Table of Contents

 

 

 

**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**WASHINGTON,D.C.  20549**

 

## **Form 10-Q**

## ** **

**x****     ****QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THESECURITIES EXCHANGE ACT OF 1934**

 

**For thequarterly period ended September 30, 2009**

 

**OR**

 

**o****        ****TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES EXCHANGE ACT OF 1934**

 

**For thetransition 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 a shell company (asdefined in Rule 12b-2 of the Exchange Act).  Yes o No x

 

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

 

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

 

 

 

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**ENCISION INC.**

 

**FORM 10-Q**

 

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

 

**INDEX**

 
| ** **        | ** **    | ** **                | ** **                                                                                       | **Page**   |
|-------------------|---------------|---------------------------|--------------------------------------------------------------------------------------------------|------------|
| ** **        | ** **    | ** **                | ** **                                                                                       | **Number** |
|              |          |                      |                                                                                             |       |
| **PART I.**  |          | **FINANCIAL INFORMATION** |                                                                                             |
| ** **        |          |                      | ** **                                                                                       |       |
|              | **ITEM1**     | -                         | Condensed  Interim Financial Statements:                                                         |       |
|              |          | -                         | Condensed Balance Sheets  as of September 30, 2009  and March 31, 2009                 | 3          |
|              |          | -                         | Condensed  Statements of Operations for the  Three Months Ended September 30, 2009 and 2008 | 4          |
|              |          | -                         | Condensed  Statements of Operations for the  Six Months Ended September 30, 2009 and 2008   | 5          |
|              |          | -                         | Condensed  Statements of Cash Flows for the  Six Months Ended September 30, 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 4**    | -                         | Submission of Matters to a Vote  of Security Holders                                             | 18         |
|              | ** **    |                      |                                                                                             |       |
|              | **ITEM 5**    | -                         | Subsequent Event                                                                                 | 18         |
|              | ** **    |                      |                                                                                             |       |
|              | **ITEM 6**    | -                         | Exhibits                                                                                         | 18         |
|              | ** **    |                      |                                                                                             |       |
|              | **SIGNATURE** | 19                        |

 

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** **

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

 

**ITEM 1 – CONDENSED INTERIMFINANCIAL STATEMENTS**

 

**Encision Inc.**

**Condensed Balance Sheets**

**(unaudited)**

 
| ** **                                                                                                                                                                                                       | ** ** | **September 30,********2009** | ** ** | **March 31,********2009** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------------|------------|--------------------------------|------------|
| **ASSETS**                                                                                                                                                                                                       |       |                               |       |                           |       |
| Current assets:                                                                                                                                                                                                  |       |                               |       |                           |       |
| Cash and cash equivalents                                                                                                                                                                                        |       | $                                  | 179,910    |                           | $          | 84,658 |   |
| Accounts receivable, net of allowance for doubtful  accounts of $13,000 at September 30, 2009 and$9,000 at March 31, 2009                                                                              |       | 1,237,844                          |       | 1,263,751                      |       |
| Inventories, net of reserve for obsolescence of  $47,500 at September 30, 2009 and $55,000 atMarch 31, 2009                                                                                            |       | 2,427,711                          |       | 2,504,598                      |       |
| Prepaid expenses                                                                                                                                                                                                 |       | 75,802                             |       | 36,541                         |       |
| Total current assets                                                                                                                                                                                             |       | 3,921,267                          |       | 3,889,548                      |       |
| Equipment, at cost:                                                                                                                                                                                              |       |                               |       |                           |       |
| Furniture, fixtures and equipment                                                                                                                                                                                |       | 2,170,959                          |       | 2,003,337                      |       |
| Customer-site equipment                                                                                                                                                                                          |       | 709,950                            |       | 667,171                        |       |
| Accumulated depreciation                                                                                                                                                                                         |       | (1,948,231                         | )          | (1,830,273                     | )          |
| Equipment, net                                                                                                                                                                                                   |       | 932,678                            |       | 840,235                        |       |
| Patents, net of accumulated amortization of  $136,877 at September 30, 2009 and $128,994 at March 31, 2009                                                                                             |       | 264,145                            |       | 215,801                        |       |
| Other assets                                                                                                                                                                                                     |       | 10,183                             |       | 24,505                         |       |
| **TOTAL ASSETS**                                                                                                                                                                                                 |       | $                                  | 5,128,273  |                           | $          | 4,970,089 |   |
| **LIABILITIES AND SHAREHOLDERS’  EQUITY**                                                                                                                                                                   |       |                               |       |                           |       |
| Current liabilities:                                                                                                                                                                                             |       |                               |       |                           |       |
| Accounts payable                                                                                                                                                                                                 |       | $                                  | 661,776    |                           | $          | 745,138 |   |
| Accrued compensation                                                                                                                                                                                             |       | 406,921                            |       | 405,906                        |       |
| Other accrued liabilities                                                                                                                                                                                        |       | 317,212                            |       | 367,266                        |       |
| Line of credit                                                                                                                                                                                                   |       | —                             |       | 190,942                        |       |
| Total current liabilities                                                                                                                                                                                        |       | 1,385,909                          |       | 1,709,252                      |       |
| Long-term liabilities:                                                                                                                                                                                           |       |                               |       |                           |       |
| Line of credit                                                                                                                                                                                                   |       | 225,000                            |       | —                         |       |
| **Commitments and contingencies**                                                                                                                                                                                |       |                               |       |                           |       |
| Shareholders’ equity:                                                                                                                                                                                       |       |                               |       |                           |       |
| Preferred stock, no par value: 10,000,000 shares  authorized; none issued and outstanding                                                                                                                        |       | —                             |       | —                         |       |
| Common stock and additional paid-in capital, no par  value: 100,000,000 shares authorized;6,455,100 and 6,455,100 shares issued and  outstanding at September 30, 2009 andMarch 31, 2009, respectively |       | 19,606,398                         |       | 19,559,626                     |       |
| Accumulated (deficit)                                                                                                                                                                                            |       | (16,089,034                        | )          | (16,298,789                    | )          |
| Total shareholders’ equity                                                                                                                                                                                  |       | 3,517,364                          |       | 3,260,837                      |       |
| **TOTAL LIABILITIES AND  SHAREHOLDERS’ EQUITY**                                                                                                                                                             |       | $                                  | 5,128,273  |                           | $          | 4,970,089 |   |

