assets and liabilitiescarried at fair value on a recurring basis. FASB Staff Position No. 157-2, “Effective Date of FASB Statement No. 157”(“FSP No. 157-2”), deferred the effective date of SFAS No. 157 for allnonfinancial assets and nonfinancial liabilities to fiscal years beginningafter November 15, 2008.  We adopted SFAS157 for all nonfinancial assets and liabilities as of April 1, 2009. Thisstatement defines fair value, establishes a framework for measuring fair valueand expands the related disclosure requirements. This statement applies underother accounting pronouncements that require or permit fair value measurements.The statement indicates, among other things, that a fair value measurementassumes that the transaction to sell an asset or transfer a liability occurs inthe principal market for the asset or liability or, in the absence of aprincipal market, the most advantageous market for the asset or liability. SFAS157 defines fair value based upon an exit price model.

 

Our financial instruments consist of cash and cash equivalents andshort-term trade receivables and payables. The carrying values of cash and cashequivalents and short-term receivables and payables approximate their fairvalue due to their short maturities.

 

Concentrationof Credit Risk.  SFAS 105, “Disclosureof Information About Financial Instruments with Off-Balance Sheet Risk andFinancial Instruments with Concentrations of Credit Risk,” requires disclosureof significant concentrations of credit risk regardless of the degree of suchrisk. Financial instruments with significant credit risk include cash. Theamount of cash that we have on deposit with financial institutions may fromtime to time exceed the $250,000 federally insured limit. However, we believe thatthe financial institutions are financially sound and the risk of loss isminimal.

 

Financialinstruments consist of cash and cash equivalents, accounts receivable andaccounts payable. The carrying value of all financial instruments approximatefair value.

 

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 two financialinstitutions in the form of demand deposits and money market funds.

 

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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 for estimatedlosses resulting from the inability of our customers to make required payments.The net accounts receivable balance at June 30, 2009 of $1,235,146 included nomore than 7% from any one customer. The net accounts receivable balance at March31, 2009 of $1,263,751 included no more than 6% from any one customer.

 

WarrantyAccrual.  We providefor the estimated cost of product warranties at the time sales are recognized.While we engage in extensive product quality programs and processes, includingactively monitoring and evaluating the quality of our component suppliers, ourwarranty obligation is based upon historical experience and is also affected byproduct failure rates and material usage incurred in correcting a productfailure. Should actual product failure rates or material usage costs differfrom our estimates, revisions to the estimated warranty liability would berequired.

 

Inventories.  Inventories are stated at the lower of cost(first-in, first-out basis) or market. We reduce inventory for estimatedobsolete or unmarketable inventory equal to the difference between the cost ofinventory and the estimated market value based upon assumptions about futuredemand and market conditions. If actual market conditions are less favorablethan those projected by management, additional inventory write-downs may berequired. At June 30, 2009 and March 31, 2009, inventory consisted of thefollowing:

 
| ** **                    | ** ** | **June 30, 2009** | ** ** | **March 31, 2009** | ** ** |
|-------------------------------|------------|-------------------|------------|--------------------|------------|
| Raw materials                 |       | $                 | 1,420,373  |               | $          | 1,336,376 |   |
| Finished goods                |       | 1,086,676         |       | 1,223,222          |       |
| Total gross inventories       |       | 2,507,049         |       | 2,559,598          |       |
| Less reserve for obsolescence |       | (47,500           | )          | (55,000            | )          |
| Total net inventories         |       | $                 | 2,459,549  |               | $          | 2,504,598 |   |

 

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

 

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

 

Patents.  The costs of applying for patents arecapitalized and amortized on a straight-line basis over the lesser of thepatent’s economic or legal life (17 years in the United States). Capitalizedcosts are expensed if patents are not granted. We review the carrying value ofour patents periodically to determine whether the patents have continuingvalue, and such reviews could result in the conclusion that the recordedamounts have been impaired.

 

Accrued Liabilities.  We have accrued $50,000 related to warrantyclaims, $48,239 related to sales commissions and $3,801 related to rentnormalization and have included these amounts in accrued liabilities in theaccompanying balance sheet at June 30, 2009. At March 31, 2009, we had accrued$50,000 related to warranty claims, $63,300 related to sales commissions and$15,202 related to rent normalization and have included these amounts inaccrued liabilities in the accompanying balance sheet at March 31, 2009.

