UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
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ANNUAL
REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
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For the fiscal year ended March 31, 2008
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TRANSITION
REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
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For the transition period from to
Commission File No.: 0-28604
ENCISION INC.
(Name of small business issuer in its charter)
Colorado
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84-1162056
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(State of incorporation)
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(I.R.S. Employer Identification No.)
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6797 Winchester Circle, Boulder, Colorado
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80301
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(Address of principal executive offices)
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(Zip Code)
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Issuers telephone number, including area code:
(303)
444-2600
Securities registered under Section 12(b) of the Exchange
Act:
Common Stock, no par value
Name of exchange on which registered:
American
Stock Exchange
Securities registered under Section 12(g) of the Act:
None
Check whether the issuer
is not required to file reports pursuant to Section 13 or 15(d) of
the Exchange Act.
o
Check whether the issuer
(1) filed all reports required to be filed by Section 13 or
15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days.
Yes
x
No
o
Check if there is no
disclosure of delinquent filers in response to Item 405 of Regulation S-B
contained in this form, and no disclosure will be contained, to the best of registrants
knowledge, in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-KSB or any amendment to this
Form 10-KSB.
x
Indicate by check mark
whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act
)
Yes
o
No
x
The issuers revenues for
fiscal year ended
March 31, 2008
was
$12,065,659
As of May 30, 2008,
the aggregate market value of the shares of common stock held by non-affiliates
of the issuer on such date was $6,675,352. This figure is based on the closing
sales price of $2.30 per share of the issuers common stock on May 30,
2008.
The number of shares
outstanding of each of the issuers classes of common equity, as of the last
practicable date.
Common Stock, no par value
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6,455,100
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(Class)
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(Outstanding at May 30, 2008)
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Transitional Small
Business Disclosure Format Yes
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No
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Documents Incorporated by
Reference: Definitive Proxy Statement for the 2008 Annual Shareholders Meeting
to be filed with the Securities and Exchange Commission and incorporated by
reference as described in Part III. The 2008 Proxy Statement will be filed
within 120 days after the end of the fiscal year ended March 31, 2008.
Statements contained in this
Annual Report on Form 10-KSB include forward looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995 and involve
substantial risks and uncertainties that may cause actual results to differ
materially from those indicated by the forward looking statements. All forward
looking statements in the Annual Report on Form 10-KSB, including
statements about our strategies, expectations about new and existing products,
market demand, acceptance of new and existing products, technologies and
opportunities, market size and growth, and return on investments in products
and market, are based on information available to us on the date of this
document, and we assume no obligation to update such forward looking
statements. In some cases, you can identify forward looking statements by
terminology such as may, will, should, could, expects, plans,
intends, anticipates, believes, estimates, predicts, potential, or
continue or the negative of such terms or other comparable terminology.
Readers of this Annual Report on Form 10-KSB are strongly encouraged to
review the section entitled
Risk Factors
.
PART I
Item 1
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Business
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Company Overview
Encision
Inc. (Encision, we, us, our or the Company), a medical device company
based in Boulder, Colorado, has developed and launched innovative technology
that is emerging as a standard of care in minimally-invasive surgery. We
believe that our patented AEM
®
Surgical Instruments are changing the
marketplace for electrosurgical devices and laparoscopic instruments by
providing a solution to a well-documented patient safety risk in laparoscopic
surgery.
We
were founded to address market opportunities created by the increase in
minimally-invasive surgery (MIS) and surgeons use of electrosurgery devices
in these procedures. The product opportunity was created by surgeons
widespread demand to use monopolar electrosurgery instruments, which, when used
in laparoscopic surgery, are susceptible to causing inadvertent collateral
tissue damage outside the surgeons field of view. The risk of unintended
electrosurgical burn injury to the patient in laparoscopic surgery has been
well documented. This risk poses a threat to patient safety and creates
liability exposure for surgeons and hospitals.
Our
patented AEM technology provides surgeons with the desired tissue effects,
while preventing stray electrosurgical energy that can cause unintended and
unseen tissue injury. AEM Laparoscopic Instruments are equivalent to
conventional instruments in size, shape, ergonomics and functionality, but they
incorporate active electrode monitoring technology to dynamically and
continuously monitor the flow of electrosurgical current, thereby helping to
prevent patient injury. With our shielded and monitored instruments, surgeons
are able to perform electrosurgical procedures more safely and effectively than
is possible using conventional instruments. In addition, the AEM instruments
are cost competitive with conventional non-shielded, non-monitored
instruments. The result is advanced patient safety at comparable cost and with
no change in surgeon technique.
AEM
technology has been recommended and endorsed by sources from all groups
involved in MIS. Surgeons, nurses, biomedical engineers, the medicolegal
community, malpractice insurance carriers and electrosurgical device
manufacturers advocate the use of AEM technology. The breadth of endorsements
continues to expand with the recognition of active electrode monitoring
technology as an
AORN Recommended Practice for Electrosurgery
and
AORN Recommended Practice for Minimally-Invasive
Surgery
by the Association of periOperative Registered Nurses
(AORN). Additionally, a recommendation was made by a hospital malpractice
insurance carrier that hospitals use surgical instruments which incorporate
shielding and monitoring technology.
Business Highlights
Proprietary, Patented Technology
We
have developed and launched patented AEM Surgical Instruments that enhance
patient safety and patient outcome in laparoscopic surgical procedures. We have
been issued four patents relating to AEM technology from the United States
Patent and Trademark Office, each encompassing multiple claims, and which have
between three years two months and seven years three months remaining. We also
have patents relating to AEM technology issued in Europe, Japan, Canada and
Australia.
Technology Solves a Well-Documented Risk in
Minimally Invasive Surgery
MIS
offers significant benefits for patients by reducing trauma, hospital stays,
recovery times and medical costs. However, these benefits have not been
achieved without the emergence of new risks. The risk of unintended tissue
damage from stray electrosurgical energy has been well documented. Such
injuries can be especially troubling given the fact that they can go
unrecognized and can lead to a cascade of adverse events, including death. Our
patented AEM technology helps to eliminate the risk of stray electrosurgical
burns in MIS while providing surgeons with the tissue effects they desire.
Product Line has been Developed and Launched
Our
AEM Surgical Instruments have been engineered to provide a seamless transition
for surgeons switching from conventional laparoscopic instruments. AEM
technology has been integrated into instruments that have the same look, feel
and functionality as conventional instruments that surgeons have been using for
years. The AEM product line encompasses the full range of instrument sizes,
types and styles favored by surgeons. Thus, hospitals can make a complete and
smooth conversion to our product line, thereby advancing patient safety in MIS.
2
Emerging as a Standard of Care
We
believe that AEM technology is following a similar path as previous
technological revolutions in surgery. Throughout the history of electrosurgery,
companies that have developed significant technological breakthroughs in
patient safety have seen their technologies become widely used. As with
Isolated electrosurgical generators in the 1970s and with REM technology in
the 1980s, AEM technology is receiving the broad endorsements that drove these
previous new technologies to becoming a standard of care. Our proprietary AEM
technology enhances patient safety in MIS, and clinicians are now widely
advocating its use. The expansion of a fully integrated AEM product line,
combined with broad independent endorsements, has created momentum for us in
the marketplace.
Developing Distribution Network is Advancing
Utilization of AEM Technology
Our
AEM technology, in the hands of a sales network with broad access to the
surgery marketplace, will help to increase utilization and market share.
Historically, our sales and marketing efforts have been hindered by our small
size and limited distribution channels. While these limitations continue, we
have improved our sales network, which provided new hospital accounts with AEM
technology in fiscal year 2008. Our supplier agreements with Novation and
Premier, the two largest Group Purchasing Organizations (GPOs) for hospitals in
the U.S., are beginning to expose more hospitals to the benefits of our AEM
technology.
Sole Possession of Key Technology Provides
Marketing Leverage
We
believe that our sole possession of patented AEM technology provides us with
marketing leverage toward gaining an increased share of the large market for
surgical instruments in MIS.
Market Overview
In
the 1990s, surgeons began widespread use of minimally-invasive surgical
techniques. The benefits of MIS are substantial and include reduced trauma for the
patient, reduced hospital stay, shorter recovery time and lower medical costs.
With improvements in the micro-camera and in the variety of available
instruments, laparoscopic surgery became popular among general and gynecologic
surgeons. Laparoscopy now accounts for a large percentage of all surgical
procedures performed in the United States. Approximately 85% of surgeons employ
monopolar electrosurgery for laparoscopy (INTERactive SURVeys). There are over
4.4 million laparoscopic procedures performed annually in the United States,
and this number is increasing annually (Note: except as otherwise stated,
market estimates in this section are as reported by Patient Safety &
Quality Healthcare).
A
component of the endoscopic surgery products market includes laparoscopic hand
instruments, including scissors, graspers, dissectors, forceps,
suction/irrigation devices, clip appliers and other surgical instruments of
various designs, which provide a variety of tissue effects. Among the
laparoscopic hand instruments, approximately $400 million in sales annually are
instruments designed for monopolar electrosurgical utility. This market for
laparoscopic monopolar electrosurgical instruments is the market we are
targeting with our innovative AEM Laparoscopic Instruments. Our proprietary AEM
product line supplants the conventional non-shielded, non-monitored
electrosurgical instruments commonly used in laparoscopic surgery.
When
a hospital decides to use our AEM technology, we make recurring sales to such
hospital for replacement instruments. Sales from replacement reusable and
disposable AEM products in hospitals represents over 90% of our sales in the
fiscal year ended March 31, 2008, and we expect this sales stream to grow
as the number of newly changed hospitals increases. AEM Instruments are
competitively priced to conventional laparoscopic instruments.
We
aim to further develop the market by continuing to educate healthcare
professionals about the benefits of AEM technology to advance patient safety.
We are working to improve our sales network to reach the decision makers who
purchase laparoscopic instruments and electrosurgical devices. We are also
pursuing relationships with GPOs to assist in promoting the benefits of AEM
technology. GPOs have significant influence on the market for surgical
instruments. Supplier agreements with Novation and Premier is helping to expose
AEM technology to new hospitals. Together, Novation and Premier represent over
3,000 hospitals which perform approximately 50% of all surgery in the United
States.
The Technology
Stray Electrosurgical Burn Injury to the Patient
Electrosurgical
technology is a valuable and popular resource for surgeons. Since its
introduction in the 1930s, electrosurgical technology has continually evolved and
is estimated to be used by over 75% of all general surgeons.
The
primary form of electrosurgery, monopolar electrosurgery, is a standard tool
for general surgeons throughout the world. In monopolar electrosurgery, the
surgeon uses an instrument (typically scissors, grasper/dissectors, spatula
blades or suction-irrigation electrodes) to deliver electrical current to
patient tissue. This active electrode provides the surgeon with the ability
to cut, coagulate or ablate tissue as needed during the surgery. With the
advent of MIS procedures, surgeons have continued using monopolar
electrosurgery as a primary tool for hemostatic incision, excision and
ablation. Unfortunately, conventional laparoscopic electrosurgical instruments
from competing manufacturers are susceptible to emitting stray electrical
currents during the procedure. This risk is exacerbated by the fact that the
micro-camera system used in laparoscopy limits the surgical field-of-view.
Ninety percent of the instrument may be outside the surgeons field-of-view at
any given time during the surgery.
Because
stray electrical current can occur at any point along the shaft of the
instrument, the potential for burns occurring to tissue outside the surgeons
field-of-view is of great concern. Such burns to non-targeted tissue are
dangerous as they are likely to go unnoticed and may lead to complications,
such as perforation and infection in adjacent tissues or organs, and this can
cause numerous adverse consequences. In many cases, the surgeon cannot detect
stray electrosurgical burns at the time of the procedure. The resulting
complication usually presents itself days later in the
3
form
of a severe infection, which often results in a return to the hospital and a
difficult course of recovery for the patient. Reports indicate that this
situation has even resulted in fatalities.
Stray
electrosurgical burn injury can result from two causes instrument insulation
failure and capacitive coupling. Instrument insulation failure can be a common
occurrence with laparoscopic instruments. Conventional active electrodes for
laparoscopic surgery are designed with the same basic construction a single
conductive element and an outer insulation coating. Unfortunately, this
insulation can fail during the natural course of normal use during surgery. It
is also possible for instrument insulation to become flawed during the cleaning
and sterilization process. This common insulation failure can allow electrical
currents to leak from the instrument to unintended and unseen tissue with
potentially serious ramifications for the patient. Capacitive coupling is
another way stray electrosurgical energy can cause unintended burns during
laparoscopy. Capacitive coupling is an electrical phenomenon that occurs when
current is induced from the instrument to nearby tissue despite intact
insulation. This potential for capacitive coupling is present in all
laparoscopic surgeries that utilize monopolar electrosurgery devices and can likely
occur outside the surgeons field-of-view.
Conventional,
non-shielded, non-monitored laparoscopic instruments are susceptible to
causing unintended, unseen burn injury to the patient in MIS. Instrument
insulation failure and capacitive coupling are the primary causes of stray
electrosurgical burns in laparoscopy and are the two events over which the
surgical team has traditionally had little, if any, control.
Encisions AEM Laparoscopic Instruments
Active
electrode monitoring technology can eliminate the risk of stray electrical
energy caused by instrument insulation failure and capacitive coupling, and
thus helps to prevent unintended burn injury to the patient.
AEM
Laparoscopic Instruments are an innovative solution to stray electrosurgical
burns in laparoscopic surgery and are designed with the same look, feel and
functionality as conventional instruments. They direct electrosurgical energy
where the surgeon desires, while continuously monitoring the current flow to
prevent stray electrosurgical energy from instrument insulation failure or
capacitive coupling.
Whereas
conventional instruments are simply a conductive element with a layer of
insulation coating, AEM Laparoscopic Instruments have a patented, multi-layered
design with a built-in shield, a concept much like the third-wire ground in
standard electrical cords. The shield in these instruments is referenced back
to a monitor at the electrosurgical generator. In the event of a harmful level
of stray electrical energy, the monitor shuts down the power at the source,
advancing patient safety. For instance, if instrument insulation failure should
occur, the AEM system, while continually monitoring the instrument, immediately
shuts down the electrosurgical generator, turning off the electrical current
and alerting the surgical staff. The AEM system protects against capacitive
coupling by providing a neutral return path for capacitively coupled
electrical current. Capacitively coupled energy is continually drained away
from the instrument and away from the patient through the protective shield
built into all AEM instruments.
The
AEM system consists of shielded 5mm AEM instruments and an AEM monitor. The AEM
instruments are designed to function identically to the conventional 5mm
instruments that surgeons are familiar with, but with the added benefit of
enhanced patient safety. Our entire line of laparoscopic instruments has the
integrated AEM design and includes the full range of instruments that are
common in laparoscopic surgery today. The AEM monitor is compatible with most
electrosurgical generators. AEM Laparoscopic Instruments provide enhanced
patient safety, require no change in surgeon technique and are cost
competitive. Thus, conversion to AEM Laparoscopic Instruments can be easy and economical.