 

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

 

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**Encision Inc.**

**Condensed Statements of Operations**

**(Unaudited)**

 
| **Three Months Ended**                         | ** ** | **September 30,********2009** | ** ** | **September 30,********2008** | ** ** |
|------------------------------------------------|------------|------------------------------------|------------|------------------------------------|------------|
| **NET SALES**                                  |       | $                                  | 3,215,610  |                               | $          | 3,346,208 |   |
| **COST OF SALES**                              |       | 1,270,592                          |       | 1,293,869                          |       |
| **GROSS PROFIT**                               |       | 1,945,018                          |       | 2,052,339                          |       |
| **OPERATING EXPENSES:**                        |       |                               |       |                               |       |
| Sales and marketing                            |       | 1,235,087                          |       | 1,321,798                          |       |
| General and administrative                     |       | 343,243                            |       | 358,044                            |       |
| Research and development                       |       | 304,853                            |       | 280,459                            |       |
| Total operating expenses                       |       | 1,883,183                          |       | 1,960,301                          |       |
| **OPERATING INCOME**                           |       | 61,835                             |       | 92,038                             |       |
| Interest expense, net                          |       | (11,688                            | )          | (16,953                            | )          |
| Other income (expense), net                    |       | (3,702                             | )          | 199                                |       |
| Interest and other income (expense), net       |       | (15,390                            | )          | (16,754                            | )          |
| **INCOME BEFORE PROVISION FOR  INCOME TAXES**  |       | 46,445                             |       | 75,284                             |       |
| Provision for income taxes                     |       | —                             |       | —                             |       |
| **NET INCOME**                                 |       | $                                  | 46,445     |                               | $          | 75,284 |   |
| Net income per share—basic and diluted    |       | $                                  | 0.01       |                               | $          | 0.01 |   |
| Weighted average shares—basic and diluted |       | 6,455,100                          |       | 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)**

 
| **Six Months Ended**                                 | ** ** | **September 30,********2009** | ** ** | **September 30,********2008** | ** ** |
|------------------------------------------------------|------------|------------------------------------|------------|------------------------------------|------------|
| **NET SALES**                                        |       | $                                  | 6,389,270  |                               | $          | 6,440,174 |   |
| **COST OF SALES**                                    |       | 2,412,327                          |       | 2,523,415                          |       |
| **GROSS PROFIT**                                     |       | 3,976,943                          |       | 3,916,759                          |       |
| **OPERATING EXPENSES:**                              |       |                               |       |                               |       |
| Sales and marketing                                  |       | 2,433,900                          |       | 2,695,950                          |       |
| General and administrative                           |       | 697,063                            |       | 724,954                            |       |
| Research and development                             |       | 605,842                            |       | 569,213                            |       |
| Total operating expenses                             |       | 3,736,805                          |       | 3,990,117                          |       |
| **OPERATING INCOME (LOSS)**                          |       | 240,138                            |       | (73,358                            | )          |
| Interest expense, net                                |       | (24,813                            | )          | (35,625                            | )          |
| Other income (expense), net                          |       | (5,570                             | )          | 19,965                             |       |
| Interest and other income (expense), net             |       | (30,383                            | )          | (15,660                            | )          |
| **INCOME (LOSS) BEFORE PROVISION  FOR INCOME TAXES** |       | 209,755                            |       | (89,018                            | )          |
| Provision for income taxes                           |       | —                             |       | —                             |       |
| **NET INCOME (LOSS)**                                |       | $                                  | 209,755    |                               | $          | (89,018 | ) |
| Net income (loss) per share—basic and diluted   |       | $                                  | 0.03       |                               | $          | (0.01 | ) |
| Weighted average shares—basic and diluted       |       | 6,455,100                          |       | 6,452,452                          |       |

 

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

 