 

Income Taxes.  We accountfor income taxes under the provisions of SFAS 109, “Accounting for Income Taxes”(“SFAS 109”). SFAS 109 requires recognition of 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. SFAS 109 also requires recognition of deferredtax assets for the expected future tax effects of all deductible temporarydifferences, loss carryforwards and tax credit carryforwards. Deferred taxassets are then reduced, if deemed necessary, by a valuation allowance for theamount of any tax benefits which, more likely than not based on currentcircumstances, are not expected to be realized. During the three months ended June30, 2009, we reversed our deferred tax assets and valuation allowance by theeffective tax rate on loss carryforwards that were used to offset taxableincome for such period. During fiscal year 2009, no tax benefit was obtainedfrom our loss. As a result, no tax benefit is reflected in the accompanyingstatements of operations for fiscal year 2009. Should we achieve sufficient,sustained income in the future, we may conclude that more or all of thevaluation allowance should be reversed. We are required to make many subjectiveassumptions and judgments regarding our income tax exposures. At June 30, 2009,we had no unrecognized tax benefits which would affect the effective tax rateif recognized and had no accrued interest or penalties related to uncertain taxpositions.

 

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

 

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

 

Stock-Based Compensation.  Beginning in fiscal year 2007, we adoptedSFAS 123 (revised 2004), “Share-Based Payment” (“SFAS 123(R)”), which requiresthe measurement and recognition of compensation expense for all share-basedpayment awards made to employees and directors, including employee stockoptions, based on estimated fair values. SFAS 123(R) supersedes our previousaccounting under Accounting Principles Board Opinion 25, “Accounting for StockIssued to Employees” (“APB 25”), for periods beginning in fiscal year 2008. In March2005, the Securities and Exchange Commission issued Staff Accounting Bulletin107 (“SAB 107”) relating to SFAS 123(R). We have applied the provisions of SAB107 in our adoption 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 and forfiscal years 2009 and 2008 reflect the impact of SFAS 123(R). In accordancewith the modified prospective transition method, our financial statements forprior periods have not been restated to reflect, and 

 

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donot include, the impact of SFAS 123(R). Stock-based compensation expenserecognized under SFAS 123(R) for the three months ended June 30, 2009 and 2008was $22,869 and $39,003, respectively, which consisted of stock-basedcompensation expense related to grants of employee stock options.

 

SFAS123(R) requires companies to estimate the fair value of share-based paymentawards on the date of grant using an option-pricing model. The value of theportion of the award that is ultimately expected to vest is recognized asexpense over the requisite service periods in the accompanying statement ofoperations. Prior to the adoption of SFAS 123(R), we accounted for stock-basedawards to employees and directors using the intrinsic value method inaccordance with APB 25 as allowed under SFAS 123, “Accounting for Stock-BasedCompensation” (“SFAS 123”). Under the intrinsic value method, no stock-basedcompensation expense had been recognized in our statement of operations becausethe exercise price of our stock options granted to employees and directorsequaled the fair market value of the underlying stock at the date of grant.

 

Stock-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. Stock-based compensation expense recognized in our statementof operations for the three months ended June 30, 2009 and 2008 included compensationexpense for share-based payment awards granted prior to, but not yet vested asof June 30, 2009, based on the grant date fair value estimated in accordancewith the pro forma provisions of SFAS 123 and compensation expense for theshare-based payment awards granted subsequent to July 30, 2005, based on thegrant date fair value estimated in accordance with the provisions of SFAS123(R). Compensation expense for all share-based payment is recognized usingthe straight-line, single-option method. As stock-based compensation expenserecognized in the accompanying statements of operations for the three monthsended June 30, 2009 and 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.

 

Uponadoption of SFAS 123(R), we continued to use the Black-Scholes option-pricingmodel (“Black-Scholes model”), which was 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)and SAB 107 using an option-pricing model, that value may not be indicative ofthe fair value observed in a willing buyer/willing seller market transaction.

 

OnNovember 10, 2005, FASB issued FASB Staff Position FAS 123(R)-3, “TransitionElection Related to Accounting for Tax Effects of Share-Based Payment Awards.”We have elected to adopt the alternative transition method provided in the FASBStaff Position for calculating the tax effects of stock-based compensationpursuant to SFAS 123(R). The alternative transition method includes simplifiedmethods to establish the beginning balance of the additional paid-in capitalpool (“APIC pool”) related to the tax effects of employee stock-basedcompensation and to determine the subsequent impact on the APIC pool andstatements of cash flows of the tax effects of employee stock-basedcompensation awards that are outstanding upon adoption of SFAS 123(R).

 

SegmentReporting.  We have concludedthat we have one operating segment.

 

Recent Accounting Pronouncements.  In May 2009, the Financial AccountingStandards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”)No. 165, “Subsequent Events” (“SFAS 165”). SFAS 165 establishes generalstandards of accounting for and disclosure of events that occur after thebalance sheet date but before financial statements are issued or are availableto be issued. SFAS 165 was effective for interim or annual financial periodsending after June 15, 2009. Subsequent Events have been analyzed from June 30through July 31, 2009. The adoption of SFAS 165 had no material impact on theCompany’s financial position or results of operations.

