Tableof Contents

 

 

** **

**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**WASHINGTON, D.C. 20549**

 

## **Form 10-Q**

## ** **

| **x**      | ** ** | **QUARTERLY REPORT PURSUANT TO SECTION 13 OR  15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934**                                                                                                                                                                                  |
|------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|       |       |                                                                                                                                                                                                                                                                                     |
| ** ** | ** ** | **For the quarterly period ended  September 30, 2008**                                                                                                                                                                                                                              |
|       |       |                                                                                                                                                                                                                                                                                     |
|       |       | **OR**                                                                                                                                                                                                                                                                                   |
|       |       |                                                                                                                                                                                                                                                                                     |
| **o**      | ** ** | **TRANSITION REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**                                                                                                                                                                                  |
|       |       |                                                                                                                                                                                                                                                                                     |
| ** ** | ** ** | **For the transition period from                        to                    ** |

 

**Commissionfile number   0-28604**

 

**ENCISIONINC.**

(Exactname of registrant as specified in its charter)

 

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

** **

**6797Winchester Circle**

**Boulder,Colorado 80301**

(Addressof principal executive offices)

 

**(303)444-2600**

(Registrant’stelephone number)

 

Indicate by check mark whether the registrant (1) hasfiled all reports required to be filed by Section 13 of 15(d) of theSecurities Exchange Act of 1934 during the preceding 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

 

Indicate by check mark whether the registrantis a large accelerated filer, an accelerated filer, a non-accelerated filer, ora smaller reporting company. See the definitions of “large accelerated filer,” “acceleratedfiler” and “smaller reporting company” in Rule 12b-2 of 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 checkmark whether the registrantis a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes   o   No   x

 

Indicate the number of shares outstanding ofeach of the issuer’s classes of common equity, as of the latest practicabledate:

 

| **Common  Stock, no par value** | ** ** | **6,455,100  Shares**                   |
|---------------------------------|------------|-----------------------------------------|
| (Class)                         |       | (outstanding  at October 31, 2008) |

 

Transitional Small Business Disclosure Format

Yes   o   No   x

 

 

 

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**ENCISION INC.**

 

**FORM 10-Q**

 

**For theQuarter Ended September 30, 2008**

 

**INDEX**

 
| ** **        | ** **    | ** **                         | ** **                                                                                      | **Page**   |
|-------------------|---------------|------------------------------------|-------------------------------------------------------------------------------------------------|------------|
| ** **        | ** **    | ** **                         | ** **                                                                                      | **Number** |
| **PART I.**  | ** **    | **UNAUDITEDFINANCIAL INFORMATION** |                                                                                            |
|              | ** **    |                               |                                                                                            |       |
|              | **ITEM1**     | -                                  | Condensed Interim Financial  Statements:                                                        |       |
|              |          | -                                  | Condensed Balance Sheets as of  September 30, 2008 and March 31, 2008                 | 3          |
|              |          | -                                  | Condensed Statements of  Operations for the Three Months Ended September 30, 2008 and 2007 | 4          |
|              |          | -                                  | Condensed Statements of  Operations for the Six Months Ended September 30, 2008 and 2007   | 5          |
|              |          | -                                  | Condensed Statements of Cash  Flows for the Six Months Ended September 30, 2008 and 2007        | 6          |
|              |          | -                                  | Notes to  Condensed Interim Financial Statements                                                | 7          |
| ** **        | ** **    |                               |                                                                                            |       |
| ** **        | **ITEM 2**    | -                                  | Management’s Discussion and  Analysis of Financial Condition and Results of Operations     | 11         |
| ** **        | ** **    |                               |                                                                                            |       |
| ** **        | **ITEM 4**    | -                                  | Controls and  Procedures                                                                        | 16         |
| ** **        | ** **    |                               |
| **PART II.** | ** **    | **OTHER INFORMATION**              |                                                                                            |
| ** **        | ** **    |                               |                                                                                            |       |
| ** **        | **ITEM 4**    | -                                  | Submission of  Matters to a Vote of Security Holders                                            | 17         |
| ** **        | ** **    |                               |                                                                                            |       |
| ** **        | **ITEM 6**    | -                                  | Exhibits                                                                                        | 17         |
| ** **        | ** **    |                               |                                                                                            |       |
| ** **        | **SIGNATURE** |                               |                                                                                            | 18         |

 

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

 

**ITEM 1 – CONDENSEDINTERIM FINANCIAL STATEMENTS**

 