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**Encision Inc.**

**Condensed Statements ofCash Flows**

**(Unaudited)**

 
| **Six Months Ended**                                                                      | ** ** | **September 30,********2009** | ** ** | **September 30,********2008** | ** ** |
|-------------------------------------------------------------------------------------------|------------|------------------------------------|------------|------------------------------------|------------|
| Cash flows from operating activities:                                                     |       |                               |       |                               |       |
| Net income (loss)                                                                         |       | $                                  | 209,755    |                               | $          | (89,018 | ) |
| Adjustments to reconcile net income (loss) to net  cash provided by operating activities: |       |                               |       |                               |       |
| Depreciation and amortization                                                             |       | 125,841                            |       | 114,807                            |       |
| Stock-based compensation expense related to stock  options                                |       | 46,772                             |       | 78,431                             |       |
| Stock-based interest expense related to warrants                                          |       | 3,127                              |       | 3,127                              |       |
| Provision for doubtful accounts, net                                                      |       | 4,000                              |       | 2,500                              |       |
| Provision for inventory obsolescence, net                                                 |       | (7,500                             | )          | (15,000                            | )          |
| Change in operating assets and liabilities:                                               |       |                               |       |                               |       |
| Accounts receivable                                                                       |       | 21,907                             |       | 130,595                            |       |
| Inventories                                                                               |       | 84,387                             |       | 340,240                            |       |
| Prepaid expenses and other assets                                                         |       | (28,066                            | )          | 12,619                             |       |
| Accounts payable                                                                          |       | (83,362                            | )          | (4,766                             | )          |
| Accrued compensation and other accrued liabilities                                        |       | (49,039                            | )          | (117,763                           | )          |
| Net cash provided by operating activities                                                 |       | 327,822                            |       | 455,772                            |       |
| Cash flows from investing activities:                                                     |       |                               |       |                               |       |
| Acquisition of property and equipment                                                     |       | (210,401                           | )          | (127,216                           | )          |
| Patent costs                                                                              |       | (56,227                            | )          | (10,045                            | )          |
| Net cash (used in) investing activities                                                   |       | (266,628                           | )          | (137,261                           | )          |
| Cash flows from financing activities:                                                     |       |                               |       |                               |       |
| Borrowings from (paydown of) credit facility                                              |       | 34,058                             |       | (100,966                           | )          |
| Proceeds from the exercise of stock options                                               |       | —                             |       | 11,520                             |       |
| Net cash provided by (used in) financing activities                                       |       | 34,058                             |       | (89,446                            | )          |
| Net increase in cash and cash equivalents                                                 |       | 95,252                             |       | 229,065                            |       |
| Cash and cash equivalents, beginning of period                                            |       | 84,658                             |       | 70,995                             |       |
| Cash and cash equivalents, end of period                                                  |       | $                                  | 179,910    |                               | $          | 300,060 |   |

 

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

 

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ENCISION INC.

 

NOTES TO CONDENSED INTERIM FINANCIAL STATEMENTS

 

SEPTEMBER 30, 2009

(Unaudited)

 

Note 1.   ORGANIZATIONAND NATURE OF BUSINESS

 

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

 

Wehave, except for fiscal years 2009, 2004 and 2003 when we achieved profitableoperations, incurred losses since our inception and have an accumulated deficitof $16,089,034 at September 30, 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.   SUMMARYOF SIGNIFICANT ACCOUNTING POLICIES

 

Basis of Presentation.  The condensed interim financial statementsincluded herein have been prepared by us, without audit, pursuant to the rules andregulations of the Securities and Exchange Commission. Certain information andfootnote disclosures normally included in financial statements prepared inaccordance with generally accepted accounting principles accepted in the UnitedStates have been condensed or omitted pursuant to such rules 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 FASB issued FSPFASB ASC 820-10-55 (Prior authoritative literature: FASB FSP 157-2/Statement157, Effective Date of FASB Statement No. 157.) FASB ASC 820-10-55 (Priorauthoritative literature: FASB FSP 157-2/Statement 157, Effective Date of FASBStatement No. 157) delayed the effective date for all nonfinancial assetsand nonfinancial liabilities, except those that are recognized or disclosed atfair value in the financial statements on a recurring basis (at leastannually). The adoption of the provisions of FASB ASC 820-10-55 (Priorauthoritative literature: FASB FSP 157-2/Statement 157, Effective Date of FASBStatement No. 157) related to nonfinancial assets and nonfinancialliabilities on January 1, 2009 did not have a material impact on theFinancial Statements. We adopted FASB ASC 820-10-55 as of April 1, 2008for financial assets and liabilities and other assets and liabilities carriedat fair value on a recurring basis. We adopted FASB ASC 820-10-55 for allnonfinancial assets and liabilities as of April 1, 2009. This statementdefines fair value, establishes a framework for measuring fair value andexpands the related disclosure requirements. This statement applies under otheraccounting pronouncements that require or permit fair value measurements.

 

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

 

Concentrationof Credit Risk.  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 receivablesand payables. The carrying value of all financial instruments approximate fairvalue.