 

InJune 2009, the FASB issued SFAS No. 166, “Accounting for Transfers of FinancialAssets — an amendment of FASB Statement No. 140” (“SFAS 166”) and SFAS No. 167,“Amendments to FASB Interpretation No. 46(R)” (“SFAS 167”). SFAS 166 willrequire more information about transfers of financial assets, eliminates thequalifying special purpose entity concept, changes the requirements forderecognizing financial assets and requires additional disclosures. SFAS 167amends FASB Interpretation No. 46(R), “Consolidation of Variable InterestEntities” regarding certain guidance for determining whether an entity is avariable interest entity and modifies the methods allowed for determining theprimary beneficiary of a variable interest entity. In addition, SFAS 167requires ongoing reassessments of whether an enterprise is the primarybeneficiary of a variable interest entity and enhanced disclosures related toan enterprise’s involvement in a variable interest entity. SFAS 166 and SFAS167 are effective for the first annual reporting period that begins after November15, 2009. The Company does not anticipate the adoption of these SFASs will havea material impact on the Company’s current financial position or results ofoperations.

 

Alsoin June 2009, the FASB issued SFAS No. 168, “The FASB Accounting StandardsCodification TM and the Hierarchy of Generally Accepted Accounting Principles —a replacement of FASB Statement No. 162” (“SFAS 168”). SFAS 168 provides forthe FASB Accounting Standards Codification TM (the “Codification”) to becomethe single official source of authoritative, nongovernmental GAAP. TheCodification did not change GAAP but reorganizes the literature. Following SFAS168 the FASB will not issue new standards in the form of Statements, FASB StaffPositions, or Emerging Issues Task Force Abstracts.  Instead it will issue Accounting StandardsUpdates (“ASU”). The ASUs will not be considered authoritative in their ownright. ASUs will serve only to update the Codification, provide backgroundinformation about the guidance, and provide the bases for conclusion on thechange(s) in the Codification. The FASB issued ASU No. 2009-01 “Topic 105 —Generally Accounting Principles” and ASU No. 2009-02 “Omnibus Update”. Both ASU2009-01 and 2009-02 are technical corrections and neither have any effect onGAAP. SFAS 168 is effective for interim and annual periods ending after September15, 2009.

 

(3)       BASIC AND DILUTED INCOME AND LOSS PERCOMMON 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. The shares used in the calculation ofdilutive potential common shares exclude options to purchase shares where theexercise price was greater than the average market price of common shares forthe period. As a result of our net loss for the three months ended June 30,2008, all 

 

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potentiallydilutive securities in such period would be anti-dilutive and were excludedfrom the computation of diluted loss per share for the three months ended June 30,2008, and there are no differences between basic and diluted per share amountspresented for such period.

 

Thefollowing table presents the calculation of basic and diluted net loss pershare:

 
| ** **                                           | ** ** | **Three Months Ended** | ** ** |
|------------------------------------------------------|------------|------------------------|------------|
| ** **                                           | ** ** | **June 30, 2009**      | ** ** | **June 30, 2008** | ** ** |
| Net income (loss)                                    |       | $                      | 163,310    |   | $ | (164,301 | ) |
| Weighted-average shares — basic                 |       | 6,455,100              |       | 6,449,774 |   |
| Effect of dilutive potential common shares           |       | —                 |       | — |   |
| Weighted-average shares — diluted               |       | 6,455,100              |       | 6,449,774 |   |
| Net income (loss) per share — basic and diluted |       | $                      | 0.03       |   | $ | (0.03 | ) |
| Antidilutive employee stock options                  |       | 580,000                |       | 415,000 |   |

 

(4)       COMMITMENTS AND CONTINGENCIES

 

Wecurrently lease our facilities at 6797 Winchester Circle, Boulder, Coloradounder noncancelable lease agreements through July 31, 2014. The minimum futurelease payment by fiscal year as of June 30, 2009 is as follows:

 
| **Fiscal Year**               | ** ** | **Amount** | ** ** |
|-------------------------------|------------|------------|------------|
| 2010 (nine months  remaining) |       | $          | 184,444    |   |
| 2011                          |       | 247,264    |       |
| 2012                          |       | 254,629    |       |
| 2013                          |       | 262,281    |       |
| 2014                          |       | 270,221    |       |
| 2015                          |       | 90,966     |       |
| Total                         |       | $          | 1,309,805  |   |

 