**EncisionInc.**

**Condensed Balance Sheets**

**(unaudited)**

 
| ** **                                                                                                                                                                                                          | ** ** | **September 30,  2008** | ** ** | **March 31,  2008** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------|------------|--------------------------|------------|
| **ASSETS**                                                                                                                                                                                                          |       |                         |       |                     |       |
| Current assets:                                                                                                                                                                                                     |       |                         |       |                     |       |
| Cash and cash  equivalents                                                                                                                                                                                          |       | $                            | 300,060    |                     | $          | 70,995 |   |
| Accounts  receivable, net of allowance for doubtful accounts of $17,500 at  September 30, 2008 and$15,000 at March 31, 2008                                                                               |       | 1,319,675                    |       | 1,452,770                |       |
| Inventories, net  of reserve for obsolescence of $50,000 at September 30, 2008 and $65,000  at March 31, 2008                                                                                             |       | 1,945,713                    |       | 2,270,953                |       |
| Prepaid expenses                                                                                                                                                                                                    |       | 97,601                       |       | 99,025                   |       |
| Total current  assets                                                                                                                                                                                               |       | 3,663,049                    |       | 3,893,743                |       |
| Equipment, at  cost:                                                                                                                                                                                                |       |                         |       |                     |       |
| Furniture,  fixtures and equipment                                                                                                                                                                                  |       | 1,881,541                    |       | 1,776,823                |       |
| Customer-site  equipment                                                                                                                                                                                            |       | 667,444                      |       | 644,946                  |       |
| Accumulated  depreciation                                                                                                                                                                                           |       | (1,732,068                   | )          | (1,623,432               | )          |
| Equipment, net                                                                                                                                                                                                      |       | 816,917                      |       | 798,337                  |       |
| Patents, net of  accumulated amortization of $122,823 at September 30, 2008 and $116,652  at March 31, 2008                                                                                               |       | 203,120                      |       | 199,246                  |       |
| Other assets                                                                                                                                                                                                        |       | 38,827                       |       | 53,149                   |       |
| **TOTAL  ASSETS**                                                                                                                                                                                                   |       | $                            | 4,721,913  |                     | $          | 4,944,475 |   |
| **LIABILITIES  AND SHAREHOLDERS’ EQUITY**                                                                                                                                                                      |       |                         |       |                     |       |
| Current  liabilities:                                                                                                                                                                                               |       |                         |       |                     |       |
| Accounts payable                                                                                                                                                                                                    |       | $                            | 531,989    |                     | $          | 536,755 |   |
| Accrued compensation                                                                                                                                                                                                |       | 357,823                      |       | 391,889                  |       |
| Other accrued  liabilities                                                                                                                                                                                          |       | 397,409                      |       | 481,106                  |       |
| Total current  liabilities                                                                                                                                                                                          |       | 1,287,221                    |       | 1,409,750                |       |
| Long-term debt                                                                                                                                                                                                      |       | 505,034                      |       | 606,000                  |       |
| **Commitments  and contingencies**                                                                                                                                                                                  |       |                         |       |                     |       |
| Shareholders’  equity:                                                                                                                                                                                         |       |                         |       |                     |       |
| Preferred stock,  no par value: 10,000,000 shares authorized; none issued and outstanding                                                                                                                           |       | —                       |       | —                   |       |
| Common stock and  additional paid-in capital, no par value: 100,000,000 shares authorized;  6,455,100 and 6,447,100 shares issued and outstanding at September 30,  2008 and March 31, 2008, respectively |       | 19,477,282                   |       | 19,387,331               |       |
| Accumulated  (deficit)                                                                                                                                                                                              |       | (16,547,624                  | )          | (16,458,606              | )          |
| Total  shareholders’ equity                                                                                                                                                                                    |       | 2,929,658                    |       | 2,928,725                |       |
| **TOTAL  LIABILITIES AND SHAREHOLDERS’ EQUITY**                                                                                                                                                                |       | $                            | 4,721,913  |                     | $          | 4,944,475 |   |

 

The accompanying notes to financial statementsare an integral part of these condensed statements.

 

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**EncisionInc.**

**Condensed Statements of Operations**

**(Unaudited)**

 
| **Three Months Ended**              | ** ** | **September 30,  2008** | ** ** | **September 30,  2007** | ** ** |
|-----------------------------------------------|------------|------------------------------|------------|------------------------------|------------|
| **NET  SALES**                                |       | $                            | 3,346,208  |                         | $          | 3,092,390 |   |
| **COST OF  SALES**                            |       | 1,293,869                    |       | 1,166,453                    |       |
| **GROSS  PROFIT**                             |       | 2,052,339                    |       | 1,925,937                    |       |
| **OPERATING  EXPENSES:**                      | ** ** | ** **                   | ** ** | ** **                   | ** ** |
| Sales and  marketing                          |       | 1,321,798                    |       | 1,236,871                    |       |
| General and  administrative                   |       | 358,044                      |       | 349,806                      |       |
| Research and  development                     |       | 280,459                      |       | 333,460                      |       |
| Total operating  expenses                     |       | 1,960,301                    |       | 1,920,137                    |       |
| **OPERATING  INCOME**                         |       | 92,038                       |       | 5,800                        |       |
| Interest  expense, net                        |       | (16,953                      | )          | (10,138                      | )          |
| Other income  (expense), net                  |       | 199                          |       | 12,175                       |       |
| Interest and  other income (expense), net     |       | (16,754                      | )          | 2,037                        |       |
| **INCOME  BEFORE PROVISION FOR INCOME TAXES** |       | 75,284                       |       | 7,837                        |       |
| Provision for  income taxes                   |       | —                       |       | —                       |       |
| **NET  INCOME**                               |       | $                            | 75,284     |                         | $          | 7,837 |   |
| Net income per  share—basic and diluted  |       | $                            | 0.01       |                         | $          | 0.00 |   |
| Weighted average  shares—basic           |       | 6,455,100                    |       | 6,439,305                    |       |
| Weighted average  shares—diluted         |       | 6,455,100                    |       | 6,457,921                    |       |

 

The accompanying notes to financial statementsare an integral part of these condensed statements.

 

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**EncisionInc.**

**Condensed Statements of Operations**

**(Unaudited)**

 
| **Six Months Ended**                  | ** ** | **September 30,  2008** | ** ** | **September 30,  2007** | ** ** |
|-------------------------------------------------|------------|------------------------------|------------|------------------------------|------------|
| **NET  SALES**                                  |       | $                            | 6,440,174  |                         | $          | 5,751,661 |   |
| **COST OF  SALES**                              |       | 2,523,415                    |       | 2,197,405                    |       |
| **GROSS  PROFIT**                               |       | 3,916,759                    |       | 3,554,256                    |       |
| **OPERATING  EXPENSES:**                        |       |                         |       |                         |       |
| Sales and  marketing                            |       | 2,695,950                    |       | 2,450,729                    |       |
| General and  administrative                     |       | 724,954                      |       | 722,244                      |       |
| Research and development                        |       | 569,213                      |       | 663,631                      |       |
| Total operating  expenses                       |       | 3,990,117                    |       | 3,836,604                    |       |
| **OPERATING  LOSS**                             |       | (73,358                      | )          | (282,348                     | )          |
| Interest  expense, net                          |       | (35,625                      | )          | (15,000                      | )          |
| Other income  (expense), net                    |       | 19,965                       |       | 9,826                        |       |
| Interest and  other income (expense), net       |       | (15,660                      | )          | (5,174                       | )          |
| **LOSS  BEFORE PROVISION FOR INCOME TAXES**     |       | (89,018                      | )          | (287,522                     | )          |
| Provision for  income taxes                     |       | —                       |       | —                       |       |
| **NET  LOSS**                                   |       | $                            | (89,018    | )                            | $          | (287,522 | ) |
| Net loss per  share—basic and diluted      |       | $                            | (0.01      | )                            | $          | (0.04 | ) |
| Weighted average  shares—basic and diluted |       | 6,452,452                    |       | 6,435,720                    |       |

 

The accompanying notes to financial statementsare an integral part of these condensed statements.

