UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q


(Mark One)

x  QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For quarterly period ended February 28, 2009
 
o  TRANSITION REPORT UNDER SECTION 13 OR 15 (d) OF THE EXCHANGE ACT

   For the transition period from ______ to ______    
  
Commission File Number: 000-27629

SHEERVISION INC.
(Exact name of small business issuer as specified in its charter)
 
Delaware
23-2426437
(State of incorporation)
(I.R.S. Employer Identification No.)
 
4030 Palos Verdes Drive N., Suite 104, Rolling Hills, CA 90274
(Address of principal executive offices)

(310) 265-8918
(Issuer's telephone number)

(Former name, former address and former fiscal year, if changed since last report)

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
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer o      Accelerated filer o      Non-accelerated filer o      Smaller reporting company x
 
Indicate by check mark whether the Company is a shell company (as defined in Rule 12b-2 of the Exchange Act).
 
Yes o   No x
 
State the number of shares outstanding of each of the issuer's classes of common equity, as of April 8, 2009: 12,756,023 shares outstanding of the Company’s common stock, par value, $.001

Transitional Small Business Disclosure Format (check one):
Yes o   No x
 

 
TABLE OF CONTENTS
HEADING
 
PAGE
 
       
PART I. FINANCIAL INFORMATION
       
         
Item 1. Financial Statements
   
1
 
         
Item 2. Management's Discussion and Analysis or Plan of Operation
   
14
 
         
Item 3. Quantitative and Qualitative Disclosures About Market Risk
   
22
 
         
Item 4T. Controls and Procedures
   
22
 
         
PART II. OTHER INFORMATION
       
         
Item 1. Legal Proceedings
   
23
 
         
Item 2. Unregistered Sale of Equity Securities and Use of Proceeds
   
23
 
         
Item 3. Defaults upon Senior Securities
   
23
 
         
Item 4. Submission of Matters to a Vote of Securities Holders
   
23
 
         
Item 5. Other Information.
   
23
 
         
Item 6. Exhibits
   
24
 
         
Signatures
   
25
 
 

ITEM 1. FINANCIAL STATEMENTS
 
PART 1. FINANCIAL INFORMATION
 
SheerVision, Inc. and Subsidiary
Consolidated Balance Sheets
 
             
   
February 28, 2009
   
August 31,
2008
 
   
(Unaudited)
   
(Audited)
 
             
Assets
             
Assets:
           
Cash
  $ 70,158     $ 111,887  
Accounts receivable
    179,099       399,950  
Inventory
    326,617       254,052  
Prepaid expenses and other current assets
    113,932       45,387  
Total Current Assets
    689,806       811,276  
                 
Property and equipment, net
    137,093       141,894  
                 
Intangible assets, net
    7,234       7,520  
                 
Total Assets
  $ 834,133     $ 960,690  
                 
Liabilities and Stockholders' Deficit
                 
Liabilities:
               
Accounts payable
  $ 282,737     $ 423,180  
Accrued expenses and other current liabilities
    96,360       84,269  
Accrued dividends - Series A convertible preferred stock
    684,979       565,145  
Line of credit
    75,000       150,000  
Total Current Liabilities
    1,139,076       1,222,594  
                 
Stockholders' Deficit:
               
Preferred stock, Series A, 9% cumulative convertible, ($0.001 par value,
               
$10 per share stated value, liquidation preference of $3,329,189, 350,000 shares authorized,
         
264,421 and 266,296 issued and outstanding)
    264       266  
Common stock, ($0.001 par value, 90,000,000 shares authorized,
               
12,756,023 and 12,735,190 shares issued and outstanding)
    12,756       12,735  
Additional paid in capital
    4,959,836       4,953,839  
Accumulated deficit
    (5,277,799 )     (5,228,744 )
Total Stockholders' Deficit
    (304,943 )     (261,904 )
                 
Total Liabilities and Stockholders' Deficit
  $ 834,133     $ 960,690  

See accompanying notes to financial statements
 
1

SheerVision, Inc. and Subsidiary
Consolidated Statements of Operations
(Unaudited)
 
                         
   
For the Three Months Ended
February 28 and 29
   
For the Six Months Ended
February 28 and 29,
 
   
2009
   
2008
   
2009
   
2008
 
                         
Sales - net
  $ 871,360     $ 827,147     $ 2,043,722     $ 1,951,245  
                                 
Cost of sales
    339,929       323,041       806,406       701,866  
                                 
Gross profit
    531,431       504,106       1,237,316       1,249,379  
                                 
Operating expenses:
                               
