Table of Contents

 

 

 

**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON,D.C.  20549**

 

## **Form 10-Q**

## ** **

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

 

**For the quarterly period ended December 31,2009**

 

**OR**

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

 

**For the transition period from                    to                   **

 

**Commission file number 0-28604**

 

**ENCISION INC.**

(Exact name of registrant as specified in itscharter)

 

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

 

**6797 Winchester Circle**

**Boulder, Colorado 80301**

(Address of principalexecutive offices)

** **

**(303) 444-2600**

(Registrant’s telephonenumber)

 

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

 

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

 

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

 

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

 

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

 

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

 

| **Common Stock, no par value** | ** ** | **6,455,100 Shares**                   |
|--------------------------------|------------|----------------------------------------|
| (Class)                        |       | (outstanding at January 31, 2010) |

 

 

 

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**ENCISION INC.**

 

**FORM 10-Q**

 

**For the Three Months Ended December 31, 2009**

 

**INDEX**

 
| ** **        | ** **                 | ** **                                                                                      | **Page**   |
|-------------------|----------------------------|-------------------------------------------------------------------------------------------------|------------|
| ** **        | ** **                 | ** **                                                                                      | **Number** |
|              |                       |                                                                                            |       |
| **PART I.**  | **FINANCIAL  INFORMATION** |                                                                                            |
|              |                       |                                                                                            |       |
| **ITEM1**         | -                          | Condensed  Interim Financial Statements:                                                        |       |
|              | -                          | Condensed Balance  Sheets as of December 31, 2009 and March 31, 2009                  | 3          |
|              | -                          | Condensed  Statements of Operations for the Three Months Ended December 31, 2009  and 2008 | 4          |
|              | -                          | Condensed  Statements of Operations for the Nine Months Ended December 31, 2009 and  2008  | 5          |
|              | -                          | Condensed  Statements of Cash Flows for the Nine Months Ended December 31, 2009 and  2008  | 6          |
|              | -                          | Notes to  Condensed Interim Financial Statements                                                | 7          |
|              |                       |                                                                                            |       |
| **ITEM 2**        | -                          | Management’s Discussion and Analysis of  Financial Condition and Results of Operations     | 12         |
|              |                       |                                                                                            |       |
| **ITEM 4**        | -                          | Controls and  Procedures                                                                        | 17         |
|              |                       |                                                                                            |       |
| **PART II.** | **OTHER INFORMATION**      |                                                                                            |
|              |                       |                                                                                            |       |
| **ITEM 6**        | -                          | Exhibits                                                                                        | 18         |
|              |                       |                                                                                            |       |
| **SIGNATURE**     | 19                         |

 

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

 

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

 

**Encision Inc.**

**Condensed Balance Sheets**

**(unaudited)**

 
| ** **                                                                                                                         | ** ** | **December 31,********2009** | ** ** | **March 31,********2009** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------|------------|--------------------------------|------------|
| **ASSETS**                                                                                                                         |       |                              |       |                           |       |
| Current assets:                                                                                                                    |       |                              |       |                           |       |
| Cash and cash equivalents                                                                                                          |       | $                                 | 46,582     |                           | $          | 84,658 |   |
| Accounts receivable, net of allowance for doubtful  accounts of $10,500 at December 31, 2009 and$9,000 at March 31, 2009 |       | 1,196,611                         |       | 1,263,751                      |       |
| Inventories, net of reserve for obsolescence of  $55,000                                                                           |       | 2,351,121                         |       | 2,504,598                      |       |
| Prepaid expenses                                                                                                                   |       | 91,909                            |       | 36,541                         |       |
| Total current assets                                                                                                               |       | 3,686,223                         |       | 3,889,548                      |       |
| Equipment, at cost:                                                                                                                |       |                              |       |                           |       |
| Furniture, fixtures and equipment                                                                                                  |       | 2,340,307                         |       | 2,003,337                      |       |
| Customer-site equipment                                                                                                            |       | 751,504                           |       | 667,171                        |       |
| Accumulated depreciation                                                                                                           |       | (1,997,125                        | )          | (1,830,273                     | )          |
| Equipment, net                                                                                                                     |       | 1,094,686                         |       | 840,235                        |       |
| Patents, net of accumulated amortization of  $140,393 at December 31, 2009 and $128,994 at March 31, 2009                |       | 264,887                           |       | 215,801                        |       |
| Other assets                                                                                                                       |       | 26,929                            |       | 24,505                         |       |
| **TOTAL ASSETS**                                                                                                                   |       | $                                 | 5,072,725  |                           | $          | 4,970,089 |   |
| **LIABILITIES AND SHAREHOLDERS’  EQUITY**                                                                                     |       |                              |       |                           |       |
| Current liabilities:                                                                                                               |       |                              |       |                           |       |
| Accounts payable                                                                                                                   |       | $                                 | 372,276    |                           | $          | 745,138 |   |
| Accrued compensation                                                                                                               |       | 337,002                           |       | 405,906                        |       |
| Other accrued liabilities                                                                                                          |       | 388,067                           |       | 367,266                        |       |
| Line of credit                                                                                                                     |       | —                            |       | 190,942                        |       |
| Total current liabilities                                                                                                          |       | 1,097,345                         |       | 1,709,252                      |       |
| Long-term liabilities:                                                                                                             |       |                              |       |                           |       |
| Line of credit                                                                                                                     |       | 275,000                           |       | —                         |       |
| **Commitments and contingencies**                                                                                                  |       |                              |       |                           |       |
| Shareholders’ equity:                                                                                                         |       |                              |       |                           |       |
| Preferred stock, no par value: 10,000,000 shares  authorized; none issued and outstanding                                          |       | —                            |       | —                         |       |
| Common stock and additional paid-in capital, no par  value: 100,000,000 shares authorized;6,455,100 shares issued and outstanding  |       | 19,640,391                        |       | 19,559,626                     |       |
| Accumulated (deficit)                                                                                                              |       | (15,940,011                       | )          | (16,298,789                    | )          |
| Total shareholders’ equity                                                                                                    |       | 3,700,380                         |       | 3,260,837                      |       |
| **TOTAL LIABILITIES AND  SHAREHOLDERS’ EQUITY**                                                                               |       | $                                 | 5,072,725  |                           | $          | 4,970,089 |   |

 

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

 