 

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**EncisionInc.**

**Condensed Statements of Cash Flows**

**(Unaudited)**

 
| **Six Months Ended**                                                             | ** ** | **September 30,  2008** | ** ** | **September 30,  2007** | ** ** |
|--------------------------------------------------------------------------------------------|------------|------------------------------|------------|------------------------------|------------|
| Cash flows from  operating activities:                                                     |       |                         |       |                         |       |
| Net loss                                                                                   |       | $                            | (89,018    | )                            | $          | (287,522 | ) |
| Adjustments to  reconcile net loss to net cash provided by (used in) operating activities: |       |                         |       |                         |       |
| Depreciation and  amortization                                                             |       | 114,807                      |       | 93,349                       |       |
| Stock-based  compensation expense related to stock options                                 |       | 78,431                       |       | 75,214                       |       |
| Stock-based  interest expense related to warrants                                          |       | 3,127                        |       | 6,254                        |       |
| Provision for  doubtful accounts, net                                                      |       | 2,500                        |       | (4,500                       | )          |
| Provision for  inventory obsolescence                                                      |       | (15,000                      | )          | 25,000                       |       |
| Change in  operating assets and liabilities:                                               |       |                         |       |                         |       |
| Accounts  receivable                                                                       |       | 130,595                      |       | (90,567                      | )          |
| Inventories                                                                                |       | 340,240                      |       | (305,425                     | )          |
| Prepaid expenses  and other assets                                                         |       | 12,619                       |       | 140,998                      |       |
| Accounts payable                                                                           |       | (4,766                       | )          | (6,973                       | )          |
| Accrued  compensation and other accrued liabilities                                        |       | (117,763                     | )          | 8,791                        |       |
| Net cash  provided by (used in) operating activities                                       |       | 455,772                      |       | (345,381                     | )          |
| Cash flows from  investing activities:                                                     |       |                         |       |                         |       |
| Acquisition of  property and equipment                                                     |       | (127,216                     | )          | (324,127                     | )          |
| Patent costs                                                                               |       | (10,045                      | )          | (33,216                      | )          |
| Net cash used in  investing activities                                                     |       | (137,261                     | )          | (357,343                     | )          |
| Cash flows from  financing activities:                                                     |       |                         |       |                         |       |
| (Paydown of)  borrowings from credit facility                                              |       | (100,966                     | )          | 280,000                      |       |
| Proceeds from  the exercise of stock options                                               |       | 11,520                       |       | 45,740                       |       |
| Net cash  provided by (used in) financing activities                                       |       | (89,446                      | )          | 325,740                      |       |
| Net increase  (decrease) in cash and cash equivalents                                      |       | 229,065                      |       | (376,984                     | )          |
| Cash and cash equivalents,  beginning of period                                            |       | 70,995                       |       | 436,403                      |       |
| Cash and cash  equivalents, end of period                                                  |       | $                            | 300,060    |                         | $          | 59,419 |   |

 

The accompanying notes to financial statementsare an integral part of these condensed statements.

 

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ENCISION INC.

 

NOTES TO CONDENSED INTERIMFINANCIAL STATEMENTS

 

SEPTEMBER 30, 2008

(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 ischanging the marketplace for electrosurgical devices and instruments byproviding a solution to a patient safety risk in laparoscopic surgery. Oursales to date have been made principally in the United States.

 

Wehave, except for fiscal years 2004 and 2003 when we achieved profitableoperations, incurred losses since our inception and have an accumulated deficitof $16,547,624 at September 30, 2008. Operations have been financedprimarily through issuances of our common stock. 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. We expect theseefforts to result in continued sales increases for fiscal year 2009.

 

(2)       SUMMARYOF SIGNIFICANT ACCOUNTING POLICIES

 

Basis of Presentation.  The condensed interim financialstatements included herein have been prepared by us, without audit, pursuant tothe rules and regulations of the Securities and Exchange Commission.Certain information and footnote disclosures normally included in financialstatements prepared in accordance with generally accepted accounting principlesaccepted in the United States have been condensed or omitted pursuant to such rules andregulations, although we believe that the disclosures made are adequate to makethe information presented not misleading. The condensed interim financialstatements and notes thereto should be read in conjunction with the financialstatements and the notes thereto included in our Annual Report on Form 10-KSBfor the fiscal year ended March 31, 2008, filed on June 28, 2008.

 

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.  Thepreparation of financial statements in conformity with accounting principlesgenerally accepted in the United States requires management to make estimatesand assumptions. Such estimates and assumptions affect the reported amounts ofassets and liabilities and the disclosure of contingent assets and liabilitiesat the date of the financial statements and the reported amounts of sales andexpense during the reporting period. Actual results could differ from thoseestimates.

 

Cashand Cash Equivalents.  For purposes of reporting cash flows, weconsider all cash and highly liquid investments with an original maturity ofthree months or less to be cash equivalents.

 

Fair Value of Financial Instruments.  In September 2006,the Financial Accounting Standards Board (“FASB”) issued Statement of FinancialAccounting Standards (“SFAS”) 157, “Fair Value Measurements”, which iseffective for fiscal years beginning after November 15, 2007 and forinterim periods within those years. This statement defines fair value,establishes a framework for measuring fair value and expands the relateddisclosure requirements. This statement applies under other accountingpronouncements that require or permit fair value measurements. The statementindicates, among other things, that a fair value measurement assumes that thetransaction to sell an asset or transfer a liability occurs in the principalmarket for the asset or liability or, in the absence of a principal market, themost advantageous market for the asset or liability. SFAS 157 defines fairvalue based upon an exit price model.

 

We adopted SFAS 157 as of April 1, 2008. Our financial instrumentsconsist of cash and cash equivalents and short-term trade receivables andpayables. The carrying values of cash and cash equivalents and short-termreceivables and payables approximate their fair value due to their shortmaturities.

 

Concentrationof Credit Risk.  SFAS 105, “Disclosure of Information AboutFinancial Instruments with Off-Balance Sheet Risk and Financial Instrumentswith Concentrations of Credit Risk,” requires disclosure of significantconcentrations of credit risk regardless of the degree of such risk. Financialinstruments with significant credit risk include cash. The amount of cash thatwe have on deposit with financial institutions exceeds the $250,000 federallyinsured limit at September 30, 2008. However, we believe that thefinancial institutions are financially sound and the risk of loss is minimal.