Technology Precedents
We
believe that gaining broad independent endorsements in the surgical community
is a demonstrated and successful method for new surgical technology to advance
in the marketplace. From a concern or problem in surgery, the medical device
industry develops a technological solution, and this solution evolves to garner
credibility and endorsements. Once this occurs, the technology is then widely
employed by hospitals to benefit patients, surgeons and the operating room
staff. We believe that AEM technology is following the same path as previous
revolutions in electrosurgery. As with other safety advances (i.e. Isolated
electrosurgical generators in the 1970s and REM technology in the 1980s), AEM
technology has received the breadth of independent endorsements that drove
previous new technology to broad market acceptance. (REM is a registered
trademark of Covidien Ltd. AEM is a registered trademark of Encision Inc.).
Time Period
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Problem
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Solution
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Results
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1970s
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All electrosurgical units had a grounded
design
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Alternate paths for the current were possible,
causing patient burns
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Isolated Electrosurgery
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Patient safety is improved;
New standard of care
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1980s
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All electrosurgical patient return electrodes
were not monitored
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Patient burns at return electrode site were
possible
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REM - Return Electrode Monitoring
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Patient safety is improved;
New standard of care
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4
1990s & 2000s
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Introduction of Minimally Invasive Surgery (MIS)
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MIS instruments are susceptible to causing stray
electrosurgical burns to unintended, unseen tissue
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AEM Laparoscopic InstrumentsShielded and
monitored instruments and the active electrode monitoring system.
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Patient safety is improved;
Emerging standard of
care
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Historical Perspective
We
were organized as a Colorado corporation in 1991 and spent several years
developing the AEM monitoring system and protective sheaths to adapt to conventional
electrosurgical instruments. During this period, we conducted product trials
and applied for patents with the United States Patent and Trademark Office and
with International patent agencies. Patents were issued to us by the United
States Patent and Trademark Office in 1994, 1997, 1998 and 2002.
As
we evolved, it was clear to us that our active electrode monitoring
technology needed to be integrated into the standard laparoscopic instrument
design. As the development program proceeded, it also became apparent that the
merging of electrical and mechanical engineering skills in the instrument
development process for our patented, integrated electrosurgical instruments
was a complex and difficult task. As a result, instruments with integrated AEM
technology were not completed for several years. Prior to offering a full range
of laparoscopic electrosurgical instrumentation, it was difficult for hospitals
to commit to the AEM solution, as we did not have adequate comparable surgical
instrument options to match surgeon demand.
With
the broad array of AEM instruments now available, the surgeon has a wide choice
of instrument options and does not have to change surgical technique. Since
conversion to AEM technology is transparent to the surgeon, hospitals can now
universally convert to AEM technology, thus providing all of their laparoscopic
surgery patients a higher level of safety. This development coincides with the
continued expansion of independent endorsements for AEM technology.
Recommendations from the malpractice insurance and medicolegal communities
complement the broad clinical endorsements that AEM technology has garnered
over the past few years, leading to market gains for the technology.
Products
We
produce and market a full line of AEM Surgical Instruments, which are shielded
and monitored to prevent stray electrosurgical burns from insulation failure
and capacitive coupling. Our product line includes a broad range of
articulating instruments (scissors, graspers and dissectors), fixed-tip electrodes
and suction-irrigation electrodes. These AEM Instruments are available in a
wide array of reusable and disposable options. Our new line of disposable
hand-switching fixed tip electrodes offers disposable and reusable alternatives
for each of our major product groups. We also have a new line of handles that
are used for advanced laparoscopic procedures that incorporate stiffer shafts
and ergonomic features. In addition, we market the AEM Monitor product line
that is used in conjunction with the AEM Instruments.
Sales and Marketing Overview
We
believe that AEM technology will become the standard of care in laparoscopic
surgery worldwide. Our marketing efforts are focused toward capitalizing on
substantial independent endorsements for the AEM technology. These third-party
endorsements advocate utilizing active electrode monitoring for advancing
patient safety in laparoscopic surgery. Substantial visibility has been
achieved as a result of the technologys recognition as an
AORN
Recommended Practice
.
To
cost-effectively expand market coverage, we focus on optimizing our
distribution network comprised of direct and independent sales representatives
who are managed and directed by our regional sales managers. Together, this
network provides market presence throughout the United States. In some
instances, customers have recognized the patient safety risks inherent in
monopolar electrosurgery and have accepted AEM technology as the way to
eliminate those risks. In other instances, we have found selling the concept
behind AEM technology more difficult. This difficulty is due to several
factors, including the necessity to make surgeons, nurses and hospital risk
managers aware of the potential for unintended electrosurgical burns (which
exists when conventional instruments are used during laparoscopic monopolar
electrosurgery) and the resulting increased medicolegal liability exposure.
Additionally, we must contend with the overall lack of single purchasing points
in the industry (surgeons and hospital staff have to be in substantial
agreement as to the benefits of new technology), and the consequent need to
make multiple sales calls on personnel with the authority to commit to hospital
expenditures. Other challenges include the fact that many hospitals have exclusive
contractual agreements with manufacturers of competing surgical instruments.
Our
marketing efforts are focused toward capitalizing on the substantial
independent endorsements which advocate utilizing AEM technology for advancing
patient safety in laparoscopic surgery. In addition, there is increasing public
interest in the reduction of medical errors and the advancement of patient
safety. This interest and focus is reflected in the JCAHO (Joint Commission on
Accreditation of Healthcare Organizations) Standards enacted in July 2001
requiring hospitals to show proactive initiatives for advancing patient safety
in order to renew their accreditation. Some recent new hospital accounts
changing to AEM technology have been motivated in part by these JCAHO patient
safety standards. We believe that the credibility and importance of our
technology is complemented by this expanding public interest in advancing
patient safety.
To
cost-effectively expand market coverage, we have developed and continue to
enhance a network of independent distributors and sales representatives across
the U.S. The goal is to optimize a network that has experience selling into the
hospital operating room environment. We believe that improvement in this
network offers us the best opportunity to cost effectively broaden acceptance
of our product line and generate increased and recurring sales. Additionally,
we are pursuing supplier agreements with the major GPOs. GPOs have significant
influence on the market for surgical devices and instruments. We have GPO
agreements with Novation and Premier, which together represent over 3,000
hospitals in the United States. We have negotiated a one year extension with
Novation through January 31, 2009 and a new three year agreement with
Premier effective as of June 1, 2008. While these agreements do not
involve purchase commitments, these relationships with Novation and Premier
expand the market visibility of AEM technology and smooth the procurement and
conversion process for new hospital customers. In fiscal year 2008,
approximately thirty percent of our new hospital account sales were sales to
members of Novation and Premier.
5
In
addition to the efforts to broaden market acceptance in the United States, we
have contracted with independent distributors in Canada, Australia and
elsewhere to market our products internationally. We have achieved CE marking
for our products so that we may sell into the European marketplace. The CE
marking, Conformite Europeene (CE), indicates that a manufacturer has
conformed to all of the obligations imposed by European health, safety and
environmental legislation. While CE certification opens up incremental markets
in Europe, our distribution options in the European marketplace are yet to be
developed, and sales in international markets is negligible.
We
believe that the expanding independent endorsements for AEM technology and the
improved sales network of independent representatives will provide the basis
for increased sales and continuing profitable operations. However, these
measures, or any others that we may adopt, may not result in increased sales or
profitable operations.
Research and Development
We
aim to continually expand the AEM instrument product line to satisfy the
evolving needs of surgeons. For AEM technology to fully become a standard of
care, we must satisfy surgeons preferred instrument shapes, sizes, styles and
functionality with integrated AEM instruments. This commitment includes
expanding the styles of electrosurgical instruments available for MIS
applications so that the conversion to AEM technology is transparent to
surgeons and does not require significant change in their current surgical
techniques. We employ full-time engineers and use independent contractors from
time to time in our research and product development efforts. This group
continuously explores ways to broaden and enhance the product line. Current
research and development efforts are focused primarily on line-extension
projects to further expand the AEM Laparoscopic Instrument product offering to
increase surgeons choices and options in laparoscopic surgery. Our research
and development expenses were $1,267,834 in fiscal year 2008 and $1,099,619 in
fiscal year 2007. We expense research and development costs for products and
processes as incurred. Costs that are included in research and development
expenses include direct salaries, contractor fees, materials, facility costs
and administrative expenses that relate to research and development.
Manufacturing, Regulatory Affairs and Quality Assurance
We
engage in various manufacturing and assembly activities at our leased facility
in Boulder, Colorado. These operations include manufacturing and assembly of
the AEM Laparoscopic Instrument system as well as fabrication, assembly and
test operations for instruments and accessories. We also have relationships
with a number of outside suppliers, including Alinabal, Inc. who accounted
for approximately 17% of our purchases in fiscal year 2008, who provide primary
sub-assemblies, various electronic and sheet metal components, and molded parts
used in our products.
We
believe that the use of both internal and external manufacturing capabilities
allows for increased flexibility in meeting our customer delivery requirements,
and significantly reduces the need for investment in specialized capital
equipment. We have developed multiple sources of supply where possible. Our
relationship with our suppliers is generally limited to individual purchase order
agreements supplemented, as appropriate, by contractual relationships to help
ensure the availability and low cost of certain products. All components,
materials and subassemblies used in our products, whether produced in-house or
obtained from others, are inspected to ensure compliance with our
specifications. All finished products are subject to our quality assurance and
performance testing procedures.
As
discussed in the section on Government Regulation, we are subject to the
rules and regulations of the United States Food and Drug Administration
(FDA). Our leased facility of 28,696 square feet contains approximately
15,100 square feet of manufacturing, regulatory affairs and quality assurance
space. The facility is designed to comply with the Quality System Regulation
(QSR), as specified in published FDA regulations. Our latest inspection by
the FDA occurred in August 2007.
We
achieved CE marking in August 2000, which required prior certification of
our quality system and product documentation. Maintenance of the CE marking
status requires periodic audits of the quality system and technical
documentation by our European Notified Body, LGA InterCert. The most recent
audit was completed in February 2008.
Patents, Patent Applications and Intellectual Proprietary Rights
We
have invested heavily in an effort to protect our valuable technology, and, as
a result of this effort, we have been issued eight relevant patents that
together form a significant intellectual property position. We were issued a United
States patent having 42 claims on May 17, 1994. This patent relates to the
basic shielding and monitoring technologies that we incorporate into our AEM
products. Three additional United States patents were issued to us in 1997,
1998 and 2002, relating to specific implementations of shielding and monitoring
in instruments. Foreign patents relating to the core AEM shielding and
monitoring technologies have been issued to us in Europe, Japan, Canada and
Australia. There are between three years two months and seven years three
months remaining on our AEM patents.
Our
technical progress depends to a significant degree on our ability to maintain
patent protection for products and processes, to preserve our trade secrets and
to operate without infringing the proprietary rights of third parties. Our
policy is to attempt to protect our technology by, among other things, filing
patent applications for technology that we consider important to the
development of our business. The validity and breadth of claims covered in
medical technology patents involve complex legal and factual questions and,
therefore, may be highly uncertain. Even though we hold patented technology,
others might copy our technology or otherwise incorporate our technology into
their products.
We
require our employees to execute non-disclosure agreements upon commencement of
employment. These agreements generally provide that all confidential
information developed or made known to the individual by us during the course
of the individuals employment is our property and is to be kept confidential
and not disclosed to third parties.
6
Competition
The
electrosurgical device market is intensely competitive and tends to be
dominated by a relatively small group of large and well-financed companies. We
compete directly for customers with those companies that currently make
conventional electrosurgical instruments. Larger competitors include U.S.
Surgical Corporation (a division of Covidien Ltd.) and Ethicon Endo-Surgery (a
division of Johnson & Johnson). While we know of no competitor
(including those referenced above) that can provide a continuous solution to
stray electrosurgical burns, the manufacturers of conventional (non-monitored,
non-shielded) instruments will resist any loss of market share resulting from
the presence of our products in the marketplace.
We
also believe that manufacturers of products based on alternative technology to
monopolar electrosurgery are our competitors. These alternative technologies
include other energy technologies such as bipolar electrosurgery, laser
surgery and the harmonic scalpel. Leading manufacturers in these areas include
Gyrus/ACMI (a division of Olympus Corporation and a leader in bi-polar
electrosurgery), Lumenis (laser surgery) and Ethicon Endo-Surgery (a division
of Johnson and Johnson, manufacturers of the harmonic scalpel). We believe that
monopolar electrosurgery offers substantial competitive, functional and
financial advantages over these alternative energy technologies and will remain
the primary tool for the surgeon, as it has been for decades. However, the risk
exists that these alternative technologies may gain greater market share and
that new competitive techniques may be developed and introduced.
As
mentioned in the Sales and Marketing discussion, the competitive issues
involved in selling our AEM product line do not primarily revolve around a
comparison of cost or features, but rather involve generating an awareness of
the inherent hazards of electrosurgery and the potential for injury to the
patient. This involves selling concepts, rather than just a product, which
results in a longer sales cycle and generally higher sales costs. Independent
endorsements of active electrode monitoring technology have greatly enhanced
the credibility of AEM Laparoscopic Instruments. However, our efforts to
increase market awareness of this technology may not be successful, and our
competitors may develop alternative strategies and/or products to counter our
marketing efforts.
Many
of our competitors and potential competitors have widely used products and
significantly greater financial, technical, product development, marketing and
other resources. We utilize a network of independent distributor
representatives. In some cases, our options for independent distribution have
conflicting and competing product interests which compromise our ability to make
market advances in certain areas. We may not be able to compete successfully
against current and future competitors, and competitive pressures faced by us
may have a material adverse impact on our business, operating results and
financial condition.
Government Regulation
Government
regulation in the United States and other countries is a significant factor in
the development and marketing of our products and in our ongoing manufacturing,
research and development activities. The FDA regulates us and our products
under a number of statutes, including the Federal Food, Drug and Cosmetics Act
(the FDC Act). Under the FDC Act, medical devices are classified as
Class I, II or III on the basis of the controls deemed necessary to
reasonably ensure their safety and effectiveness. Class I devices are
subject to the least extensive controls, as their safety and effectiveness can
be reasonably assured through general controls (e.g., labeling, pre-market
notification and adherence to QSR). For Class II devices, safety and
effectiveness can be assured through the use of special controls (e.g.,
performance standards, post-market surveillance, patient registries and FDA
guidelines). Class III devices (i.e., life-sustaining or life-supporting
implantable devices or new devices which have been found not to be
substantially equivalent to legally marketed devices) require the highest level
of control, generally requiring pre-market approval by the FDA to ensure their
safety and effectiveness.