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**Encision Inc.**

**Condensed Statements ofOperations**

**(Unaudited)**

 
| **Three Months Ended**                        | ** ** | **December 31,********2009** | ** ** | **December 31,********2008** | ** ** |
|-----------------------------------------------|------------|-----------------------------------|------------|-----------------------------------|------------|
| **NET SALES**                                 |       | $                                 | 3,260,316  |                              | $          | 3,270,854 |   |
| **COST OF SALES**                             |       | 1,251,710                         |       | 1,191,492                         |       |
| **GROSS PROFIT**                              |       | 2,008,606                         |       | 2,079,362                         |       |
| **OPERATING EXPENSES:**                       |       |                              |       |                              |       |
| Sales and marketing                           |       | 1,146,245                         |       | 1,191,079                         |       |
| General and administrative                    |       | 361,305                           |       | 354,908                           |       |
| Research and development                      |       | 340,749                           |       | 286,551                           |       |
| Total operating expenses                      |       | 1,848,299                         |       | 1,832,538                         |       |
| **OPERATING INCOME**                          |       | 160,307                           |       | 246,824                           |       |
| Interest expense, net                         |       | (9,213                            | )          | (14,449                           | )          |
| Other income (expense), net                   |       | (2,071                            | )          | 535                               |       |
| Interest and other income (expense), net      |       | (11,284                           | )          | (13,914                           | )          |
| **INCOME BEFORE PROVISION FOR  INCOME TAXES** |       | 149,023                           |       | 232,910                           |       |
| Provision for income taxes                    |       | —                            |       | —                            |       |
| **NET INCOME**                                |       | $                                 | 149,023    |                              | $          | 232,910 |   |
| Net income per share—basic               |       | $                                 | 0.02       |                              | $          | 0.04 |   |
| Net income per share—diluted             |       | $                                 | 0.02       |                              | $          | 0.04 |   |
| Weighted average shares—basic            |       | 6,455,100                         |       | 6,455,100                         |       |
| Weighted average shares—diluted          |       | 6,461,192                         |       | 6,455,100                         |       |

 

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

 

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**Encision Inc.**

**Condensed Statements ofOperations**

**(Unaudited)**

 
| **Nine Months Ended**                         | ** ** | **December 31,********2009** | ** ** | **December 31,********2008** | ** ** |
|-----------------------------------------------|------------|-----------------------------------|------------|-----------------------------------|------------|
| **NET SALES**                                 |       | $                                 | 9,649,587  |                              | $          | 9,711,029 |   |
| **COST OF SALES**                             |       | 3,664,038                         |       | 3,714,908                         |       |
| **GROSS PROFIT**                              |       | 5,985,549                         |       | 5,996,121                         |       |
| **OPERATING EXPENSES:**                       |       |                              |       |                              |       |
| Sales and marketing                           |       | 3,580,145                         |       | 3,887,030                         |       |
| General and administrative                    |       | 1,058,367                         |       | 1,079,861                         |       |
| Research and development                      |       | 946,591                           |       | 855,764                           |       |
| Total operating expenses                      |       | 5,585,103                         |       | 5,822,655                         |       |
| **OPERATING INCOME**                          |       | 400,446                           |       | 173,466                           |       |
| Interest expense, net                         |       | (34,026                           | )          | (50,073                           | )          |
| Other income (expense), net                   |       | (7,642                            | )          | 20,500                            |       |
| Interest and other income (expense), net      |       | (41,668                           | )          | (29,573                           | )          |
| **INCOME BEFORE PROVISION FOR  INCOME TAXES** |       | 358,778                           |       | 143,893                           |       |
| Provision for income taxes                    |       | —                            |       | —                            |       |
| **NET INCOME**                                |       | $                                 | 358,778    |                              | $          | 143,893 |   |
| Net income per share—basic               |       | $                                 | 0.06       |                              | $          | 0.02 |   |
| Net income per share—diluted             |       | $                                 | 0.06       |                              | $          | 0.02 |   |
| Weighted average shares—basic            |       | 6,455,100                         |       | 6,453,338                         |       |
| Weighted average shares—diluted          |       | 6,463,018                         |       | 6,453,338                         |       |

 

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

 

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**Encision Inc.**

**Condensed Statements of CashFlows**

**(Unaudited)**

 
| **Nine Months Ended**                                                              | ** ** | **December 31,********2009** | ** **   | **December 31,********2008** | ** ** |
|------------------------------------------------------------------------------------|------------|-----------------------------------|--------------|-----------------------------------|------------|
| Cash flows from operating activities:                                              |       |                              |         |                              |       |
| Net income                                                                         |       | $                                 | 358,778      |                              | $          | 143,893 |   |
| Adjustments to reconcile net income to net cash  provided by operating activities: |       |                              |         |                              |       |
| Depreciation and amortization                                                      |       | 178,251                           |         | 181,102                           |       |
| Stock-based compensation expense related to stock  options                         |       | 80,765                            |         | 124,259                           |       |
| Stock-based interest expense related to warrants                                   |       | —                            |         | 9,381                             |       |
| Provision for doubtful accounts, net                                               |       | 1,500                             |         | (1,000                            | )          |
| Provision for inventory obsolescence, net                                          |       | —                            |         | (20,000                           | )          |
| Change in operating assets and liabilities:                                        |       |                              |         |                              |       |
| Accounts receivable                                                                |       | 65,640                            |         | 20,916                            |       |
| Inventories                                                                        |       | 153,477                           |         | 192,816                           |       |
| Prepaid expenses and other assets                                                  |       | (57,792                           | )            | 9,558                             |       |
| Accounts payable                                                                   |       | (372,862                          | )            | 136,209                           |       |
| Accrued compensation and other accrued liabilities                                 |       | (48,103                           | )            | (187,469                          | )          |
| Net cash provided by operating activities                                          |       | 359,654                           |         | 609,665                           |       |
| Cash flows from investing activities:                                              |       |                              |         |                              |       |
| Acquisition of property and equipment                                              |       | (421,303                          | )            | (184,250                          | )          |
| Patent costs                                                                       |       | (60,485                           | )            | (28,492                           | )          |
| Net cash (used in) investing activities                                            |       | (481,788                          | )            | (212,742                          | )          |
| Cash flows from financing activities:                                              |       |                              |         |                              |       |
| Borrowings from (paydown of) credit facility                                       |       | 84,058                            |         | (407,058                          | )          |
| Proceeds from the exercise of stock options                                        |       | —                            |         | 11,520                            |       |
| Net cash provided by (used in) financing activities                                |       | 84,058                            |         | (395,538                          | )          |
| Net increase (decrease) in cash and cash  equivalents                              |       | (38,076                           | )            | 1,385                             |       |
| Cash and cash equivalents, beginning of period                                     |       | 84,658                            |         | 70,995                            |       |
| Cash and cash equivalents, end of period                                           |       | $                                 |  46,582 |                              | $          |  72,380 |   |

 

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

 

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ENCISION INC.