General and administrative expenses
    385,611       369,720       675,342       795,211  
Selling and marketing
    225,739       244,111       526,856       496,212  
Product development
    9,880       14,022       17,492       30,663  
Shipping
    30,017       32,345       67,860       63,283  
Total operating expenses
    651,247       660,198       1,287,550       1,385,369  
                                 
Loss from operations
    (119,816 )     (156,092 )     (50,234 )     (135,990 )
                                 
Other income (expense)
                               
Interest income
    5       1,116       396       2,402  
Other income
    126,797       -       126,797       -  
Interest expense
    (2,016 )     -       (5,382 )     -  
Total other income - net
    124,786       1,116       121,811       2,402  
                                 
Income (loss) before provision for income taxes
    4,970       (154,976 )     71,577       (133,588 )
                                 
Provision for income taxes
    -       -       800       1,600  
                                 
Net income (loss)
  $ 4,970     $ (154,976 )   $ 70,777     $ (135,188 )
                                 
Less: Preferred stock dividends - Series A convertible
                         
preferred stock
    (59,917 )     (60,180 )     (119,834 )     (120,941 )
                                 
Net loss applicable to common shareholders
  $ (54,947 )   $ (215,156 )   $ (49,057 )   $ (256,129 )
                                 
Net loss per share - basic and diluted
  $ (0.00 )   $ (0.02 )   $ (0.00 )   $ (0.02 )
                                 
Weighted average number of shares outstanding
                               
during the period - basic and diluted
    12,756,023       12,722,827       12,746,240       12,708,175  

See accompanying notes to financial statements
 
2
 
SheerVision, Inc. and Subsidiary
Consolidated Statements of Cash Flows
(Unaudited)
 
   
For the Six Months Ended
February 28 and 29,
 
   
2009
   
2008
 
             
CASH FLOWS FROM OPERATING ACTIVITIES:
           
Net income
  $ 70,777     $ (135,188 )
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
         
       Depreciation and amortization
    21,095       15,373  
       Stock based compensation
    6,016          
Changes in operating assets and liabilities:
               
  (Increase) Decrease in:
               
    Accounts receivable
    220,851       3,417  
    Inventory
    (72,565 )     54,718  
    Prepaid expenses and other current assets
    (68,545 )     (37,282 )
  Increase (Decrease) in:
               
    Accounts payable
    (140,443 )     48,936  
    Accrued expenses and other current liabilities
    12,091       1,578  
         Net Cash Provided by (Used in) Operating Activities
    49,277       (48,448 )
                 
CASH FLOWS FROM INVESTING ACTIVITIES:
               
Purchase of property and equipment
    (16,006 )     (10,461 )
        Net Cash Used in Investing Activities
    (16,006 )     (10,461 )
                 
CASH FLOWS FROM FINANCING ACTIVITIES:
               
Repayment on line of credit
    (75,000 )     -  
        Net Cash Used in Financing Activities
    (75,000 )     -  
                 
Net Increase (Decrease) in Cash
    (41,729 )     (58,909 )
                 
Cash and Cash Equivalents - Beginning of Period
    111,887       265,262  
                 
Cash and Cash Equivalents - End of Period
  $ 70,158     $ 206,353  
                 
SUPPLEMENTARY CASH FLOW INFORMATION:
               
Cash paid during the period for:
               
    Income taxes
  $ -     $ 1,600  
    Interest
  $ -     $ -  
                 
SUPPLEMENTARY DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
 
Accrued preferred stock dividends - Series A
  $ 119,834     $ 120,941  
Issuance of common stock in connection with conversion of Series A convertible preferred stock
  $ 21     $ 41  
 
See accompanying notes to financial statements

3
 
SheerVision, Inc. and Subsidiary
Notes to Consolidated Financial Statements
February 28, 2009
(Unaudited)
 
NOTE 1 - BASIS OF PRESENTATION

The accompanying unaudited financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America and the rules and regulations of the United States Securities and Exchange Commission for interim financial information with the instructions to Form 10-Q and Article 10 of Regulation S-X.  Accordingly, they do not include all the information and footnotes necessary for a comprehensive presentation of financial position, results of operations, or cash flows. It is management's opinion, however, that all material adjustments (consisting of normal recurring adjustments) have been made which are necessary for a fair financial statement presentation. The results for the interim period are not necessarily indicative of the results to be expected for the full year.