If
a manufacturer or distributor of medical devices can establish that a proposed
device is substantially equivalent to a legally marketed Class I or
Class II medical device or to a Class III medical device for which
the FDA has not required a Pre-Market Approval application, the manufacturer or
distributor may seek FDA marketing clearance for the device by filing a
510(k) pre-market notification. Following submission of the
510(k) notification, the manufacturer or distributor may not place the
device into commercial distribution in the United States until an order has
been issued by the FDA. The FDAs target for issuing such orders is within 90
days of submission, but the process can take significantly longer. The order
may declare the FDAs determination that the device is substantially
equivalent to another legally marketed device and allow the proposed device to
be marketed in the United States. The FDA may, however, determine that the
proposed device is not substantially equivalent or may require further
information, such as additional test data, before making a determination
regarding substantial equivalence. Any adverse determination or request for
additional information could delay market introduction and have a material
adverse effect on our continued operations. We have received a favorable
510(k) notification for our AEM monitors and the AEM laparoscopic
instruments, all of which are designated as Class II medical devices.
Labeling
and promotional activities are subject to scrutiny by the FDA and, in certain
instances, by the Federal Trade Commission. The FDA also imposes post-marketing
controls on us and our products, and registration, listing, medical device
reporting, post-market surveillance, device tracking and other requirements on
medical devices. Failure to meet these pervasive FDA requirements or adverse
FDA determinations regarding our clinical and preclinical trials could subject
us and/or our employees to injunction, prosecution, civil fines, seizure or
recall of products, prohibition of sales or suspension or withdrawal of any
previously granted approvals, which could lead to a material adverse impact on
our financial position and results of operations.
The
FDA regulates our quality control and manufacturing procedures by requiring us
and our contract manufacturers to demonstrate compliance with the QSR as
specified in published FDA regulations. The FDA requires manufacturers to
register with the FDA, which subjects them to periodic FDA inspections of
manufacturing facilities. If violations of applicable regulations are noted
during FDA inspections of our manufacturing facilities or the facilities of our
contract manufacturers, the continued marketing of our products may be
adversely affected. Such regulations are subject to change and depend heavily
on administrative interpretations. In August 2007, the FDA conducted a
Quality System Regulation Inspection of our facilities. We believe that we have
the internal resources and processes in place to be reasonably assured that we
are in compliance with all applicable United States regulations regarding the
manufacture and sale of medical devices. However, if we were found not to be in
compliance with the QSR, in the future, such findings could result in a
material adverse impact on our financial condition, results of operations and
cash flows.
7
Sales
of medical devices outside of the United States are subject to United States
export requirements and foreign regulatory requirements. Legal restrictions on
the sale of imported medical devices vary from country to country. The time
required to obtain approval by a foreign country may be longer or shorter than
that required for FDA approval and the requirements may differ. We have
obtained a Certificate of Export from the United States Department of Health
and Human Services that states that we have been found to be ...in substantial
compliance with Current Good Manufacturing Practices... based on the most
recent inspection. However, a specific foreign country in which we wish to sell
our products may not accept or continue to accept the Export Certificate. Entry
into the European Economic Area market also requires prior certification of our
quality system and product documentation. We achieved CE marking in
August 2000, allowing a launch into the European marketplace. Maintenance
of the CE marking status requires annual audits of the quality system and
technical documentation by our European Notified Body, LGA InterCert. The most
recent audit was completed in February 2008. In addition to licensing,
entry into the Canadian market now requires quality system certification to ISO
13485:2003. Our quality system was audited and a certification was issued by
LGA-InterCert, of Nuremberg, Germany, in February 2008.
Environmental Laws and Regulations
From
time to time we receive materials returned from customers, sales
representatives and other sources which are potentially biologically hazardous.
These materials are segregated, and disposed of in accordance with specific
procedures that minimize potential exposure to employees. The costs of
compliance with these procedures are not significant. Our operations, in
general, do not involve the use of environmentally sensitive materials.
Insurance
We
are covered under comprehensive general liability insurance policies, which
have per occurrence and aggregate limits of $1 million and $2 million,
respectively, and a $5 million umbrella policy. We maintain customary property
and casualty, workers compensation, employer liability and other commercial
insurance policies.
Employees
As
of March 31, 2008, we employed 50 full-time individuals, of which 13 are
engaged directly in research, development and regulatory activities, 10 in
manufacturing/operations, 22 in marketing and sales and 5 in administrative
positions. None of our employees are covered by a collective bargaining
agreement, and we consider our relations with our employees to be good.
Item 2
.
Properties
.
We
lease 28,696 square feet of office and manufacturing space under noncancelable
lease agreements through August 14, 2009 at 6797 Winchester Circle,
Boulder, Colorado. We believe that our existing facilities are adequate for our
current operations.
Item 3
.
Legal Proceedings
.
We
are not involved in any legal proceeding. We may become involved in litigation
in the future in the normal course of business.
Item 4
.
Submission of Matters to a Vote of Security
Holders
.
There
were no matters submitted to a shareholder vote during the fourth quarter of
the fiscal year ended March 31, 2008.
8
PART II
Item 5
.
Market for Common Equity and Related
Stockholder Matters and Small Business Issuer Purchases of Equity Securities
.
Our
common stock is quoted on the AMEX under the symbol ECI. The following table
lists the high and low sales prices for each period indicated:
|
|
2008
|
|
2007
|
|
Fiscal
|
|
High
|
|
Low
|
|
High
|
|
Low
|
|
First quarter
|
|
$
|
4.20
|
|
$
|
3.14
|
|
$
|
3.80
|
|
$
|
2.81
|
|
Second quarter
|
|
$
|
3.40
|
|
$
|
2.40
|
|
$
|
2.90
|
|
$
|
2.21
|
|
Third quarter
|
|
$
|
2.75
|
|
$
|
1.78
|
|
$
|
3.31
|
|
$
|
2.26
|
|
Fourth quarter
|
|
$
|
2.30
|
|
$
|
1.78
|
|
$
|
4.03
|
|
$
|
3.00
|
|
We
have never paid cash dividends on our common stock and have no present plans to
do so. We presently intend to retain any cash generated from operations in the
future for use in our business. As of March 31, 2008, there were
approximately 117 holders of record of our common stock.
Item 6
.
Managements
Discussion and Analysis of Financial Condition and Results of Operations
.
Certain statements contained
in this section are not historical facts, including statements about our
strategies and expectations about new and existing products, market demand,
acceptance of new and existing products, technologies and opportunities, market
and industry segment growth, and return on investments in products and markets.
These statements are forward looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995 and involve substantial risks
and uncertainties that may cause actual results to differ materially from those
indicated by the forward looking statements. All forward looking statements in
this section are based on information available to us on the date of this
document, and we assume no obligation to update such forward looking
statements. Readers of this Form 10-KSB are strongly encouraged to review
the section entitled
Risk Factors
.
Outlook
Installed Base of AEM Monitoring Equipment
. We believe
that sales of our installed base of AEM monitors will increase as the inherent
risks associated with monopolar laparoscopic electrosurgery become more widely
acknowledged and as the network of direct and independent sales representatives
becomes more adept at selling the AEM products to our customers. We expect that
the replacement sales of electrosurgical instruments and accessories will also
increase as additional hospitals are converted to AEM technology. We believe
that improvement in the quality of sales representatives carrying the AEM
product line, along with increased marketing efforts and the introduction of
new products, may provide the basis for increased sales and continuing
profitable operations. However, these measures, or any others that we may
adopt, may not result in either increased sales or continuing profitable
operations.
Possibility of Continued Operating Losses.
Except for
fiscal years 2004 and 2003 when we achieved profitable operations, we have
incurred losses since our inception and have an accumulated deficit of
$16,458,606 as of March 31, 2008. We have made significant strides toward improving
our operating results. However, due to the ongoing need to develop, optimize
and train our sales distribution network and the need to increase sustained
sales to a level adequate to cover fixed and variable operating costs, we may
continue to operate at a net loss.
Sales Growth
. We expect to generate increased sales in the U.S.
from sales to new hospital customers as our network of direct and independent
sales representatives becomes more proficient and expands the number of new
hospital accounts to AEM Laparoscopic Instruments. We believe that the
visibility and credibility of the independent clinical endorsements for AEM
technology will contribute to new hospital accounts and increased sales in
fiscal year 2009. We also expect that supplier agreements with Novation and
Premier, which together represent over 3,000 U.S. hospitals, will expose more
hospitals to the benefits of AEM technology and may stimulate new hospital
accounts. Major progress was achieved in developing our disposable fixed-tip instruments
with hand activation. We launched this new family of products at the end of the
fourth quarter of fiscal year 2008. Our goal is to offer our customers an AEM
disposable counterpart for each AEM reusable instrument.
Sales and Marketing Expenses.
We continue our efforts to
expand domestic and international distribution capability, and we believe that
sales and marketing expenses will need to be maintained at a healthy level in
order to expand our market visibility and optimize the field sales capability
of converting new hospital customers to AEM technology. Sales and marketing
expenses are expected to increase as we increase our direct sales
representatives. In fiscal year 2009, we expect to have 18 direct sales
territories and five direct sales managers.
Manufacturing
. We believe that we will be able to achieve a
major cost reduction, and provide better control over quality and consistency,
by producing the product on our own. During the second half of fiscal year
2008, we began manufacturing our own disposable scissor inserts.
Research and Development Expenses
. Research and development
expenses are expected to increase to support development of refinements to our
AEM product line, which will further expand the instrument options for the
surgeon. New refinements to the AEM product line are planned for introduction
in fiscal year 2009.
On
July 16, 2007, we received a notice from the American Stock Exchange (the
Amex) that we did not satisfy a rule for continued listing on the Amex.
The notice serves as a warning letter and asserts that we failed to comply with
the requirements of Section 1003(a)(ii) of the Amex Company Guide
(the Amex Guide), which failure could jeopardize our continued listing on the
Amex. Section 1003(a)(ii) of the Amex Guide requires, among other
things, that we have stockholders equity of not less than $4,000,000 because
we have sustained losses from continuing operations and/or net losses in three
out of our four most recent fiscal years. The notice letter required us to submit
a compliance plan to the Amex advising the Amex of the
9
action
that we have taken, or that we will take, to bring us back into compliance with all of the continued
listing standards of the Amex Guide by January 9, 2009. We will be subject
to periodic review by Amex regarding our compliance plan. We cannot assure that we will meet all the
continued listing standards of the Amex Guide or increase our stockholders
equity above $4,000,000 by January 2009 and if we fail to do so we may be
subject to immediate delisting proceedings from Amex.
Results of Operations
Net sales.
Our sales for the fiscal year ended March 31,
2008 (FY 08) were $12,065,659, and for the fiscal year ended March 31,
2007 (FY 07) our sales were $11,010,038. This represents an increase of 10%
in FY 08 from FY 07. This increase is due to the establishment of new accounts
in forty-one hospitals for AEM technology, which increased the installed base
of users of reusable and disposable AEM Laparoscopic Instruments. We benefited
from a high customer retention rate and a recurring sales stream from the
purchases of replacement instruments in existing accounts. Our retention rate
of customers is also very strong due to the fact that there is no directly
competing technology to supplant AEM products once a hospital has changed to
AEM technology. Sales from replacement AEM products in hospitals represented
over 90% of our sales in FY 08.
Gross profit.
Gross profit in FY 08 increased $697,747, or
10%, to $7,602,194 from $6,904,447 in FY 07, which resulted in a gross margin
of 63% of net sales for both FY 08 and FY 07.
Sales and marketing expenses.
Sales and marketing expenses
were $5,083,521 in FY 08, an increase of $575,111, or 13%, from $4,508,410 in
FY 07. The increase resulted from additions to our direct sales force,
increased sales sample costs due to the introduction of new products, and
travel costs. The increase was partially offset by a decrease in commissions
for independent representatives and trade show expense.
General and administrative expenses.
General and administrative
expenses were $1,405,357 in FY 08, a decrease of $22,474, or 2%, from
$1,427,831 in FY 07. The decrease was primarily the result of a one-time
expense, in FY 07, of approximately $73,000 relating to the costs of obtaining
equity capital financing, a project that was subsequently abandoned after we
obtained a $2,000,000 line of credit facility from SVB Silicon Valley Bank. The
decrease was partially offset by an increase in compensation expense, bank
service charges and outside service costs.
Research and development expenses.
Research and development
expenses were $1,267,834 in FY 08, an increase of $168,215, or 15%, from
$1,099,619 in FY 07. The increase was a result of an increase in compensation
expense for additional engineers and outside services.
Net loss.
Net loss in FY 08 of $179,318 represented a net loss
increase of $89,241 compared to FY 07 net loss of $90,077. The increase is a
result of an increase in sales and gross profit margin that was exceeded by
total operating expenses, reduced interest income and increased interest
expense. Net loss in FY 07 included $73,000 relating to the costs of obtaining
equity capital financing, a project that was subsequently abandoned after we
obtained our credit facility.
Liquidity and Capital Resources
To
date, operating funds have been provided primarily by issuances of our common
stock and warrants and the exercise of stock options to purchase our common
stock, which totaled $19,387,331 from our inception through March 31,
2008, and, to a lesser degree, by sales of our products. Our operations used
$467,213 of cash in FY 08 on sales of $12,065,659 and used $116,959 of cash in
FY 07 on sales of $11,010,038. In FY 08 and prior years, the use of cash in our
operations resulted primarily from the funding of our annual net losses. These
amounts of cash generated from and used in operations are not indicative of the
expected cash to be generated from or used in operations in the fiscal year
ending March 31, 2009 (FY 09). As of March 31, 2008, we had $70,995
in cash and cash equivalents, and an unused line of credit of $1,394,000,
available to fund future operations. Working capital was $2,483,993 at March 31,
2008 compared to $2,172,722 at March 31, 2007. Current liabilities were
$1,409,750 at March 31, 2008, compared to $1,464,153 at March 31,
2007.
On
November 10, 2006, we entered into a credit facility agreement with
Silicon Valley Bank. The terms of the credit facility include a line of credit
for $2,000,000 for three years at an interest rate calculated at prime rate
plus 1.25%. In connection with the credit facility, we issued warrants to
Silicon Valley Bank to purchase 28,000 shares of our common stock at a per
share price of $2.75. Our borrowing under the credit facility is limited by our
eligible receivables and inventory at the time of borrowing. As of
March 31, 2008, we had borrowed $606,000 from the credit facility. The credit facility requires us to meet certain
financial covenants. In February 2008, we failed to meet the minimum
defined quick debt ratio covenant. As a result, the lender has imposed a $750 a
month maintenance fee, additional financial reporting and we may ask for
additional borrowings only at the beginning of each week instead of when
needed.
We
believe that the unique performance of the AEM technology and our breadth of
independent endorsements provide an opportunity for continued market share
growth. We believe that the market awareness of the AEM technology and its
endorsements is continually improving and that this will benefit sales efforts
in FY 09. We believe that we enter FY 09 having achieved improvements in the
clinical credibility of our technology. Our FY 09 operating plan is focused on
growing sales, increasing gross profits, increasing research and development
costs while reducing losses and negative cash flows. We cannot predict with
certainty the expected sales, gross profit, net income or loss and usage of
cash and cash equivalents for FY 09. However, we believe that cash resources
and borrowing capacity will be sufficient to fund our operations for at least
the next twelve months under our current operating plan. If we are unable to
manage the business operations in line with our budget expectations, it could
have a material adverse effect on business viability, financial position,
results of operations and cash flows. Further, if we are not successful in
sustaining profitability and remaining at least cash flow break-even, additional
capital may be required to maintain ongoing operations.