 

NOTES TO CONDENSED INTERIMFINANCIAL STATEMENTS

 

DECEMBER 31, 2009

(Unaudited)

 

Note 1.  ORGANIZATION AND NATURE OFBUSINESS

 

EncisionInc. is a medical device company that designs, develops, manufactures andmarkets patented surgical instruments that provide greater safety to patientsundergoing minimally-invasive surgery. We believe that our patented AEM® surgical instrument technology is changing themarketplace for electrosurgical devices and instruments by providing a solutionto a patient safety risk in laparoscopic surgery. Our sales to date have beenmade principally in the United States.

 

Wehave, except for fiscal years 2009, 2004 and 2003 when we achieved profitableoperations, incurred losses since our inception and have an accumulated deficitof $15,940,011 at December 31, 2009. Operations have been financedprimarily through issuances of our common stock and warrants to purchase ourcommon stock and, to a lesser extent, profits from operations. Our liquidityhas substantially diminished because of such continuing operating losses, andwe may be required to seek additional capital in the future.

 

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

 

Note 2.  SUMMARY OF SIGNIFICANTACCOUNTING POLICIES

 

Basis of Presentation.  The condensed interim financial statementsincluded herein have been prepared by us, without audit, pursuant to the rules andregulations of the Securities and Exchange Commission (“SEC”). Certaininformation and footnote disclosures normally included in financial statementsprepared in accordance with generally accepted accounting principles acceptedin the United States have been condensed or omitted pursuant to such rules andregulations, although we believe that the disclosures made are adequate to makethe information presented not misleading. The condensed interim financialstatements and notes thereto should be read in conjunction with the financialstatements and the notes thereto included in our Annual Report on Form 10-Kfor the fiscal year ended March 31, 2009, filed on June 29, 2009.

 

Theaccompanying condensed interim financial statements have been prepared, in allmaterial respects, in conformity with the standards of accounting measurementsand 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.  All adjustments are of anormal recurring nature. The results of operations for the most recent interimperiod are not necessarily indicative of the results to be expected for thefull year.

 

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

 

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

 

FairValue of Financial Instruments.  In February 2008, the FinancialAccounting Standards Board (“FASB”) issued FSP FASB ASC 820-10-55 (Priorauthoritative literature: FASB FSP 157-2/Statement 157, Effective Date of FASBStatement No. 157.) FASB ASC 820-10-55 (Prior authoritative literature:FASB FSP 157-2/Statement 157, Effective Date of FASB Statement No. 157),which delayed the effective date for all nonfinancial assets and nonfinancialliabilities, except those that are recognized or disclosed at fair value in thefinancial statements on a recurring basis (at least annually). The adoption ofthe provisions of FASB ASC 820-10-55 (Prior authoritative literature: FASB FSP157-2/Statement 157, Effective Date of FASB Statement No. 157) related tononfinancial assets and nonfinancial liabilities on January 1, 2009 didnot have a material impact on the Financial Statements. We adopted FASB ASC820-10-55 as of April 1, 2008 for financial assets and liabilities andother assets and liabilities carried at fair value on a recurring basis. Weadopted FASB ASC 820-10-55 for all nonfinancial assets and liabilities as of April 1,2009. This statement defines fair value, establishes a framework for measuringfair value and expands the related disclosure requirements. This statementapplies under other accounting pronouncements that require or permit fair valuemeasurements.

 

Our financial instruments consist of cash and cash equivalents,short-term trade receivables, payables and line of credit. The carrying valuesof cash and cash equivalents and short-term receivables and payablesapproximate their fair value due to their short maturities.

 

Concentrationof Credit Risk.  Financialinstruments with significant credit risk include cash. The amount of cash thatwe have on deposit with financial institutions may from time to time exceed the$250,000 federally insured limit. However, we believe that the financialinstitutions are financially sound and the risk of loss is minimal.

 

Financialinstruments consist of cash and cash equivalents, short-term trade receivables,payables and line of credit. The carrying value of all financial instrumentsapproximate fair value.

 

Wehave no significant off-balance sheet concentrations of credit risk such asforeign exchange contracts, options contracts or other foreign hedgingarrangements. We maintain the majority of our cash balances with one financialinstitution in the form of demand deposits and money market funds.Accounts receivable aretypically unsecured and are derived from transactions with and from entities inthe healthcare industry primarily located in the United States. Accordingly, wemay be exposed to credit risk generally associated with the healthcareindustry. We maintain allowances for doubtful accounts for estimated lossesresulting from the inability of our customers to make required payments. Thenet accounts receivable balance at December 

 

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31,2009 of $1,196,611 included no more than 3% from any one customer. The netaccounts receivable balance at March 31, 2009 of $1,263,751 included nomore than 6% from any one customer.

 

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

 

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

 
| ** **                    | ** ** | **December 31, 2009** | ** ** | **March 31, 2009** | ** ** |
|-------------------------------|------------|---------------------------------|------------|-------------------------|------------|
| Raw materials                 |       | $                               | 1,281,718  |                    | $          | 1,336,376 |   |
| Finished goods                |       | 1,124,403                       |       | 1,223,222               |       |
| Total gross inventories       |       | 2,406,121                       |       | 2,559,598               |       |
| Less reserve for obsolescence |       | (55,000                         | )          | (55,000                 | )          |
| Total net inventories         |       | $                               | 2,351,121  |                    | $          | 2,504,598 |   |

 

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

 

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

 

Patents.  The costs of applying for patents arecapitalized and amortized on a straight-line basis over the lesser of thepatent’s economic or legal life (20 years from the date of application in theUnited States). Capitalized costs are expensed if patents are not granted. Wereview the carrying value of our patents periodically to determine whether thepatents have continuing value, and such reviews could result in the conclusionthat the recorded amounts have been impaired.