The unaudited interim financial statements should be read in conjunction with the Company’s Annual Report on Form 10-K, which contains the audited financial statements and notes thereto, together with the Management’s Discussion and Analysis, for the fiscal year ended August 31, 2008.  The interim results for the period ended February 28, 2009 are not necessarily indicative of the results for the full fiscal year.

NOTE 2 – ORGANIZATION, NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

SheerVision, Inc. (the “ Company ”), a Delaware corporation, designs and sells surgical loupes, light systems and related optical products for the dental, medical and veterinary markets. Through its exclusive arrangements with manufacturers based in Asia, it can provide these surgical loupes and light systems directly to end-users at substantially lower prices than similar competitors' products. The Company has also recently negotiated favorable terms with multiple United States manufacturers, and is currently manufacturing a number of products domestically.

Principles of Consolidation

All significant intercompany accounts and transactions have been eliminated in consolidation.

Risks and Uncertainties

The Company operates in an industry that is subject to intense competition and rapid technological change and is in a state of fluctuation as a result of the credit crisis occurring in the United States.  The Company's operations are subject to significant risk and uncertainties including financial, operational, technological, and regulatory risks including the potential risk of business failure.

Also see Note 3 regarding going concern matters.

Use of Estimates

The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.  Actual results could differ from those estimates.

Cash and Cash Equivalents
 
The Company considers all highly liquid instruments purchased with a maturity of three months or less to be cash equivalents.

The Company minimizes its credit risk associated with cash by periodically evaluating the credit quality of its primary financial institution. The balance at times may exceed federally insured limits. At February 28, 2009 and August 31, 2008, respectively, the balance did not exceed the federally insured limit.
 
4
 
SheerVision, Inc. and Subsidiary
Notes to Consolidated Financial Statements
February 28, 2009
(Unaudited)
 
Accounts Receivable and Allowance for Doubtful Accounts

Accounts receivable represent balances due from customers for the sale of the Company’s products. An allowance for doubtful accounts is provided for those accounts receivable considered to be potentially uncollectible, based upon historical experience and management’s evaluation of outstanding accounts receivable at each reporting period. At February 28, 2009 and August 31, 2008, respectively, there was no allowance required.

Inventory

Inventory is valued at the lower of cost or market, determined on a first-in, first-out basis. At February 28, 2009 and August 31, 2008, respectively, inventory consisted of finished goods and raw materials. At February 28, 2009, the Company only purchased inventory as finished goods and no longer carries raw materials as inventory.  Because of the technical nature of the products, the Company may be exposed to a number of factors that could result in portions of its inventory becoming either obsolete or in excess of anticipated usage. These factors include, but are not limited to, technological changes in its markets, competitive pressures in products and prices, and the introduction of new product lines. The Company regularly evaluates its ability to realize the value of its inventory based on a combination of factors, including historical usage rates, forecasted sales, product life cycles, and market acceptance of new products. When inventory that is obsolete or in excess of anticipated usage is identified, it is written down to realizable value or an inventory valuation reserve is established.

For the three and six months ended February 28, 2009, and for the year ended August 31, 2008, respectively, the Company did not record any write-downs to net realizable value for obsolescence.

Long Lived Assets

In accordance with Statement of Financial Statements SFAS No. 144, “ Accounting for Impairment or Disposal of Long-Lived Assets” , the Company carries long-lived assets at the lower of the carrying amount or fair value. Impairment is evaluated by estimating future undiscounted cash flows expected to result from the use of the asset and its eventual disposition. If the sum of the expected undiscounted future cash flow is less than the carrying amount of the assets, an impairment loss is recognized. Fair value, for purposes of calculating impairment, is measured based on estimated future cash flows, discounted at a market rate of interest.  There were no impairment losses recorded during the three and six months ended February 28, 2009.

Property and Equipment

Property and equipment are stated at cost and are being depreciated using the straight-line method over the estimated useful lives of the related assets, generally five to seven years.   Leasehold improvements are amortized on a straight-line basis over the shorter of the estimated useful lives of the assets or the remaining lease terms. The Company follows the practice of charging maintenance renewals and minor repairs to expense as incurred. Renewals and betterments that materially increase the value of the property are capitalized.

Fair Value of Financial Instruments
 
The carrying amounts of the Company’s short-term financial instruments, including accounts receivable, inventory, prepaid expenses and other current assets, accounts payable, accrued expenses and other current liabilities, and line of credit payable, approximate fair value due to the relatively short period to maturity for these instruments.
 