 

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

 

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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.

 

Accountsreceivable are typically unsecured and are derived from transactions with and fromentities in the healthcare industry primarily located in the United States.Accordingly, we may be exposed to credit risk generally associated with thehealthcare 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 September 30, 2008 of $1,319,675included no more than 5% from any one customer. The net accounts receivablebalance at March 31, 2008 of $1,452,770 included no more than 4% from anyone customer.

 

WarrantyAccrual.  We provide for the estimated cost of productwarranties at the time sales are recognized. While we engage in extensiveproduct quality programs and processes, including actively monitoring and evaluatingthe quality of our component suppliers, our warranty obligation is based uponhistorical experience and is also affected by product failure rates andmaterial usage incurred in correcting a product failure. Should actual productfailure rates or material usage costs differ from our estimates, revisions tothe estimated warranty liability would be required.

 

Inventories. Inventories are stated at the lower of cost (first-in, first-out basis)or market. We reduce inventory for estimated obsolete or unmarketable inventoryequal to the difference between the cost of inventory and the estimated marketvalue based upon assumptions about future demand and market conditions. Ifactual market conditions are less favorable than those projected by management,additional inventory write-downs may be required. At September 30, 2008and March 31, 2008, inventory consisted of the following:

 
| ** **                     | ** ** | **September 30, 2008** | ** ** | **March 31, 2008** | ** ** |
|--------------------------------|------------|----------------------------------|------------|------------------------------|------------|
| Raw materials                  |       | $                                | 1,200,424  |                         | $          | 1,296,761 |   |
| Finished goods                 |       | 795,289                          |       | 1,039,192                    |       |
| Total gross  inventories       |       | 1,995,713                        |       | 2,335,953                    |       |
| Less reserve for  obsolescence |       | (50,000                          | )          | (65,000                      | )          |
| Total net  inventories         |       | $                                | 1,945,713  |                         | $          | 2,270,953 |   |

 

Propertyand Equipment.Property and 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 thisequipment. Manufacturing and production equipment acquired, but not placed inservice, in fiscal year 2007 and manufacturing and production equipmentacquired after fiscal year 2007 is of a different technology for which thestraight-line method is more appropriate. Therefore, we used the straight-linemethod of depreciation 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. 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.

 

Long-LivedAssets.  Long-lived assets are reviewed for impairmentwhenever events or changes in circumstances indicate that the carrying amountof an asset may not be recoverable. A long-lived asset is considered impairedwhen estimated future cash flows related to the asset, undiscounted and withoutinterest, are insufficient to recover the carrying amount of the asset. If deemedimpaired, the long-lived asset is reduced to its estimated fair value.Long-lived assets to be disposed of are reported at the lower of their carryingamount or estimated fair value less cost to sell.

 

Patents.  Thecosts of applying for patents are capitalized and amortized on a straight-linebasis over the lesser of the patent’s economic or legal life (17 years in theUnited States). Capitalized costs are expensed if patents are not granted. Wereview the carrying value of our patents periodically to determine whether thepatents have continuing value, and such reviews could result in the conclusionthat the recorded amounts have been impaired.

 

Accrued Liabilities.  We have accrued $50,000 relatedto warranty claims, $74,730 related to sales commissions and $38,005 related torent normalization and have included these amounts in accrued liabilities inthe accompanying balance sheet at September 30, 2008. At March 31,2008, we had accrued $75,000 related to warranty claims, $107,034 related tosales commissions and $58,890 related to rent normalization and have includedthese amounts in accrued liabilities in the accompanying balance sheet at March 31,2008.

 

Income Taxes.  We account for income taxes under theprovisions of SFAS 109, “Accounting for Income Taxes” (“SFAS 109”). SFAS 109requires recognition of deferred income tax assets and liabilities for theexpected future income tax consequences, based on enacted tax laws, oftemporary differences between the financial reporting and tax bases of assetsand liabilities. SFAS 109 also requires recognition of deferred tax assets forthe expected future tax effects of all deductible temporary differences, losscarryforwards and tax credit carryforwards. Deferred tax assets are thenreduced, if deemed necessary, by a valuation allowance for the amount of anytax benefits which, more likely than not based on current circumstances, arenot expected to be realized. During fiscal years 2008 and 2007, no tax benefitwas obtained from our loss. As a result, no tax benefit is reflected in theaccompanying statements of operations. Should we achieve sufficient, sustainedincome in the future, we may conclude that some or all of the valuationallowance should be reversed.

 

Sales Recognition.  Sales from product sales isrecorded when we ship the product and title has passed to the customer,provided that we have evidence of a customer arrangement and can conclude thatcollection is probable. Our shipping policy is FOB Shipping Point. We recognizerevenue from sales to stocking distributors when there is no right of return,other than for normal warranty claims. We have no ongoing obligations relatedto product sales, except for normal warranty.

 

Researchand Development Expenses.  We expense research and development costs forproducts and processes as incurred.

 

Stock-Based Compensation.  Beginning in fiscal year 2007,we adopted SFAS 123 (revised 2004), “Share-Based Payment” (“SFAS 123(R)”),which requires the measurement and recognition of compensation expense for allshare-based payment awards made to employees and directors, including employeestock options, based on estimated fair values. SFAS 123(R) supersedes ourprevious accounting under Accounting Principles Board Opinion 25, “Accountingfor Stock Issued to Employees” (“APB 25”), for periods beginning in fiscal year2007. In March 2005, the Securities and

 

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ExchangeCommission issued Staff Accounting Bulletin 107 (“SAB 107”) relating to SFAS123(R). We have applied the provisions of SAB 107 in our adoption of SFAS123(R).

