**U. S.Securities and Exchange Commission**

**Washington,D.C.  20549**

 

**Form 10-QSB**

 

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

 

**For the quarterly period ended December 31,2002**

 

**For the transition period from             to            **

 

**Commission file number   0-28604**

 

| **ENCISION  INC.**                                                 |
|--------------------------------------------------------------------|
| (Exact name of small business issuer as  specified in its charter) |
|                                                               |   |   |
| **Colorado**                                                       |   | **84-1162056** |
| (State or other jurisdiction of  incorporation or organization)    |   | (I.R.S. Employer Identification No.) |
|                                                               |   |   |
| **4828 Sterling Drive, Boulder, Colorado****80301**                |
| (Address of principal executive offices)                           |
|                                                               |   |   |
| **(303) 444-2600**                                                 |
| (Registrant’s telephone number)                               |

 

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

 

| **Common Stock, No par****value** |   | **5,430,026****Shares**           |
|-----------------------------------|--------|-----------------------------------|
| Class                             |   | (outstanding at January 31, 2003) |

 

Transitional Small Business Disclosure Format

 

Yes    o  No    ý

 

 

----

 

**ENCISIONINC.**

 

**FORM10-QSB**

 

**Forthe Quarter Ended December 31, 2002**

 

**INDEX**

 
| **PART I.**  | **UNAUDITEDFINANCIAL INFORMATION** |
|--------------|------------------------------------|
|         |                               |   |   |
|         | **ITEM1**                          | -      Condensed Interim Financial Statements: |
|         |                               | -     Condensed Balance Sheets as of December  31, 2002 and March 31, 2002 |
|         |                               | -     Condensed Statements of Operations for  the Three Months Ended December 31, 2002 and 2001 |
|         |                               | -      Condensed Statements of Operations for the Nine Months Ended December  31, 2002 and 2001 |
|         |                               | -      Condensed Statements of Cash Flows for  the Nine Months Ended December 31, 2002 and 2001 |
|         |                               | -      Notes to Condensed Interim Financial Statements |
|         |                               |   |   |
|         | **ITEM 2**                         | -     Management’s Discussion and Analysis of  Financial Condition and Results of Operations |
|         |                               |   |   |
|         | **ITEM 3**                         | -      Controls and Procedures |
|         |                               |   |   |
| **PART II.** | **OTHER INFORMATION**              |
|         |                               |   |   |
|         | **ITEM 6**                         | -      Exhibits and Reports on Form 8-K |
|         |                               |   |   |
|         | **SIGNATURE**                      |

 

2

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

 

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

 

ENCISION INC.

 

CONDENSED BALANCE SHEETS(Unaudited)

 
|                                                                                                                 |   | **December  31,  2002** |      | **March 31,  2002** |   |
|----------------------------------------------------------------------------------------------------------------------|--------|-------------------------|-----------|---------------------|--------|
| ASSETS                                                                                                               |   |                    |      |                |   |
| CURRENT ASSETS:                                                                                                      |   |                    |      |                |   |
| Cash and cash equivalents                                                                                            |   | $                       | 670,334   |                | $      | 500,988 |   |
| Accounts receivable, net of allowance for  doubtful accounts of $28,000 and $16,000, respectively                    |   | 856,428                 |      | 824,459             |   |
| Inventory, net of reserve for obsolescence  of $68,000 and $60,000, respectively                                     |   | 921,334                 |      | 856,784             |   |
| Prepaid expenses                                                                                                     |   | 103,323                 |      | 62,535              |   |
| Total current assets                                                                                                 |   | 2,551,419               |      | 2,244,766           |   |
| EQUIPMENT, at cost:                                                                                                  |   |                    |      |                |   |
| Furniture, fixtures and equipment                                                                                    |   | 1,047,577               |      | 780,278             |   |
| Less- accumulated depreciation                                                                                       |   | (812,560                | )         | (755,636            | )      |
| Equipment, net                                                                                                       |   | 235,017                 |      | 24,642              |   |
| PATENTS, net of accumulated amortization of  $52,832 and $34,147, respectively                                       |   | 132,955                 |      | 131,065             |   |
| OTHER ASSETS                                                                                                         |   | 12,972                  |      | 12,972              |   |
| Total assets                                                                                                         |   | $                       | 2,932,363 |                | $      | 2,413,445 |   |
|                                                                                                                 |   |                    |      |                |   |
| LIABILITIES AND SHAREHOLDERS’ EQUITY                                                                            |   |                    |      |                |   |
|                                                                                                                 |   |                    |      |                |   |
| CURRENT LIABILITIES:                                                                                                 |   |                    |      |                |   |
| Accounts payable                                                                                                     |   | $                       | 514,159   |                | $      | 273,933 |   |
| Accrued compensation                                                                                                 |   | 143,201                 |      | 143,586             |   |
| Other accrued liabilities                                                                                            |   | 331,015                 |      | 223,239             |   |
| Total current liabilities                                                                                            |   | 988,375                 |      | 640,758             |   |
|                                                                                                                 |   |                    |      |                |   |
| COMMITMENTS AND CONTINGENCIES                                                                                        |   |                    |      |                |   |
|                                                                                                                 |   |                    |      |                |   |
| SHAREHOLDERS’ EQUITY:                                                                                           |   |                    |      |                |   |
| Preferred stock, no par value, 10,000,000  shares authorized, no shares issued or outstanding                        |   | —                  |      | —              |   |
| Common stock, no par value, 100,000,000  shares authorized, 5,428,850 and 5,414,532 shares outstanding, respectively |   | 17,266,685              |      | 17,248,365          |   |
| Accumulated deficit                                                                                                  |   | (15,322,697             | )         | (15,475,678         | )      |
| Total shareholders’ equity                                                                                      |   | 1,943,988               |      | 1,772,687           |   |
| Total liabilities and shareholders’ equity                                                                      |   | $                       | 2,932,363 |                | $      | 2,413,445 |   |

 

The accompanying notes are an integral partof these condensed financial statements.

 

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ENCISION INC.

 

CONDENSED STATEMENTS OF OPERATIONS(Unaudited)

 
|                                                                                  |   | **For the  Three Months  Ended December 31,** |      |
|---------------------------------------------------------------------------------------|--------|-----------------------------------------------|-----------|
|                                                                                  |   | **2002**                                      |      | **2001** |   |
|                                                                                  |   |                                          |      |   |   |
| REVENUE, NET                                                                          |   | $                                             | 1,812,053 |   | $ | 1,120,927 |   |
|                                                                                  |   |                                          |      |   |   |
| COST OF SALES                                                                         |   | 754,117                                       |      | 485,781 |   |
| Gross profit                                                                          |   | 1,057,936                                     |      | 635,146 |   |
| OPERATING EXPENSES:                                                                   |   |                                          |      |   |   |
| Sales and marketing                                                                   |   | 599,080                                       |      | 436,915 |   |
| General and administrative                                                            |   | 189,254                                       |      | 190,935 |   |
| Research and development                                                              |   | 121,775                                       |      | 122,334 |   |
| Total operating expenses                                                              |   | 910,109                                       |      | 750,184 |   |
| INCOME (LOSS) FROM OPERATIONS                                                         |   | 147,827                                       |      | (115,038 | ) |
|                                                                                  |   |                                          |      |   |   |
| OTHER INCOME (EXPENSE):                                                               |   |                                          |      |   |   |
| Interest income                                                                       |   | 1,034                                         |      | 3,613 |   |
| Other income (expense), net                                                           |   | (499                                          | )         | (1,164 | ) |
| NET INCOME (LOSS)                                                                     |   | $                                             | 148,362   |   | $ | (112,589 | ) |
|                                                                                  |   |                                          |      |   |   |
| NET INCOME (LOSS) PER SHARE:                                                          |   |                                          |      |   |   |
| Basic net income (loss) per common share                                              |   | $                                             | 0.03      |   | $ | (0.02 | ) |
|                                                                                  |   |                                          |      |   |   |
| Diluted net income (loss) per common share                                            |   | $                                             | 0.03      |   | $ | (0.02 | ) |
|                                                                                  |   |                                          |      |   |   |
| Weighted average shares used in computing  basic net income (loss) per common share   |   | 5,423,747                                     |      | 5,406,544 |   |
|                                                                                  |   |                                          |      |   |   |
| Weighted average shares used in computing  diluted net income (loss) per common share |   | 5,858,960                                     |      | 5,406,544 |   |

 

The accompanying notes are an integral partof these condensed financial statements.

 

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ENCISION INC.