 

Wehave no significant off-balance sheet concentrations of credit risk such asforeign exchange contracts, options contracts or other foreign hedgingarrangements. We maintain the majority of our cash balances with two financialinstitutions in the form of demand deposits and money market funds.  Accounts receivable are typically unsecuredand are derived from transactions with and from entities in the healthcareindustry primarily located in the United States. Accordingly, we may be exposedto credit risk generally associated with the healthcare industry. We maintainallowances for doubtful accounts for estimated losses resulting from theinability of our customers to make required payments. The net accountsreceivable balance at 

 

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September 30,2009 of $1,237,844 included no more than 6% 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 September 30, 2009 and March 31, 2009, inventoryconsisted of the following:

 
| ** **                    | ** ** | **September 30, 2009** | ** ** | **March 31, 2009** | ** ** |
|-------------------------------|------------|-----------------------------|------------|-------------------------|------------|
| Raw materials                 |       | $                           | 1,505,203  |                    | $          | 1,336,376 |   |
| Finished goods                |       | 970,008                     |       | 1,223,222               |       |
| Total gross inventories       |       | 2,475,211                   |       | 2,559,598               |       |
| Less reserve for obsolescence |       | (47,500                     | )          | (55,000                 | )          |
| Total net inventories         |       | $                           | 2,427,711  |                    | $          | 2,504,598 |   |

 

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

 

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

 

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

 

Accrued Liabilities.  We have accrued $50,000 related to warrantyclaims, $44,159 related to sales commissions and $2,487 related to rentnormalization and have included these amounts in accrued liabilities in theaccompanying balance sheet at September 30, 2009. At March 31, 2009, wehad 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 September 30, 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.Should we achieve sufficient, sustained income in the future, we may concludethat more or all of the valuation allowance should be reversed. We are requiredto make many subjective assumptions and judgments regarding our income taxexposures. At September 30, 2009, we had no unrecognized tax benefitswhich would affect the effective tax rate if recognized and had no accruedinterest or 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 product sales,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 six months ended September 30, 2009 was$23,903 and $46,772, 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 six months ended September 30, 2008 was $39,428 and $78,431,respectively.

 

SegmentReporting.  We haveconcluded that we have one operating segment.

 

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RecentlyAdopted and Issued Accounting Guidance

 

*Recently Issued Accounting Guidance*

 

InJune 2009, the Financial Accounting Standards Board (“FASB”) issuedAccounting Standards Codification (“ASC”) 810, *Consolidation,*(formerly SFAS No. 167, *Amendmentsto FASB Interpretation No. 46(R*)) regarding the consolidationof variable interest entities. ASC 810 is intended**to improve financial reporting by providing additionalguidance to companies involved with variable interest entities and by requiringadditional disclosures about a company’s involvement in variable interestentities. This standard is effective for interim and annual periods endingafter November 15, 2009, which will not have a material impact on ourfinancial 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. This standard is effective for interim and annualperiods ending after November 15, 2009, which will not have a materialimpact on our financial statements.

 

*Recently Adopted Accounting Guidance*

 

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 registrants. The standard is effectivefor interim and annual periods ending after September 15, 2009. We adoptedthe provisions of the standard on September 30, 2009, which did not have amaterial impact on our unaudited condensed consolidated financial statements.

 

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 for potentialrecognition or disclosure in the financial statements, the circumstances underwhich an entity should recognize events or transactions occurring after thebalance sheet date in its financial statements, and the disclosures that anentity should make about events or transactions that occurred after the balancesheet date. ASC 855 is effective for fiscal years and interim periods endedafter June 15, 2009. We adopted the provisions of the standard, which hadno effect on the unaudited condensed consolidated financial statements andsubsequent events through the date of this filing. We evaluated subsequentevents from October 1, 2009 to November 13, 2009, the date we issuedour unaudited condensed consolidated financial statements.

 

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 LOSSPER 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 thepotential common shares is dilutive. The shares used in the calculation ofdilutive potential common shares exclude options to purchase shares where theexercise price was greater than the average market price of common shares forthe period. As a result of our net loss for the six months ended September 30,2008, all potentially dilutive securities in such period would be anti-dilutiveand were excluded from the computation of diluted loss per share for the sixmonths ended September 30, 2008, and there are no differences betweenbasic and diluted per share amounts presented for such period.

 

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

 
| ** **                                           | ** ** | **Three Months Ended**      | ** ** | **Six Months Ended**        | ** ** |
|------------------------------------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| ** **                                           | ** ** | **September 30, 2009** | ** ** | **September 30, 2008** | ** ** | **September 30, 2009** | ** ** | **September 30, 2008** | ** ** |
| Net income (loss)                                    |       | $                           | 46,445     |                        | $          | 75,284 |   | $ | 209,755 |   | $ | (89,017 | ) |
| Weighted-average shares — basic                 |       | 6,455,100                   |       | 6,455,100                   |       | 6,455,100 |   | 6,452,452 |   |
| Effect of dilutive potential common shares           |       | —                      |       | —                      |       | — |   | — |   |
| Weighted-average shares — diluted               |       | 6,455,100                   |       | 6,455,100                   |       | 6,455,100 |   | 6,452,452 |   |
| Net income (loss) per share — basic and diluted |       | $                           | 0.01       |                        | $          | 0.01 |   | $ | 0.03 |   | $ | (0.01 | ) |
| Antidilutive employee stock options                  |       | 590,000                     |       | 440,000                     |       | 590,000 |   | 440,000 |   |