 

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 fiscal years 2008 and 2007 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 do not include, the impactof SFAS 123(R). Stock-based compensation expense recognized under SFAS 123(R) forthe three and six months ended September 30, 2008 was $39,428 and $78,431,respectively, which consisted of stock-based compensation expense related togrants of employee stock options. Stock-based compensation expense related toemployee stock options during the three and six months ended September 30,2007 was $36,340 and $75,214, 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 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 September 30, 2008 and 2007included compensation expense for share-based payment awards granted prior to,but not yet vested as of September 30, 2008, based on the grant date fairvalue estimated in accordance with the pro forma provisions of SFAS 123 andcompensation expense for the share-based payment awards granted subsequent to July 30,2005, based on the grant date fair value estimated in accordance with theprovisions of SFAS 123(R). Compensation expense for all share-based payment isrecognized using the straight-line, single-option method. As stock-basedcompensation expense recognized in the accompanying statements of operationsfor the three months ended September 30, 2008 and 2007 is based on awardsultimately expected to vest, it has been reduced for estimated forfeitures.SFAS 123(R) requires forfeitures to be estimated at the time of grant andrevised, if necessary, in subsequent periods if actual forfeitures differ fromthose 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) 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, 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 concluded that we have one operatingsegment.

 

Basicand Diluted Income and Loss 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. As a result of our net loss for the threemonths ended September 30, 2008 and 2007, all potentially dilutivesecurities in the loss year would be anti-dilutive and were excluded from thecomputation of diluted loss per share, and there are no differences betweenbasic and diluted per share amounts for the loss year presented.

 

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

 
| ** **                                  | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|---------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                  | ** ** | **September 30,  2008**     | ** ** | **September 30,  2007**   | ** ** | **September 30,  2008** | ** ** | **September 30,  2007** | ** ** |
| Net income  (loss)                          |       | $                                | 75,284     |                           | $          | 7,837 |   | $ | (89,017 | ) | $ | (287,522 | ) |
| Weighted-average  shares — basic       |       | 6,455,100                        |       | 6,439,305                      |       | 6,452,452 |   | 6,435,720 |   |
| Effect of  dilutive potential common shares |       | —                           |       | 18,616                         |       | — |   | — |   |
| Weighted-average  shares — diluted     |       | 6,455,100                        |       | 6,457,921                      |       | 6,452,452 |   | 6,435,720 |   |
| Net income  (loss) per share — basic   |       | $                                | 0.01       |                           | $          | 0.00 |   | $ | (0.01 | ) | $ | (0.04 | ) |
| Net income (loss)  per share — diluted |       | $                                | 0.01       |                           | $          | 0.00 |   | $ | (0.01 | ) | $ | (0.04 | ) |
| Antidilutive  employee stock options        |       | 440,000                          |       | 147,750                        |       | 440,000 |   | 385,000 |   |

 

(3)       COMMITMENTS AND CONTINGENCIES

 

Wecurrently lease our facilities at 6797 Winchester Circle, Boulder, Colorado undernoncancelable lease agreements through August 14, 2009. The minimum futurelease payment by fiscal year as of September 30, 2008 is as follows:

 

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| **Fiscal Year**         | ** ** | **Amount** | ** ** |
|------------------------------|------------|------------|------------|
| 2009 (six months  remaining) |       | $          | 124,845    |   |
| 2010                         |       | 94,804     |       |
| Total                        |       | $          | 219,649    |   |

 

Our minimum future equipment lease payments withGeneral Electric Capital Corporation as of September 30, 2008, by fiscalyear, are as follows:

 
| **Fiscal Year**         | ** ** | **Amount** | ** ** |
|------------------------------|------------|------------|------------|
| 2009 (six months  remaining) |       | $          | 50,937     |   |
| 2010                         |       | 101,873    |       |
| 2011                         |       | 101,873    |       |
| 2012                         |       | 101,873    |       |
| 2013                         |       | 101,873    |       |
| 2014                         |       | 8,488      |       |
| Total                        |       | $          | 466,917    |   |

 

Weare subject to regulation by the United States Food and Drug Administration (“FDA”).The FDA provides regulations governing the manufacture and sale of our productsand regularly inspects us and other manufacturers to determine compliance withthese regulations. We believe that we were in substantial compliance with allknown regulations as of September 30, 2008. FDA inspections are conductedperiodically at the discretion of the FDA. Our latest inspection by the FDAoccurred in May 2004.

 

(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 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 and six months ended September 30, 2008 and2007, which was allocated as follows:

 
| ** **                        | ** ** | **Three Months Ended**   | ** ** | **Six Months Ended**     | ** ** |
|-----------------------------------|------------|------------------------------------|------------|------------------------------------|------------|
| ** **                        | ** ** | **September 30,   2008** | ** ** | **September 30,   2007** | ** ** | **September 30,   2008** | ** ** | **September 30,   2007** | ** ** |
| Cost of sales                     |       | $                                  | 210        |                               | $          | — |   | $ | 420 |   | $ | — |   |
| Sales and  marketing              |       | 7,059                              |       | 7,051                              |       | 14,118 |   | 16,995 |   |
| General and  administrative       |       | 27,338                             |       | 24,806                             |       | 54,251 |   | 49,612 |   |
| Research and  development         |       | 4,821                              |       | 4,483                              |       | 9,642 |   | 8,607 |   |
| Stock-based  compensation expense |       | $                                  | 39,428     |                               | $          | 36,340 |   | $ | 78,431 |   | $ | 75,214 |   |

 

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 to purchase 5,000 and 40,000 shares of stock were granted duringthe three and six months ended September 30, 2008, respectively.

 

Asof September 30, 2008, $232,000 of total unrecognized compensation costsrelated to nonvested stock is expected to be recognized over a weighted-averageperiod of two years.

 

(5)       RELATED PARTY TRANSACTION

 

Duringthe quarter ended September 30, 2008, we paid consulting fees ofapproximately $12,000 to an entity owned by one of our directors.

 

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**ITEM 2****-****MANAGEMENT’S DISCUSSION ANDANALYSIS 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 reviewthe section entitled *“Risk Factors”*inour Form 10-KSB for the fiscal year ended March 31, 2008.

 

**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 changingthe marketplace 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 tocausing inadvertent collateral tissue damage outside the surgeon’s field ofview. The risk of unintended electrosurgical burn injury to the patient inlaparoscopic surgery has been well documented. This risk poses a threat topatient safety and creates liability exposure for surgeons and hospitals thatdo not adequately address the issue.

 

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

 

AEMtechnology has been recommended and endorsed by sources from various groupsinvolved in 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, anergonomically-designed handle for our articulating instruments, and we plan tointroduce new additions to the AEM product line in fiscal year 2009. Duringfiscal year 2009, we launched our next generation of enTouch handles for AEMarticulating laparoscopic instrument inserts.