 

CONDENSED STATEMENTS OF OPERATIONS

(Unaudited)

 
|                                                                                  |   | **For the  Nine Months  Ended December 31,** |      |
|---------------------------------------------------------------------------------------|--------|----------------------------------------------|-----------|
|                                                                                  |   | **2002**                                     |      | **2001** |   |
|                                                                                  |   |                                         |      |   |   |
| REVENUE, NET                                                                          |   | $                                            | 4,908,318 |   | $ | 3,372,372 |   |
|                                                                                  |   |                                         |      |   |   |
| COST OF SALES                                                                         |   | 1,952,973                                    |      | 1,445,666 |   |
| Gross profit                                                                          |   | 2,955,345                                    |      | 1,926,706 |   |
| OPERATING EXPENSES:                                                                   |   |                                         |      |   |   |
| Sales and marketing                                                                   |   | 1,782,195                                    |      | 1,204,407 |   |
| General and administrative                                                            |   | 662,845                                      |      | 583,758 |   |
| Research and development                                                              |   | 361,642                                      |      | 299,787 |   |
| Total operating expenses                                                              |   | 2,806,682                                    |      | 2,087,952 |   |
| INCOME (LOSS) FROM OPERATIONS                                                         |   | 148,663                                      |      | (161,246 | ) |
|                                                                                  |   |                                         |      |   |   |
| OTHER INCOME (EXPENSE):                                                               |   |                                         |      |   |   |
| Interest income                                                                       |   | 3,247                                        |      | 17,259 |   |
| Other income (expense), net                                                           |   | 1,071                                        |      | (3,311 | ) |
| NET INCOME (LOSS)                                                                     |   | $                                            | 152,981   |   | $ | (147,298 | ) |
|                                                                                  |   |                                         |      |   |   |
| NET INCOME (LOSS) PER SHARE:                                                          |   |                                         |      |   |   |
| Basic net income (loss) per common share                                              |   | $                                            | 0.03      |   | $ | (0.03 | ) |
|                                                                                  |   |                                         |      |   |   |
| Diluted net income (loss) per common share                                            |   | $                                            | 0.03      |   | $ | (0.03 | ) |
|                                                                                  |   |                                         |      |   |   |
| Weighted average shares used in computing  basic net income (loss) per common share   |   | 5,422,211                                    |      | 5,402,964 |   |
|                                                                                  |   |                                         |      |   |   |
| Weighted average shares used in computing  diluted net income (loss) per common share |   | 5,895,458                                    |      | 5,402,964 |   |

 

The accompanying notes are an integral partof these condensed financial statements.

 

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ENCISION INC.

 

CONDENSEDSTATEMENTS OF CASH FLOWS

(Unaudited)

 
|                                                                                                |   | **For the  Nine Months  Ended December 31,** |    |
|-----------------------------------------------------------------------------------------------------|--------|----------------------------------------------|---------|
|                                                                                                |   | **2002**                                     |    | **2001** |   |
|                                                                                                |   |                                         |    |   |   |
| CASH FLOWS FROM OPERATING ACTIVITIES:                                                               |   |                                         |    |   |   |
| Net income (loss)                                                                                   |   | $                                            | 152,981 |   | $ | (147,298 | ) |
| Adjustments to reconcile net income (loss)  to net cash provided by (used in) operating activities- |   |                                         |    |   |   |
| Depreciation and amortization                                                                       |   | 75,609                                       |    | 55,122 |   |
| Provision for bad debts                                                                             |   | 12,000                                       |    | 3,000 |   |
| Inventory reserves                                                                                  |   | 8,000                                        |    | 5,000 |   |
| Non-cash, stock-based, compensation charge                                                          |   | 12,000                                       |    | — |   |
| Changes in operating assets and liabilities-                                                        |   |                                         |    |   |   |
| Accounts receivable                                                                                 |   | (43,969                                      | )       | 172,575 |   |
| Inventory                                                                                           |   | (72,550                                      | )       | (303,693 | ) |
| Other assets                                                                                        |   | (40,788                                      | )       | (20,171 | ) |
| Accounts payable                                                                                    |   | 240,226                                      |    | 74,367 |   |
| Accrued compensation and other accrued  liabilities                                                 |   | 107,391                                      |    | (4,055 | ) |
| Net cash provided by (used) in operating  activities                                                |   | 450,900                                      |    | (165,153 | ) |
| CASH FLOWS FROM INVESTING ACTIVITIES:                                                               |   |                                         |    |   |   |
| Investment in equipment                                                                             |   | (267,299                                     | )       | (6,000 | ) |
| Patent costs                                                                                        |   | (20,575                                      | )       | (9,915 | ) |
|                                                                                                |   |                                         |    |   |   |
| Net cash used in investing activities                                                               |   | (287,874                                     | )       | (15,915 | ) |
| CASH FLOWS FROM FINANCING ACTIVITIES:                                                               |   |                                         |    |   |   |
| Proceeds from the exercise of stock options                                                         |   | 6,320                                        |    | 10,189 |   |
| Net cash provided by financing activities                                                           |   | 6,320                                        |    | 10,189 |   |
|                                                                                                |   |                                         |    |   |   |
| NET INCREASE (DECREASE) IN CASH AND CASH  EQUIVALENTS                                               |   | 169,346                                      |    | (170,879 | ) |
|                                                                                                |   |                                         |    |   |   |
| CASH AND CASH EQUIVALENTS, beginning of  period                                                     |   | 500,988                                      |    | 791,415 |   |
| CASH AND CASH EQUIVALENTS, end of period                                                            |   | $                                            | 670,334 |   | $ | 620,536 |   |

 

The accompanying notes are an integral partof these financial statements.

 

6

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ENCISION INC.

 

NOTES TO CONDENSED INTERIM FINANCIALSTATEMENTS

 

DECEMBER 31, 2002(Unaudited)

 

(1)                                  ORGANIZATIONAND NATURE OF BUSINESS

 

Encision Inc. (the “Company”), a Colorado corporation, designs,develops, manufactures and markets patented electrosurgical devices thatprovide greater safety to patients undergoing minimally-invasive surgery. TheCompany believes its patented AEM® technology is changing the marketplace forelectrosurgical devices and laparoscopic instruments by providing a solution toa documented risk in laparoscopic surgery. The Company’s sales to date havebeen made principally in the United States.

 

The Company has incurred annual losses since its inception and has anaccumulated deficit of $15,322,697 at December 31, 2002. Operations have beenfinanced primarily through issuance of common stock. The Company’s liquidityhas stabilized after a history of operating losses.  To further expand it operations, or to support future operating losses,if any, the Company may be required to seek additional capital to continueoperations.

 

During the fiscal year ending on March 31, 2002 and continuing throughDecember 31, 2002, the Company continued to execute a strategy designed toachieve profitable operations. The Company implemented strategic marketing andsales plans to expand the use of the Company’s products in surgically-activehospitals in the United States. Management expects these efforts to result incontinued sales revenue increases for fiscal year 2003 which, combined with controlledoperating expenses and consistent gross profit margins, are expected toultimately lead to profitable operations and conserve the Company’s cashresources.

 

Although there can be no guarantee, based upon its current operatingplan, the Company believes that its cash and working capital resources will besufficient to fund its operations in fiscal year 2003 and through December 31,2003. If the Company is unable to manage the business operations in line withthe budget expectations, it could have a material adverse effect on theCompany’s business viability, financial position, results of operations andcash flows. If the Company is not successful during the near future insustaining cash flow break-even, additional capital resources may be requiredto maintain ongoing operations.

 

(2)                                  SUMMARYOF SIGNIFICANT ACCOUNTING POLICIES

 

Use of Estimates in the Preparation ofFinancial Statements

 

The preparation of financial statements in conformity with generallyaccepted accounting principles requires management to make estimates andassumptions. Such estimates and assumptions affect the reported amounts ofassets and liabilities as well as disclosure of contingent assets andliabilities at the date of the financial statements and the reported amounts ofrevenue and expense during the reporting period. Actual results could differfrom those estimates.  Significantestimates made by the Company include the allowance for uncollectable accountsreceivable, the allowance for excess and/or obsolete inventory, the valuationallowance on deferred tax assets, warranty costs and the useful lives oflong-lived assets.

 

Cash and Equivalents

 

For purposes of reporting the statements of cash flows, the Companyconsiders all cash and highly liquid investments with an original maturity ofthree months or less to be cash equivalents.

 

Fair Value of Financial Instruments

 

The Company’s financial instruments consist of cash, cash equivalentsand short-term trade receivables and payables. The carrying values of cash,cash equivalents and short-term receivables and payables approximate their fairvalue.