 

Accrued Liabilities.  We have accrued $50,000 related to warrantyclaims, $45,889 related to sales commissions and $6,217 related to rentnormalization and have included these amounts in accrued liabilities in theaccompanying balance sheet at December 31, 2009. At March 31, 2009,we had accrued $50,000 related to warranty claims, $63,300 related to salescommissions and $15,202 related to rent normalization and have included theseamounts in accrued liabilities in the accompanying balance sheet at March 31,2009.

 

Income Taxes.  We accountfor income taxes under FASB ASC 740-10-30 (Prior authoritative literature, FASBStatement 109 “Accounting for Income Taxes”. Recognition is required ofdeferred income 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 109 alsorequires 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. During thethree months ended December 31, 2009, we reversed our deferred tax assetsand valuation allowance by the effective tax rate on loss carryforwards thatwere used to offset taxable income for such period. During fiscal year 2009, notax benefit was obtained from our loss. As a result, no tax benefit isreflected in the accompanying statements of operations for fiscal year 2009. Shouldwe achieve sufficient, sustained income in the future, we may conclude thatmore or all of the valuation allowance should be reversed. We are required tomake many subjective assumptions and judgments regarding our income taxexposures. At December 31, 2009, we had no unrecognized tax benefits whichwould affect the effective tax rate if recognized and had no accrued interestor penalties related to uncertain tax positions.

 

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

 

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

 

Stock-Based Compensation.  We accounted for stock-based compensationunder the provisions of FASB Accounting Standards Codification (ASC) 718-10-55(Prior authoritative literature: FASB Statement 123(R), Share-Based Payment).”This statement requires us to record an expense associated with the fair valueof stock-based compensation. We currently use the Black-Scholes optionvaluation model to calculate stock based compensation at the date of grant.Option pricing models require the input of highly subjective assumptions,including the expected price volatility. Changes in these assumptions canmaterially affect the fair value estimate.

 

Stock-basedcompensation expense recognized under FASB Accounting Standards Codification(ASC) 718-10-55 for the three and nine months ended December 31, 2009 was$33,993 and $80,765, respectively, which consisted of stock-based compensationexpense related to grants of employee stock options. Stock-based compensationexpense related to grants of employee stock options recognized for the threeand nine months ended December 31, 2008 was $45,828 and $124,259,respectively.

 

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SegmentReporting.  We haveconcluded that we have one operating segment.

 

RecentlyIssued and Adopted Accounting Guidance

 

*Recently Issued Accounting Guidance*

 

Sincethe filing of our Form 10-K for the fiscal year ended March 31, 2009,the Financial Accounting Standards Board (“FASB”) has issued 22 accountingstandards updates. We have evaluated these updates and do not believe theadoption of any of these updates will have a material impact on our unauditedcondensed financial statements.

 

*Recently Adopted Accounting Guidance*

 

InJune 2009, the FASB issued Accounting Standards Codification (“ASC”) 810, *Consolidation,*(formerly SFAS No. 167,*Amendments to FASB Interpretation No. 46(R*))regarding the consolidation of variable interest entities. ASC 810 is intended**to improve financial reporting byproviding additional guidance to companies involved with variable interestentities and by requiring additional disclosures about a company’s involvementin variable interest entities. We adopted the provisions of the standard on December 31,2009, which did not have a material impact on our unaudited condensedconsolidated financial statements.

 

InJune 2009, the FASB issued ASC 860, *Transfersand Servicing* (formerly SFAS No. 166, *Accounting for Transfers of Financial Assets*).ASC 860 requires more information about transfers of financial assets and wherecompanies have continuing exposure to the risk related to transferred financialassets. ASC 860 eliminates the concept of a qualifying special purpose entity,changes the requirements for derecognizing financial assets and requiresadditional disclosure. We adopted the provisions of the standard on December 31,2009, which did not have a material impact on our unaudited condensedconsolidated financial statements.

 

InJune 2009, the FASB issued ASC 105, *GenerallyAccepted Accounting Principles* (formerly SFAS No. 168, *The “FASB Accounting Standards Codification”**TM** and the Hierarchy of Generally AcceptedAccounting Principles — a replacement of FASB Statement No. 162*). ASC 105establishes the FASB ASC as the single source of authoritative nongovernmentalU.S. GAAP, except for SEC rules and interpretive releases, which aresources of authoritative GAAP for SEC reporting companies. The standard iseffective for interim and annual periods ending after September 15, 2009.We adopted the provisions of the standard on September 30, 2009, which didnot have a material impact on our unaudited condensed consolidated financialstatements.

 

InMay 2009, the FASB issued ASC 855, *SubsequentEvents*(formerly SFAS No. 165, *SubsequentEvents*). ASC 855 establishes general accounting standards anddisclosure of events that occur after the balance sheet date but beforefinancial statements are issued or are available to be issued. ASC 855 setsforth the period after the balance sheet date during which management of areporting entity should evaluate events or transactions that may occur forpotential recognition or disclosure in the financial statements, thecircumstances under which an entity should recognize events or transactionsoccurring after the balance sheet date in its financial statements, and thedisclosures that an entity should make about events or transactions thatoccurred after the balance sheet date. ASC 855 is effective for fiscal yearsand interim periods ended after June 15, 2009. We adopted the provisionsof the standard, which had no effect on the unaudited condensed consolidatedfinancial statements and subsequent events through the date of this filing. Weevaluated subsequent events from January 1, 2010 to February 12,2010, the date we issued our unaudited condensed consolidated financialstatements.

 

InApril 2009, the FASB issued ASC 825, *FinancialInstruments*(formerly Financial Staff Position (“FSP”) No. 107-1and Accounting Principles Board (“APB”) 28-1 (FSP No. 107-1 and APB 28-1),*Interim Disclosures about Fair Value ofFinancial Instruments*). ASC 825 requires disclosures of fair valuefor any financial instruments not currently reflected at fair value on thebalance sheet for all interim periods. ASC 825 enhances consistency infinancial reporting by increasing the frequency of fair value disclosures andis effective for interim and annual periods ending after June 15, 2009,and is to be applied prospectively. We adopted the provisions of the standard,which did not have an effect on our unaudited condensed consolidated financialstatements.

 

Note3.  BASIC AND DILUTED INCOME AND LOSS PER COMMON SHARE

 

Wereport both basic and diluted net income (loss) per share. Basic net income orloss per common share is computed by dividing net income or loss for the periodby the weighted average number of common shares outstanding for the period.Diluted net income or loss per common share is computed by dividing the netincome or loss for the period by the weighted average number of common andpotential common shares outstanding during the period if the effect of the potentialcommon shares is dilutive. The shares used in the calculation of dilutivepotential common shares exclude options to purchase shares where the exerciseprice was greater than the average market price of common shares for theperiod.