We
have explored and are continuing to explore options to provide additional
financing to fund future operations as well as other possible courses of
action. Such actions include, but are not limited to, securing a larger credit
facility, sales of debt or equity securities (which may result in dilution to
existing shareholders), licensing of technology, strategic alliances and other
similar actions. There can be no assurance that we will be able to obtain
additional funding (if needed) through a sale of our common stock or loans from
financial institutions or other third parties or
10
through
any of the actions discussed above on terms acceptable to us or at all. If we
cannot sustain profitable operations and additional capital is unavailable,
lack of liquidity could have a material adverse effect on our business
viability, financial position, results of operations and cash flows.
Income Taxes
As
of March 31, 2008, net operating loss carryforwards totaling approximately
$16,400,000 were available to reduce taxable income in the future. The net
operating loss carryforwards expire, if not previously utilized, at various
dates beginning in FY 09. We have not paid income taxes since our inception.
The Tax Reform Act of 1986 and other income tax regulations contain provisions
which may limit the net operating loss carryforwards available to be used in
any given year if certain events occur, including changes in our ownership. We
have established a valuation allowance for the entire amount of our deferred
tax asset since inception due to our history of losses. During FY 08 and FY 07,
no tax benefit was obtained from our loss. As a result, no tax benefit is
reflected in the accompanying statements of operations. Should we achieve
sufficient, sustained income in the future, we may conclude that some or all of
the valuation allowance should be reversed.
Contractual Obligations
For
more information on our contractual obligations on operating leases, refer to
Note 4 of the Financial Statements
.
We
currently lease our facilities under noncancelable lease agreements through
August 14, 2009 at 6797 Winchester Circle, Boulder, Colorado. The minimum
future lease payment by fiscal year as of March 31, 2008 is as follows:
Fiscal Year
|
|
Amount
|
|
2009
|
|
$
|
249,691
|
|
2010
|
|
94,804
|
|
Total
|
|
$
|
344,495
|
|
Our
minimum future equipment lease payments with General Electric Capital
Corporation as of March 31, 2008, by fiscal year, are as follows:
Fiscal Year
|
|
Amount
|
|
2009
|
|
$
|
101,873
|
|
2010
|
|
101,873
|
|
2011
|
|
101,873
|
|
2012
|
|
101,873
|
|
2013
|
|
101,873
|
|
2014
|
|
8,488
|
|
Total
|
|
$
|
517,853
|
|
Aside
from the operating lease commitments, we do not have any material contractual commitments
requiring settlement in the future.
Critical Accounting Policies and Estimates
Our
discussion and analysis of our financial condition and results of operations
are based upon our financial statements, which have been prepared in accordance
with accounting principles generally accepted in the United States. The
preparation of these financial statements requires us to make estimates and
judgments that affect the reported amounts of assets, liabilities, sales and
expenses, and related disclosure of contingent assets and liabilities. On an
on-going basis, we evaluate our estimates, including those related to bad
debts, inventories, sales returns, warranty, contingencies and litigation. We
base our estimates on historical experience and on various other assumptions
that are believed to be reasonable under the circumstances, the results of
which form the basis for making judgments about the carrying values of assets
and liabilities that are not readily apparent from other sources. Actual
results may differ from these estimates under different assumptions or
conditions. We believe the following critical accounting policies affect the
more significant judgments and estimates used in the preparation of our
financial statements.
We
maintain allowances for doubtful accounts for estimated losses resulting from
the inability of our customers to make required payments. If the financial
condition of our customers were to deteriorate, resulting in an impairment of
their ability to make payments, additional allowances would be required, which
would increase our expenses during the periods in which any such allowances
were made. The amount recorded as a provision for bad debts in each period is
based upon our assessment of the likelihood that we will be paid on our
outstanding receivables, based on customer-specific as well as general
considerations. To the extent that our estimates prove to be too high, and we
ultimately collect a receivable previously determined to be impaired, we may
record a reversal of the provision in the period of such determination.
We
provide for the estimated cost of product warranties at the time sales are
recognized. While we engage in extensive product quality programs and
processes, including actively monitoring and evaluating the quality of our
component suppliers, we have experienced some costs related to warranty. The
warranty accrual is based upon historical experience and is adjusted based on
current experience. Should actual warranty experience differ from our
estimates, revisions to the estimated warranty liability would be required.
We
reduce inventory for estimated obsolete or unmarketable inventory equal to the
difference between the cost of inventory and the estimated market value based
upon assumptions about future demand and market conditions. If actual market
conditions are less favorable than those projected by management, additional
inventory write-downs may be required. Any write-downs of inventory would
reduce our reported net income during the period in which such write-downs were
applied. To the extent that our estimates prove to be too high, and we
ultimately utilize or sell inventory previously determined to be impaired, we
may record a reversal of the provision in the period of such determination.
11
We
recognize deferred income tax assets and liabilities for the expected future
income tax consequences, based on enacted tax laws, of temporary differences
between the financial reporting and tax bases of assets and liabilities.
Deferred tax assets are then reduced, if deemed necessary, by a valuation
allowance for the amount of any tax benefits which, more likely than not based
on current circumstances, are not expected to be realized. Should we achieve
sufficient, sustained income in the future, we may conclude that all or some of
the valuation allowance should be reversed.
We
state property and equipment at cost, with depreciation computed over the
estimated useful lives of the assets, generally three to seven years. Prior to
FY 08, we utilized the double-declining method of depreciation for property and
equipment due to the expected usage of the property and equipment over time.
This method is expected to continue throughout the life of this equipment.
Manufacturing and production equipment acquired, but not placed in service, in
FY 07 and manufacturing and production equipment acquired after FY 07 is of a
different technology for which the straight-line method is more appropriate.
Therefore, we will utilize the straight-line method of depreciation for this
and other property and equipment starting April 1, 2007. This difference
in depreciation methods utilized for manufacturing and production equipment is
based on the technological differences of the equipment and does not constitute
a change in accounting principle. Leasehold improvements are depreciated over
the shorter of 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.
We
amortize our patent costs over their estimated useful lives, which is typically
the remaining statutory life. From time to time, we may be required to adjust
these lives based on advances in technology, competitor actions, and the like.
We review the recorded amounts of patents at each period end to determine if
their carrying amount is still recoverable based on our expectations regarding
sales of related products. Such an assessment, in the future, may result in a conclusion
that the assets are impaired, with a corresponding charge against earnings.
Beginning
in FY 07, we adopted Statement of Financial Accounting Standards 123 (revised
2004), Share-Based Payment, (SFAS 123(R)), which requires the measurement
and recognition of compensation expense for all share-based payment awards made
to employees and directors including employee stock options based on estimated
fair values.
Risk Factors
:
You
should carefully consider the risk factors described below. If any of the
following risk factors actually occur, our business, prospects, financial
condition or results of operations would likely suffer. In such case, the
trading price of our common stock could fall, resulting in the loss of all or
part of your investment. You should look at all these risk factors in total.
Some risk factors may stand on their own. Some risk factors may affect (or be
affected by) other risk factors. You should not assume we have identified these
connections. You should not assume that we will always update these and future
risk factors in a timely manner. We are not undertaking any obligation to
update these risk factors to reflect events or circumstances after the date of
this report or to reflect the occurrence of unanticipated events.
Among
the factors that could cause future results and financial condition to be
materially different from expectations are:
Our products may not be accepted by the market
. The success of
our products and our financial condition depends on the acceptance of AEM
products by the medical community in commercially viable quantities during FY
08 and beyond. We cannot predict how quickly or how broadly AEM products will
be accepted by the medical community. We need to continually educate the
marketplace about the
potential
hazards involved in the use of conventional electrosurgical products during MIS
procedures and the expected benefits associated with the use of AEM products.
If we are unsuccessful in educating the marketplace about our technology and
the hazards of conventional instruments, we will not create sufficient demand
by hospitals and surgeons for AEM products and our financial condition, results
of operations and cash flows could be adversely affected.
We need to continually develop and train our network
of direct and independent sales representatives and expand our distribution
efforts in order to be successful.
Our attempts to develop and
train a network of direct and independent sales representatives in the U.S. and
to expand our international distribution efforts may take longer than expected
and may result in considerable amounts of retraining effort as the direct and
independent sales representatives change their product lines, product focus and
personnel. We may not be able to obtain full coverage of the U.S. by direct and
independent sales representatives as quickly as anticipated. The independent
sales representative network has inherent flaws and inefficiencies, which can
include conflicts of interest and competing products. Optimizing the quality of
the network and the performance of direct and independent sales representatives
in the U.S. is an ongoing challenge. We may also encounter difficulties in
developing our international presence due to regulatory issues and our ability
to successfully develop international distribution options. Our inability to
expand our network of direct and independent sales representatives and optimize
their performance could adversely affect our financial results.
We may need additional funding to support our operations.
We were
formed in 1991 and have incurred losses
of $16.5 million since that date. We have primarily financed research,
development and operational activities with sales of our common stock. At
March 31, 2008, we had $70,995 in cash available to fund future operations
and, in addition, access to a line of credit for $1,394,000. We may find that
investment in sales, marketing, research and development initiatives, merited
by market opportunity, may result in our operating at a net loss from quarter to
quarter. We may also find ourselves at a competitive disadvantage due to our
constrained liquidity. On November 10, 2006, we entered into a credit
facility agreement with Silicon Valley Bank. The terms of the credit facility
include a line of credit for $2,000,000 for three years at an interest rate
calculated at prime rate plus 1.25%. In connection with the credit facility, we
issued warrants to Silicon Valley Bank to purchase 28,000 shares of our common
stock at a per share price of $2.75. Our borrowing under the credit facility is
limited by our eligible receivables and inventory at the time of borrowing. As
of March 31, 2008, we had borrowed $606,000 from the credit facility. The credit facility requires us to meet certain
financial covenants. In February 2008, we failed to meet the minimum quick
debt ratio covenant. As a result, the lender has imposed a $750 monthly
maintenance fee, additional financial reporting and we may ask for additional
borrowings only at the beginning of each week instead of when needed. If
we fail to comply with the restrictions contained in the credit facility and
the lender does not waive such noncompliance, the resulting event of default
could result in the lender accelerating the repayment of all outstanding
amounts due under the credit facility. There can be no assurances that we would
be successful in obtaining alternative sources of funding to repay these
obligations should this event occur. In addition, should we need additional
financing, we may not be able to obtain it on terms acceptable to us or at all.
12
We may not be able to compete successfully against
current manufacturers of conventional (unshielded, unmonitored)
electrosurgical instruments or against competitors who manufacture products
that are based on surgical technologies that are alternatives to monopolar
electrosurgery.
The electrosurgical products market is intensely
competitive. We expect that manufacturers of unshielded, unmonitored
electrosurgical instruments will resist any loss of market share that might
result from the presence of our shielded and monitored instruments in the
marketplace. We also believe that manufacturers of products that are based upon
surgical technologies that are alternatives to monopolar electrosurgery are our
competitors. These technologies include bipolar electrosurgery, the harmonic
scalpel and lasers. The alternative technologies may gain market share and new
competitive technologies may be developed and introduced. Most of our
competitors and potential competitors have significantly greater financial, technical,
product development, marketing and other resources than we do. Most of our
competitors also currently have substantial installed customer bases in the
medical products market and have significantly greater market recognition than
we have. As a result of these factors, our competitors may be able to respond
more quickly to new or emerging technologies and changes in customer
requirements or to devote greater resources to the development, promotion and
sale of their products. It is possible that new competitors or new alliances
among competitors may emerge and rapidly acquire significant market share. The
competitive pressures we face may materially adversely affect our financial
position, results of operations and cash flows, and this may hinder our ability
to respond to competitive threats.
If we do not continually enhance our products and keep
pace with rapid technological changes, we may not be able to attract and retain
customers.
Our future success and
financial performance will depend in part on our ability to meet the
increasingly sophisticated needs of customers through the timely development
and successful introduction of product upgrades, enhancements and new products.
These upgrades, enhancements and new products are subject to significant technological
risks. The medical device market is subject to rapid technological change,
resulting in frequent new product introductions and enhancements of existing
products, as well as the risk of product obsolescence. While we are currently
developing new products and enhancing our existing product lines, we
may not be successful in completing the development of the new products or
enhancements. In addition, we must respond effectively to technological changes
by continuing to enhance our existing products to incorporate emerging or
evolving standards. We may not be successful in developing and marketing
product enhancements or new products that respond to technological changes or
evolving industry standards. We may experience difficulties that could delay or
prevent the successful development, introduction and marketing of those
products, and our new products and product enhancements may not adequately meet
the requirements of the marketplace and achieve commercially viable levels of
market acceptance. If any potential new products, upgrades, or enhancements are
delayed, or if any potential new products, upgrades, or enhancements experience
quality problems or do not achieve such market acceptance, or if new products
make our existing products obsolete, our financial position, results of
operations and cash flows would be materially adversely affected.
If government regulations change or if we fail to
comply with existing and/or new regulations, we might miss market opportunities
and experience increased costs and limited growth.
The research,
manufacturing, marketing and distribution of our products in the United States
and other countries are subject to extensive regulation by numerous
governmental authorities including, but not limited to, the Food and Drug
Administration. Under the Federal Food, Drug and Cosmetic Act, medical devices
must receive clearance from the Food and Drug Administration through the
Section 510(k) pre-market notification process or through the more
lengthy pre-market approval process before they can be sold in the United
States. The process of obtaining required regulatory approvals is lengthy and
has required the expenditure of substantial resources. There can be no
assurance that we will be able to continue to obtain the necessary approvals.
As part of our strategy, we also intend to pursue commercialization of our
products in international markets. Our products are subject to regulations that
vary from country to country. The process of obtaining foreign regulatory
approvals in certain countries can be lengthy and require the expenditure of
substantial resources. We may not be able to obtain necessary regulatory
approvals or clearances on a timely basis or at all, and delays in receipt of
or failure to receive such approvals or clearances, or failure to comply with
existing or future regulatory requirements would have a material adverse effect
on our financial position, results of operations and cash flows.
If we fail to comply with the extensive regulatory
requirements governing the manufacturing of our products, we could be subject
to fines, suspensions or withdrawals of regulatory approvals, product recalls,
suspension of manufacturing, operating restrictions and/or criminal
prosecution.
The manufacturing of our products is subject to
extensive regulatory requirements administered by the Food and Drug
Administration and other regulatory bodies. Inspection of our manufacturing
facilities and processes can be conducted at any time, without prior notice, by
such regulatory bodies. In addition, future changes in regulations or
interpretations made by the Food and Drug Administration or other regulatory
bodies, with possible retroactive effect, could adversely affect us. Changes in
existing regulations or adoption of new regulations or policies could prevent
us from obtaining, or affect the timing of, future regulatory approvals or
clearances. We may not be able to obtain necessary regulatory approvals or
clearances on a timely basis in the future, or at all. Delays in receipt of,
failure to receive such approvals or clearances and/or failure to comply with
existing or future regulatory requirements would have a material adverse effect
on our financial position, results of operations and cash flows.