 

Property and Equipment

 

Property and equipment are stated at cost, with depreciation computedprimarily on a double-declining basis over the estimated useful life of theasset, generally three to five years. Leasehold improvements are amortized overthe shorter of the remaining lease term or the estimated useful life of theasset. Maintenance and repairs are expensed as incurred and major additions,replacements and 

 

7

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improvements are capitalized. In circumstances where AEM monitors,owned by the Company, have been placed at customers’ premises as part of asales initiative, the equipment cost is capitalized and depreciated on a double-decliningbasis over five years. Depreciation expense for these assets is included inCost of Sales.

 

Inventory

 

Inventory consists primarily of component parts and raw materials, andis valued at the lower of cost (first-in, first-out basis) or market.  Reserves for inventory obsolescence are madebased upon management’s and historical experience. Changes in the Company’soperating environment could result in increases to this reserve. Inventoryconsists of the following:

 
|                            |   | **December  31,  2002** |    | **March 31,  2002** |   |
|---------------------------------|--------|-------------------------|---------|---------------------|--------|
|                            |   |                    |    |                |   |
| Raw materials and subassemblies |   | $                       | 676,839 |                | $      | 633,358 |   |
| Finished goods                  |   | 312,495                 |    | 283,426             |   |
|                            |   | 989,334                 |    | 916,784             |   |
| Less - reserve for obsolescence |   | (68,000                 | )       | (60,000             | )      |
|                            |   | $                       | 921,334 |                | $      | 856,784 |   |

 

Long-Lived Assets

 

Long-lived assets are reviewed for impairment whenever events orchanges in circumstances indicate that the carrying amount of an asset may notbe recoverable. A long-lived asset is considered impaired when estimated futurecash flows related to the asset, undiscounted and without interest, areinsufficient to recover the carrying amount of the asset. If deemed impaired,the long-lived asset is reduced to its estimated fair value. Long-lived assetsto be disposed of are reported at the lower of their carrying amount or estimatedfair value less cost to sell.

 

Patents

 

The costs of applying for patents are capitalized and amortized on astraight-line basis over the lesser of the patent’s economic or legal life (17years in the U.S.). Capitalized costs are expensed if patents are not granted.The Company reviews the carrying value of its patents periodically to determinewhether the patents have continuing value.

 

Income Taxes

 

The Company accounts for income taxes under the provisions of Statementof Financial Accounting Standards (“SFAS”) No. 109, “Accounting for IncomeTaxes” (“SFAS No. 109”). SFAS No. 109 requires recognition of deferredincome tax assets and liabilities for the expected future income taxconsequences, based on enacted tax laws, of temporary differences between thefinancial reporting and tax bases of assets and liabilities. SFAS No. 109requires recognition of deferred tax assets for the expected future tax effectsof all deductible temporary differences, loss carryforwards and tax creditcarryforwards. Deferred tax assets are then reduced, if deemed necessary, by avaluation allowance for the amount of any tax benefits which, more likely thannot based on current circumstances, are not expected to be realized.

 

Revenue Recognition

 

Revenue from product sales is recorded when the Company ships theproduct and the earnings process is complete. The Company recognizes revenuefrom sales to stocking distributors when there is no right of return, otherthan under normal warranty provisions. The Company’s shipping policy is FOBShipping Point.

 

Stock-Based Compensation

 

The Company has adopted the disclosure-only provisions of SFAS No. 123,“Accounting for Stock-Based Compensation” (“SFAS No. 123”), and appliesAccounting Principles Board Opinion No. 25, “Accounting for Stock Issued toEmployees” (“APB No. 25”), and related interpretations in accounting forstock options granted to employees.  TheCompany applies the provisions of SFAB No. 123 and related interpretations to Stock-basedcompensation for non-employees.

 

8

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Comprehensive Income (Loss)

 

The Company has adopted the provisions of SFAS No. 130, “ReportingComprehensive Income” (“SFAS No. 130”). SFAS No. 130 establishes standards for reporting and display of comprehensiveincome or loss and its components in a full set of general-purpose financialstatements. Comprehensive income (loss) is the same as net income (loss) forall periods presented.

 

Basic and Diluted Income (Loss) per Common Share

 

Net income or loss per share is calculated in accordance with SFAS No.128, “Earnings Per Share” (“SFAS 128”). Under the provisions of SFAS 128, basicnet income or loss per share is computed by dividing net income or loss for theperiod by the weighted average number of common shares outstanding for theperiod. Diluted net income or loss per 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 the Company’s net loss forthe three and nine month periods ended December 31, 2001, all potentiallydilutive securities would be anti-dilutive and thus, are excluded from dilutedearnings per share.

 

For all periods presented, the Company had outstanding stock optionsthat could create future dilution to the Company’s common shareholders and arenot currently classified as outstanding common shares of the Company.  The following table details such options andthe common stock equivalent for each. The common stock equivalent amount is based on specific conversionpursuant to the corresponding terms of the options.  Potential stock issuances excluded from earning per share becausetheir effect was anti-dilutive are as follows:

 
|    |   | **Three  Months  Ended  12/31/02** |   | **Nine  Months  Ended  12/31/02** |   | **Three  Months  Ended  12/31/01** |   | **Nine  Months  Ended  12/31//01** |   |
|---------|--------|------------------------------------|--------|-----------------------------------|--------|------------------------------------|--------|------------------------------------|--------|
|    |   |                               |   |                              |   |                               |   |                               |   |
| Options |   | 48,200                             |   | 43,200                            |   | 867,923                            |   | 862,006                            |   |

 

Recently Issued Accounting Standards

 

In December 2002, the Financial Accounting Standards Board (“FASB”)issued Statement of Financial Accounting Standard No. 148, “Accounting forStock-Based Compensation - Transition and Disclosure - - an amendment of FASBStatement NO.123” (“SFAS No. 148).  SFASNo. 148 amends FASB Statement No. 123, “Accounting for Stock-BasedCompensation”, to provide alternative methods of transition for a voluntarychange to the fair value based method of accounting for stock-based employeecompensation.  The statement also amendsthe disclosure requirements of SFAS No. 123 to require prominent disclosures inboth annual and interim financial statements about the reported results.  Certain provisions of SFAS No. 148 areeffective for financial statements for all fiscal years ending after December31, 2002.  Other provisions of thestatement are effective for interim financial statements for periods beginningafter December 15, 2002.  The Company iscurrently evaluating the impact that the adoption of this statement will haveon its financial statements and disclosures.

 

(3)                                  COMMITMENTSAND CONTINGENCIES

 

The Company currently leases its facilities under noncancelable leaseagreements through October 31, 2004. The minimum future lease payments are$27,105 for fiscal year ended March 31, 2003, $111,572 for fiscal year endedMarch 31, 2004 and $66,955 for fiscal year ended March 31, 2005.

 

The Company is subject to regulation by the United States Food and DrugAdministration (“FDA”). The FDA provides regulations governing the manufacture andsale of the Company’s products and regularly inspects the Company and othermanufacturers to determine their compliance with these regulations. As ofDecember 31, 2002 the Company believes it was in substantial compliance withall known regulations. The Company was last inspected in November 1998 and hasnot, at December 31, 2002, been notified of any deficiencies from thatinspection. FDA inspections are conducted approximately every two years or on amore frequent basis at the discretion of the FDA.

 

The results of operations for the quarter and nine months endedDecember 31, 2002 should not be taken as an indication of the results ofoperations for all or any part of the balance of the year.

 

The accounts receivable balance at December 31, 2002 of $856,428included $53,240 (6%) from international customers.

 

(4)                                  MANAGEMENT’SREPRESENTATIONS

 

The condensed interim financial statements included herein have beenprepared by the Company, without audit, pursuant to the rules and regulationsof the Securities and Exchange Commission. Certain information and footnotedisclosures normally included in 

 

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financial statements prepared in accordance with generally acceptedaccounting principles have been condensed or omitted pursuant to such rules andregulations, although the Company believes that the disclosures made areadequate to make the information presented not misleading. The condensedinterim financial statements and notes thereto should be read in conjunctionwith the financial statements and the notes thereto, included in the Company’sAnnual Report to the Securities and Exchange Commission for the fiscal yearended March 31, 2002, filed on Form 10-KSB on June 12, 2002.