 

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 September 30, 2008. This sales stream is expected to grow asthe base of hospitals that switch to AEM technology continues to grow. Inaddition, we intend to develop disposable versions of more of our AEM productsin order to meet market demands and expand our sales opportunities.

 

Wehave, except for fiscal years 2004 and 2003 when we achieved profitableoperations, incurred losses since our inception and have an accumulated deficitof $16,547,624 at September 30, 2008. Operations have been financedprimarily through issuances of our common stock. Our liquidity hassubstantially diminished because of such continuing operating losses, and wemay be required to seek additional capital in the future.

 

Duringthe six months ended September 30, 2008, we provided $455,772 of cash fromour operations and used $127,216 for investments in equipment. As of September 30,2008, we had $300,060 in cash and cash equivalents available to fund futureoperations, an increase of $229,065 from March 31, 2008. As of September 30,2008, we borrowed $505,034 from our $2,000,000 credit facility, a decrease of$100,966 from March 31, 2008. Our working capital was $2,375,828 at September 30,2008 compared to $2,483,993 at March 31, 2008.

 

**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 and 2002.

 

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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 ourinstalled base of AEM monitors will increase sales as the inherent risksassociated with monopolar laparoscopic electrosurgery become more widelyacknowledged and as we focus on increasing our sales efficiency. We expect thatthe replacement sales of electrosurgical instruments and accessories will alsoincrease as additional hospitals adopt AEM technology. We anticipate that theefforts to improve the quality of sales representatives carrying the AEMproduct line, along with increased marketing efforts and the introduction ofnext generation products, may provide the basis for increased sales andprofitable operations. However, these measures, or any others that we mayadopt, may not result in either increased sales or profitable operations.Furthermore, most of our next generation products are in the early stages ofdevelopment. Further additions to the AEM product line are planned for introductionin fiscal year 2009.

 

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 2009. Our objectives in the remainderof fiscal year 2009 are to maintain expense controls while optimizing salesexecution in the field, to expand market awareness of the AEM technology and tomaximize the number of additional hospital accounts switching to AEMinstruments while retaining existing hospital customers. In addition,acceptance of AEM products depends on surgeons’ preference for our instruments,which depends on factors such as ergonomics and ease of use in addition to thetechnological advantage of AEM products. If surgeons prefer other instrumentsto our instruments, our business results will suffer.

 

*Possibilityof Operating Losses*:  We have, except for fiscal years 2004 and2003 when we achieved profitable operations, incurred losses since ourinception and have an accumulated deficit of $16,547,624 at September 30,2008. Operations have been financed primarily through issuances of our commonstock. We have made strides toward improving our operating results but due tothe ongoing need to develop, optimize and train our direct sales managers andthe independent sales representative network, the need to support thedevelopment of refinements to our product line, and the need to increasesustained sales to a level adequate to cover fixed and variable operatingcosts, we may continue to operate at a net loss. Sustained losses, or ourinability to generate sufficient cash flow from operations to fund ourobligations, may result in a need to raise additional capital.

 

*SalesGrowth*:  We expect to generate increased sales in theU.S. from sales to new hospital customers and from expanded sales in existinghospitals as our network of direct and independent sales representativesbecomes more efficient. We believe that the visibility and credibility of theindependent clinical endorsements for AEM technology will contribute to newhospital accounts and increase sales in fiscal year 2009. We also expect thatsupplier agreements with Novation and Premier, which together represent over3,000 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 overseasmarkets to assess opportunities for sales growth internationally. Finally, weintend to explore opportunities to capitalize on our proven AEM technology vialicensing arrangements and strategic alliances. These efforts to generateadditional sales and further the market penetration of our products are longerterm in nature and may not materialize. Even if we are able to successfullydevelop next generation products or identify potential international markets orstrategic partners, we may not be able to capitalize on these opportunities.

 

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

 

*ManufacturingEquipment:*  We expect to increase gross profit and grossmargins by manufacturing our scissor inserts internally. We began manufacturingour scissor inserts in the third quarter of fiscal year 2008.

 

*Salesand Marketing Expenses*:We continue our efforts to expand domestic and international distributioncapability, and we believe that sales and marketing expenses will decrease as apercentage of net sales with increasing sales volume.

 

*Researchand Development Expenses*:Research and development expenses are expected to decrease modestly but willsupport development of refinements to our AEM product line, which will furtherexpand the instrument options for surgeons.

 

**Results of Operations**

 

*For thethree months ended September 30, 2008 compared to the three months ended September 30,2007.*

 

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*Netsales.*  Net sales for the quarter ended September 30,2008, were $3,346,208 compared to $3,092,390 for the quarter ended September 30,2007, an increase of 8%. The increase is attributable to the addition of newhospital accounts, partially offset by business lost from hospitals thatpreviously changed to AEM technology. We opened fifteen new hospital accountsfor AEM technology in the three months ended September 30, 2008 versusnine new hospital accounts for AEM technology in the three months ended September 30,2007. We have changed and added new sales managers and independent salesrepresentatives in an effort to capitalize on identified market opportunities.It will take a number of months before new sales managers and new independentsales representatives generate new hospital accounts, but we expect that thecombination of these new additions will provide the focus that is needed toachieve market gains.

 

*Grossprofit*.  Gross profit for the quarter ended September 30,2008 of $2,052,339 represented an increase of 7% from gross profit of$1,925,937 for the quarter ended September 30, 2007. Gross profit as apercentage of sales (gross margins) decreased from 62% for the quarter ended September 30,2007 to 61% for the quarter ended September 30, 2008. The gross profitmargin decrease for the quarter ended September 30, 2008 was primarily dueto increased scrap costs of 0.7% and increased sales of lower gross profitmargin products. The decrease was partially offset by a higher gross profitmargin for our internally manufactured disposable scissor inserts and a 0.7%increase to gross profit margin that was attributed to a decrease in warrantyclaims.

 

*Sales and marketing expenses*.  Sales and marketing expenses of$1,321,798 for the quarter ended September 30, 2008 represented anincrease of 7% from sales and marketing expenses of $1,236,871 for the quarterended September 30, 2007. The increase was a result of increasedcompensation for additional sales employees and travel expenses. The increasein such cost was partially offset by decreased commissions for independentsales representatives and decreased trade shows expense.