Ourminimum future equipment lease payments with General Electric CapitalCorporation as of June 30, 2009, by fiscal year, are as follows:

 
| **Fiscal Year**               | ** ** | **Amount** | ** ** |
|-------------------------------|------------|------------|------------|
| 2010 (nine months  remaining) |       | $          | 76,405     |   |
| 2011                          |       | 101,873    |       |
| 2012                          |       | 101,873    |       |
| 2013                          |       | 101,873    |       |
| 2014                          |       | 8,488      |       |
| Total                         |       | $          | 390,512    |   |

 

OnNovember 10, 2006, we entered into a credit facility agreement with SiliconValley Bank. The terms of the credit facility include a line of credit for$2,000,000 for three years at an interest rate calculated at prime rate plus1.25%, subject to increase upon a default. In connection with the creditfacility, we issued warrants to Silicon Valley Bank to purchase 28,000 sharesof our common stock at a per share price of $2.75. Our borrowing under thecredit facility is limited by our eligible receivables and inventory at thetime of borrowing. As of June 30, 2009, we had borrowed $275,000 from thecredit facility and, under our eligible receivables and inventory limit, had anadditional $1,329,845 available to borrow. We must repay our borrowings by November10, 2009 unless we renegotiate a commitment with Silicon Valley Bank or anotherfinancial institution prior to that date.

 

Asidefrom the operating lease and credit facility commitments, we do not have any materialcontractual commitments requiring settlement in the future.

 

Weare subject to regulation by the United States Food and Drug Administration(“FDA”). The FDA provides regulations governing the manufacture and sale of ourproducts and regularly inspects us and other manufacturers to determinecompliance with these regulations. We believe that we were in substantialcompliance with all known regulations as of June 30, 2009. FDA inspections areconducted periodically at the discretion of the FDA. Our latest inspection bythe FDA occurred in May 2004.

 

(5)       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 onestimated fair values. The following table summarizes stock-based compensationexpense related to employee stock options and employee stock purchases underSFAS 123(R) for the three months ended June 30, 2009 and 2008, which wasallocated as follows:

 
| ** **                       | ** ** | **Three Months Ended** | ** ** |
|----------------------------------|------------|------------------------|------------|
| ** **                       | ** ** | **June 30, 2009**      | ** ** | **June 30, 2008** | ** ** |
| Cost of sales                    |       | $                      | 810        |   | $ | 210 |   |
| Sales and marketing              |       | 4,857                  |       | 7,059 |   |
| General and administrative       |       | 13,026                 |       | 26,913 |   |
| Research and development         |       | 4,176                  |       | 4,821 |   |
| Stock-based compensation expense |       | $                      | 22,869     |   | $ | 39,003 |   |

 

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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. Directorstock options to purchase 10,000 and 200,000 shares of stock were grantedduring the three months ended June 30, 2009. The weighted-average assumptionsfor employee stock options granted during the three months ended June 30, 2009are summarized as follows:

 
| ** **               | ** ** | **Three Months  Ended** | ** ** |
|--------------------------|------------|-------------------------|------------|
| ** **               | ** ** | **June 30, 2009**       | ** ** |
| Risk-free interest rate  |       | 1.9                     | %          |
| Expected life (in years) |       | 5.0                     |       |
| Expected volatility      |       | 47                      | %          |
| Expected dividend        |       | 0                       | %          |

 

Asof June 30, 2009, $220,000 of total unrecognized compensation costs related tononvested stock is expected to be recognized over a period of five years.

 

(6)       RELATED PARTY TRANSACTION

 

Wepaid consulting fees of $18,520 and $20,920 to an entity owned by one of ourdirectors during the three months ended June 30, 2009 and 2008, respectively.

 

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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-Q are strongly encouraged to review thesection entitled *“Risk Factors”*in our Form 10-Kfor the fiscal year ended March 31, 2009.

 

**General**

 

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

 

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 to causinginadvertent collateral tissue damage outside the surgeon’s field of view. Therisk of unintended electrosurgical burn injury to the patient in laparoscopicsurgery has been well documented. This risk poses a threat to patient safetyand creates liability exposure for surgeons and hospitals that do notadequately address the issue.

 

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

 

AEMtechnology has been recommended and endorsed by sources from various groupsinvolved in MIS. Surgeons, nurses, biomedical engineers, the medicolegalcommunity, malpractice insurance carriers and electrosurgical devicemanufacturers advocate the use of AEM technology. Recommendations from themalpractice insurance and medicolegal communities complement the broad clinicalendorsements 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 include ergonomicsand user functionalities for which surgeons have been expressing a preference.During fiscal year 2006, we announced enTouchTM, an ergonomically-designedhandle for our articulating instruments, and we plan to introduce new additionsto the AEM product line in fiscal year 2010.