 

The accompanying condensed interim financial statements have beenprepared, in all material respects, in conformity with the standards ofaccounting measurements set forth in Accounting Principles Board Opinion No. 28and reflect, in the opinion of management, all adjustments necessary tosummarize fairly the financial position and results of operations for suchperiods in accordance with accounting principles generally accepted in theUnited States of America.  Alladjustments are of a normal recurring nature. The results of operations for themost recent interim period are not necessarily indicative of the results to beexpected for the full year.

 

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

 

**General**

 

Encision Inc. (“Company”) has developed and launched innovativetechnology that is emerging as a standard of care in minimally-invasive surgery(MIS). The Company believes its patented AEM® technology is changing themarketplace for electrosurgical devices and laparoscopic instruments byproviding a solution to a well-documented patient safety risk in laparoscopicsurgery.

 

During laparoscopic surgical procedures, the surgeon operates fromoutside the patient’s body, introducing cameras and instruments through smallaccess ports to perform the surgical intervention. MIS enhances the patient’spost-operative course of recovery and is now the preferred surgical approach inover 50% of abdominal surgeries. Over 2.5 million laparoscopic procedures areperformed annually in the U.S. and reports estimate that 85% of surgeonsutilize electrosurgical instruments in these procedures. The Companymanufactures and markets patented electrosurgical instruments that providegreater safety and efficacy to patients who undergo minimally invasive surgery.

 

Stray electrosurgical current has been shown to cause unintended andunseen burn injury to the patient, which may result in prolongedhospitalization or death. This well-documented patient safety risk can beaddressed with the Company’s AEM Laparoscopic Instruments. Management believesthat Encision’s patented AEM instruments offer surgeons significant advantagescompared to conventional electrosurgical instruments because of their abilityto continually and dynamically monitor for stray electrical energy during MISprocedures. With the AEM System, surgeons are able to perform a broad range ofelectrosurgical procedures more safely and efficaciously than is possible usingconventional laparoscopic instruments. The Company has obtained patentprotection for its products’ core ‘shielding and monitoring’ technology builtinto the AEM instrument product line.

 

The Company has focused its marketing strategies on expanding themarket awareness of the AEM technology and its broad independent endorsements,and has continued efforts to expand the AEM product line. With the broad arrayof AEM instruments now available from the Company, the surgeon has a widechoice of instrument options and does not have to change surgical technique.This coincides with the continued expansion of independent endorsements for AEMtechnology. New recommendations from the malpractice insurance and medicolegalcommunities complement the broad clinical endorsements AEM technology hasgarnered over the past few years.

 

Adding further credibility to the benefits of Encision’s AEM technologyis the Company’s recent supplier agreements with Novation and Premier, two ofthe largest Group Purchasing Organizations (GPO) in the United States.Together, Novation and Premier represent over 3,000 hospitals and over 50% ofall surgery in the U.S. Management believes that the launch of these GPOsupplier agreements gives further indication that AEM technology is gainingbroader acceptance in the market. Management believes that having the nation’sleading medical purchasing groups recognize the value of the Company’stechnology reflects the potential impact that AEM instruments products can havein the market and in advancing patient safety in surgery nationwide. Theseagreements do not involve purchase commitments but the Company expects theserelationships to expand the market visibility of AEM technology and smooth theprocurement and conversion process for new hospital customers.

 

When a hospital converts to AEM technology it provides recurringrevenue to the Company from sales of replacement instruments. There is a strongretention rate of customers who have converted to AEM technology. Managementbelieves this indicates strong customer satisfaction and is further supportedby the fact that there is no directly competing technology to supplant AEMproducts once the hospital has converted. The replacement market of reusableand disposable AEM products in converted hospitals represents over 65% ofEncision’s revenue over the past twelve months and this revenue stream isexpected to grow as the base of newly converted hospitals continues to grow.

 

The Company has incurred annual losses since its inception and has anaccumulated deficit of $15,322,697 at December 31, 2002.  Operations have been financed primarilythrough issuance of equity. The Company’s liquidity has stabilized after ahistory of operating losses.  To furtherexpand it operations, or to support future operating losses, if any, theCompany may be required to seek additional capital to continue operations.

 

During the nine months ended December 31, 2002, the Company generated$450,900 in cash from its operations, used $287,874 for investments in patentsand equipment (primarily capital equipment owned by the Company at customerlocations) and received $6,320 from the exercise of stock options. As ofDecember 31, 2002, the Company had $670,334 in cash and cash equivalentsavailable to fund future operations, an increase of $169,346 from March 31, 2002.  The Company’s working capital is $1,563,044at December 31, 2002.

 

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**HistoricalPerspective**

 

The Company was organized in 1991 and in subsequent years developed theAEM monitoring system and protective sheaths to adapt to conventionalelectrosurgical instruments. During this period, the Company conducted producttrials and applied for patents with the United States Patent Office and withthe International patent agencies. Patents were issued in 1994, 1997, 1998 and2002.

 

As the Company evolved, it became clear that its active electrodemonitoring technology needed to be integrated into the standard laparoscopicinstrument design. As the development program proceeded, it also becameapparent that the merging of electrical and mechanical engineering skills inthe instrument development process for the Company’s patented, integratedelectrosurgical instruments was more complex than expected. As a result,instruments with integrated AEM technology were not completed for severalyears.  It was not until 2000 that asufficiently broad AEM instrument line was introduced to provide hospitaloperating rooms with a Standard of Care – AEM Instruments for all of their electrified monopolar instrumentationin laparoscopic surgery. Prior to offering the full range of laparoscopicinstrumentation, it was difficult for hospitals to commit to the AEM solution,as there were not adequate comparable surgical instrument options to match whatthe surgeon demanded.

 

With the broad array of AEM instruments now available, the surgeon hasa wide choice of instrument options and does not have to change surgicaltechnique. Since conversion to AEM technology is transparent to the surgeon,hospitals can now universally convert to AEM instruments, thus providing all oftheir laparoscopic patients a higher level of safety. This coincides with thecontinued expansion of independent endorsements for AEM technology. Newrecommendations from the malpractice insurance and medicolegal communitiescomplement the broad clinical endorsements AEM technology has garnered over thepast few years.

 

**Outlook**

 

**Statements containedin this section and the section below on Outlook, and other portions of thisdocument discussing future plans, goals and expectations, are not historicalfacts, including statements about the Company’s strategies and expectationsabout new and existing products and market demand and acceptance of new andexisting products, technologies and opportunities, market and industry segmentgrowth, future revenues, margins or profits, and return on investments inproducts and markets. These statements are forward looking statements withinthe meaning of the Private Securities Litigation Reform Act of 1995 and involvesubstantial risks and uncertainties that may cause actual results to differmaterially from those indicated by the forward looking statements.  All forward looking statements are based oninformation available to the Company on the date of this document, and theCompany assumes no obligation to update such forward looking statements.Readers of this Form 10-QSB are strongly encouraged to review the sectionentitled *“FactorsWhich May Affect Future Performance”*which discusses factors thatmay materially affect the financial and other performance**and condition of theCompany and the price of the Company’s stock. We undertake no duty to updateany of the forward looking statements after the date of this Form 10-QSB toconform them to actual results or to changes in our  expectations.**

 

*Installed Base ofAEM Monitoring Equipment*:  The Company believes that the installed base of AEM monitors hasthe potential for increasing as the inherent risks associated with monopolarlaparoscopic surgery become more widely acknowledged and as the network ofindependent sales representatives becomes more adept at selling the AEM systemto our customers. The Company strategy of placing Company-owned AEM monitors atno-charge into the customer site may facilitate an accelerated conversion toAEM instruments. The Company has converted over 300 hospitals to AEMinstruments and expects that the repetitive sales of electrosurgicalinstruments and accessories should increase as additional AEM monitors areinstalled. The Company believes that the measures taken to improve the qualityof sales representatives carrying the AEM product line, along with increasedmarketing efforts and the introduction of new products, may provide the basisfor increased revenues and may ultimately lead to sustained profitable operations.However, these measures, or any others that the Company may adopt, may notresult in either increased revenues or sustained profitable operations.

 

*Possibility ofContinued Operating Losses*: The Company has incurredannual losses from operations since inception and has an accumulated deficit of$15,322,697 as of December 31, 2002. The Company has made significant stridestoward improving its operating results and year to date is cash-flow positivefrom an operating perspective. The Company has generated a profit year to datein FY 2003, however, due to the ongoing need to develop, optimize and train thesales distribution network and the need to increase revenues to a leveladequate to cover fixed and variable operating costs, the Company believes itis possible that it may operate at a net loss from time to time. Nonetheless,the Company believes, based upon its current operating plan, that its currentcash on hand and other capital available to it currently, will be sufficient tofund operations through at least December 31, 2003.