Our current patents, trade secrets and know-how may
not provide a competitive advantage, the pending applications may not result in
patents being issued, and our competitors may design around any patents issued
to us.
Our success will continue to depend in part on our ability to
maintain patent protection for our products and processes, to preserve our
trade secrets and to operate without infringing the proprietary rights of third
parties. We have four issued U.S. patents on several technologies embodied in
our AEM Monitoring System, AEM Instruments and related accessories and we have
applied for additional U.S. patents. In addition, we have four issued foreign
patents. There are between three years two months and seven years three months
remaining on our AEM patents. The validity and breadth of claims coverage in
medical technology patents involve complex legal and factual questions and may
be highly uncertain. Also, patents may not protect our proprietary information
and know-how or provide adequate remedies for us in the event of unauthorized use
or disclosure of such information, and others may be able to develop competing
technology, independent of such information. There has been substantial
litigation regarding patent and other intellectual property rights in the
medical device industry. Litigation may be necessary to enforce patents issued
to us, to protect trade secrets or know-how owned by us, to defend us against
claimed infringement of the rights of others or to determine the ownership,
scope or validity of our proprietary rights or those of others. Any such claims
may require us to incur substantial litigation expenses and to divert
substantial time and effort of management personnel and could substantially
decrease the amount of capital available for our operations. An adverse
determination in litigation involving the proprietary rights of others could
subject us to significant liabilities to third parties, could require us to
seek licenses from third parties, and could prevent us from manufacturing,
selling or using our products. The occurrence of any such actual or threatened
litigation or the effect on our business of such litigation may materially
adversely affect our financial position, results of operations and cash flows.
Additionally, our assessment that a patent is no longer of value could result
in a significant charge against our earnings.
13
We depend on single source suppliers for certain of
the key components of our products and sub-contractors to provide much of the
materials used in the manufacturing of our products. The loss of a supplier or
limitation in supply from existing suppliers could have a material adverse
effect on our ability to manufacture our products until a new source of supply
is located.
Although we believe that there are alternative
suppliers, any interruption in the supply of key components could have a
material adverse effect on us. A sudden increase in customer demand may create
a backorder situation as lead times for some of our critical materials are in
excess of 12 weeks.
We rely on
subcontractors to provide products, either in the form of finished goods or
sub-assemblies that we then assemble and test. While these sub-contractors
reduce our total cost of manufacturing, they may not be as responsive to
increased demand as we would be if we had our manufacturing capacity entirely
in-house, which may limit our growth strategy and sales.
The potential fluctuation in future quarterly results
may cause our stock price to fluctuate.
We expect that our operating
results could fluctuate significantly from quarter to quarter in the future and
will depend upon a number of factors, many of which are outside our control.
These factors include the extent to which our AEM technology and related
accessories gain market acceptance; our investments in marketing, sales,
research and development and administrative personnel necessary to support
growth; our ability to expand our market share; actions of competitors; and,
general economic conditions. The market value of our common stock has
dramatically fluctuated in the past and is likely to fluctuate in the future.
Any deviation could have an immediate and significant negative impact on the
market price of our stock.
Our common stock is thinly traded, the prices at which
it trades are volatile and the buying or selling actions of a few shareholders
may adversely affect our stock price.
As of May 31, 2008, we
had a public float, which is defined as shares outstanding minus shares held by
our officers, directors, or holders of greater than 5% of our outstanding
common stock, of 2,902,327 shares, or 45% of our outstanding common stock. The
average number of shares traded in any given day over the past year has been
relatively small compared to the public float. Thus, the actions of a few
shareholders either buying or selling shares of our common stock may adversely
affect the price of the shares. Historically, thinly traded securities such as
our common stock have experienced extreme price and volume fluctuations that do
not necessarily relate to operating performance.
Our insurance coverage for product liability claims is
up to $5,000,000.
We
face
an inherent business risk of exposure to product liability claims in the event
that the use of our products is alleged to have resulted in adverse effects to
a patient. We maintain a general liability insurance policy up to the amount of
$5,000,000 that includes coverage for product liability claims. Liability
claims may be excluded from the policy, may exceed the coverage limits of the
policy, or the insurance may not continue to be available on commercially
reasonable terms or at all. Consequently, a product liability claim or other
claim with respect to uninsured liabilities or in excess of insured liabilities
could have a material adverse effect on our financial position, results of
operations and cash flows.
We depend on certain key personnel.
We are highly
dependent on a limited number of key management personnel, particularly our
President and CEO, John R. Serino, and our Chairman of the Board, Roger C.
Odell. Our loss of key personnel to death, disability or termination, or our
inability to hire and retain qualified personnel, could have a material adverse
effect on our financial position, results of operations and cash flow.
We may be delisted from the American Stock Exchange, which may cause
our stock price to drop
. On July 16, 2007, we received a notice
from the American Stock Exchange (the Amex) that we did not satisfy a
rule for continued listing on the Amex. The notice warned that we failed
to comply with the requirements of the Amex Company Guide (the Amex Guide),
which failure could jeopardize our continued listing on the Amex. The Amex
Guide requires, among other things, that we have stockholders equity of not
less than $4,000,000 because we have sustained losses from continuing
operations and/or net losses in three out of our four most recent fiscal years.
The notice letter required us to submit a compliance plan to the Amex advising
the Amex of the action that we have taken, or that we will take, to bring us
back into compliance with all of the
continued listing standards of the Amex Guide by January 9, 2009. We cannot assure that we will meet all the
continued listing standards of the Amex Guide or increase our stockholders
equity above $4,000,000 by January 2009 and if we fail to do so we may be
subject to immediate delisting proceedings from Amex. Delisting from Amex would
likely result in a less liquid trading market for our common stock, which could
lead to more dramatic fluctuations in our stock price and may negatively impact
the market price of our stock.
14
Item 7
.
Financial Statements and Supplementary Data
.
The following financial statements are included in
this Report:
15
Report of Independent
Registered Public Accounting Firm
To the Board of Directors
Encision Inc.
Boulder,
Colorado
We
have audited the accompanying balance sheets of Encision Inc. as of March 31, 2008 and 2007 and the
related statements of operations, stockholders equity and cash flows for the
years then ended. These financial statements are the responsibility of the
Companys management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement. The Company is not
required to have, nor were we engaged to perform, an audit of its internal
control over financial reporting. Our audits included consideration of internal
control over financial reporting as a basis for designing audit procedures that
are appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Companys internal control over financial
reporting. Accordingly, we express no such opinion. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the
financial statements referred to above present fairly, in all material
respects, the financial position of Encision Inc. as of March 31, 2008 and 2007, and the results of its operations
and its cash flows for the years then ended, in conformity with accounting
principles generally accepted in the United States of America.
/s/ Gordon,
Hughes & Banks, LLP
Greenwood Village, Colorado
May 30,
2008
16
Encision Inc.
Balance Sheets
|
|
March 31, 2008
|
|
March 31, 2007
|
|
ASSETS
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
Cash and cash
equivalents
|
|
$
|
70,995
|
|
$
|
436,403
|
|
Accounts
receivable, net of allowance for doubtful account of $15,000 at
March 31, 2008 and $23,500 at March 31, 2007
|
|
1,452,770
|
|
1,194,373
|
|
Inventories, net
of reserve for obsolescence of $65,000 at March 31, 2008 and $80,000 at March 31,
2007
|
|
2,270,953
|
|
1,764,227
|
|
Prepaid expenses
|
|
99,025
|
|
241,872
|
|
Total current
assets
|
|
3,893,743
|
|
3,636,875
|
|
Equipment, at
cost:
|
|
|
|
|
|
Furniture,
fixtures and equipment
|
|
1,746,583
|
|
1,084,260
|
|
Customer-site
equipment
|
|
644,946
|
|
612,553
|
|
Equipment-in-progress
|
|
30,240
|
|
233,357
|
|
Accumulated
depreciation
|
|
(1,623,432
|
)
|
(1,413,656
|
)
|
Equipment, net
|
|
798,337
|
|
516,514
|
|
Patents, net of
accumulated amortization of $116,652 at March 31, 2008 and $104,496 at March 31,
2007
|
|
199,246
|
|
153,066
|
|
Other assets
|
|
53,149
|
|
81,195
|
|
TOTAL
ASSETS
|
|
$
|
4,944,475
|
|
$
|
4,387,650
|
|
LIABILITIES
AND SHAREHOLDERS EQUITY
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
Accounts payable
|
|
$
|
536,755
|
|
$
|
620,814
|
|
Accrued
compensation
|
|
391,889
|
|
295,994
|
|
Other accrued
liabilities
|
|
481,106
|
|
547,345
|
|
Total current
liabilities
|
|
1,409,750
|
|
1,464,153
|
|
Long-term debt
|
|
606,000
|
|
|
|
Commitments
and contingencies
|
|
|
|
|
|
Shareholders
equity:
|
|
|
|
|
|
Preferred stock,
no par value: 10,000,000 shares authorized; none issued and outstanding
|
|
|
|
|
|
Common stock and
additional paid-in capital, no par value: 100,000,000 shares authorized;
6,447,100 and 6,430,437 shares issued and outstanding at March 31, 2008
and March 31, 2007, respectively
|
|
19,387,331
|
|
19,202,785
|
|
Accumulated
(deficit)
|
|
(16,458,606
|
)
|
(16,279,288
|
)
|
Total
shareholders equity
|
|
2,928,725
|
|
2,923,497
|
|
TOTAL
LIABILITIES AND SHAREHOLDERS EQUITY
|
|
$
|
4,944,475
|
|
$
|
4,387,650
|
|
The
accompanying notes to financial statements are an integral part of these
statements.
17
Encision Inc.
Statements of Operations
Years Ended
|
|
March 31, 2008
|
|
March 31, 2007
|
|
NET
SALES
|
|
$
|
12,065,659
|
|
$
|
11,010,038
|
|
COST OF
SALES
|
|
4,463,465
|
|
4,105,591
|
|
GROSS
PROFIT
|
|
7,602,194
|
|
6,904,447
|
|
OPERATING
EXPENSES:
|
|
|
|
|
|
Sales and
marketing
|
|
5,083,521
|
|
4,508,410
|
|
General and
administrative
|
|
1,405,357
|
|
1,427,831
|
|
Research and
development
|
|
1,267,834
|
|
1,099,619
|
|
Total operating
expenses
|
|
7,756,712
|
|
7,035,860
|
|
OPERATING
LOSS
|
|
(154,518
|
)
|
(131,413
|
)
|
Interest income
(expense), net
|
|
(35,450
|
)
|
29,685
|
|
Other income
(expense), net
|
|
10,650
|
|
11,651
|
|
Interest and
other income (expense), net
|
|
(24,800
|
)
|
41,336
|
|
LOSS
BEFORE PROVISION FOR INCOME TAXES
|
|
(179,318
|
)
|
(90,077
|
)
|
Provision for
income taxes
|
|
|
|
|
|
NET
LOSS
|
|
$
|
(179,318
|
)
|
$
|
(90,077
|
)
|
Net loss per
sharebasic and diluted
|
|
$
|
(0.03
|
)
|
$
|
(0.01
|
)
|
Weighted average
sharesbasic and diluted
|
|
6,441,410
|
|
6,422,785
|
|
The
accompanying notes to financial statements are an integral part of these
statements.
18
Encision Inc.
Statements of Shareholders
Equity
|
|
Shares of
Common Stock
|
|
Common Stock and
Additional
Paid-in Capital
|
|
Accumulated
Deficit
|
|
Total
Shareholders Equity
|
|
BALANCES
AT MARCH 31, 2006
|
|
6,398,146
|
|
$
|
18,920,885
|
|
$
|
(16,189,211
|
)
|
$
|
2,731,674
|
|
Net loss
|
|
|
|
|
|
(90,077
|
)
|
(90,077
|
)
|
Exercise of
stock options
|
|
32,291
|
|
61,947
|
|
|
|
61,947
|
|
Compensation
expense related to stock options
|
|
|
|
182,423
|
|
|
|
182,423
|
|
Estimated fair
value of warrants issued in conjunction with line of credit
|
|
|
|
37,530
|
|
|
|
37,530
|
|
BALANCES
AT MARCH 31, 2007
|
|
6,430,437
|
|
$
|
19,202,785
|
|
$
|
(16,279,288
|
)
|
$
|
2,923,497
|
|
Net loss
|
|
|
|
|
|
(179,318
|
)
|
(179,318
|
)
|
Exercise of
stock options
|
|
16,663
|
|
45,740
|
|
|
|
45,740
|
|
Compensation
expense related to stock options
|
|
|
|
138,806
|
|
|
|
138,806
|
|
BALANCES
AT MARCH 31, 2008
|
|
6,447,100
|
|
$
|
19,387,331
|
|
$
|
(16,458,606
|
)
|
$
|
2,928,725
|
|
The
accompanying notes to financial statements are an integral part of these
statements.
19
Encision Inc.
Statements of Cash Flows
Years Ended
|
|
March 31, 2008
|
|
March 31, 2007
|
|
Cash flows from
operating activities:
|
|
|
|
|
|
Net loss
|
|
$
|
(179,318
|
)
|
$
|
(90,077
|
)
|
Adjustments to
reconcile net loss to net cash used in operating activities:
|
|
|
|
|
|
Depreciation and
amortization
|
|
221,932
|
|
209,653
|
|
Stock-based
compensation expense related to stock options
|
|
138,806
|
|
182,423
|
|
Stock-based
interest expense related to warrants
|
|
12,508
|
|
4,833
|
|
Provision for
doubtful accounts, net change
|
|
(8,500
|
)
|
(14,500
|
)
|
Provision for
inventory obsolescence, net change
|
|
(15,000
|
)
|
10,000
|
|
Change in
operating assets and liabilities:
|
|
|
|
|
|
Accounts
receivable
|
|
(249,897
|
)
|
(237,379
|
)
|
Inventories
|
|
(491,726
|
)
|
(375,379
|
)
|
Prepaid expenses
and other assets
|
|
158,385
|
|
(185,058
|
)
|
Accounts payable
|
|
(84,059
|
)
|
321,048
|
|
Accrued
compensation and other accrued liabilities
|
|
29,656
|
|
57,477
|
|
Net cash (used
in) operating activities
|
|
(467,213
|
)
|
(116,959
|
)
|
Cash flows from
investing activities:
|
|
|
|
|
|
Acquisition of
property and equipment
|
|
(491,599
|
)
|
(397,832
|
)
|
Patent costs
|
|
(58,336
|
)
|
(12,294
|
)
|
Net cash (used
in) investing activities
|
|
(549,935
|
)
|
(410,126
|
)
|
Cash flows from
financing activities:
|
|
|
|
|
|
Borrowings from
credit facility
|
|
606,000
|
|
|
|
Proceeds from
the exercise of stock options
|
|
45,740
|
|
61,947
|
|
Net cash
provided by financing activities
|
|
651,740
|
|
61,947
|
|
Net (decrease)
in cash and cash equivalents
|
|
(365,408
|
)
|
(465,138
|
)
|
Cash and cash
equivalents, beginning of fiscal year
|
|
436,403
|
|
901,541
|
|
Cash and cash
equivalents, end of fiscal year
|
|
$
|
70,995
|
|
$
|
436,403
|
|
|
|
|
|
|
|
Supplemental
disclosures of cash flow information:
|
|
|
|
|
|
Cash paid during
the year for interest
|
|
$
|
22,162
|
|
$
|
|
|
Noncash cost
related to warrants issued
|
|
$
|
|
|
$
|
32,697
|
|
The
accompanying notes to financial statements are an integral part of these
statements.