 

Thefollowing table presents the calculation of basic and diluted net income (loss)per share:

 
| ** **                                 | ** ** | **Three Months Ended**      | ** ** | **Nine Months Ended**       | ** ** |
|--------------------------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| ** **                                 | ** ** | **December 31,  2009** | ** ** | **December 31,  2008** | ** ** | **December 31,  2009** | ** ** | **December 31,  2008** | ** ** |
| Net income                                 |       | $                           | 149,023    |                        | $          | 232,910 |   | $ | 358,778 |   | $ | 143,893 |   |
| Weighted-average shares — basic       |       | 6,455,100                   |       | 6,455,100                   |       | 6,455,100 |   | 6,453,338 |   |
| Effect of dilutive potential common shares |       | 6,092                       |       | —                      |       | 7,918 |   | — |   |
| Weighted-average shares — diluted     |       | 6,461,192                   |       | 6,455,100                   |       | 6,463,018 |   | 6,453,338 |   |
| Net income per share — basic          |       | $                           | 0.02       |                        | $          | 0.04 |   | $ | 0.06 |   | $ | 0.02 |   |
| Net income per share — diluted        |       | $                           | 0.02       |                        | $          | 0.04 |   | $ | 0.06 |   | $ | 0.02 |   |
| Antidilutive employee stock options        |       | 552,667                     |       | 590,000                     |       | 552,667 |   | 590,000 |   |

 

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Note4.  COMMITMENTS AND CONTINGENCIES

 

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

 
| **Fiscal Year**                | ** ** | **Amount** | ** ** |
|--------------------------------|------------|------------|------------|
| 2010 (three months  remaining) |       | $          | 60,621     |   |
| 2011                           |       | 247,264    |       |
| 2012                           |       | 254,629    |       |
| 2013                           |       | 262,281    |       |
| 2014                           |       | 270,221    |       |
| 2015                           |       | 90,966     |       |
| Total                          |       | $          | 1,185,982  |   |

 

Ourminimum future equipment lease payments with General Electric CapitalCorporation as of December 31, 2009, by fiscal year, are asfollows:

 
| **Fiscal Year**                | ** ** | **Amount** | ** ** |
|--------------------------------|------------|------------|------------|
| 2010 (three months  remaining) |       | $          | 25,469     |   |
| 2011                           |       | 101,873    |       |
| 2012                           |       | 101,873    |       |
| 2013                           |       | 101,873    |       |
| 2014                           |       | 8,488      |       |
| Total                          |       | $          | 339,576    |   |

 

OnNovember 4, 2009, we signed a second amendment to our credit facilityagreement with Silicon Valley Bank, effective November 10, 2009. The termsof the credit facility include a line of credit for $2,000,000 for two years atan interest rate calculated at prime rate plus 1.25%, subject to increase upona default. Our borrowing under the credit facility is limited by our eligiblereceivables and inventory at the time of borrowing. As of December 31,2009, we had borrowed $275,000 from the credit facility and, under our eligiblereceivables and inventory limit, had an additional $1,300,000 available toborrow.

 

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

 

Weare subject to regulation by the United States Food and Drug Administration (“FDA”).The FDA provides regulations governing the manufacture and sale of our productsand regularly inspects us and other manufacturers to determine compliance withthese regulations. We believe that we were in substantial compliance with allknown regulations as of December 31, 2009. FDA inspections are conductedperiodically at the discretion of the FDA. Our latest inspection by the FDAoccurred in November 2009.

 

Note 5.  SHARE BASEDCOMPENSATION

 

Theprovisions of FASB Accounting Standards Codification (ASC) 718-10-55 requiresthe measurement and recognition of compensation expense for all share-basedpayment awards made to our employees and directors, including employee stockoptions, based on estimated fair values. The following table summarizesstock-based compensation expense related to employee stock options and employeestock purchases for the three and nine months ended December 31, 2009 and2008, which was allocated as follows:

 
| ** **                       | ** ** | **Three Months Ended**      | ** ** | **Nine Months Ended**       | ** ** |
|----------------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| ** **                       | ** ** | **December 31,  2009** | ** ** | **December 31,  2008** | ** ** | **December 31,  2009** | ** ** | **December 31,  2008** | ** ** |
| Cost of sales                    |       | $                           | 810        |                        | $          | 1,113 |   | $ | 2,430 |   | $ | 1,533 |   |
| Sales and marketing              |       | 5,562                       |       | 7,950                       |       | 16,310 |   | 22,068 |   |
| General and administrative       |       | 23,445                      |       | 30,756                      |       | 49,497 |   | 85,007 |   |
| Research and development         |       | 4,176                       |       | 6,009                       |       | 12,528 |   | 15,651 |   |
| Stock-based compensation expense |       | $                           | 33,993     |                        | $          | 45,828 |   | $ | 80,765 |   | $ | 124,259 |   |

 

The Black-Scholes model requires the use of actual employee exercisebehavior data and the application of a number of assumptions, includingexpected volatility, risk-free interest rate and expected dividends. Stockoptions to purchase 200,000 and 235,000 shares of stock were granted during thethree and nine months ended December 31, 2009, respectively. Theweighted-average assumptions for employee stock options granted during thethree and nine months ended December 31, 2009 are summarized as follows:

 
| ** **               | ** ** | **Three Months  Ended  December 31,  2009** | ** ** | **Nine Months  Ended  December 31,  2009** | ** ** |
|--------------------------|------------|--------------------------------------------------|------------|-------------------------------------------------|------------|
| Risk-free interest rate  |       | 2.2                                              | %          | 2.3                                             | %          |
| Expected life (in years) |       | 5.0                                              |       | 5.0                                             |       |
| Expected volatility      |       | 90                                               | %          | 88                                              | %          |
| Expected dividend        |       | 0                                                | %          | 0                                               | %          |

 

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Asof December 31, 2009, $422,000 of total unrecognized compensation costsrelated to nonvested stock options is expected to be recognized over a periodof five years.

 

Note6.  RELATED PARTY TRANSACTION

 

Wepaid consulting fees of $18,035 and $47,225 to an entity owned by one of ourdirectors during the three and nine months ended December 31, 2009,respectively, and approximately $13,000 and $42,000 during the three and ninemonths ended December 31, 2008, respectively.