 

*Revenue Growth*:  The Company expects to generate increasedrevenues in the U.S. from sales to new hospital customers as the network ofindependent sales representatives becomes more proficient and expands thenumber of hospital conversions to AEM Laparoscopic Instruments. The Companybelieves that the visibility and credibility of the independent clinicalendorsements for the AEM technology will contribute to new hospital conversionsand increased revenues in FY 2003. The Company also expects that new supplieragreements with Novation and Premier, which together represent over 3,000 U.S.hospitals, will expose more new hospitals to the benefits of AEM technology andmay stimulate new hospital conversions and increased revenues.

 

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*Gross Profit andGross Margins*: Gross profit and gross margin 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 theCompany are expected to be higher at higher levels of production and sales.Gross margins may be affected in the future as the costs for AEM monitors arebeing capitalized and depreciated over five years.

 

*Sales and MarketingExpenses*: The Company believes that, while continuingto expand its domestic and international distribution capability, the sales andmarketing expenses may decrease as a percentage of net revenue with increasingsales volume.

 

*Research andDevelopment Expenses*: Research and development expenses are expected to increase modestly tosupport the Company’s development of new AEM products, further expanding theinstrument options for the surgeon. New additions to the AEM product line areplanned during fiscal year 2003. Fifteen new AEM instruments have beenintroduced to the market since March 31, 2002.

 

**Factors Which MayAffect Future Performance**:

 

Among the factors that could cause future results to be materiallydifferent from expectations are:

 

*1.**                                      Ourproducts may not be accepted by the market*.  The success of our products and our financial condition dependson the acceptance of AEM products by the medical community in commerciallyviable quantities during fiscal year 2003 and beyond. We cannot predict how quicklyor how broadly AEM products will be accepted by the medical community. We needto continue to educate the marketplace about the**potential hazards involvedin the use of conventional electrosurgical products during minimally-invasivesurgical procedures and the expected benefits associated with the use of AEMproducts. If we are unsuccessful in educating the marketplace about ourtechnology and the hazards of conventional instruments, we will not createsufficient demand by hospitals and surgeons for AEM products and our financialcondition, results of operations and cash flows could be adversely affected.

 

*2.**                                      Weneed to develop and train our network of independent sales representatives andexpand our international distribution efforts in order to be successful.*Our attempts to develop and train a network of independent salesrepresentatives in the U.S. and to expand our international distributionefforts may take longer than expected and may result in considerable amounts ofretraining effort as the independent sales organizations change their productlines and personnel. We may not be able to obtain full coverage of the U.S. byindependent sales representatives as quickly as anticipated. We may alsoencounter difficulties in developing our international presence due toregulatory issues and our ability to successfully develop internationaldistribution options. Our inability to expand our network of independent salesrepresentatives could adversely affect our financial results.

 

*3.**                                      Wemay need additional funding to support our operations.*  We were**formed in 1991 and have incurred lossesof $15.3 million since that date. We have primarily financed research,development, and operational activities with sales of our common stock. AtDecember 31, 2002, we had $670,334 in cash and cash equivalents available tofund future operations. We believe that if sales do not continue to increaseduring fiscal year 2003, our working capital could be significantly diminished,which could result in a material adverse effect on us and our results ofoperations. We may also find ourselves at a competitive disadvantage due to ourconstrained liquidity.

 

*4.**                                      Wemay not be able to compete successfully against current manufacturers ofconventional (“unshielded, unmonitored”) electrosurgical instruments or againstcompetitors who manufacture products that are based on surgical technologiesthat are alternatives to monopolar electrosurgery. *The electrosurgical products market is intensely competitive.We expect that manufacturers of “unshielded, unmonitored” electrosurgicalinstruments will resist any loss of market share that might result from thepresence of our “shielded and monitored” instruments in the marketplace. Wealso believe that manufacturers of products that are based upon surgicaltechnologies that are alternatives to monopolar electrosurgery are ourcompetitors. These technologies include bipolar electrosurgery, the harmonicscalpel and lasers. The alternative technologies may gain market share and newcompetitive technologies may be developed and introduced. Many of ourcompetitors and potential competitors have significantly greater financial,technical, product development, marketing and other resources. Many of ourcompetitors also currently have substantial installed customer bases in themedical products market and have significantly greater market recognition. As aresult of these factors, our competitors may be able to respond more quickly tonew or emerging technologies and changes in customer requirements or to devotegreater resources to the development, promotion and sale of their products. Itis possible that new competitors or new alliances among competitors may emergeand rapidly acquire significant market share. The competitive pressures we facemay materially adversely affect our financial position, results of operationsand cash flows, and this may hinder our ability to respond to competitivethreats.

 

*5.**                                      Ifwe do not continually enhance our products and keep pace with rapidtechnological changes, we may not be able to attract and retain customers.*****Ourfuture success and financial performance will depend in part on our ability tomeet the increasingly sophisticated needs of customers through the timelydevelopment and successful introduction of product upgrades, enhancements andnew products. These upgrades, enhancements and new products are subject tosignificant technical risks. The medical device market is subject to rapidtechnological change, resulting in frequent new product introductions andenhancements of existing products, as well as the risk of product obsolescence.While we are currently developing new products and enhancing our existingproduct lines, 

 

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we may not be successful in completing the development of the newproducts or enhancements. In addition, we must respond effectively totechnological changes by continuing to enhance our existing products toincorporate emerging or evolving standards. We may not be successful indeveloping and marketing product enhancements or new products that respond totechnological changes or evolving industry standards. We may experiencedifficulties that could delay or prevent the successful development,introduction and marketing of those products, and our new products and productenhancements may not adequately meet the requirements of the marketplace andachieve commercially viable levels of market acceptance. If any potential newproducts, upgrades, or enhancements are delayed, or if any potential new products,upgrades, or enhancements experience quality problems or do not achieve suchmarket acceptance, or if new products make our existing products obsolete, ourfinancial position, results of operations and cash flows would be materiallyadversely affected.

 

*6.**                                      Ifgovernment regulations change or if we fail to comply with existing and/or newregulations, we might miss market opportunities and have increased costs andlimited growth.*  The research,manufacturing, marketing and distribution of our products in the United Statesand other countries is subject to extensive regulation by numerous governmentalauthorities including, but not limited to, the Food and Drug Administration.Under the Federal Food, Drug and Cosmetic Act, medical devices must receive clearancefrom the Food and Drug Administration through the Section 510(k) pre-marketnotification process or through the more lengthy pre-market approval processbefore they can be sold in the United States. The process of obtaining requiredregulatory approvals is lengthy and has required the expenditure of substantialresources. There can be no assurance that we will be able to continue to obtainthe necessary approvals. As part of our strategy, we also intend to pursuecommercialization of our products in international markets. Our products aresubject to regulations that vary from country to country. The process ofobtaining foreign regulatory approvals in certain countries can be lengthy andrequire the expenditure of substantial resources. We may not be able to obtainnecessary regulatory approvals or clearances on a timely basis or at all, anddelays in receipt of or failure to receive such approvals or clearances, orfailure to comply with existing or future regulatory requirements would have amaterial adverse effect on our financial position, results of operations andcash flows.

 

*7.**                                      Ifwe fail to comply with the extensive regulatory requirements governing themanufacturing of our products, we could be subject to fines, suspensions orwithdrawals of regulatory approvals, product recalls, suspension ofmanufacturing, operating restrictions and/or criminal prosecution.* Themanufacturing of our products is subject to extensive regulatory requirementsadministered by the Food and Drug Administration and other regulatory bodies.Inspection of our manufacturing facilities and processes can be conducted atany time, without prior notice, by the agencies. In addition, future changes inregulations or interpretations made by the Food and Drug Administration or otherregulatory bodies, with possible retroactive effect, could adversely affect us.Changes in existing regulations or adoption of new regulations or policiescould prevent us from obtaining, or affect the timing of, future regulatoryapprovals or clearances. We may not be able to obtain necessary regulatoryapprovals or clearances on a timely basis in the future, or at all. Delays inreceipt of, or failure to receive such approvals or clearances, or failure tocomply with existing or future regulatory requirements, would have a materialadverse effect on our financial position, results of operations and cash flows.