5
 
SheerVision, Inc. and Subsidiary
Notes to Consolidated Financial Statements
February 28, 2009
(Unaudited)
 
Revenue Recognition

The Company follows the guidance of the Securities and Exchange Commission’s Staff Accounting Bulletin No. 104 for revenue recognition.  The Company’s surgical loupes and lighting products need no installation and are ready for use upon receipt by the customer. 

The Company records revenue when all of the following have occurred: (1) persuasive evidence of an arrangement exists, (2) the product is delivered, (3) the sales price to the customer is fixed or determinable, and (4) collectibility is reasonably assured.  Products sold are delivered by shipments made through common carrier and revenue is recognized upon shipment to the customer.  Discounts and sales incentives are recognized as a reduction of revenue at the time of sale.  The Company offers an unconditional satisfaction guarantee for a 30 day period and permits product returns within 30 days of purchase, at which time returns are accepted and refunds are made.  Historically, returns have been minimal. The Company has evaluated the criteria under SFAS No. 48, “ Revenue Recognition when Right of Return Exists” and has determined that recognition of revenue on the date of shipment is appropriate.  As a result, management has determined that no reserve is required. Shipping charges and special orders are nonrefundable.

Cost of Sales

Cost of sales represents costs directly related to the production and sale of the Company’s products. Primary costs include raw materials, direct labor, payroll, commissions and rental charges.

Advertising

In accordance with Accounting Standards Executive Committee Statement of Position 93-7, (“ SOP 93-7 ”) costs incurred for producing and communicating advertising of the Company, are charged to operations as incurred.

Advertising expense has been included in the statement of operations as selling and marketing expense.

Product Development

The Company expenses all product development costs as incurred for which there is no alternative future use.

Income Taxes

The Company accounts for income taxes using the asset and liability method in accordance with SFAS No. 109, “ Accounting for Income Taxes ”. The asset and liability method provides that deferred tax assets and liabilities be recognized for the expected future tax consequences of temporary differences between the financial reporting and tax bases of assets and liabilities, and for operating loss and tax credit carry-forwards. Deferred tax assets and liabilities are measured using the currently enacted tax rates and laws that will be in effect when the differences are expected to reverse. The Company records a valuation allowance to reduce deferred tax assets to the amount that is believed more likely than not to be realized.

The Company adopted the provisions of FASB Interpretation No. 48 “ Accounting for Uncertainty in Income Taxes-An Interpretation of FASB Statement No. 109 ” (“ FIN 48 ”).  FIN 48 contains a two-step approach to recognizing and measuring uncertain tax positions. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates it is more likely than not, that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. The second step is to measure the tax benefit as the largest amount, which is more than 50% likely of being realized upon ultimate settlement. The Company considers many factors when evaluating and estimating the Company’s tax positions and tax benefits, which may require periodic adjustments. At February 28, 2009, the Company did not record any liabilities for uncertain tax positions.

6
 
SheerVision, Inc. and Subsidiary
Notes to Consolidated Financial Statements
February 28, 2009
(Unaudited)

Earnings per Share

The Company computes net loss per share in accordance with SFAS No. 128, “ Earnings per Share ” (“ SFAS No. 128 ”). SFAS No. 128 requires presentation of both basic and diluted earnings per share (“ EPS ”) on the face of the income statement. Basic EPS is computed by dividing net income (loss) available to common stockholders by the weighted average number of common shares outstanding during the period. Diluted EPS gives effect to all dilutive potential common shares outstanding during the period including stock options, using the treasury stock method, and convertible preferred stock, using the if-converted method. In computing diluted EPS, the average stock price for the period is used in determining the number of shares assumed to be purchased from the exercise or conversion of stock options, warrants and convertible preferred stock. Diluted EPS excludes all dilutive potential common shares if their effect is anti-dilutive. As of February 28, 2009, the Company had 1,488,989 warrants, 2,938,011 convertible preferred stock shares, and 411,000 stock options shares that could potentially dilute future earnings (loss) per share; hence, they have been excluded from diluted earnings (loss) per share and diluted earnings (loss) per share is not presented, as the Company reflects a net loss and the effect of considering any common stock equivalents if outstanding would have been anti-dilutive.

Segment Information

The Company follows Statement of Financial Accounting Standards No. 131, “ Disclosures about Segments of an Enterprise and Related Information ”.  During 2009 and 2008, respectively, the Company only operated in one segment; therefore, segment information has not been presented.

Stock-Based Compensation

All share-based payments to employees are recorded and expensed in the statement of operations as applicable under SFAS No. 123(R) “ Share-Based Payment ”.  SFAS No. 123(R) requires the measurement and recognition of compensation expense for all share-based payment awards made to employees and directors including grants of employee stock options based on estimated fair values.  The Company has used the Black-Scholes option-pricing model to estimate grant date fair value for all option grants.