 

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

 

Certain statements contained in this section on Management’s Discussionand Analysis are not historical facts, including statements about ourstrategies and expectations with respect to new and existing products, marketdemand, acceptance of new and existing products, marketing efforts,technologies and opportunities, market and industry segment growth, and returnon investments in products and markets. These statements are forward lookingstatements within the meaning of the Private Securities Litigation Reform Actof 1995 and involve substantial risks and uncertainties that may cause actualresults to differ materially from those indicated by the forward lookingstatements. All forward looking statements in this section on Management’sDiscussion and Analysis are based on information available to us on the date ofthis document, and we assume no obligation to update such forward lookingstatements. Readers of this Form 10-Q are strongly encouraged to reviewthe section entitled *“Risk Factors”*inour Form 10-K for the fiscal year ended March 31, 2009.

 

**General**

 

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

 

Wewere founded to address market opportunities created by the increase inminimally-invasive surgery (“MIS”) and surgeons’ preference for usingelectrosurgery devices in these procedures. The product opportunity was createdby surgeons’ continued widespread demand for using monopolar electrosurgery instruments,which, when used in laparoscopic surgery, are susceptible to causinginadvertent collateral tissue damage outside the surgeon’s field of view. Therisk of unintended electrosurgical burn injury to the patient in laparoscopicsurgery has been well documented. This risk poses a threat to patient safetyand creates liability exposure for surgeons and hospitals that do notadequately address the issue.

 

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

 

AEMtechnology has been recommended and endorsed by sources from various groupsinvolved in MIS. Surgeons, nurses, biomedical engineers, the medicolegalcommunity, malpractice insurance carriers and electrosurgical devicemanufacturers advocate the use of AEM technology. Recommendations from themalpractice insurance and medicolegal communities complement the broad clinicalendorsements AEM technology has garnered over the past few years.

 

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

 

Wehave focused our marketing strategies to date on expanding the market awarenessof the AEM technology and our broad independent endorsements and have continuedefforts to improve and expand the AEM product line. Accordingly, we are currentlyfocusing on updating our accepted AEM instruments to include ergonomics anduser functionalities for which surgeons have been expressing a preference. Duringfiscal year 2006, we announced enTouchTM, an ergonomically-designed handle forour articulating instruments, and we plan to introduce new additions to the AEMproduct line in fiscal year 2010.

 

Whena hospital changes to AEM technology, we receive recurring sales from sales ofreplacement instruments. We believe that there is no directly competingtechnology to supplant AEM products once a hospital switches to our products.The replacement market of reusable and disposable AEM products in hospitals thatuse our AEM technology represented over 90% of our sales during the threemonths ended December 31, 2009. This sales stream is expected to grow asthe base of hospitals that switch to AEM technology continues to grow. Inaddition, we intend to develop disposable versions of more of our AEM productsin order to meet market demands and expand our sales opportunities.

 

Wehave, except for fiscal years 2009, 2004 and 2003 when we achieved profitableoperations, incurred losses since our inception and have an accumulated deficitof $15,940,011 at December 31, 2009. Operations have been financedprimarily through issuances of our common stock and warrants, and to a lesserextent, from profits on operations. Our liquidity has substantially diminishedbecause of such continuing operating losses, and we may be required to seekadditional capital in the future.

 

Duringthe nine months ended December 31, 2009, we provided $359,654 of cash fromour operations and used $421,303 for investments in equipment. As of December 31,2009, we had $46,582 in cash and cash equivalents available to fund futureoperations, a decrease of $38,076 from March 31, 2009. As of December 31,2009, we had borrowed $275,000 from our $2,000,000 amended credit facility, anincrease of $84,058 from March 31, 2009. Our working capital was$2,588,878 at December 31, 2009 compared to $2,180,296 at March 31,2009.

 

**Historical Perspective**

 

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

 

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

 

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

 

**Outlook**

 

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

 

Webelieve that the unique performance of the AEM technology and our breadth ofindependent endorsements provide an opportunity for continued market sharegrowth. In our view, market awareness and awareness of the clinical credibilityof the AEM technology, as well as awareness of our endorsements, arecontinually improving, and we expect this awareness to benefit our salesefforts for the remainder of fiscal year 2010. Our objectives in the remainderof fiscal year 2010 are to maintain expense controls while optimizing salesexecution in the field, to expand market awareness of the AEM technology and tomaximize the number of additional hospital accounts switching to AEMinstruments while retaining existing hospital customers. In addition,acceptance of AEM products depends on surgeons’ preference for our instruments,which depends on factors such as ergonomics and ease of use in addition to thetechnological advantage of AEM products. If surgeons prefer other instrumentsto our instruments, our business results will suffer.

 

*Possibilityof Operating Losses*:  We have,except for fiscal years 2009, 2004 and 2003 when we achieved profitable operations,incurred losses since our inception and have an accumulated deficit of$15,940,011 at December 31, 2009. Operations have been financed primarilythrough issuances of our common stock and warrants to purchase our common stockand, to a lesser extent, profits from operations. We have made strides towardimproving our operating results but due to the ongoing need to develop,optimize and train our direct sales managers and the independent salesrepresentative network, the need to support the development of refinements toour product line, and the need to increase sustained sales to a level adequateto cover fixed and variable operating costs, we may operate at a net loss.Sustained losses, or our inability to generate sufficient cash flow fromoperations to fund our obligations, may result in a need to raise additionalcapital.

 

*SalesGrowth*:  Our sales growth has stabilizedfrom weakness in the medical device industry. We expect to generate increasedsales in the U.S. from sales to new hospital customers and from expanded salesin existing hospitals as our network of direct and independent salesrepresentatives becomes more efficient. We believe that the visibility andcredibility of the independent clinical endorsements for AEM technology willcontribute to new hospital accounts and increase sales in fiscal year 2010. Wealso expect that supplier agreements with Novation and Premier, which togetherrepresent over 3,000 U.S. hospitals, will expose more hospitals to the benefitsof AEM technology and may stimulate new hospital accounts. We also expect toincrease market share through promotional programs of placing our AEM monitorsat no charge into hospitals that commit to standardize AEM instruments.However, all of these efforts to increase market share and grow sales willdepend in part on our ability to expand the efficiency and effective coveragerange of our direct and independent sales representatives.