 

*8.**                                      Ourcurrent patents, trade secrets and know-how may not provide a competitiveadvantage, the pending applications may not result in patents being issued, andour competitors may design around any patents issued to us.* Our successdepends, and will continue to depend in part, on our ability to maintain patentprotection for our products and processes, to preserve our trade secrets and tooperate without infringing the proprietary rights of third parties. We havefour issued U.S. patents on several technologies embodied in our AEM MonitoringSystem, AEM Instruments and related accessories and we have applied foradditional U.S. patents. In addition, we have four issued foreign patents. Thevalidity and breadth of claims coverage in medical technology patents involvecomplex legal and factual questions and may be highly uncertain. Also, patentsmay not protect our proprietary information and know-how or provide adequateremedies for us in the event of unauthorized use or disclosure of suchinformation, and others may be able to develop, independently, suchinformation. There has been substantial litigation regarding patent and otherintellectual property rights in the medical device industry. Litigation may benecessary to enforce patents issued to us, to protect trade secrets or know-howowned by us, to defend us against claimed infringement of the rights of othersor to determine the ownership, scope or validity of our proprietary rights orthose of others. Any such claims may require us to incur substantial litigationexpenses and to divert substantial time and effort of management personnel andcould substantially decrease the amount of capital available for ouroperations. An adverse determination in litigation involving the proprietaryrights of others could subject us to significant liabilities to third parties,could require us to seek licenses from third parties, and could prevent us frommanufacturing, selling or using our products. The occurrence of any such actualor threatened litigation or the effect on our business of such litigation maymaterially adversely affect our financial position, results of operations andcash flows.  Additionally, ourassessment that a patent is no longer of value could result in a significantcharge against our earnings.

 

*9.**                                      Wedepend on single source suppliers for certain of the key components andsub-contractors to provide much of our products used in the manufacturing ofour products which could have a material adverse effect on our ability tomanufacture our products until a new source of supply is located.* Althoughwe believe that there are alternative suppliers, any interruption in the supplyof key components could have a material adverse effect on us. A sudden increasein customer demand may create a backorder situation as lead times for some ofour critical materials are in excess of 12 weeks.****We rely on subcontractors toprovide products, either in the form of finished goods or sub-assemblies thatwe then assemble and test. While these sub-contractors reduce our total cost of

 

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manufacturing, they may not be as responsive to increased demand as wewould be if we had our manufacturing capacity entirely in-house, which maylimit our growth strategy and revenues.

 

*10.**                               Thepotential fluctuation in future quarterly results may cause our stock price tofluctuate.* We expect that our operating results could fluctuatesignificantly from quarter to quarter in the future and will depend upon anumber of factors, many of which are outside our control. These factors includethe extent to which our AEM system and related accessories gain marketacceptance; our investments in marketing, sales, research and development andadministrative personnel necessary to support our anticipated growth; ourability to expand our market share; actions of competitors and general economicconditions. The market value of our stock has dramatically fluctuated in thepast and is likely to fluctuate in the future. Any deviation could have animmediate and significant negative impact on the market price of our stock.

 

*11.**                               Ourcommon stock trading is thin and volatile and the buying or selling actions ofa few shareholders may adversely effect our stock price.  *We have a public float of 2,458,369shares or 45% of the outstanding common stock. The average number of sharestraded in any given day over the past year has been relatively small comparedto the public float. Thus, the actions of a few shareholders either buying orselling shares of our common stock may adversely affect the price of theshares. Historically, the over-the-counter markets for securities such as ourcommon stock have experienced extreme price and volume fluctuations that do notnecessarily relate to operating performance.

 

*12.**                               Ourinsurance coverage for product liability claims is up to $5,000,000.* We**facean inherent business risk of exposure to product liability claims in the eventthat the use of our products is alleged to have resulted in adverse effects toa patient. We maintain a general liability insurance policy up to the amount of$5,000,000 that includes coverage for product liability claims. Liabilityclaims may be excluded from the policy, may exceed the coverage limits of thepolicy, or the insurance may not continue to be available on commerciallyreasonable terms or at all. Consequently, a product liability claim or otherclaim with respect to uninsured liabilities or in excess of insured liabilitiescould have a material adverse effect on our financial position, results ofoperations and cash flows.

 

*13.**                               Wedepend on revenue from some major customers*:  We depend on revenue that is generated from the hospital’songoing usage of the AEM surgical instruments. In FY 2002, we generated revenuefrom over 200 hospitals that have converted to AEM products, but no hospitalcustomer contributed more than 3% to the total revenues. We utilize a fewstocking distributors, which sell AEM products to multiple hospital customers.In FY 2002, we recorded revenue of $670,072 (14%) and $564,225 (12%) from twoof these distributors. While it is infrequent that a hospital customer stopsusing AEM instruments after they convert, a loss of ongoing revenue from ahospital customer could have a material adverse effect on our revenues and cashflows.

 

*14.**                               Wedepend on certain key personnel.* We arehighly dependent on a limited number of key management personnel, particularlyour President & Chief Executive Officer, James A. Bowman. Our loss of keypersonnel to death, disability or termination, or our inability to hire andretain qualified personnel, could have a material adverse effect on our financialposition, results of operations and cash flows.

 

**Results of Operations**

 

*For the three monthsended December 31, 2002 compared to the three months ended December 31, 2001.*

 

*Net revenue*.  Revenue for the quarter ended December 31,2002, were $1,812,053, compared to $1,120,927 for the quarter ended December31, 2001, an increase of 62%. The increase is attributable to our continuing toimprove our sales and marketing efforts, which has resulted in the successfulconversion of new hospitals utilizing AEM technology. The increasing number ofhospitals converting to AEM technology is also attributed to the recent GPOsupplier agreements with Novation and Premier, as well as our strategic plan toaccelerate market share gains through promotional programs of placingCompany-owned AEM Monitors at no-charge into hospitals that commit tostandardize on AEM instruments. When a hospital converts to AEM technology theCompany earns revenue from replacement instrument purchases, which only theCompany can provide.  The Companyconverted twenty-five new hospitals to AEM technology in the three months endedDecember 31, 2002.

 

*Gross Profit*.  The gross profit for the quarter endedDecember 31, 2002 of $1,057,936 increased by 67% from the quarter endedDecember 31, 2001 gross profit of $635,146. Gross profit as a percentage ofrevenue (gross margin) increased from 57% for the quarter ended December 31,2001 to 58% in the quarter ended December 31, 2002.  The increase in gross marginwas primarily the result of increased unit sales, resulting in increasedutilization of fixed manufacturing overhead, offset by unit increases in thesales of disposable AEM instruments which are lower gross margin products.  For the three months ended December31, 2001, the Company provided $26,523 in AEM monitors to customers at no-chargeto newly converted hospitals as part of a sales incentive program.

 

*Sales and marketing expenses*.  Sales and marketing expenses of $599,080 forthe quarter ended December 31, 2002 increased by 37% compared to $436,915 forthe quarter ended December 31, 2001. Theincrease was a result of increased sales commissions on increasing revenue andincreased marketing expenditures in launching a new supplier agreement with twogroup purchasing organizations.

 

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*General andadministrative expenses*.  General and administrative expenses of $189,254 for the quarterended December 31, 2002 decreased by 1% compared to $190,935 for the quarterended December 31, 2001. The modest decrease is the result of various expense controlsand in line with the budget plan.

 

*Research anddevelopment expenses*. Research and development expenses of $121,775 for the quarter endedDecember 31, 2002 decreased by 5% compared to $122,334 for the quarter endedDecember 31, 2001. The modest decrease is the result of various expensecontrols and in line with the budget plan.

 

*For the nine monthsended December 31, 2002 compared to the nine months ended December 31, 2001.*

 

*Net revenue.*Revenuefor the nine months ended December 31, 2002, were $4,908,318, compared to$3,372,372 for the nine months ended December 31, 2001, an increase of 46%. Theincrease is attributable to the Company continuing to expand its productoffering, improve its sales and marketing efforts and successful conversion of newhospitals utilizing AEM technology.  TheCompany has converted 95 new hospitals to AEM technology during the nine monthsended December 31, 2002.

 

*Gross profit*.The gross profit for the nine months ended December 31, 2002 of $2,955,345increased by 54% from the nine months ended December 31, 2001 gross profit of$1,926,706. Gross profit as a percentage of revenue (gross margin) increasedfrom 57% for the nine months ended December 31, 2001 to 60% in the nine monthsended December 31, 2002.  The increase wasprimarily the result of increased unit sales, resulting in increasedutilization of fixed manufacturing overhead and offset by unit increases in the sales of disposable AEM instruments,which are lower gross margin products. For the nine months ended December31, 2001, the Company provided $80,753 in AEM monitors to customers atno-charge to newly converted hospitals as part of a sales incentive program.