 

Whena hospital changes to AEM technology, we receive recurring sales from sales ofreplacement instruments. We believe that there is no directly competingtechnology to supplant AEM products once a hospital switches to our products.The replacement market of reusable and disposable AEM products in hospitalsthat use our AEM technology represented over 90% of our sales during the threemonths ended June 30, 2009. This sales stream is expected to grow as the baseof hospitals that switch to AEM technology continues to grow. In addition, weintend to develop disposable versions of more of our AEM products in order tomeet market demands and expand our sales opportunities.

 

Wehave, except for fiscal years 2009, 2004 and 2003 when we achieved profitableoperations, incurred losses since our inception and have an accumulated deficitof $16,135,479 at June 30, 2009. Operations have been financed primarilythrough issuances of our common stock and warrants, and to a lesser extent, fromprofits on operations. Our liquidity has substantially diminished because ofsuch continuing operating losses, and we may be required to seek additionalcapital in the future.

 

Duringthe three months ended June 30, 2009, we provided $71,141 of cash from ouroperations and used $102,449 for investments in equipment. As of June 30, 2009,we had $125,535 in cash and cash equivalents available to fund futureoperations, an increase of $40,877 from March 31, 2009. As of June 30, 2009, wehad borrowed $275,000 from our $2,000,000 credit facility, an increase of$84,058 from March 31, 2009. Our working capital was $2,322,164 at June 30,2009 compared to $2,180,296 at March 31, 2009.

 

**Historical Perspective**

 

Wewere organized in 1991 and spent several years developing the AEM monitoringsystem and protective sheaths to adapt to conventional electrosurgicalinstruments. During this period, we conducted product trials and applied forpatents with the United States Patent Office and international patent agencies.Patents were issued to us in 1994, 1996, 1997, 1998, 2002 and 2008.

 

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Aswe evolved, it became clear to us that our AEM technology needed to beintegrated into the standard laparoscopic instrument design. As the developmentprogram proceeded, it also became apparent that the merging of electrical andmechanical engineering skills in the instrument development process for ourpatented, integrated electrosurgical instruments was a complex and difficulttask. As a result, instruments with integrated AEM technology were notcompleted for several years. Prior to offering a full range of laparoscopicelectrosurgical instrumentation, it was difficult for hospitals to commit tothe AEM solution, as we did not have adequate comparable surgical instrumentoptions to meet surgeons’ demands. As of fiscal year 2005, a sufficiently broadproduct line was available to provide hospital operating rooms with AEMinstruments in most of the designs common for laparoscopic surgery.

 

The launch of an expanded line of AEM instruments was accomplished overthe past three years. We are now turning our focus to developing nextgeneration versions of our AEM instruments to better meet market demands,particularly the demand for improved ergonomics and simplified userfunctionalities. This strategy coincides with the independent endorsements ofour AEM technology and the recommendations from the malpractice insurance andmedicolegal communities.

 

**Outlook**

 

*InstalledBase of AEM Monitoring Equipment*:  We believe that sales of our installed baseof AEM monitors will increase sales as the inherent risks associated withmonopolar laparoscopic electrosurgery become more widely acknowledged and as wefocus on increasing our sales efficiency. We expect that the replacement salesof electrosurgical instruments and accessories will also increase as additionalhospitals adopt AEM technology. We anticipate that the efforts to improve thequality of sales representatives carrying the AEM product line, along withincreased marketing efforts and the introduction of next generation products,may provide the basis for increased sales and profitable operations. However, thesemeasures, or any others that we may adopt, may not result in either increasedsales or profitable operations. Furthermore, most of our next generationproducts are in the early stages of development.

 

Webelieve that the unique performance of the AEM technology and our breadth ofindependent endorsements provide an opportunity for continued market sharegrowth. In our view, market awareness and awareness of the clinical credibilityof the AEM technology, as well as awareness of our endorsements, are continuallyimproving, and we expect this awareness to benefit our sales efforts for theremainder of fiscal year 2010. Our objectives in the remainder of fiscal year2010 are to maintain expense controls while optimizing sales execution in thefield, to expand market awareness of the AEM technology and to maximize thenumber of additional hospital accounts switching to AEM instruments whileretaining existing hospital customers. In addition, acceptance of AEM productsdepends on surgeons’ preference for our instruments, which depends on factorssuch as ergonomics and ease of use in addition to the technological advantageof AEM products. If surgeons prefer other instruments to our instruments, ourbusiness results will suffer.