 

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 September 30, 2009 is asfollows:

 

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| **Fiscal Year**             | ** ** | **Amount** | ** ** |
|-----------------------------|------------|------------|------------|
| 2010 (six months remaining) |       | $          | 121,241    |   |
| 2011                        |       | 247,264    |       |
| 2012                        |       | 254,629    |       |
| 2013                        |       | 262,281    |       |
| 2014                        |       | 270,221    |       |
| 2015                        |       | 90,966     |       |
| Total                       |       | $          | 1,246,602  |   |

 

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

 
| **Fiscal Year**             | ** ** | **Amount** | ** ** |
|-----------------------------|------------|------------|------------|
| 2010 (six months remaining) |       | $          | 50,937     |   |
| 2011                        |       | 101,873    |       |
| 2012                        |       | 101,873    |       |
| 2013                        |       | 101,873    |       |
| 2014                        |       | 8,488      |       |
| Total                       |       | $          | 365,044    |   |

 

OnNovember 10, 2006, we entered into a credit facility agreement withSilicon Valley Bank. The terms of the credit facility include a line of creditfor $2,000,000 for three years at an interest rate calculated at prime rateplus 1.25%, subject to increase upon a default. In connection with the creditfacility, we issued warrants to Silicon Valley Bank to purchase 28,000 sharesof our common stock at a per share price of $2.75. Our borrowing under thecredit facility is limited by our eligible receivables and inventory at thetime of borrowing. As of September 30, 2009, we had borrowed $225,000 fromthe credit facility and, under our eligible receivables and inventory limit,had an additional $1,362,883 available to borrow.

 

OnNovember 4, 2009, we signed and entered into a new 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. As a result of this subsequent event, we have classified theoutstanding balance as a long-term liability as of September 30, 2009. Ourborrowing under the credit facility is limited by our eligible receivables andinventory at the time of borrowing. No warrants were issued under the newcredit facility agreement.

 

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 September 30, 2009. FDA inspections are conductedperiodically at the discretion of the FDA. Our latest inspection by the FDAoccurred in May 2004.

 

Note 5.   VALUATIONAND EXPENSE INFORMATION UNDER SFAS 123(R)

 

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 six months ended September 30, 2009 and2008, which was allocated as follows:

 
| ** **                       | ** ** | **Three Months Ended**       | ** ** | **Six Months Ended**         | ** ** |
|----------------------------------|------------|------------------------------|------------|------------------------------|------------|
| ** **                       | ** ** | **September 30,  2009** | ** ** | **September 30,  2008** | ** ** | **September 30,  2009** | ** ** | **September 30,  2008** | ** ** |
| Cost of sales                    |       | $                            | 810        |                         | $          | 210 |   | $ | 1,620 |   | $ | 420 |   |
| Sales and marketing              |       | 5,891                        |       | 7,059                        |       | 10,748 |   | 14,118 |   |
| General and administrative       |       | 13,026                       |       | 27,338                       |       | 26,052 |   | 54,251 |   |
| Research and development         |       | 4,176                        |       | 4,821                        |       | 8,352 |   | 9,642 |   |
| Stock-based compensation expense |       | $                            | 23,903     |                         | $          | 39,428 |   | $ | 46,772 |   | $ | 78,431 |   |

 

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 25,000 and 35,000 shares of stock were granted during thethree and six months ended September 30, 2009, respectively. Theweighted-average assumptions for employee stock options granted during thethree and six months ended September 30, 2009 are summarized as follows:

 
| ** **               | ** ** | **Three Months  Ended**      | ** ** | **Six Months  Ended**        | ** ** |
|--------------------------|------------|------------------------------|------------|------------------------------|------------|
| ** **               | ** ** | **September 30,  2009** | ** ** | **September 30,  2009** | ** ** |
| Risk-free interest rate  |       | 2.6                          | %          | 2.4                          | %          |
| Expected life (in years) |       | 5.0                          |       | 5.0                          |       |
| Expected volatility      |       | 90                           | %          | 77                           | %          |
| Expected dividend        |       | 0                            | %          | 0                            | %          |

 

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Asof September 30, 2009, $225,000 of total unrecognized compensation costsrelated to nonvested stock is expected to be recognized over a period of fiveyears.

 

Note6.   RELATED PARTY TRANSACTION

 

Wepaid consulting fees of $14,420 and $29,190 to an entity owned by one of ourdirectors during the three and six months ended September 30, 2009,respectively and $12,070 and $29,990 during the three and six months ended September 30,2008, respectively.

 

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**ITEM 2  ****-****   MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIALCONDITION 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’s Discussionand Analysis are based on information available to us on the date of thisdocument, 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 electrosurgeryinstruments, which, when used in laparoscopic surgery, are susceptible tocausing inadvertent collateral tissue damage outside the surgeon’s field ofview. The risk of unintended electrosurgical burn injury to the patient inlaparoscopic surgery has been well documented. This risk poses a threat topatient safety and creates liability exposure for surgeons and hospitals thatdo not adequately address the issue.