20
ENCISION INC.
NOTES TO FINANCIAL STATEMENTS
1. Description of Business
Encision Inc. is a medical device company that designs,
develops, manufactures and markets patented surgical instruments that provide
greater safety to patients undergoing minimally-invasive surgery. We believe
that our patented AEM
®
surgical instrument technology is changing
the marketplace for electrosurgical devices and instruments by providing a
solution to a well-documented risk in laparoscopic surgery. Our sales to date
have been made principally in the United States.
We have, except for fiscal years 2004 and 2003 when
we achieved profitable operations, incurred losses since our inception and have
an accumulated deficit of $16,458,606 at March 31, 2008. Operations have
been financed primarily through issuance of common stock. Our liquidity has
substantially diminished because of such continuing operating losses, and we
may be required to seek additional capital in the future.
Our strategic marketing and sales plan is designed to
expand the use of our products in surgically active hospitals in the United
States.
2. Summary of Significant Accounting Policies
Use of Estimates in the Preparation of Financial
Statements.
The preparation of financial statements in
conformity with accounting principles generally accepted in the United States
of America requires management to make estimates and assumptions. Such
estimates and assumptions affect the reported amounts of assets and liabilities
as well as disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of sales and expense during the
reporting period. Actual results could differ from those estimates.
Cash and Cash Equivalents.
For purposes of
reporting cash flows, we consider all cash and highly liquid investments with
an original maturity of three months or less to be cash equivalents.
Fair Value of Financial Instruments.
Our financial
instruments consist of cash and cash equivalents and short-term trade
receivables and payables. The carrying values of cash and cash equivalents and
short-term receivables and payables approximate their fair value due to their
short maturities.
Concentration of Credit Risk.
Statement of
Financial Accounting Standards (SFAS) 105, Disclosure of Information About
Financial Instruments with Off-Balance Sheet Risk and Financial Instruments
with Concentrations of Credit Risk, requires disclosure of significant
concentrations of credit risk regardless of the degree of such risk. Financial
instruments with significant credit risk include cash. The amount on deposit
with financial institutions does exceed the $100,000 federally insured limit at
March 31, 2008. However, we believe that the financial institutions are
financially sound and the risk of loss is minimal.
Financial instruments consist of cash and cash
equivalents, accounts receivable and accounts payable. The carrying value of
all financial instruments approximate fair value.
We have no significant off-balance sheet
concentrations of credit risk such as foreign exchange contracts, options
contracts or other foreign hedging arrangements. We maintain the majority of
our cash balances with two financial institutions in the form of demand
deposits and money market funds.
Accounts receivable are typically unsecured and are
derived from transactions with and from entities in the healthcare industry
primarily located in the United States. Accordingly, we may be exposed to
credit risk generally associated with the healthcare industry. We maintain
allowances for doubtful accounts for estimated losses resulting from the
inability of our customers to make required payments.
A summary of the activity in our allowance for
doubtful accounts is as follows:
Years Ended
|
|
March 31, 2008
|
|
March 31, 2007
|
|
Balance,
beginning of year
|
|
$
|
23,500
|
|
$
|
38,000
|
|
Provision for
estimated losses
|
|
(2,207
|
)
|
(4,791
|
)
|
Write-off of
uncollectible accounts
|
|
(6,293
|
)
|
(9,709
|
)
|
Balance, end of
year
|
|
$
|
15,000
|
|
$
|
23,500
|
|
The net accounts receivable balance at March 31,
2008 of $1,452,770 included no more than 4% from any one customer. The net
accounts receivable balance at March 31, 2007 of $1,194,373 included no
more than 3% from any one customer.
Warranty Accrual.
We provide for the estimated
cost of product warranties at the time sales are recognized. While we engage in
extensive product quality programs and processes, including actively monitoring
and evaluating the quality of our component suppliers, our warranty obligation
is based upon historical experience and is also affected by product failure
rates and material usage incurred in correcting a product failure. Should
actual product failure rates or material usage costs differ from our estimates,
revisions to the estimated warranty liability would be required. A summary of
our warranty claims activity, included in other accrued liabilities, is as
follows:
Years Ended
|
|
March 31, 2008
|
|
March 31, 2007
|
|
Balance,
beginning of year
|
|
$
|
100,000
|
|
$
|
135,000
|
|
Provision for
estimated warranty claims
|
|
2,561
|
|
(25,378
|
)
|
Claims made
|
|
(27,561
|
)
|
(9,622
|
)
|
Balance, end of
year
|
|
$
|
75,000
|
|
$
|
100,000
|
|
21
Inventories
Inventories are stated at the lower of cost
(first-in, first-out basis) or market. We reduce inventory for estimated
obsolete or unmarketable inventory equal to the difference between the cost of
inventory and the estimated market value based upon assumptions about future
demand and market conditions. If actual market conditions are less favorable
than those projected by management, additional inventory write-downs may be
required. At March 31, 2008 and 2007, inventory consisted of the following:
|
|
March 31, 2008
|
|
March 31, 2007
|
|
Raw materials
|
|
$
|
1,296,761
|
|
$
|
1,166,607
|
|
Finished goods
|
|
1,039,192
|
|
677,620
|
|
Total gross
inventories
|
|
2,335,953
|
|
1,844,227
|
|
Less reserve for
obsolescence
|
|
(65,000
|
)
|
(80,000
|
)
|
Total net
inventories
|
|
$
|
2,270,953
|
|
$
|
1,764,227
|
|
A summary of the activity in our inventory reserve
for obsolescence is as follows:
Years Ended
|
|
March 31, 2008
|
|
March 31, 2007
|
|
Balance,
beginning of year
|
|
$
|
80,000
|
|
$
|
70,000
|
|
Provision for
estimated obsolescence
|
|
26,951
|
|
36,199
|
|
Write-off of
obsolete inventory
|
|
(41,951
|
)
|
(26,199
|
)
|
Balance, end of
year
|
|
$
|
65,000
|
|
$
|
80,000
|
|
Property and Equipment.
Property and
equipment are stated at cost, with depreciation computed over the estimated
useful lives of the assets, generally three to seven years. Prior to FY 08, we
utilized the double-declining method of depreciation for property and equipment
due to the expected usage of the property and equipment over time. This method
is expected to continue throughout the life of this equipment. Manufacturing
and production equipment acquired, but not placed in service, in FY 07 and
manufacturing and production equipment acquired after FY 07 is of a different
technology for which the straight-line method is more appropriate. Therefore,
we will use the straight-line method of depreciation for this and other
property and equipment starting April 1, 2007. This difference in
depreciation methods utilized for manufacturing and production equipment is
based on the technological differences of the equipment and does not constitute
a change in accounting principle. Leasehold improvements are depreciated over
the shorter of 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. Depreciation expense for the
years ended March 31, 2008 and 2007 was $209,776 and $197,146,
respectively.
Long-Lived Assets.
Long-lived assets are
reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. A long-lived asset
is considered impaired when estimated future cash flows related to the asset,
undiscounted and without interest, are insufficient to recover the carrying
amount of the asset. If deemed impaired, the long-lived asset is reduced to its
estimated fair value. Long-lived assets to be disposed of are reported at the
lower of their carrying amount or estimated fair value less cost to sell.
Patents.
The costs of applying for
patents are capitalized and amortized on a straight-line basis over the lesser
of the patents economic or legal life (17 years in the United States).
Capitalized costs are expensed if patents are not granted. We review the
carrying value of our patents periodically to determine whether the patents
have continuing value and such reviews could result in the conclusion that the
recorded amounts have been impaired. A summary of our patents at March 31,
2008 and 2007 is as follows:
|
|
March 31, 2008
|
|
March 31, 2007
|
|
Patents issued
|
|
$
|
172,788
|
|
$
|
172,788
|
|
Accumulated
amortization
|
|
(116,652
|
)
|
(104,496
|
)
|
Patents issued,
net of accumulated amortization
|
|
56,136
|
|
68,292
|
|
|
|
|
|
|
|
Patent
applications
|
|
201,740
|
|
143,403
|
|
Reserve for
patent applications
|
|
(58,629
|
)
|
(58,629
|
)
|
Patent
applications, net of reserve
|
|
143,111
|
|
84,774
|
|
|
|
|
|
|
|
Total net
patents
|
|
$
|
199,246
|
|
$
|
153,066
|
|
Accrued Liabilities.
We have accrued $75,000
related to warranty claims, $107,034 related to sales commissions and $58,890
related to rent normalization and have included these amounts in accrued
liabilities in the accompanying balance sheet at March 31, 2008. At
March 31, 2007, we had accrued $100,000 related to warranty claims,
$136,128 related to sales commissions and $96,822 related to rent normalization
and included these amounts in accrued liabilities in the accompanying balance
sheet at March 31, 2007.
Income Taxes.
We account for income taxes
under the provisions of Statement of Financial Accounting Standards (SFAS)
109, Accounting for Income Taxes (SFAS 109). SFAS 109 requires recognition
of deferred income tax assets and liabilities for the expected future income
tax consequences, based on enacted tax laws, of temporary differences between
the financial reporting and tax bases of assets and liabilities. SFAS 109 also
requires recognition of deferred tax assets for the expected future tax effects
of all deductible temporary differences, loss carryforwards and tax credit
carryforwards. Deferred tax assets are then reduced, if deemed necessary, by a
valuation allowance for the amount of any tax benefits which, more likely than
not based on current circumstances, are not expected to be realized. During
fiscal years 2008 and 2007, no tax benefit was obtained from our loss. As a
result, no tax benefit is reflected in the accompanying statements of
operations. Should we achieve sufficient, sustained income in the future, we
may conclude that some or all of the valuation allowance should be reversed
(Note 5).
Sales Recognition.
Sales from product sales is recorded when we ship the
product and title has passed to the customer, provided that we have evidence of
a customer arrangement and can conclude that collection is probable. Our
shipping policy is FOB Shipping Point. We recognize
22
revenue from sales to stocking distributors when
there is no right of return, other than for normal warranty claims. We have no
ongoing obligations related to product sales, except for normal warranty.
Research and Development Expenses
. We expense
research and development costs for products and processes as incurred.
Stock-Based Compensation.
Beginning in
fiscal year 2007, we adopted Statement of Financial Accounting Standards 123
(revised 2004), Share-Based Payment, (SFAS 123(R)) which requires the
measurement and recognition of compensation expense for all share-based payment
awards made to employees and directors including employee stock options based
on estimated fair values. SFAS 123(R) supersedes our previous accounting
under Accounting Principles Board Opinion
25, Accounting for Stock Issued to Employees (APB 25) for periods
beginning in fiscal year 2007. In March 2005, the Securities and Exchange
Commission issued Staff Accounting Bulletin 107 (SAB 107) relating to SFAS
123(R). We have applied the provisions of SAB 107 in our adoption of SFAS
123(R).
We have adopted SFAS 123(R) using the modified
prospective transition method, which requires the application of the accounting
standard as of April 1, 2006, the first day of our fiscal year 2007. Our
financial statements as of and for fiscal years 2008 and 2007 reflect the
impact of SFAS 123(R). In accordance with the modified prospective transition
method, our financial statements for prior periods have not been restated to
reflect, and do not include, the impact of SFAS 123(R). Stock-based
compensation expense recognized under SFAS 123(R) for fiscal years 2008
and 2007 was $138,806 and $182,423, respectively, which consisted of
stock-based compensation expense related to employee stock options.
SFAS 123(R) requires companies to estimate the
fair value of share-based payment awards on the date of grant using an
option-pricing model. The value of the portion of the award that is ultimately
expected to vest is recognized as expense over the requisite service periods in
the accompanying statement of operations. Prior to the adoption of SFAS 123(R),
we accounted for stock-based awards to employees and directors using the intrinsic
value method in accordance with APB 25 as allowed under Statement of Financial
Accounting Standards 123, Accounting for Stock-Based Compensation (SFAS
123). Under the intrinsic value method, no stock-based compensation expense
had been recognized in our statement of operations because the exercise price
of our stock options granted to employees and directors equaled the fair market
value of the underlying stock at the date of grant.
Stock-based compensation expense recognized during
the period is based on the value of the portion of share-based payment awards
that is ultimately expected to vest during the period. Stock-based compensation
expense recognized in our statement of operations for fiscal years 2008 and
2007 included compensation expense for share-based payment awards granted prior
to, but not yet vested as of March 31, 2008, based on the grant date fair
value estimated in accordance with the pro forma provisions of SFAS 123 and
compensation expense for the share-based payment awards granted subsequent to
July 30, 2005, based on the grant date fair value estimated in accordance
with the provisions of SFAS 123(R). Compensation expense for all share-based
payment is recognized using the straight-line, single-option method. As
stock-based compensation expense recognized in the accompanying statement of
operations for fiscal years 2008 and 2007 is based on awards ultimately
expected to vest, it has been reduced for estimated forfeitures. SFAS 123(R) requires
forfeitures to be estimated at the time of grant and revised, if necessary, in
subsequent periods if actual forfeitures differ from those estimates. In our
pro forma information required under SFAS 123 for the periods prior to fiscal
year 2007, we accounted for forfeitures as they occurred.
Upon adoption of SFAS 123(R), we continued to use the
Black-Scholes option-pricing model (Black-Scholes model) which was previously
used for our pro forma information required under SFAS 123. Our determination
of fair value of share-based payment awards on the date of grant using an
option-pricing model is affected by our stock price as well as assumptions
regarding a number of highly complex and subjective variables. These variables
include, but are not limited to our expected stock price volatility over the
term of the awards, and actual and projected employee stock option exercise
behaviors. Although the fair value of employee stock options is determined in
accordance with SFAS 123(R) and SAB 107 using an option-pricing model,
that value may not be indicative of the fair value observed in a willing
buyer/willing seller market transaction.
On November 10, 2005, the Financial Accounting
Standards Board (FASB) issued FASB Staff Position FAS 123(R)-3, Transition
Election Related to Accounting for Tax Effects of Share-Based Payment Awards.
We have elected to adopt the alternative transition method provided in the FASB
Staff Position for calculating the tax effects of stock-based compensation
pursuant to SFAS 123(R). The alternative transition method includes simplified
methods to establish the beginning balance of the additional paid-in capital
pool (APIC pool) related to the tax effects of employee stock-based
compensation, and to determine the subsequent impact on the APIC pool and
statements of cash flows of the tax effects of employee stock-based
compensation awards that are outstanding upon adoption of SFAS 123(R).