 

*Sales and marketing expenses*. Sales andmarketing expenses of $1,782,195 for the nine months ended December 31, 2002increased by 48% compared to $1,204,407 for the nine months ended December 31,2001. The increase was a result of increasedsales commissions on increasing revenue and increased marketing expenditures inlaunching a new supplier agreement with two group purchasing organizations.

 

*General andadministrative expenses*. General and administrativeexpenses of $662,845 for the nine months ended December 31, 2002 increased by14% compared to $583,758 for the nine months ended December 31, 2001. Thisincrease is the result of higher compensation, as well as increased expenses ininvestor relations and insurance during the nine month period.

 

*Research anddevelopment expenses*. Research and developmentexpenses of $361,642 for the nine months ended December 31, 2002 increased by21% compared to $299,787 for the nine months ended December 31, 2001. Theincrease is a result of added headcount and the costs associated withinitiatives to address design, manufacturing and cost improvements with twoproduct lines.

 

**Liquidity and CapitalResources**

 

The Company has historically satisfied its cash requirementsprincipally through sales of Common Stock which approximated $17.3 millionthrough December 31, 2002, and, to a substantially lesser degree, funds providedby sales of its products. Historically, these funds have been used for workingcapital and general corporate purposes including research and development. TheCompany may use working capital to build inventories, to ensure that orders canbe filled in a timely manner, to support the sales efforts of its sales forceand to accommodate anticipated growth.

 

Capital expenditures historically have been relatively minor, and haveconsisted of specialized equipment, manufacturing equipment, office equipmentand leasehold improvements. The Company anticipates that its capitalrequirements will remain relatively minor, with the exception of costs relatedto AEM monitors placed at no-charge to hospitals as part of a sales incentiveprogram, discussed below.

 

During fiscal year 2002 and continuing through December 31, 2002, theCompany instituted a cost containment program for its operations. Withincreased sales revenues in fiscal year 2003, the Company is expecting anincrease in the gross profit that will ultimately reduce the overall net lossincurred from operations and slow the consumption of the Company’s cashresources. Competitive disadvantages might occur as a result of the Company’scurrent liquidity situation.

 

For the nine months ended December 31, 2002, the Company generated$450,900 in cash from its operations, used $287,874 for investments in patentsand equipment and received $6,320 from the exercise of stock options. Theinvestment in equipment ($267,299) is primarily due to the capitalization ofAEM monitors placed in hospitals under various promotional programs.  Placing Company-owned AEM monitors intohospitals at no charge to facilitate their usage of AEM instruments is a salesinitiative to accelerate new hospital conversions to AEM instruments. Underthese promotional programs the Company maintains ownership of the AEM monitorand the cost is capitalized and depreciated as cost of sales over the projectedlife of the asset.

 

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As of December 31, 2002, the Company had $670,334 in cash and cashequivalents available to fund future operations. Working capital was $1,563,044at December 31, 2002 compared to $1,604,008 at March 31, 2002.  The Company believes it has sufficientworking capital to continue its operations through at least December 31, 2003.

 

**Outlook**

 

During fiscal year 2002 and continuing into fiscal year 2003, theCompany made significant strides toward achieving sustainable profitableoperations. The Company implemented an aggressive marketing and sales plan andthese efforts are expected to result in continued sales revenue increases forfiscal year 2003. Revenue increases combined with controlled operating expensesand increased gross profit margins are expected to ultimately lead to sustainableprofitable operations and conserve the Company’s cash resources. While theCompany has budgets to guide its operating decisions, the Company cannotpredict with certainty the expected revenues, gross profit margin, profit orloss and usage of cash and cash equivalents for fiscal year 2003.

 

The fiscal year 2003 budget anticipates positive cash flow fromoperations and a 25–50% growth in sales revenue.  This forecast assumes that the Company’s gross profit margin willbe approximately 60%.

 

While there is no guarantee that the Company will be able to meet theoperational and financial requirements of the proposed fiscal year 2003 budgetand limit the use of cash and cash equivalents, the Company’s operating planand execution thereof is focused on growing revenue, increasing margin andconserving cash. The Company believes that its cash resources will besufficient to fund its operations for at least the next twelve months under itscurrent operating plan. If the Company is unable to manage the businessoperations in line with the budget expectations, it could have a materialadverse effect on the Company’s business viability, financial position, resultsof operations and cash flows. Further, if the Company is not successful inmaintaining positive cash flow, additional capital resources will be requiredto maintain ongoing operations.

 

The Company has explored and is continuing to explore options toprovide additional financing to fund future operations as well as otherpossible courses of action. Such actions include, but are not limited to,securing a line of credit, sales of debt or equity securities (which may resultin a dilution to existing shareholders), licensing of technology, strategicalliances and other similar actions. There can be no guarantee that the Companywill be able to obtain additional funding through a private placement of itscommon stock or loans from financial institutions or other third parties orthrough any of the actions discussed above. If the Company cannot achievesustained profitable operations and additional capital is unavailable, its lackof liquidity could have a material adverse effect on the Company’s businessviability, financial position, results of operations and cash flows, and couldresult in a substantial reduction in the Company’s level of activities.

 

In February 2000, the Company appointed James A. Bowman as President& CEO and implemented strategic operational changes across all of theCompany’s operations. To lay a foundation for future growth within the constraintsof the Company’s financial resources the Company focused on: expansion of itsproduct line, expansion of independent endorsements of the Company’s technologyand improved performance of the field sales network.  Progress in these critical areas has resulted in record revenuesand gross profits, as well as periodic profitability.

 

The Company believes that gaining broad clinical endorsements is ademonstrated and successful process for surgical technology to traditionallyadvance in the marketplace. From a concern or problem in surgery, the medicaldevice industry develops a technological solution and this solution evolves togain the breadth of endorsements. Once this occurs, the technology is thenemployed by the hospital to benefit the patient, surgeon and operating roomstaff. Management believes that AEM technology is following the same path asprevious revolutions in electrosurgery. As with “Isolated” ESU generators inthe 1970s and with “REM” technology in the 1980s, AEM technology is receivingthe broad clinical endorsements that drove previous new technology to marketacceptance.

 

The Company believes the unique performance of the AEM technology andits breadth of clinical endorsements provides an opportunity for continuedmarket growth. Management believes that the market visibility and awareness ofthe AEM technology and its independent surgical endorsements is continuallyimproving and that this will benefit its sales efforts for the remainder of FY2003 and beyond.

 

Management’s ongoing focus and commitment in FY 2003 is to maintainexpense controls while optimizing sales execution in the field, developingwidespread market awareness of AEM technology and maximizing the number of newhospital conversions to AEM instruments.

 

The Company’s common stock is traded on the Over The Counter BulletinBoard (OTCBB: ECSN).

 

**Income Taxes**

 

Net operating loss carryforwards totaling approximately $15.3 million,as of December 31, 2002, is available to reduce future taxable income, ifany.  The net operating losscarryforwards expire, if not previously utilized, at various dates beginning inthe year 2011. 

 

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The Company has not paid income taxes since its inception. The TaxReform Act of 1986 and other income tax regulations contain provisions whichmay limit the net operating loss carryforwards available to be used in anygiven year, if certain events occur, including changes in ownership interests.The Company has established a valuation allowance for the entire amount of itsdeferred tax asset since inception due to its history of operating losses.

 

### **ContractualObligations**

 

At December 31, 2002, the Company’s commitments under these obligationswere as follows:

 
|                 |   | **Operating  Leases** |    |
|----------------------|--------|-----------------------|---------|
| Year ended March 31, |   |                  |    |
| 2003                 |   | $                     | 27,106  |   |
| 2004                 |   | 111,572               |    |
| 2005                 |   | 66,955                |    |
|                 |   | $                     | 232,738 |   |

### ** **

### **CriticalAccounting Policies and Estimates**

 

The Company’s discussion and analysis of its financial condition andresults of operations are based upon its consolidated financial statements,which have been prepared in accordance with accounting principles generallyaccepted in the United States. The preparation of these financial statementsrequires the Company to make estimates and judgments that affect the reportedamounts of assets, liabilities, revenues and expenses, and related disclosureof contingent assets and liabilities. On an on-going basis, the Companyevaluates its estimates, including those related to bad debts, inventories andcontingencies (including litigation). The Company bases its estimates onhistorical experience and on various other assumptions that are believed to bereasonable under the circumstances, the results of which form the basis formaking judgments about the carrying values of assets and liabilities that arenot readily apparent from other sources. Actual results may differ from theseestimates under different assumptions or conditions. The Company believes thefollowing critical accounting policies affect its more significant judgmentsand estimates used in the preparation of its consolidated financial statements.