 

*General and administrative expenses*.  Generaland administrative expenses of $358,044 for the quarter ended September 30,2008 represented an increase of 2% from general and administrative expenses of$349,806 for the quarter ended September 30, 2007. The increase wasprimarily the result of a slight increase to bad debts.

 

*Research and development expenses*. Research and development expenses of $280,459 for the quarter ended September 30,2008 represented a decrease of 16% compared to $333,460 for the quarter ended September 30,2007. The decrease was a result of decreased outside services and testmaterials.

 

*Netincome. *Net income was $75,284 for the quarter ended September 30,2008 compared to net income of $7,837 for the quarter ended September 30,2007. Net income increase was a result of increased sales income that waspartially reduced by increased operating expenses.

 

Theresults of operations for the three months ended September 30, 2008 shouldnot be taken as an indication of the results of operations for all or any partof the balance of the fiscal year.

 

*For thesix months ended September 30, 2008 compared to the six months ended September 30,2007.*

 

*Netsales.*  Net sales for the six months ended September 30,2008, were $6,440,174 compared to $5,751,661 for the six months ended September 30,2007, an increase of 12%. The increase is attributable to the addition of newhospital accounts, partially offset by business lost from hospitals thatpreviously changed to AEM technology. We opened twenty-six new hospitalaccounts for AEM technology in the six months ended September 30, 2008versus twenty-one new hospital accounts for AEM technology in the six monthsended September 30, 2007. 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 focus thatis needed to achieve market gains.

 

*Grossprofit*.  Gross profit for the six months ended September 30,2008 of $3,916,759 represented an increase of 10% from gross profit of$3,554,256 for the six months ended September 30, 2007. Gross profit as apercentage of sales (gross margins) decreased from 62% for the six months endedSeptember 30, 2007 to 61% for the six months ended September 30,2008. The gross profit margin decrease for the six months ended September 30,2008 was primarily due to increased scrap costs of 0.7% and increased sales oflower gross profit margin products. The decrease was partially offset by ahigher gross profit margin for our internally manufactured disposable scissorinserts.

 

*Sales and marketing expenses*.  Sales and marketing expenses of$2,695,950 for the six months ended September 30, 2008 represented anincrease of 10% from sales and marketing expenses of $2,450,729 for the sixmonths ended September 30, 2007. The increase was a result of increasedcompensation for additional sales employees and increases in sales samples,travel expenses and outside services. The increase in such cost was partiallyoffset by decreased commissions for independent sales representatives.

 

*General and administrative expenses*. General and administrative expenses of $724,954 for the six months endedSeptember 30, 2008 represented a de minimus increase from general andadministrative expenses of $722,244 for the six months ended September 30,2007. The increase was primarily the result of a number of smaller increasedcosts. The increase in such cost was partially offset by reduced investorrelations costs and reduced legal fees.

 

*Research and development expenses*. Research and development expenses of $569,213 for the six months ended September 30,2008 represented a decrease of 14% compared to $663,631 for the six monthsended September 30, 2007. The decrease was a result of decreased outsideservices, inventory usage and test materials.

 

*Netloss. *Net loss was $89,018 for the six months ended September 30,2008 compared to a net loss of $287,522 for the six months ended September 30,2007. Net loss reduction was a result of increased sales income that waspartially reduced by increased operating expenses.

 

Theresults of operations for the six months ended September 30, 2008 shouldnot be taken as an indication of the results of operations for all or any partof the balance of the fiscal year.

 

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**Liquidity and Capital Resources**

 

Todate, operating funds have been provided primarily by issuances of our commonstock and warrants to purchase our common stock, which together totaled$19,477,282 through September 30, 2008, 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%, 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 September 30, 2008, we had borrowed $505,034 fromthe credit facility. The credit facility requires us to meet certain financialcovenants. In February 2008, we failed to meet the minimum defined quickdebt ratio covenant. As a result, the lender has imposed a $750 a monthmaintenance fee, additional financial reporting and we may ask for additionalborrowings only at the beginning of each week instead of when needed.

 

Ouroperations provided $455,772 of cash in the six months ended September 30,2008 on net sales of $6,440,174. The amounts of cash generated from and used inoperations are not indicative of the expected cash to be generated from or usedin operations in fiscal year 2009. For the six months ended September 30,2008, we invested $127,216 in the acquisition of property and equipment. As of September 30,2008, we had $300,060 in cash and cash equivalents available to fund futureoperations and have borrowed $505,034 from our credit facility. Working capitalwas $2,375,828 at September 30, 2008 compared to $2,483,993 at March 31,2008. Current liabilities were $1,287,221 at September 30, 2008, comparedto $1,409,750 at March 31, 2008.

 

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 at 6797 Winchester Circle, Boulder, Coloradounder noncancelable lease agreements through August 14, 2009. The minimumfuture lease payment by fiscal year as of September 30, 2008 is asfollows:

 
| **Fiscal Year**         | ** ** | **Amount** | ** ** |
|------------------------------|------------|------------|------------|
| 2009 (six months  remaining) |       | $          | 124,845    |   |
| 2010                         |       | 94,804     |       |
| Total                        |       | $          | 219,649    |   |

 

Our minimum future equipment lease payments withGeneral Electric Capital Corporation as of September 30, 2008, by fiscalyear, are as follows:

 
| **Fiscal Year**         | ** ** | **Amount** | ** ** |
|------------------------------|------------|------------|------------|
| 2009 (six months  remaining) |       | $          | 50,937     |   |
| 2010                         |       | 101,873    |       |
| 2011                         |       | 101,873    |       |
| 2012                         |       | 101,873    |       |
| 2013                         |       | 101,873    |       |
| 2014                         |       | 8,488      |       |
| Total                        |       | $          | 466,917    |   |

 

Ourfiscal year 2009 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 2009. 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 achieving profitability and positive cash flow,additional capital may be required to maintain ongoing operations.

 

OnJuly 16, 2007, we received notice from the American Stock Exchange (the “Amex”)that we were not in compliance with Section 1003(a)(ii) of the AmexCompany Guide due to stockholders’ equity of less than $4,000,000 and lossesfrom continuing operations and net losses in three out of four of our mostrecent fiscal years. We submitted a plan of compliance on August 15, 2007advising the Amex of action that we would take to regain compliance by January 16,2009.