Stock-based compensation expense related to employee
stock options under SFAS 123(R) for fiscal years 2008 and 2007 was
allocated as follows:
Years Ended
|
|
March 31, 2008
|
|
March 31, 2007
|
|
Sales and
marketing
|
|
$
|
31,097
|
|
$
|
42,358
|
|
General and
administrative
|
|
90,135
|
|
112,957
|
|
Research and
development
|
|
17,574
|
|
27,108
|
|
Stock-based
compensation expense included in operating expenses
|
|
$
|
138,806
|
|
$
|
182,423
|
|
Comprehensive Income (Loss).
We have adopted
the provisions of SFAS 130, Reporting Comprehensive Income (SFAS 130). SFAS
130 establishes standards for reporting and display of comprehensive income or
loss and its components in a full set of general-purpose financial statements.
For fiscal years ended March 31, 2008 and 2007, we had no comprehensive
income items.
Segment Reporting.
We have concluded that we
have one operating segment.
Basic and Diluted Income and Loss per Common Share.
Net income or loss per share is
calculated in accordance with SFAS 128, Earnings Per Share (SFAS 128).
Under the provisions of SFAS 128, basic net income or loss per common share is
computed by dividing net income or loss
23
for the period by the weighted average number of
common shares outstanding for the period. Diluted net income or loss per common
share is computed by dividing the net income or loss for the period by the
weighted average number of common and potential common shares outstanding
during the period if the effect of the potential common shares is dilutive. As
a result of our net loss in fiscal years 2008 and 2007, all potentially
dilutive securities in the loss year would be anti-dilutive and were excluded
from the computation of diluted loss per share, and there are no differences
between basic and diluted per share amounts for the loss year presented.
The following table presents the calculation of basic
and diluted net loss per share:
Years Ended
|
|
March 31, 2008
|
|
March 31, 2007
|
|
Net income
(loss)
|
|
$
|
(179,318
|
)
|
$
|
(90,077
|
)
|
Weighted-average
shares basic
|
|
6,447,100
|
|
6,422,785
|
|
Effect of
dilutive potential common shares
|
|
|
|
|
|
Weighted-average
shares diluted
|
|
6,447,100
|
|
6,422,785
|
|
Net income
(loss) per share basic
|
|
$
|
(0.03
|
)
|
$
|
(0.01
|
)
|
Net income
(loss) per share diluted
|
|
$
|
(0.03
|
)
|
$
|
(0.01
|
)
|
Antidilutive
employee stock options
|
|
425,000
|
|
415,000
|
|
Recently Issued Accounting Standards.
Effective
April 1, 2007, we adopted the provisions of FASB Interpretation
No. 48, Accounting for Uncertainty in Income Taxes (FIN 48). FIN 48
clarifies the accounting for uncertainty in income taxes recognized in a
companys financial statements in accordance with FASB Statement 109,
Accounting for Income Taxes. FIN 48
Requires a company to determine whether it is more likely than not that
a tax position will be sustained upon examination based upon the technical
merits of the position. If the more-likely-than-not threshold is not met, a
company must measure the tax position to determine the amount to recognize in
the financial statements. The application of income tax law and regulations is
inherently complex and subject to change. We are required to make many
subjective assumptions and judgments regarding the income tax exposures.
Changes in these subjective assumptions and judgments can materially affect
amounts recognized in our financial statements. At the adoption date of
April 1, 2007 and at March 31, 2008, we had no unrecognized tax
benefits which would affect the effective tax rate if recognized, and as of
March 31, 2008, we had no accrued interest or penalties related to
uncertain tax positions. On initial application, FIN 48 was applied to all tax
positions for which the statute of limitations remained open. As we have a
federal net operating loss carryover from the fiscal year ended March 31,
1994 forward, except for fiscal years ended March 31, 2003 and 2004, all
tax years from fiscal year ended March 31, 1994 forward are subject to
examination. As states have varying carryforward periods, the states are
generally subject to examination for the previous 15 years or less.
In February 2007, the FASB issued Statement of
Financial Standards No. 159 (FASB 159), The Fair Value Option for
Financial Assets and Financial Liabilities - Including an Amendment of FASB
Statement No. 115. This Statement provides companies with an option to
measure, at specified election dates, many financial instruments and certain
other items at fair value that are not currently measured at fair value. A
company that adopts SFAS 159 will report unrealized gains and losses on items
for which the fair value option has been elected in earnings at each subsequent
reporting date. FASB 159 also establishes presentation and disclosure
requirements designed to facilitate comparisons between entities that choose
different measurement attributes for similar types of assets and liabilities.
FASB 159 is effective for fiscal years beginning after November 15, 2007.
We do not believe that the adoption of SFAS 159 will have a material impact on
our results of operations or financial condition.
In December 2007, the FASB issued SFAS
No. 141 (Revised 2007), Business Combinations (SFAS No. 141R).
SFAS No. 141R will change the accounting for business combinations. Under
SFAS No. 141R, an acquiring entity will be required to recognize all the
assets acquired and liabilities assumed in a transaction at the
acquisition-date fair value with limited exceptions. SFAS No. 141R will
change the accounting treatment and disclosure for certain specific items in a
business combination. SFAS No. 141R applies prospectively to business
combinations for which the acquisition date is on or after the beginning of the
first annual reporting period beginning on or after December 15, 2008.
Accordingly, any business combinations we engage in will be recorded and
disclosed following existing GAAP until January 1, 2009. We expect SFAS
No. 141R will have an impact on accounting for business combinations once
adopted, but the effect is dependent upon acquisitions at that time. We are
still assessing the impact of this pronouncement.
In December 2007, the FASB issued SFAS
No. 160, Non-controlling Interests in Consolidated Financial Statements-An
Amendment of ARB No. 51 (SFAS No. 160). SFAS No. 160
establishes new accounting and reporting standards for the non-controlling
interest in a subsidiary and for the deconsolidation of a subsidiary. SFAS
No. 160 is effective for fiscal years beginning on or after
December 15, 2008. We believe that SFAS 160 should not have a material
impact on our financial position or results of operations.
In March 2008, the FASB issued SFAS
No. 161, Disclosures about Derivative Instruments and Hedging Activities,
an amendment of FASB Statement No. 133 (SFAS No. 161). The use and
complexity of derivative instruments and hedging activities have increased
significantly over the past several years. Constituents have expressed concerns
that the existing disclosure requirements in FASB Statement No. 133,
Accounting for Derivative Instruments and Hedging Activities, do not provide
adequate information about how derivative and hedging activities affect an
entitys financial position, financial performance, and cash flows.
Accordingly, this Statement requires enhanced disclosures about an entitys
derivative and hedging activities and thereby improves the transparency of
financial reporting. This Statement is effective for financial statements
issued for fiscal years and interim periods beginning after November 15,
2008, with early application encouraged. This Statement encourages, but does
not require, comparative disclosures for earlier periods at initial adoption.
We are still assessing the impact of this pronouncement.
In May 2008, the FASB issued SFAS No. 162,
The Hierarchy of Generally Accepted Accounting Principles. This Statement
identifies the sources of accounting principles and the framework for selecting
the principles used in the preparation of financial statements of
nongovernmental entities that are presented in conformity with generally
accepted accounting principles (GAAP) in the United States (the GAAP
hierarchy). This Statement shall be effective 60 days following the SECs
approval of the Public Company Accounting Oversight Board (PCAOB) amendments to
AU Section 411, The Meaning of Present Fairly in Conformity With Generally
Accepted Accounting Principles. We are still assessing the impact of this
pronouncement.
24
3. Shareholders Equity
Stock Option Plan
We
adopted our 2007 Stock Option Plan (the Plan, as summarized below) to promote
our and our shareholders interests by helping us to attract, retain and
motivate our key employees and associates. Under the terms of the Plan, the
Board of Directors may grant either nonqualified or incentive stock
options, as defined by the Internal Revenue Code and related regulations. The
purchase price of the shares subject to a stock option will be the fair market
value of our common stock on the date the stock option is granted. Generally,
vesting of stock options occurs such that 20% becomes exercisable one year
after the date of grant and 20% becomes exercisable each year thereafter.
Generally, all stock options must be exercised within five years from the date
granted. The number of common shares reserved for issuance under the Plan is
700,000 shares of common stock, subject to adjustment for dividend, stock split
or other relevant changes in our capitalization.
Statement of Financial Accounting Standards 123(R)
Beginning
in fiscal year 2007, we adopted SFAS 123(R), which requires the measurement and
recognition of compensation expense for all share-based payment awards made to
our employees and directors, including employee stock options based on
estimated fair values. Stock-based compensation expense related to employee
stock options under SFAS 123(R) for fiscal years 2008 and 2007 was
allocated as follows:
Years Ended
|
|
March 31, 2008
|
|
March 31, 2007
|
|
Sales and marketing
|
|
$
|
31,097
|
|
$
|
42,358
|
|
General and
administrative
|
|
90,135
|
|
112,957
|
|
Research and
development
|
|
17,574
|
|
27,108
|
|
Stock-based
compensation expense included in operating expenses
|
|
$
|
138,806
|
|
$
|
182,423
|
|
Upon adoption of SFAS 123(R) the value of each
employee stock option was estimated on the date of grant using the
Black-Scholes model for the purpose of financial information in accordance with
SFAS 123. The use of a Black-Scholes model requires the use of actual employee
exercise behavior data and the use of a number of assumptions including
expected volatility, risk-free interest rate and expected dividends. Employee
stock options for 45,000 shares of stock were granted during fiscal year 2008.
As
of March 31, 2008, $279,000 of total unrecognized compensation costs
related to nonvested stock is expected to be recognized over a weighted-average
period of two years. The weighted-average assumptions for employee stock
options are summarized as follows:
Years Ended
|
|
March 31, 2008
|
|
March 31, 2007
|
|
Risk-free
interest rate
|
|
3.0
|
%
|
5.0
|
%
|
Expected life
(in years)
|
|
5.0
|
|
5.0
|
|
Expected
volatility
|
|
49
|
%
|
63
|
%
|
Expected
dividend
|
|
0
|
%
|
0
|
%
|
To
estimate expected lives of options for this valuation, it was assumed options
would be exercised upon becoming fully vested. All options are initially
assumed to vest. Cumulative compensation cost recognized in net income or loss
with respect to options that are forfeited prior to vesting is adjusted as a
reduction of compensation expense in the period of forfeiture. The volatility
of the stock is based on the historical volatility for the period that
approximates the expected lives of the options being valued. Fair value
computations are highly sensitive to the volatility factor; the greater the
volatility, the higher the computed fair value of options granted.
The
total fair value of options granted was computed to be approximately $43,675
and $78,082, for the fiscal years ended March 31, 2008 and 2007,
respectively. For disclosure purposes, these amounts are amortized ratably over
the vesting periods of the options. Effects of stock-based compensation, net of
the effect of forfeitures, totaled $138,806 and $182,423 for fiscal years 2008
and 2007, respectively.
The
Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options that have no vesting restrictions and are fully
transferable. In addition, option valuation models require the use of
assumptions, including the expected stock price volatility. Because our
employee stock options have characteristics significantly different than those
of traded options, and because changes in the subjective input assumptions can
materially affect the fair value estimate, in managements opinion, the
existing models do not necessarily provide a reliable single measure of the
fair value of our employee stock options. A summary of our stock option
activity and related information for each of the fiscal years ended
March 31, 2008 and 2007 is as follows:
|
|
STOCK OPTIONS OUTSTANDING
|
|
|
|
Number
Outstanding
|
|
Weighted-Average
Exercise Price per
Share
|
|
BALANCE
AT MARCH 31, 2006
|
|
448,017
|
|
$
|
2.73
|
|
Granted
|
|
40,000
|
|
3.38
|
|
Exercised
|
|
(32,291
|
)
|
1.92
|
|
Forfeited/expired
|
|
(40,726
|
)
|
2.63
|
|
BALANCE
AT MARCH 31, 2007
|
|
415,000
|
|
$
|
2.86
|
|
Granted
|
|
45,000
|
|
2.09
|
|
Exercised
|
|
(16,663
|
)
|
2.75
|
|
Forfeited/expired
|
|
(18,337
|
)
|
2.73
|
|
BALANCE
AT MARCH 31, 2008
|
|
425,000
|
|
$
|
2.79
|
|
|
|
|
|
|
|
|
|
25
The following table summarizes information about
employee stock options outstanding and exercisable at March 31, 2008:
|
|
STOCK OPTIONS OUTSTANDING
|
|
STOCK OPTIONS EXERCISABLE
|
|
Range of Exercise Prices
|
|
Number
Outstanding
|
|
Weighted-Average
Remaining Contractual
Life (in Years)
|
|
Weighted-Average
Exercise Price
per Share
|
|
Number
Exercisable
|
|
Weighted-Average
Exercise Price
per Share
|
|
$1.44 - $2.40
|
|
60,000
|
|
1.6
|
|
$
|
1.93
|
|
21,111
|
|
$
|
1.92
|
|
$2.53 - $2.89
|
|
285,000
|
|
1.5
|
|
$
|
2.81
|
|
248,571
|
|
$
|
2.81
|
|
$3.00 - $3.75
|
|
80,000
|
|
2.2
|
|
$
|
3.36
|
|
49,466
|
|
$
|
3.36
|
|
|
|
425,000
|
|
1.6
|
|
$
|
2.79
|
|
319,148
|
|
$
|
2.84
|
|
Of
the 425,000 options exercisable as of March 31, 2008, 75,000 represent
nonqualified stock options and 350,000 represent incentive stock options. The
exercise price of all options granted through March 31, 2008 has been
equal to or greater than the fair market value, as determined by our Board of
Directors or based upon publicly quoted market values of our common stock on
the date of the grant. As of March 31, 2008, options for 660,000 shares of
our common stock are available for grant under the Plan.
4. Commitments and Contingencies
We
currently lease our facilities under noncancelable lease agreements through
August 14, 2009 at 6797 Winchester Circle, Boulder, Colorado. The minimum
future lease payment by fiscal year as of March 31, 2008 is as follows:
Fiscal Year
|
|
Amount
|
|
2009
|
|
$
|
249,691
|
|
2010
|
|
94,804
|
|
Total
|
|
$
|
344,495
|
|
Our
minimum future equipment lease payments with General Electric Capital
Corporation as of March 31, 2008, by fiscal year, are as follows:
Fiscal Year
|
|
Amount
|
|
2009
|
|
$
|
101,873
|
|
2010
|
|
101,873
|
|
2011
|
|
101,873
|
|
2012
|
|
101,873
|
|
2013
|
|
101,873
|
|
2014
|
|
8,488
|
|
Total
|
|
$
|
517,853
|
|
Rent
expense for our facilities for the fiscal years ended March 31, 2008 and
2007 was $179,505 and $129,237, respectively. Rent expense for our equipment
for the fiscal years ended March 31, 2008 and 2007 was $93,777 and $0,
respectively.
We are subject to regulation by the United States
Food and Drug Administration (FDA). The FDA provides regulations governing
the manufacture and sale of our products and regularly inspects us and other
manufacturers to determine our and their compliance with these regulations. As
of March 31, 2008, we believe we were in substantial compliance with all
known regulations. FDA inspections are conducted periodically at the discretion
of the FDA. We were last inspected in May 2004 and were notified of six
potential deficiencies from that inspection, none of which we believe to be
material.