 

*Possibilityof Operating Losses*:  We have,except for fiscal years 2009, 2004 and 2003 when we achieved profitableoperations, incurred losses since our inception and have an accumulated deficitof $16,135,479 at June 30, 2009. Operations have been financed primarilythrough issuances of our common stock and warrants to purchase our common stockand, to a lesser extent, profits from operations. We have made strides towardimproving our operating results but due to the ongoing need to develop,optimize and train our direct sales managers and the independent salesrepresentative network, the need to support the development of refinements toour product line, and the need to increase sustained sales to a level adequateto cover fixed and variable operating costs, we may operate at a net loss.Sustained losses, or our inability to generate sufficient cash flow fromoperations to fund our obligations, may result in a need to raise additionalcapital.

 

*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 will contributeto new hospital accounts and increase sales in fiscal year 2010. We also expectthat supplier agreements with Novation and Premier, which together representover 3,000 U.S. hospitals, will expose more hospitals to the benefits of AEMtechnology and may stimulate new hospital accounts. We also expect to increasemarket share through promotional programs of placing our AEM monitors at nocharge into hospitals that commit to standardize AEM instruments. However, allof these efforts to increase market share and grow sales will depend in part onour ability to expand the efficiency and effective coverage range of our directand independent sales representatives.

 

Wealso have longer term initiatives in place to improve our prospects.  We expect that development of next generationversions of our AEM products will better position our products in themarketplace and improve our retention rate at hospitals that have changed toAEM technology, enabling us to grow our sales. We may also explore overseas marketsto assess opportunities 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 developnext generation products or identify potential international markets orstrategic partners, we may 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 by 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, and we believe that sales andmarketing expenses will decrease as a percentage of net sales with increasingsales volume.

 

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

 

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**Results of Operations**

 

*For thethree months ended June 30, 2009 compared to the three months ended June 30,2008.*

 

*Netsales.*  Net sales for the quarter ended June 30,2009 were $3,173,660 compared to $3,093,966 for the quarter ended June 30,2008, an increase of 3%. The increase is attributable to the addition of newhospital accounts, partially offset by business lost from hospitals thatpreviously changed to AEM technology. We opened six new hospital accounts forAEM technology in the three months ended June 30, 2009 versus eleven newhospital accounts for AEM technology in the three months ended June 30,2008. We have changed sales managers and independent sales representatives inan effort to capitalize on identified market opportunities. It will take anumber of months before new sales managers and new independent salesrepresentatives generate new hospital accounts, but we expect that thecombination of these new additions will provide the focus that is needed toachieve market gains.

 

*Grossprofit*.  Gross profit for the quarterended June 30, 2009 of $2,031,925 represented an increase of 9% from grossprofit of $1,864,420 for the quarter ended June 30, 2008. Gross profit asa percentage of sales (gross margins) increased from 60% for the quarter ended June 30,2008 to 64% for the quarter ended June 30, 2009. The gross profit marginincrease in the first quarter of fiscal year 2010 was the result of productionefficiencies and an increase to inventory, as compared to last fiscal year’sfirst quarter, which resulted in a higher absorption of overhead costs toinventory and a decrease to cost of sales.

 

*Sales and marketing expenses*.  Sales and marketing expenses of $1,198,813for the quarter ended June 30, 2009 represented a decrease of 13% fromsales and marketing expenses of $1,374,152 for the quarter ended June 30,2008. The decrease was a result of decreased commissions for independent salesrepresentatives, decreased marketing independent contractor, and decreasedtravel and trade shows expenses. The decrease in such cost was partially offsetby increased commissions generated by sales by our sales employees.

 

*General and administrative expenses*.  General and administrative expenses of$353,819 for the quarter ended June 30, 2009 represented a decrease of 4%from general and administrative expenses of $366,909 for the quarter ended June 30,2008. The decrease was the result of a decrease to stock option expense andregulatory fees, which were due to timing of when the costs of the regulatoryfees are due.

 

*Research and development expenses*.  Research and development expenses of $300,989for the quarter ended June 30, 2009 represented an increase of 4% comparedto $288,754 for the quarter ended June 30, 2008. The increase was a resultof software license and outside services expense. The increase in such cost waspartially offset by decreased compensation expense.

 

*Netincome. *Net income was $163,310 forthe quarter ended June 30, 2009 compared to a net loss of $164,301 for thequarter ended June 30, 2008. The income increase was a result of a slightincrease in sales income, increased gross margin and reduced operatingexpenses, as discussed above.

 

Theresults of operations for the three months ended June 30, 2009 should notbe taken as an indication of the results of operations for all or any part ofthe balance of the fiscal year.

 

**Liquidity and Capital Resources**

 

Todate, operations have been financed primarily through issuances of our commonstock and warrants to purchase our common stock and, to a lesser extent,profits from operations, which together totaled $19,582,495 through June 30,2009.