 

OnSeptember 24, 2008, we received notice from the Amex indicating that,based on a review of our Form 10-KSB for the year ended March 31,2008, Form 10-Q for the period ended June 30, 2008 and informationprovided by us, the Amex had determined that we had not made progressconsistent with our plan of compliance and that there is no basis for the Amexto conclude that we could regain compliance by the January 16, 2009deadline. Accordingly, the Amex determined that delisting procedures pursuantto Section 1009(e) of the Amex Company Guide were warranted. We donot intend to appeal the delisting.

 

Uponour delisting of common stock from the Amex, we determined that our securitiesare eligible to trade on the Over-the-Counter Bulletin Board (“OTCBB”). Weintend to continue to comply with our Securities and Exchange Commission filingobligations.

 

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Tradingof our common stock on the OTCBB, which is maintained by the Financial IndustryRegulatory Authority (“FINRA”), is subject to a market maker’s filing of a Form 211with, and the clearance of such Form 211 by, FINRA. Our common stock iscurrently quoted under the symbol “ECIA” on the Pink Sheets, an electronicquotation service for securities traded over-the-counter, and will continue tobe quoted on the Pink Sheets.

 

**Income Taxes**

 

Asof March 31, 2008, 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 ending March 31, 2009. We have not paidincome taxes since our inception. The Tax Reform Act of 1986 and other incometax regulations contain provisions which may limit the net operating losscarryforwards available to be used in any given year if certain events occur,including changes in ownership interests. We have established a valuationallowance for the entire amount of our deferred tax asset since inception dueto our history of losses. Should we achieve sufficient, sustained income in thefuture, we may conclude that some or all of the valuation allowance should bereversed. If some or all of the valuation allowance were reversed, then, to theextent of the reversal, a tax benefit would be recognized which would result inan increase to income.

 

## **Critical Accounting Policies and Estimates**

 

Ourdiscussion and analysis of our financial condition and results of operationsare based upon our financial statements, which have been prepared in accordancewith accounting principles generally accepted in the United States. Thepreparation of these financial statements requires us to make estimates andjudgments that affect the reported amounts of assets, liabilities, sales andexpenses, and related disclosure of contingent assets and liabilities. On anon-going basis, we evaluate our estimates, including those related to baddebts, inventories, sales returns, warranty, contingencies and litigation. Webase our estimates on historical experience and on various other assumptionsthat are believed to be reasonable under the circumstances, the results ofwhich form the basis for making judgments about the carrying values of assetsand liabilities that are not readily apparent from other sources. Actualresults may differ from these estimates under different assumptions orconditions. We believe the following critical accounting policies affect themore significant judgments and estimates used in the preparation of ourfinancial statements.

 

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

 

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 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 thisequipment. Manufacturing and production equipment acquired, but not placed inservice, in fiscal year 2007 and manufacturing and production equipmentacquired after fiscal year 2007 is of a different technology for which thestraight-line method is more appropriate. Therefore, we used the straight-linemethod of depreciation 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. Leaseholdimprovements are depreciated over the shorter of the remaining lease term orthe estimated useful life of the asset. Maintenance and repairs are expensed asincurred and major additions, replacements and improvements are capitalized.

 

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

 

Wecurrently estimate forfeitures for stock-based compensation expense related toemployee stock options at 7% and evaluate the forfeiture rate quarterly.

 

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**ITEM 4****-**** 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-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 September 30, 2008, 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 September 30, 2008, 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. As aresult, no corrective actions were taken.

 

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

 

**ITEM 4****                                                  ****SUBMISSION OF MATTERS TO A VOTEOF SECURITY HOLDERS**

 

At our Annual Meeting of Shareholders on August 6, 2008, thefollowing actions were taken:

 

(i)        The following persons were elected asdirectors of Encision Inc. for terms expiring at the 2009 annual meeting ofshareholders, and until their successors are duly elected and qualified:

 
| ** **         | ** ** | **Votes For** | ** ** | **Votes Withheld** | ** ** |
|--------------------|------------|--------------------|------------|-------------------------|------------|
| Bruce L. Arfmann   |       | 5,126,484          |       | 29,619                  |       |
|               |       |               |       |                    |       |
| Robert H. Fries    |       | 5,093,766          |       | 62,337                  |       |
|               |       |               |       |                    |       |
| Vern D.  Kornelsen |       | 4,426,645          |       | 729,458                 |       |
|               |       |               |       |                    |       |
| David W. Newton    |       | 4,435,694          |       | 720,409                 |       |
|               |       |               |       |                    |       |
| Roger C. Odell     |       | 5,098,265          |       | 57,838                  |       |
|               |       |               |       |                    |       |
| John R. Serino     |       | 5,126,999          |       | 29,104                  |       |
|               |       |               |       |                    |       |
| George A.  Stewart |       | 4,439,029          |       | 717,074                 |       |

 

(ii)       Ratification of appointment of Gordon, Hughes & Banks, LLP toserve as our independent auditors in fiscal year 2009:

 
| Votes for     |   | 5,112,449 |   |
|---------------|--------|-----------|--------|
|          |   |      |   |
| Votes against |   | 2,982     |   |
|          |   |      |   |
| Abstentions   |   | 40,672    |   |

 

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

 

The following exhibits are filed with this report on Form 10-Q orare incorporated by reference:

 

3.1            Articles of Incorporation of the Company, asamended (incorporated by reference from Registration Statement #333-4118-Ddated June 25, 1996).

 

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

 

4.1            Form of certificate for shares of CommonStock (incorporated by reference from Registration Statement #333-4118-D dated June 25,1996).

 

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

 

31.2      Certification of Principal Financial and Accounting Officer under Rule 13a-14(a) ofthe Exchange Act (filed herewith).

 

32.1      Certification of Periodic Reports pursuant to Section 906 of theSarbanes-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.

 
|                    |   |                                     |
|-------------------------|--------|------------------------------------------|
| November 14,  2008 |   | /s/  Marcia McHaffie                     |
| Date                    |   | Marcia  McHaffie                         |
|                    |   | Controller                               |
|                    |   | Principal  Accounting Officer & |
|                    |   | Principal  Financial Officer             |

 

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