We were granted a
Certificate to Foreign Government in October 11, 2000 that states in part
that, based on the last periodic inspection, we were in substantial compliance
with current good manufacturing processes, thereby allowing us to ship products
to foreign countries.
Our
obligation with respect to employee severance benefits is minimized by the at
will nature of the employee relationships. Our total obligation as of
March 31, 2008 with respect to contingent severance benefit obligations is
less than $150,000.
On
November 10, 2006, we entered into a credit facility agreement with
Silicon Valley Bank. The terms of the credit facility include a line of credit
for $2,000,000 for three years at an interest rate calculated at prime rate
plus 1.25%. In connection with the credit facility, we issued warrants to
Silicon Valley Bank to purchase 28,000 shares of our common stock at a per
share price of $2.75. Our borrowing under the credit facility is limited by our
eligible receivables and inventory at the time of borrowing. The credit facility requires us to meet certain
financial covenants. In February 2008, we failed to meet the minimum
defined quick debt ratio covenant. As a result, the lender has imposed a $750
monthly maintenance fee, additional financial reporting and we may ask for
additional borrowings only at the beginning of each week instead of when
needed.
26
5. Income Taxes
The provision for income
taxes consists of the following:
Years Ended
|
|
March 31, 2008
|
|
March 31, 2007
|
|
Current:
|
|
|
|
|
|
Federal
|
|
$
|
|
|
$
|
|
|
State
|
|
|
|
|
|
Total current
|
|
|
|
|
|
Deferred:
|
|
|
|
|
|
Federal
|
|
71,000
|
|
156,000
|
|
State
|
|
7,000
|
|
16,000
|
|
Total deferred
|
|
78,000
|
|
172,000
|
|
Decrease in
valuation allowance
|
|
(78,000
|
)
|
(172,000
|
)
|
Total
|
|
$
|
|
|
$
|
|
|
The items accounting for
the difference between income taxes computed at the federal statutory rate and
the provision for income taxes consists of the following:
Years Ended
|
|
March 31, 2008
|
|
March 31, 2007
|
|
Federal
statutory rate
|
|
$
|
(61,000
|
)
|
$
|
(31,000
|
)
|
Effect of:
|
|
|
|
|
|
State taxes, net
of federal tax benefit
|
|
(6,000
|
)
|
(3,000
|
)
|
Other
|
|
65,000
|
|
80,000
|
|
Valuation
allowance
|
|
2,000
|
|
(46,000
|
)
|
Total
|
|
$
|
|
|
$
|
|
|
The
components of the deferred tax asset are as follows:
Years Ended
|
|
March 31, 2008
|
|
March 31, 2007
|
|
Credits and net
operating loss carryforwards
|
|
$
|
6,011,000
|
|
$
|
6,059,000
|
|
Other
|
|
127,000
|
|
157,000
|
|
Gross deferred
tax assets
|
|
6,138,000
|
|
6,216,000
|
|
Valuation
allowance
|
|
(6,138,000
|
)
|
(6,216,000
|
)
|
Total deferred
tax assets
|
|
$
|
|
|
$
|
|
|
We
believe that based on all available evidence, it is more likely than not that
the deferred tax assets will not be fully realized. Accordingly, a valuation
allowance has been recorded against the deferred tax asset.
As
of March 31, 2008, we had approximately $16.4 million of net operating
loss carryovers for tax purposes. Additionally, we have certain research and
development tax credits available to offset future federal and state income
taxes. The net operating loss and credit carryovers begin to expire in the fiscal
year ended March 31, 2009. In the fiscal years ended March 31, 2009,
2010 and 2011, net operating losses of approximately $900,000, $1,000,000 and
$1,300,000, respectively, will begin to expire if sufficient taxable income is
not available to use them. Our net operating loss carryovers at March 31,
2008 include $582,000 in income tax deductions related to stock options which
will be tax effected and the benefit will be reflected as a credit to
additional paid-in capital when realized. The Internal Revenue Code contains
provisions, which may limit the net operating loss carryforwards available to
be used in any given year if certain events occur, including significant
changes in ownership interests.
6. Legal Proceedings
We
are not involved in any legal proceeding. We may become involved in litigation
in the future in the normal course of business.
7. Major Customers/Suppliers
We
depend on sales that are generated from hospitals ongoing usage of AEM
surgical instruments. In fiscal year 2008, we generated sales from over 350
hospitals that have changed to AEM products, but no hospital customer
contributed more than 3% to the total sales. Approximately 50% of the new
hospital accounts in fiscal years 2008 and 2007 were from hospitals affiliated
with group purchasing organizations, Novation and Premier, with whom we signed
supplier agreements in 2002 with an extension with Novation through
January 31, 2009 and a new three year agreement with Premier effective as
of June 1, 2008. In fiscal year 2008, we depended upon one vendor for
approximately 17% of our purchases.
8. Defined Contribution Employee Benefit Plan
We
have adopted a 401(k) Profit Sharing Plan which covers all full-time
employees who have completed three months of full-time continuous service and
are age eighteen or older. Participants may defer up to 20% of their gross pay
up to a maximum limit determined by law. Participants are immediately vested in
their contributions. We may make discretionary contributions based on corporate
financial results for the fiscal year. To date, we have not made contributions
to the 401(k) Profit Sharing Plan. Vesting in a contribution account (our
contribution) is based on years of service, with a participant fully vested
after five years of credited service.
27
9. Quarterly Results (Unaudited)
(In thousands, except per share amounts)
Quarter Ended
|
|
Mar. 31, 2008
|
|
Dec. 31, 2007
|
|
Sep. 30, 2007
|
|
June 30, 2007
|
|
Mar. 31, 2007
|
|
Dec. 31, 2006
|
|
Sep. 30, 2006
|
|
June 30, 2006
|
|
Net sales
|
|
$
|
3,183
|
|
$
|
3,131
|
|
$
|
3,092
|
|
$
|
2,659
|
|
$
|
2,817
|
|
$
|
2,787
|
|
$
|
2,652
|
|
$
|
2,754
|
|
Gross profit
|
|
$
|
2,020
|
|
$
|
2,028
|
|
$
|
1,926
|
|
$
|
1,628
|
|
$
|
1,767
|
|
$
|
1,733
|
|
$
|
1,699
|
|
$
|
1,706
|
|
Operating income
(loss)
|
|
$
|
61
|
|
$
|
67
|
|
$
|
6
|
|
$
|
(288
|
)
|
$
|
(179
|
)
|
$
|
(61
|
)
|
$
|
12
|
|
$
|
97
|
|
Net income
(loss)
|
|
$
|
49
|
|
$
|
59
|
|
$
|
8
|
|
$
|
(295
|
)
|
$
|
(177
|
)
|
$
|
(49
|
)
|
$
|
32
|
|
$
|
104
|
|
Net income
(loss) per sharebasic and diluted
|
|
$
|
0.01
|
|
$
|
0.01
|
|
$
|
0.00
|
|
$
|
(0.05
|
)
|
$
|
(0.03
|
)
|
$
|
(0.01
|
)
|
$
|
0.01
|
|
$
|
0.02
|
|
10. Recent Developments
On
July 16, 2007, we received a letter from AMEX stating that we were not in
compliance with Section 1003(a)(ii) of the Amex Company Guide due to
stockholders equity of less than $4,000,000 and losses from continuing
operations and/or net losses in three out of four of our most recent fiscal
years. On August 15, 2007, we provided AMEX with information regarding our
plan of compliance and financial projections. Based on a review of this
information and conversations between AMEX Staff and our representatives, AMEX
agreed to extend the period by which we must regain compliance with its listing
standards to January 16, 2009. We will be subject to periodic review by
the AMEX Staff regarding our compliance plan during the extension period.
Failure to make progress consistent with the plan could result in commencement
of immediate delisting proceedings by AMEX.
11. Subsequent Event
We
have signed a new three year GPO agreement with Premier effective as of
June 1, 2008.
28
Item
8
Changes In and Disagreements with
Accountants on Accounting and Financial Disclosure.
None
Item
8 (T)
.
Controls and Procedures.
We carried out an evaluation under the supervision
and with the participation of our management, including our Chief Executive
Officer and Principal Accounting Officer, of the effectiveness of our
disclosure controls and procedures (as defined in Rules 13a-15(e) and
15d-15(e) of the Securities Exchange Act of 1934 (the Exchange Act)) as
of the end of the period covered by this report. Based upon that evaluation,
the Chief Executive Officer and the Principal Accounting Officer concluded that
our disclosure controls and procedures are effective in ensuring that
information required to be disclosed by us under the Exchange Act is recorded,
processed, summarized and reported within the time periods specified under the
Exchange Act rules and forms.
Managements Annual Report on
Internal Control Over Financial Reporting
Our management is responsible for establishing and
maintaining adequate internal control over financial reporting, as defined in
Rules 13a-15(f) and 15d-15(f) of the Securities and Exchange Act
of 1934. Our internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. Our internal control over
financial reporting includes those policies and procedures that
(i) pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of our assets;
(ii) provide reasonable assurance that transactions are recorded to permit
preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the Company are
made only in accordance with authorizations of our management and directors;
and (iii) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use or disposition of our assets that
could have a material effect on our financial statements.
Management assessed the effectiveness of our internal
control over financial reporting as of March 31, 2008. In making this
assessment, management used the criteria set forth in Internal
Control-Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO).
Based on its assessment of internal control over
financial reporting, management has concluded that, as of March 31, 2008,
our internal control over financial reporting was effective.
This Annual Report does not include an attestation
report of the Companys registered public accounting firm regarding internal
control over financial reporting. Managements report was not
subject to attestation by the Companys registered public accounting firm
pursuant to temporary rules of the Securities and Exchange Commission that
permit the Company to provide only managements report in this Annual Report.
Changes In Internal Control Over Financial Reporting
There were no significant changes in our internal
control over financial reporting or in other factors that could significantly
affect our internal control over financial reporting subsequent to the
evaluation date, nor any significant deficiencies or material weaknesses in
such disclosure controls, internal controls and procedures requiring corrective
actions. As a result, no corrective actions were taken.
Item 8 B
.
Other Information
None
29
PART III
Item 9
.
Directors, Executive Officers, Promoters, Control
Persons and Corporate Governance; Compliance with Section 16(a) of
the Exchange Act.
Information in response to
this item is incorporated by reference from the registrants definitive proxy
statement for its 2009 Annual Meeting of Shareholders to be filed within 120
days after March 31, 2008.
Item 10
.
Executive Compensation
.
Information in response to this item is incorporated
by reference from the registrants definitive
statement for its 2009 Annual
Meeting of Shareholders to be filed within 120 days after March 31, 2008.
Item 11
.
Security Ownership of
Certain Beneficial Owners and Management and Related Shareholder Matters
.
Information in response to this item is incorporated by reference from the
registrants definitive proxy statement for its 2009 Annual Meeting of
Shareholders to be filed within 120 days after March 31, 2008.
The following table summarizes certain information
regarding our equity compensation plan as of March 31, 2008:
Plan Category
|
|
Number of securities to be
issued upon exercise of
outstanding options
|
|
Weighted-average
exercise price of
outstanding options
|
|
Number of securities
remaining available for
future issuance under equity
compensation plans (1)
|
|
|
|
|
|
|
|
|
|
Equity
compensation plans approved by security holders
|
|
425,000
|
|
$
|
2.79
|
|
660,000
|
|
|
|
|
|
|
|
|
|
|
Equity
compensation plans not approved by security holders
|
|
|
|
|
|
|
|
Total
|
|
425,000
|
|
$
|
2.79
|
|
660,000
|
|
(1) Shares issued and available under the 2007
Stock Option Plan.
Item 12
.
Certain Relationships and
Related Transactions, and Director Independence
.
Information in response to this item is incorporated by reference from the
registrants definitive proxy statement for its 2009 Annual Meeting of
Shareholders to be filed within 120 days after March 31, 2008.
Item 13
.
Exhibits
.
(a) Exhibits - The following exhibits are
attached to this report on Form 10-KSB or are incorporated herein 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 filed
on October 30, 2007).
4.1
Form of
certificate for shares of Common Stock. (Incorporated by reference from
Registration Statement #333-4118-D dated June 25, 1996).
10.1
Lease Agreement dated
June 3, 2004 between Encision Inc. and DaPuzzo Investment Group, LLC
(Incorporated by reference from Quarterly Report on Form 10-QSB filed on
August 12, 2004).
10.2
Encision Inc. 2007 Stock
Option Plan. (Incorporated by reference from Proxy Statement dated
June 30, 2007).
10.3
Loan and Security Agreement between
Encision Inc. and Silcon Valley Bank (Incorporated by reference from Current
Report on Form 8-K filed on November 10, 2006).
23.1
Consent of Independent
Registered Public Accounting Firm, Gordon, Hughes and Banks, LLP.
31.1
Section 302
Certification of Principal Executive Officer
31.2
Section 302
Certification of Principal Financial and Accounting Officer
32.1
Section 906
Certifications
Item
14
.
Principal
Accountant Fees and Services.
Information in response to this item is incorporated
by reference from the registrants
definitive proxy statement
for its 2009 Annual Meeting of Shareholders to be filed within 120 days after
March 31, 2008.
30
SIGNATURES
In accordance with Section 13 or 15(d) of
the Exchange Act, the registrant caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
Dated: June 27, 2008.
|
ENCISION INC.
|
|
|
|
|
|
By:
|
/s/ Marcia K. McHaffie
|
|
|
|
Marcia K. McHaffie
|
|
Controller
|
|
Principal Accounting Officer & Principal Financial Officer
|
In accordance with the Exchange Act, this report has
been signed below by the following persons on behalf of the registrant and in
the capacities and on the dates indicated.
/s/ Bruce L. Arfmann
|
|
June 27, 2008
|
Bruce L. Arfmann
|
|
|
Director
|
|
|
|
|
|
|
|
|
/s/ Robert H. Fries
|
|
June 27, 2008
|
Robert H. Fries
|
|
|
Director
|
|
|
|
|
|
|
|
|
/s/ Vern D. Kornelsen
|
|
June 27, 2008
|
Vern D. Kornelsen
|
|
|
Director
|
|
|
|
|
|
|
|
|
/s/ George A. Stewart
|
|
June 27, 2008
|
George A. Stewart
|
|
|
Director
|
|
|
|
|
|
|
|
|
/s/ John R. Serino
|
|
June 27, 2008
|
John R. Serino
|
|
|
President and CEO
|
|
|
Principal Executive Officer
|
|
|
Director
|
|
|
|
|
|
|
|
|
/s/ David W. Newton
|
|
June 27, 2008
|
David W. Newton
|
|
|
Vice President - Technology
|
|
|
Director
|
|
|
|
|
|
|
|
|
/s/ Roger C. Odell
|
|
June 27, 2008
|
Roger C. Odell
|
|
|
Chairman of the Board and Vice-President Business Development
|
|
|
Director
|
|
|
31
Encision (AMEX:ECI)
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Encision (AMEX:ECI)
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