 

Wealso have longer term initiatives in place to improve our prospects.  We expect that development of next generationversions of our AEM products will better position our products in themarketplace and improve our retention rate at hospitals that have changed toAEM technology, enabling us to grow our sales. We may also explore overseasmarkets to assess opportunities for sales growth internationally. Finally, weintend to explore opportunities to capitalize on our proven AEM technology vialicensing arrangements and strategic alliances. These efforts to generateadditional sales and further the market penetration of our products are longerterm in nature and may not materialize. Even if we are able to successfullydevelop next generation products or identify potential international markets orstrategic partners, we may not be able to capitalize on these opportunities.

 

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

 

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

 

*Salesand Marketing Expenses*: We continue our efforts to expand domesticand international distribution capability, and we believe that sales andmarketing expenses will decrease as a percentage of net sales with increasingsales volume.

 

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

 

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**Results of Operations**

 

*For thethree months ended December 31, 2009 compared to the three months ended December 31,2008.*

 

*Netsales.*  Net sales for the quarter ended December 31,2009 were $3,260,316 compared to $3,270,854 for the quarter ended December 31,2008, no percentage change. The decrease is attributable to weakness in themedical device industry and by business lost from hospitals that previouslychanged to AEM technology. This was partially offset by addition of newhospital accounts. We opened six new hospital accounts for AEM technology inthe three months ended December 31, 2009 versus five new hospital accountsfor AEM technology in the three months ended December 31, 2008. We haveadded sales employees in an effort to capitalize on identified marketopportunities. It will take a number of months before new sales employeesgenerate new hospital accounts, but we expect that these new additions will providethe focus that is needed to achieve market gains.

 

*Grossprofit*.  Gross profit for the quarterended December 31, 2009 of $2,008,606 represented a decrease of 3% fromgross profit of $2,079,362 for the quarter ended December 31, 2008. Grossprofit as a percentage of sales (gross margins) decreased from 63.6% for thequarter ended December 31, 2008 to 61.6% for the quarter ended December 31,2009. The gross profit margin decrease from the third quarter of fiscal year2009 was due to increased sales of lower gross profit margin products.

 

*Sales and marketing expenses*.  Sales and marketing expenses of $1,146,245for the quarter ended December 31, 2009 represented a decrease of 4% fromsales and marketing expenses of $1,191,079 for the quarter ended December 31,2008. The decrease was a result of decreased commissions for independent salesrepresentatives, decreased sales sample and sales literature costs. Thedecrease in such costs was partially offset by increased commissions for oursales employees, increased travel and trade show costs.

 

*General and administrative expenses*.  General and administrative expenses of$361,305 for the quarter ended December 31, 2009 represented an increaseof 2% from general and administrative expenses of $354,908 for the quarterended December 31, 2008. The increase was the result of an increase incompensation expense.

 

*Research and development expenses*.  Research and development expenses of $340,749for the quarter ended December 31, 2009 represented an increase of 19%compared to $286,551 for the quarter ended December 31, 2008. The increasewas the result of an increase in compensation and temporary help expense, andinventory usage, test materials and outside services for future new products.

 

*Netincome. *Net income was $149,023 forthe quarter ended December 31, 2009 compared to net income of $232,910 forthe quarter ended December 31, 2008. The net income decrease was a resultof a decrease in gross profit and increased operating expenses, as discussedabove.

 

*For thenine months ended December 31, 2009 compared to the nine months ended December 31,2008.*

 

*Netsales.*  Net sales for the nine monthsended December 31, 2009 were $9,649,587 compared to $9,711,029 for thenine months ended December 31, 2008, a decrease of 1%. The decrease isattributable to the business lost from hospitals that previously changed to AEMtechnology, partially offset by the addition of new hospital accounts. Weopened 15 new hospital accounts for AEM technology in the nine months ended December 31,2009 versus 34 new hospital accounts for AEM technology in the nine monthsended December 31, 2008.

 

*Grossprofit*.  Gross profit for the ninemonths ended December 31, 2009 of $5,985,549 represented no percentagechange from gross profit of $5,996,121 for the nine months ended December 31,2008. Gross profit as a percentage of sales (gross margins) for the nine monthsended December 31, 2009 did not change from 62% for the nine months ended December 31,2008.

 

*Sales and marketing expenses*.  Sales and marketing expenses of $3,580,145for the nine months ended December 31, 2009 represented a decrease of 8%from sales and marketing expenses of $3,887,030 for the nine months ended December 31,2008. The decrease was a result of decreased commissions for independent salesrepresentatives, decreased sales sample, travel, sales literature, publicrelations and trade shows costs. The decrease in such cost was partially offsetby increased compensation of our sales employees.

 

*General and administrative expenses*.  General and administrative expenses of$1,058,367 for the nine months ended December 31, 2009 represented adecrease of 2% from general and administrative expenses of $1,079,861 for thenine months ended December 31, 2008. The decrease was the result of a decreasein stock option expense and regulatory fees.

 

*Research and development expenses*.  Research and development expenses of $946,591for the nine months ended December 31, 2009 represented an increase of 11%compared to $855,764 for the nine months ended December 31, 2008. Theincrease was a result of inventory usage for testing of products, outsideservices and tooling expense. The increase in such cost was partially offset bydecreased compensation expense, temporary help and test materials.

 

*Net income. *Net income was $358,778 forthe nine months ended December 31, 2009 compared to net income of $143,893for the nine months ended December 31, 2008. The net income increase was aresult of reduced operating expenses, as discussed above.

 

Theresults of operations for the three and nine months ended December 31,2009 should not be taken as an indication of the results of operations for allor any part of the balance of the fiscal year.

 

**Liquidity and Capital Resources**

 

Todate, operations have been financed primarily through issuances of our commonstock and warrants to purchase our common stock which together totaled$19,640,391 through December 31, 2009 and, to a lesser extent, profitsfrom operations.

 

OnNovember 4, 2009, we signed a second amendment to our credit facilityagreement with Silicon Valley Bank, effective November 10, 2009. The termsof the credit facility include a line of credit for $2,000,000 for two years atan interest rate calculated at prime rate plus 1.25%, subject to 

 

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increaseupon a default. Our borrowing under the credit facility is limited by oureligible receivables and inventory at the time of borrowing. As of December 31,2009, we had borrowed $275,000 from the credit facility and, under our eligiblereceivables and inventory limit, had an additional $1,300,000 available toborrow.