 

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

 

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

 

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

 

Wehave focused our marketing strategies to date on expanding the market awarenessof the AEM technology and our broad independent endorsements and have continuedefforts to improve and expand the AEM product line. Accordingly, we arecurrently focusing on modernizing our accepted AEM instruments to includeergonomics and user functionalities for which surgeons have been expressing apreference. During fiscal year 2006, we announced enTouchTM, anergonomically-designed handle for our articulating instruments, and we plan tointroduce new additions to the AEM product line in fiscal year 2010.

 

Whena hospital changes to AEM technology, we receive recurring sales from sales ofreplacement instruments. We believe that there is no directly competingtechnology to supplant AEM products once a hospital switches to our products.The replacement market of reusable and disposable AEM products in hospitalsthat use our AEM technology represented over 90% of our sales during the threemonths ended September 30, 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 $16,089,034 at September 30, 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 three months ended September 30, 2009, we provided $327,822 of cashfrom our operations and used $210,401 for investments in equipment. As of September 30,2009, we had $179,910 in cash and cash equivalents available to fund futureoperations, an increase of $95,252 from March 31, 2009. As of September 30,2009, we had borrowed $225,000 from our $2,000,000 credit facility, an increaseof $34,058 from March 31, 2009. Our working capital was $2,535,358 at September 30,2009 compared to $2,180,296 at March 31, 2009.

 

**Historical Perspective**

 

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

 

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As we evolved, it becameclear to us that our AEM technology needed to be integrated into the standardlaparoscopic instrument design. As the development program proceeded, it alsobecame apparent that the merging of electrical and mechanical engineeringskills in the instrument development process for our patented, integratedelectrosurgical instruments was a complex and difficult task. As a result,instruments with integrated AEM technology were not completed for severalyears. Prior to offering a full range of laparoscopic electrosurgicalinstrumentation, it was difficult for hospitals to commit to the AEM solution,as we did not have adequate comparable surgical instrument options to meetsurgeons’ demands. As of fiscal year 2005, a sufficiently broad product linewas available to provide hospital operating rooms with AEM instruments in mostof the designs common for laparoscopic surgery.

 

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

 

**Outlook**

 

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

 

Webelieve that the unique performance of the AEM technology and our breadth ofindependent endorsements provide an opportunity for continued market sharegrowth. In our view, market awareness and awareness of the clinical credibilityof the AEM technology, as well as awareness of our endorsements, 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 profitableoperations, incurred losses since our inception and have an accumulated deficitof $16,089,034 at September 30, 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. We have madestrides toward improving our operating results but due to the ongoing need todevelop, 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 declineddue to 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.

 

*Gross Profitand Gross Margins*:  Gross profitand gross margins can be expected to fluctuate from quarter to quarter as aresult 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 September 30, 2009 compared to the three months ended September 30,2008.*

 

*Netsales.*  Net sales for the quarter ended September 30,2009 were $3,215,610 compared to $3,346,208 for the quarter ended September 30,2008, a decrease of 4%. The decrease is attributable to weakness in the medicaldevice industry and by business lost from hospitals that previously changed toAEM technology. This was partially offset by addition of new hospital accounts.We opened three new hospital accounts for AEM technology in the three monthsended September 30, 2009 versus fifteen new hospital accounts for AEMtechnology in the three months ended September 30, 2008. We have addedsales employees in an effort to capitalize on identified market opportunities.It will take a number of months before new sales employees generate newhospital accounts, but we expect that these new additions will provide thefocus that is needed to achieve market gains.

 

*Grossprofit*.  Gross profit for the quarterended September 30, 2009 of $1,945,018 represented a decrease of 5% fromgross profit of $2,052,339 for the quarter ended September 30, 2008. Grossprofit as a percentage of sales (gross margins) decreased from 61.3% for thequarter ended September 30, 2008 to 60.5% for the quarter ended September 30,2009. The higher gross profit margin in the second quarter of fiscal year 2009was the result of a reduction of warranty accrual which increased the grossprofit margin by 0.7%.

 

*Sales and marketing expenses*.  Sales and marketing expenses of $1,235,087for the quarter ended September 30, 2009 represented a decrease of 7% fromsales and marketing expenses of $1,321,798 for the quarter ended September 30,2008. The decrease was a result of decreased commissions for independent salesrepresentatives, decreased marketing independent contractor cost, and decreasedtrade shows expenses. The decrease in such cost was partially offset byincreased compensation of additional sales employees and sales samples for oursales employees.

 

*General and administrative expenses*.  General and administrative expenses of$343,243 for the quarter ended September 30, 2009 represented a decreaseof 4% from general and administrative expenses of $358,044 for the quarterended September 30, 2008. The decrease was the result of a decrease instock option expense.

 

*Research and development expenses*.  Research and development expenses of $304,853for the quarter ended September 30, 2009 represented an increase of 9%compared to $280,459 for the quarter ended September 30, 2008. Theincrease was primarily the result of higher tooling costs. The increase in suchcost was partially offset by decreased compensation expense.

 

*Netincome. *Net income was $46,445 forthe quarter ended September 30, 2009 compared to net income of $75,284 forthe quarter ended September 30, 2008. The net income decrease was a resultof a decrease in sales income and decreased gross margin. The decrease in netincome was partially offset by reduced operating expenses, as discussed above.