 

The Company maintains allowances for doubtful accounts for estimatedlosses resulting from the inability of its customers to make required payments.If the financial condition of the Company’s customers deteriorate, resulting inan impairment of their ability to make payments, additional allowances may berequired.

 

The Company provides for the estimated cost of product warranties atthe time revenue is recognized. While the Company engages in extensive productquality programs and processes, including actively monitoring and evaluatingthe quality of its component suppliers, the Company’s warranty obligation isbased upon historical experience and is also affected by product failure ratesand material usage incurred in correcting a product failure. Should actualproduct failure rates or material usage costs differ from the Company’sestimates, revisions to the estimated warranty liability would be required.

 

The Company is depreciating AEM monitors that have been placed atcustomer premises over their estimated lives using accelerated depreciationmethods. Should the Company’s estimated useful lives prove too long, or theestimate of salvage value prove too high, impairment charges would be recordedat that time, which could negatively impact the Company’s gross profits.

 

The Company reduces inventory for estimated obsolete or unmarketableinventory equal to the difference between the cost of inventory and theestimated market value based upon assumptions about future demand and marketconditions. If actual market conditions are less favorable than those projectedby management, additional inventory write-downs may be required.

 

**ITEM 3****  ****-  CONTROLSAND PROCEDURES**

 

(a) Evaluation of disclosure controls and procedures. The Companycarried out an evaluation under the supervision and with the participation ofthe Company’s management, including the Company’s Chief Executive Officer andPrincipal Accounting Officer, of the effectiveness of the Company’s disclosurecontrols and procedures (as defined in Rules 13a-14(c) and 15d-14c of theSecurities and Exchange Act of 1934 (the “Exchange Act”)) as of a date withinthe 90 days prior to the date of the filing of this report. Based upon thatevaluation, the Chief Executive Officer and the Principal Accounting Officerconcluded that the Company’s disclosure controls and procedures are effectivein ensuring that information required to be disclosed by the Company under theExchange Act is recorded, processed, summarized and reported within the timeperiods specified under the Exchange Act rules and forms.

 

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(b) There were no significant changes in the Company’s internalcontrols or in other factors that could significantly affect the Company’sdisclosure controls and procedures subsequent to the Evaluation Date, nor anysignificant deficiencies or material weaknesses in such disclosure controls,internal controls and procedures requiring corrective actions. As a result nocorrective actions were taken.

 

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

 
|   | **ITEM 1**    |   | Not Applicable                   |
|--------|---------------|--------|----------------------------------|
|   |          |   |                             |
|   | **ITEM 2**    |   | Not Applicable                   |
|   |          |   |                             |
|   | **ITEM 3**    |   | Not Applicable                   |
|   |          |   |                             |
|   | **ITEM 4**    | -      | Not Applicable                   |
|   |          |   |                             |
|   | **ITEM 5**    | -      | Not Applicable                   |
|   |          |   |                             |
|   | **ITEM****6** | -      | EXHIBITS AND REPORTS ON FORM 8-K |
|   |          |   |                             |
|   |          |   | (a)  Exhibits          |
|   |          |   |                             |
|   |          |   | 99.2                             |   | Certification of Periodic Reports pursuant to Sarbanes-Oxley Act of  2002 |

 

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**SIGNATURE**

 

Pursuant to the requirements of Section 13 or 15(d) of the SecuritiesExchange Act of 1934, Encision has duly caused this report to be signed on itsbehalf by the undersigned thereunto duly authorized.

 

 
| **Name**            |   | **Title**                      |       | **Date** |
|---------------------|--------|--------------------------------|------------|----------|
|                |   |                           |       |     |
|                |   |                           |       |     |
| /s/ Marcia McHaffie |   |                           | Controller |     | February 14, 2003 |
| Marcia McHaffie     |   | (Principal Accounting Officer) |       |     |
|                     |        |                                |            |          |  |

 

 

21

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**CERTIFICATIONS**

 

I, James A. Bowman, certify that:

 

1.               I have reviewed this quarterly report onForm 10-QSB of Encision Inc.;

 

2.               Based on my knowledge, this quarterlyreport does not contain any untrue statement of a material fact or omit tostate a material fact necessary to make the statements made, in light of thecircumstances under which such statements were made, not misleading with respectto the period covered by this quarterly report;

 

3.               Based on my knowledge, the financialstatements, and other financial information included in this quarterly report,fairly present in all material respects the financial condition, results ofoperations and cash flows of the registrant as of, and for, the periodspresented in this quarterly report;

 

4.               The registrant’s other certifyingofficers and I are responsible for establishing and maintaining disclosurecontrols and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14)for the registrant and have:

 

a)              designed such disclosure controls andprocedures to ensure that material information relating to the registrant,including its consolidated subsidiaries, is made known to us by others withinthose entities, particularly during the period in which this quarterly reportis being prepared;

 

b)             evaluated the effectiveness of theregistrant’s disclosure controls and procedures as of a date within 90 daysprior to the filing date of this quarterly report (the “Evaluation Date”); and

 

c)              presented in this quarterly report ourconclusions about the effectiveness of the disclosure controls and proceduresbased on our evaluation as of the Evaluation Date;

 

5.               The registrant’s other certifying officersand I have disclosed, based on our most recent evaluation, to the registrant’sauditors and the audit committee of registrant’s board of directors (or personsperforming the equivalent functions):

 

a)              all significant deficiencies in thedesign or operation of internal controls which could adversely affect theregistrant’s ability to record, process, summarize and report financial dataand have identified for the registrant’s auditors any material weaknesses ininternal controls; and

 

b)             any fraud, whether or not material, thatinvolves management or other employees who have a significant role in theregistrant’s internal controls; and

 

6.               The registrant’s other certifyingofficers and I have indicated in this quarterly report whether or not therewere significant changes in internal controls or in other factors that couldsignificantly affect internal controls subsequent to the date of our mostrecent evaluation, including any corrective actions with regard to significantdeficiencies and material weaknesses.

 

 

Dated:  February 14, 2003.

 
|   | /s/ James A. Bowman                                    |   |
|--------|--------------------------------------------------------|--------|
|   |                                                   |
|   | James A. Bowman  President and Chief Executive Officer |

 

 

22

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**CERTIFICATIONS**

 

I, Marcia McHaffie, certify that:

 

1.               I have reviewed this quarterly report onForm 10-QSB of Encision Inc.;

 

2.               Based on my knowledge, this quarterlyreport does not contain any untrue statement of a material fact or omit tostate a material fact necessary to make the statements made, in light of thecircumstances under which such statements were made, not misleading withrespect to the period covered by this quarterly report;

 

3.               Based on my knowledge, the financialstatements, and other financial information included in this quarterly report,fairly present in all material respects the financial condition, results ofoperations and cash flows of the registrant as of, and for, the periodspresented in this quarterly report;

 

4.               The registrant’s other certifyingofficers and I are responsible for establishing and maintaining disclosurecontrols and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14)for the registrant and have:

 

a)              designed such disclosure controls andprocedures to ensure that material information relating to the registrant,including its consolidated subsidiaries, is made known to us by others withinthose entities, particularly during the period in which this quarterly reportis being prepared;

 

b)             evaluated the effectiveness of theregistrant’s disclosure controls and procedures as of a date within 90 daysprior to the filing date of this quarterly report (the “Evaluation Date”); and

 

c)              presented in this quarterly report ourconclusions about the effectiveness of the disclosure controls and proceduresbased on our evaluation as of the Evaluation Date;

 

5.               The registrant’s other certifyingofficers and I have disclosed, based on our most recent evaluation, to theregistrant’s auditors and the audit committee of registrant’s board ofdirectors (or persons performing the equivalent functions):

 

a)              all significant deficiencies in thedesign or operation of internal controls which could adversely affect theregistrant’s ability to record, process, summarize and report financial dataand have identified for the registrant’s auditors any material weaknesses ininternal controls; and

 

b)             any fraud, whether or not material, thatinvolves management or other employees who have a significant role in theregistrant’s internal controls; and

 

6.               The registrant’s other certifyingofficers and I have indicated in this quarterly report whether or not there weresignificant changes in internal controls or in other factors that couldsignificantly affect internal controls subsequent to the date of our mostrecent evaluation, including any corrective actions with regard to significantdeficiencies and material weaknesses.

 

 

Dated:  February 14, 2003.

 
|   | /s/ Marcia McHaffie                                          |   |
|--------|--------------------------------------------------------------|--------|
|   |                                                         |
|   | Marcia McHaffie  Controller and Principal Accounting Officer |

** **

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