 

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%, subject to increase upon a default. In connection with the creditfacility, we issued warrants to Silicon Valley Bank to purchase 28,000 sharesof our common stock at a per share price of $2.75. Our borrowing under thecredit facility is limited by our eligible receivables and inventory at thetime of borrowing. As of June 30, 2009, we had borrowed $275,000 from thecredit facility and, under our eligible receivables and inventory limit, had anadditional $1,329,845 available to borrow. We must repay our borrowings by November 10,2009 unless we renegotiate a commitment with Silicon Valley Bank or anotherfinancial institution by then.

 

Ouroperations provided $71,141 of cash during the three months ended June 30,2009 on net sales of $3,173,660. Cash was provided principally by net income.The amounts of cash provided by and used in operations for the three monthsended June 30, 2009 are not indicative of the expected cash to begenerated from or used in operations in fiscal year 2010. During the threemonths ended June 30, 2009, we invested $102,449 in the acquisition ofproperty and equipment. As of June 30, 2009, we had $125,535 in cash andcash equivalents available to fund future operations and had borrowed $275,000from our credit facility. Working capital was $2,322,164 at June 30, 2009compared to $2,180,296 at March 31, 2009. Current liabilities were$1,607,911 at June 30, 2009, compared to $1,709,252 at March 31,2009. The decrease in current liabilities at June 30, 2009 was caused,principally, by reducing accounts payable and accrued compensation and waspartially offset by an increase of our borrowings under our line of credit.

 

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

 

Wecurrently lease our facilities at 6797 Winchester Circle, Boulder, Coloradounder noncancelable lease agreements through July 31, 2014. The minimumfuture lease payment by fiscal year as of June 30, 2009 is as follows:

 
| **Fiscal Year**              | ** ** | **Amount** | ** **    |
|------------------------------|------------|------------|---------------|
| 2010 (nine months remaining) |       | $          |  184,444 |   |
| 2011                         |       | 247,264    |          |
| 2012                         |       | 254,629    |          |
| 2013                         |       | 262,281    |          |
| 2014                         |       | 270,221    |          |
| 2015                         |       | 90,966     |          |
| Total                        |       | $          | 1,309,805     |   |

 

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Ourminimum future equipment lease payments with General Electric CapitalCorporation as of June 30, 2009, by fiscal year, are as follows:

 
| **Fiscal Year**              | ** ** | **Amount** | ** **    |
|------------------------------|------------|------------|---------------|
| 2010 (nine months remaining) |       | $          |  76,405  |   |
| 2011                         |       | 101,873    |          |
| 2012                         |       | 101,873    |          |
| 2013                         |       | 101,873    |          |
| 2014                         |       | 8,488      |          |
| Total                        |       | $          |  390,512 |   |

 

Asof June 30, 2009, the following table shows our contractual obligationsfor the periods presented:

 
| ** **                   | ** ** | **Payment due by period** | ** ** |
|------------------------------|------------|---------------------------|------------|
| **Contractual  obligations** | ** ** | **Totals**                | ** ** | **Less than 1 year** | ** ** | **1-3 years** | ** ** | **3-5 years** | ** ** | **More than 5 years** | ** ** |
| Line  of credit obligations  |       | $                         | 275,000    |   | $ | 275,000 |   | $ |  — |   | $ | — |   | $ | — |   |
| Operating  lease obligations |       | 1,700,317                 |       | 349,053 |   | 697,792 |   | 630,729 |   | 22,743 |   |
| Total                        |       | $                         | 1,975,317  |   | $ | 624,053 |   | $ | 697,792 |   | $ | 630,729 |   | $ | 22,743 |   |

 

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

 

Ourfiscal year 2010 operating plan is focused on increasing new hospital accounts,retaining existing hospital customers, growing sales, increasing gross profitsand conserving cash. We are investing in research and development efforts todevelop next generation versions of the AEM product line. We have invested inmanufacturing property and equipment to manufacture disposable scissors insertsinternally and reduce our cost of sales. We cannot predict with certainty theexpected sales, gross profit, net income or loss and usage of cash and cashequivalents for fiscal year 2010. However, we believe that our cash resourcesand credit facility will be sufficient to fund our operations for at least thenext twelve months. If we are unable to manage our business operations in linewith budget expectations, it could have a material adverse effect on ourbusiness viability, financial position, results of operations and cash flows.If we are not successful in continuing profitability and positive cash flow,additional capital may be required to maintain ongoing operations.