 

*For thesix months ended September 30, 2009 compared to the six months ended September 30,2008.*

 

*Netsales.*  Net sales for the six monthsended September 30, 2009 were $6,389,270 compared to $6,440,174 for thesix months ended September 30, 2008, a decrease of 1%. The decrease isattributable to the addition of new hospital accounts, partially offset bybusiness lost from hospitals that previously changed to AEM technology. Weopened nine new hospital accounts for AEM technology in the three months ended September 30,2009 versus 26 new hospital accounts for AEM technology in the six months endedSeptember 30, 2008. We have added sales employees in an effort tocapitalize on identified market opportunities. It will take a number of monthsbefore new sales employees generate new hospital accounts, but we expect thatthese new additions will provide the focus that is needed to achieve marketgains.

 

*Grossprofit*.  Gross profit for the six monthsended September 30, 2009 of $3,976,943 represented an increase of 2% fromgross profit of $3,916,759 for the six months ended September 30, 2008.Gross profit as a percentage of sales (gross margins) increased from 61% forthe six months ended September 30, 2008 to 62% for the six months ended September 30,2009. The gross profit margin increase in the first six months of fiscal year2010 was the result of production efficiencies and an increase to inventory, ascompared to last fiscal year’s first six months, which resulted in a higherabsorption of overhead costs to inventory and a decrease to cost of sales.

 

*Sales and marketing expenses*.  Sales and marketing expenses of $2,433,900for the six months ended September 30, 2009 represented a decrease of 10%from sales and marketing expenses of $2,695,950 for the six months ended September 30,2008. The decrease was a result of decreased commissions for independent salesrepresentatives, decreased marketing independent contractor cost, and decreasedtravel and trade shows expenses. The decrease in such cost was partially offsetby increased commissions generated by sales of our sales employees.

 

*General and administrative expenses*.  General and administrative expenses of$697,063 for the six months ended September 30, 2009 represented adecrease of 4% from general and administrative expenses of $724,954 for the sixmonths ended September 30, 2008. The decrease was the result of a decreasein stock option expense and regulatory fees.

 

*Research and development expenses*.  Research and development expenses of $605,842for the six months ended September 30, 2009 represented an increase of 6%compared to $569,213 for the six months ended September 30, 2008. Theincrease was a result of software license and outside services expense. Theincrease in such cost was partially offset by decreased compensation expense.

 

*Netincome. *Net income was $209,755 forthe six months ended September 30, 2009 compared to a net loss of $89,018for the six months ended September 30, 2008. The net income increase was aresult of increased gross margin and reduced operating expenses, as discussedabove.

 

Theresults of operations for the three and six months ended September 30, 2009should not be taken as an indication of the results of operations for all orany part of the balance of the fiscal year.

 

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**Liquidity and Capital Resources**

 

Todate, operations have been financed primarily through issuances of our commonstock and warrants to purchase our common stock and, to a lesser extent,profits from operations, which together totaled $19,606,398 through September 30,2009.

 

OnNovember 10, 2006, we entered into a credit facility agreement withSilicon Valley Bank. The terms of the credit facility include a line of creditfor $2,000,000 for three years at an interest rate calculated at prime rateplus 1.25%, subject to increase upon a default. In connection with the creditfacility, we issued warrants to Silicon Valley Bank to purchase 28,000 sharesof our common stock at a per share price of $2.75. Our borrowing under thecredit facility is limited by our eligible receivables and inventory at thetime of borrowing. As of September 30, 2009, we had borrowed $225,000 fromthe credit facility and, under our eligible receivables and inventory limit,had an additional $1,362,883 available to borrow.

 

OnNovember 4, 2009, we signed and entered into a new 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. As a result of this subsequent event, we have classified theoutstanding balance as a long-term liability as of September 30, 2009. Ourborrowing under the credit facility is limited by our eligible receivables andinventory at the time of borrowing. No warrants were issued under the newcredit facility agreement.

 

Ouroperations provided $327,822 of cash during the six months ended September 30,2009 on net sales of $6,389,270. Cash was provided principally by net incomeand non-cash depreciation and amortization expense. The amounts of cashprovided by and used in operations for the six months ended September 30,2009 are not indicative of the expected cash to be generated from or used inoperations in fiscal year 2010. During the six months ended September 30,2009, we invested $210,401 in the acquisition of property and equipment. As of September 30,2009, we had $179,910 in cash and cash equivalents available to fund futureoperations and had borrowed $225,000 from our credit facility. Working capitalwas $2,535,358 at September 30, 2009 compared to $2,180,296 at March 31,2009. Current liabilities were $1,385,909 at September 30, 2009, comparedto $1,709,252 at March 31, 2009. The decrease in current liabilities at September 30,2009 was caused, principally, by reducing accounts payable and other accruedliabilities 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 September 30, 2009 is asfollows:

 
| **Fiscal Year**             | ** ** | **Amount** | ** ** |
|-----------------------------|------------|------------|------------|
| 2010 (six months remaining) |       | $          | 121,241    |   |
| 2011                        |       | 247,264    |       |
| 2012                        |       | 254,629    |       |
| 2013                        |       | 262,281    |       |
| 2014                        |       | 270,221    |       |
| 2015                        |       | 90,966     |       |
| Total                       |       | $          | 1,246,602  |   |