 

Ouroperations provided $359,654 of cash during the nine months ended December 31,2009 on net sales of $9,649,587. Cash was provided principally by net incomeand non-cash depreciation and amortization expense. The amounts of cashprovided by and used in operations for the nine months ended December 31,2009 are not indicative of the expected cash to be generated from or used inoperations in fiscal year 2010. During the nine months ended December 31,2009, we invested $421,303 in the acquisition of property and equipment. As of December 31,2009, we had $46,582 in cash and cash equivalents available to fund futureoperations and had borrowed $275,000 from our credit facility. Working capitalwas $2,588,878 at December 31, 2009 compared to $2,180,296 at March 31,2009. Current liabilities were $1,097,345 at December 31, 2009, comparedto $1,709,252 at March 31, 2009. The decrease in current liabilities at December 31,2009 was caused, principally, by reducing accounts payable and accruedcompensation and classifying our borrowings under our line of credit as along-term liability.

 

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

 

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

 
| **Fiscal Year**                | ** ** | **Amount** | ** ** |
|--------------------------------|------------|------------|------------|
| 2010 (three months  remaining) |       | $          | 60,621     |   |
| 2011                           |       | 247,264    |       |
| 2012                           |       | 254,629    |       |
| 2013                           |       | 262,281    |       |
| 2014                           |       | 270,221    |       |
| 2015                           |       | 90,966     |       |
| Total                          |       | $          | 1,185,982  |   |

 

Ourminimum future equipment lease payments with General Electric CapitalCorporation as of December 31, 2009, by fiscal year, are as follows:

 
| **Fiscal Year**                | ** ** | **Amount** | ** ** |
|--------------------------------|------------|------------|------------|
| 2010 (three months  remaining) |       | $          | 25,469     |   |
| 2011                           |       | 101,873    |       |
| 2012                           |       | 101,873    |       |
| 2013                           |       | 101,873    |       |
| 2014                           |       | 8,488      |       |
| Total                          |       | $          | 339,576    |   |

 

Asof December 31, 2009, the following table shows our contractualobligations for the periods presented:

 
| ** **                  | ** ** | **Payment due by period** | ** ** |
|-----------------------------|------------|---------------------------|------------|
| **Contractual obligations** | ** ** | **Totals**                | ** ** | **Less than 1 year** | ** ** | **1-3 years** | ** ** | **3-5 years** | ** ** | **More than 5 years** | ** ** |
| Line of credit obligations  |       | $                         | 275,000    |   | $ | — |   | $ | 275,000 |   | $ | — |   | $ | — |   |
| Operating lease obligations |       | 1,525,558                 |       | 347,343 |   | 716,854 |   | 461,361 |   | — |   |
| Total                       |       | $                         | 1,800,558  |   | $ | 347,343 |   | $ | 991,854 |   | $ | 461,361 |   | $ | — |   |

 

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

 

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

 

**Income Taxes**

 

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

 

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paidincome taxes since our inception. The Tax Reform Act of 1986 and other incometax regulations contain provisions which may limit the net operating losscarryforwards available to be used in any given year if certain events occur,including changes in ownership interests. We have established a valuationallowance for the entire amount of our deferred tax asset since inception dueto our history of losses. Should we achieve sufficient, sustained income in thefuture, we may conclude that some or all of the valuation allowance should bereversed. If some or all of the valuation allowance were reversed, then, to theextent of the reversal, a tax benefit would be recognized which would result inan increase to income.

 

## **Critical Accounting Policies and Estimates**

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

(a) We have carried out an evaluation under the supervision and with theparticipation of our management, including our Chief Executive Officer andPrincipal Accounting and Financial Officer, of the effectiveness of ourdisclosure controls and procedures (as defined in Rules 13a-15(e) and15d-15(e) of the Securities and Exchange Act of 1934 (the “Exchange Act”)).Based upon that evaluation, the Chief Executive Officer and the PrincipalAccounting and Financial Officer concluded that, as of December 31, 2009,our disclosure controls and procedures were effective in ensuring thatinformation required to be disclosed by us under the Exchange Act was recorded,processed, summarized and reported within the time periods specified under theExchange Act rules and forms.

 

(b) During the quarter ended December 31, 2009, there were no changes in ourinternal control over financial reporting or in other factors that havematerially affected, or are reasonably likely to materially affect, ourinternal control over financial reporting, nor were there any significantdeficiencies or material weaknesses in such disclosure controls and proceduresor internal control over financial reporting requiring corrective actions.

 

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

 

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

 

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

 
|   | 3.1    |   | Articles  of Incorporation of the Company, as amended (incorporated by reference from  Registration Statement #333-4118-D dated June 25, 1996).                                                                             |
|--------|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |   |                                                                                                                                                                                                                             |
|   | 3.2    |   | Bylaws  of the Company (incorporated by reference from Current Report on  Form 8-K dated October 30, 2008).                                                                                                            |
|   |   |   |                                                                                                                                                                                                                             |
|   | 4.1    |   | Form of  certificate for shares of Common Stock (incorporated by reference from  Registration Statement #333-4118-D dated June 25, 1996).                                                                              |
|   |   |   |                                                                                                                                                                                                                             |
|   | 10.1   |   | Second  Amendment to Loan and Security Agreement by and between the Company and  Silicon Valley Bank dated November 4, 2009 (incorporated by reference  from Current Report on Form 8-K dated November 10, 2009). |
|   |   |   |                                                                                                                                                                                                                             |
|   | 31.1   |   | Certification  of Chief Executive Officer under Rule 13a-14(a) of the Exchange Act  (filed herewith).                                                                                                                  |
|   |   |   |                                                                                                                                                                                                                             |
|   | 31.2   |   | Certification  of Principal Financial and Accounting Officer under  Rule 13a-14(a) of the Exchange Act (filed herewith).                                                                                               |
|   |   |   |                                                                                                                                                                                                                             |
|   | 32.1   |   | Certifications  of Periodic Reports pursuant to Section 906 of the Sarbanes-Oxley Act of  2002 (filed herewith).                                                                                                            |

 

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**SIGNATURE**

 

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

 

 
| Encision  Inc.          |   |                                     |
|-------------------------|--------|------------------------------------------|
|                    |   |                                     |
|                    |   |                                     |
| February 12,  2010 |   | /s/  Marcia McHaffie                     |
| Date                    |   | Marcia  McHaffie                         |
|                    |   | Controller                               |
|                    |   | Principal  Accounting Officer & |
|                    |   | Principal  Financial Officer             |

 

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