 

**Income Taxes**

 

Asof March 31, 2009, net operating loss carryforwards totaling approximately$15.5 million are available to reduce taxable income in the future. The netoperating loss carryforwards expire, if not previously utilized, at variousdates beginning in the fiscal year ending March 31, 2010. 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 Policiesand Estimates**

## ** **

Ourdiscussion and analysis of our financial condition and results of operationsare based upon our financial statements, which have been prepared in accordancewith accounting principles generally accepted in the United States. Thepreparation of these financial statements requires us to make estimates andjudgments that affect the reported amounts of assets, liabilities, sales andexpenses, and related disclosure of contingent assets and liabilities. On an on-goingbasis, we evaluate our estimates, including those related to bad debts,inventories, sales returns, warranty, contingencies and litigation. We base ourestimates on historical experience and on various other assumptions that arebelieved to be reasonable under the circumstances, the results of which formthe basis for making judgments about the carrying values of assets andliabilities that are not readily apparent from other sources. Actual resultsmay differ from these estimates under different assumptions or conditions. Webelieve the following critical accounting policies affect the more significantjudgments and estimates used in the preparation of our financial statements.

 

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

 

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

 

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Wereduce inventory for estimated obsolete or unmarketable inventory equal to thedifference between the cost of inventory and the estimated market value basedon assumptions about future demand and market conditions. If actual marketconditions are less favorable than those projected by management, additionalinventory write-downs may be required. Any write-downs of inventory wouldreduce our reported net income during the period in which such write-downs wereapplied. To the extent that our estimates prove to be too high, and weultimately utilize or sell inventory previously determined to be impaired, wemay record a reversal of the provision in the period of such determination.

 

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

 

Propertyand equipment are stated at cost, with depreciation computed over the estimateduseful lives of the assets, generally three to seven years. We use thestraight-line method of depreciation for property and equipment. Leaseholdimprovements are depreciated over the shorter of the remaining lease term orthe estimated useful life of the asset. Maintenance and repairs are expensed asincurred and major additions, replacements and improvements are capitalized.

 

Weamortize our patent costs over their estimated useful lives, which is typicallythe remaining statutory life. From time to time, we may be required to adjustthese useful lives of our patents based on advances in technology, competitoractions, and the like. We review the recorded amounts of patents at each periodend to determine if their carrying amount is still recoverable based on our expectationsregarding sales of related products. Such an assessment, in the future, mayresult in a conclusion that the assets are impaired, with a correspondingcharge against earnings.

 

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

 

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

 

(a) We have carried out an evaluation under the supervision and with 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-15(e) 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 June 30, 2009, 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) During the quarter ended June 30, 2009, there were no changes in ourinternal control over financial reporting or in other factors that havematerially affected, or are reasonably likely to materially affect, ourinternal control over financial reporting, nor were there any significantdeficiencies or material weaknesses in such disclosure controls and proceduresor internal control over financial reporting requiring corrective actions.

 

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| **PART II.** | **OTHER INFORMATION**                                                                                   |
|-------------------|---------------------------------------------------------------------------------------------------------|
| ** **        | ** **                                                                                              |
| **ITEM****6**     | **EXHIBITS**                                                                                            |
|              |                                                                                                    |   |
|              | The  following exhibits are filed with this report on Form 10-Q or are  incorporated by reference: |
|              |
|              | 3.1                                                                                                     | Articles  of Incorporation of the Company, as amended (incorporated by reference from  Registration Statement #333-4118-D dated June 25, 1996). |
|              |                                                                                                    |   |
|              | 3.2                                                                                                     | Bylaws  of the Company (incorporated by reference from Current Report on  Form 8-K dated October 30, 2008). |
|              |                                                                                                    |   |
|              | 4.1                                                                                                     | Form of  certificate for shares of Common Stock (incorporated by reference from  Registration Statement #333-4118-D dated June 25, 1996). |
|              |                                                                                                    |   |
|              | 31.1                                                                                                    | Certification  of Chief Executive Officer under Rule 13a-14(a) of the Exchange Act  (filed herewith). |
|              |                                                                                                    |   |
|              | 31.2                                                                                                    | Certification  of Principal Financial and Accounting Officer under Rule 13a-14(a) of  the Exchange Act (filed herewith). |
|              |                                                                                                    |   |
|              | 32.1                                                                                                    | Certifications  of Periodic Reports pursuant to Section 906 of the Sarbanes-Oxley Act of  2002 (filed herewith). |
|                   |                                                                                                         |  |  |  |

 

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**SIGNATURE**

 

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

 

 

Encision Inc.

 

 
| August 14,  2009 |   | /s/  Marcia McHaffie                     |
|-----------------------|--------|------------------------------------------|
| Date                  |   | Marcia  McHaffie                         |
|                  |   | Controller                               |
|                  |   | Principal  Accounting Officer & |
|                  |   | Principal  Financial Officer             |

 

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