 

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

 
| **Fiscal Year**             | ** ** | **Amount** | ** ** |
|-----------------------------|------------|------------|------------|
| 2010 (six months remaining) |       | $          | 50,937     |   |
| 2011                        |       | 101,873    |       |
| 2012                        |       | 101,873    |       |
| 2013                        |       | 101,873    |       |
| 2014                        |       | 8,488      |       |
| Total                       |       | $          | 365,044    |   |

 

Asof September 30, 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  |       | $                         | 225,000    |   | $ | — |   | $ | 225,000 |   | $ | — |   | $ | — |   |
| Operating lease obligations |       | 1,611,646                 |       | 346,746 |   | 713,149 |   | 551,751 |   | — |   |
| Total                       |       | $                         | 1,836,646  |   | $ | 346,746 |   | $ | 938,149 |   | $ | 551,751 |   | $ | — |   |

 

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

 

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

 

**Income Taxes**

 

Asof March 31, 2009, net operating loss carryforwards totaling approximately$15.5 million are available to reduce taxable income in the future. The netoperating loss carryforwards expire, if not previously utilized, at variousdates beginning in the fiscal year ending March 31, 2010. We have not paidincome taxes since our inception. The Tax Reform Act of 1986 and other incometax regulations contain provisions which may limit the net operating losscarryforwards available to be used in any given year if certain events occur,including changes in ownership interests. We have established a valuation allowancefor the entire amount of our deferred tax asset since inception due to ourhistory 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 and judgmentsthat affect the reported amounts of assets, liabilities, sales and expenses,and related disclosure of contingent assets and liabilities. On an on-goingbasis, we evaluate our estimates, including those related to bad debts,inventories, sales returns, warranty, contingencies and litigation. We base ourestimates on historical experience and on various other assumptions that arebelieved to be reasonable under the circumstances, the results of which formthe basis for making judgments about the carrying values of assets andliabilities that are not readily apparent from other sources. Actual resultsmay differ from these estimates under different assumptions or conditions. Webelieve the following critical accounting policies affect the more significantjudgments and estimates used in the preparation of our financial statements.

 

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

 

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

 

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 expenseinclude risk-free interest rate, expected life, expected volatility andexpected dividend.

 

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**ITEM 4  -  CONTROLS AND PROCEDURES**

 

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

 

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| **PART II.** | ** ** | **OTHER  INFORMATION**                                                                           |
|-------------------|------------|--------------------------------------------------------------------------------------------------|
|              |       |                                                                                             |
| **ITEM 4**        |       | Submission of Matters to a Vote of  Security Holders                                             |
| ** **        |       |                                                                                             |
| ** **        |       | At  our Annual Meeting of Shareholders on August 5, 2009 the following  actions were taken: |

 

(i)                         The followingpersons were elected director of Encision Inc. for terms expiring in 2010:

 
| ** **               | ** ** | **Votes  For** | ** ** | **Votes  Withheld** | ** ** |
|--------------------------|------------|----------------|------------|---------------------|------------|
| Bruce L. Arfmann         |       | 3,926,684      |       | 128,639             |       |
| Robert H. Fries          |       | 3,962,660      |       | 92,663              |       |
| Vern D. Kornelsen        |       | 3,839,571      |       | 215,752             |       |
| Ruediger Naumann-Etienne |       | 4,042,723      |       | 12,600              |       |
| David W. Newton          |       | 3,767,716      |       | 287,607             |       |
| Roger C. Odell           |       | 3,769,811      |       | 285,512             |       |
| John R. Serino           |       | 3,890,005      |       | 165,318             |       |

 

(ii)                      Ratification ofappointment of Eide Bailly LLP to serve as our registered independentaccounting firm for fiscal year 2010:

 
| Votes for     |   | 4,046,233 |   |
|---------------|--------|-----------|--------|
| Votes against |   | 5,100     |   |
| Abstentions   |   | 3,990     |   |

 
| **ITEM 5** | ** ** | **SUBSEQUENT EVENT** |
|------------|------------|----------------------|

 

On November 4, 2009, Encision Inc. (the “Company”) and SiliconValley Bank (“Bank”) entered into a Second Amendment to Loan and SecurityAgreement (the “Amendment”), which amends the Loan and Security Agreement datedas of November 10, 2006, to extend the maturity date of the Company’s $2million revolving line of credit to November 8, 2011 and increase theexpenses payable by the Company in connection with Bank’s periodic audit of theCompany’s records and inspection of the collateral.  The Amendment also requires the Company topay a facility fee of $10,000 on the date of the Amendment and an additional$10,000 facility fee on November 9, 2010.

 
| **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).  |
|   |   |   |                                                                                                                                                 |
|   | 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.          |   |                                     |
|-------------------------|--------|------------------------------------------|
|                    |   |                                     |
|                    |   |                                     |
| November 13,  2009 |   | /s/  Marcia McHaffie                     |
| Date                    |   | Marcia  McHaffie                         |
|                    |   | Controller                               |
|                    |   | Principal  Accounting Officer & |
|                    |   | Principal  Financial Officer             |

 

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