Share-based compensation expense is based on the value of the portion of share-based payment awards that is ultimately expected to vest during the year, less expected forfeitures.  SFAS No. 123R requires forfeitures to be estimated at the time of grant and revised, if necessary in subsequent periods if actual forfeitures differ from those estimates.

Non-Employee Stock Based Compensation

Stock-based compensation awards issued to non-employees for services are recorded at either the fair value of the services rendered or the instruments issued in exchange for such services, whichever is more readily determinable, using the measurement date guidelines enumerated in Emerging Issues Task Force Issue EITF No. 96-18, “Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services” (“ EITF 96-18 ”).

Recent Accounting Pronouncements

Other accounting standards have been issued or proposed by the FASB or other standards-setting bodies that do not require adoption until a future date and are not expected to have a material impact on the financial statements upon adoption. No additional new pronouncements are applicable at February 28, 2009.
 
7
 
SheerVision, Inc. and Subsidiary
Notes to Consolidated Financial Statements
February 28, 2009
(Unaudited)
 
Reclassifications

Certain amounts in the fiscal year 2008 financial statements have been reclassified to conform to the fiscal year 2009 presentation.  The results of these reclassifications did not materially affect financial position, results of operations or cash flows.

NOTE 3 – GOING CONCERN CONSIDERATIONS

As reflected in the accompanying financial statements, the Company has a working capital deficit of $449,270, an accumulated deficit of $5,277,799 and a stockholders’ deficit of $304,943 at February 28, 2009.

For the six months ended February 28, 2009, the Company reflects net income and net cash provided by operating activities; however, the Company does not yet have history of financial stability or sources of cash that can be relied upon to sustain operations for current and expected future growth.

The Company intends to fund operations through increased sales, which may be insufficient to fund its capital expenditures, working capital or other cash requirements for the year ending August 31, 2009. The Company may seek additional funds to finance its immediate and long-term operations through debt and/or equity financing. The successful outcome of future financing activities cannot be determined at this time and there is no assurance that if achieved, the Company will have sufficient funds to execute its intended business plan or generate positive operating results.

These factors, among others, raise doubt about the Company’s ability to continue as a going concern. The accompanying financial statements do not include any adjustments related to recoverability and classification of asset carrying amounts or the amount and classification of liabilities that might result should the Company be unable to continue as a going concern.

In response to these problems, management has taken the following actions:
 
·
the Company is expanding its revenue base beyond direct sales to OEM and third party sales;
 
  ·  
the Company is aggressively signing up new international distributors through its International Distributor Program; and
 
·
the Company is seeking third party financing.

NOTE 4 - INVENTORY

Inventory consists of the following at February 28, 2009 and August 31, 2008:
 
   
February 28, 2009
(unaudited)
   
August 31, 2008 (audited)
 
Finished goods
  $ 326,617     $ 249,802  
Raw materials
    -       4,250  
Total
  $ 326,617     $ 254,052  
 
8
 
SheerVision, Inc. and Subsidiary
Notes to Consolidated Financial Statements
February 28, 2009
(Unaudited)
 
NOTE 5 - PROPERTY AND EQUIPMENT

At February 28, 2009 and August 31, 2008, respectively, property and equipment consisted of the following:

   
Estimated
Useful Lives
 
February 28, 2009 (unaudited)
   
August 31. 2008 (audited)
 
Manufacturing equipment
 
7 years
  $ 164,646     $ 148,640  
Office and computer equipment
 
5 years
    49,438       49,437  
Leasehold improvement
 
15 years
    7,179       7,179  
          221,263       205,257  
Less: accumulated depreciation
        (84,170 )     (63,362 )
Property and equipment - net
      $ 137,093     $ 141,894  

Depreciation and amortization expense for the three and six months ended February 28, 2009 amounted to $10,371 and $7,597, respectively and for the three and six months ended February 29, 2008 amounted to $20,326 and $15,809, respectively.

NOTE 6 - INTANGIBLE ASSETS

During the year ended August 31, 2007, the Company filed for patent protection with the United States Patent and Trademark Office for certain developed technologies. The Company used this patent to produce a product line for the Company, and as of February 28, 2009, there is no known impairment to this patent.

The cost incurred by the Company was $8,562, which is being amortized on a straight-line basis over a period of 15 years and is stated net of accumulated amortization of $1,328 and $757 at February 28, 2009 and February 29, 2008, respectively. Amortization expense for the three and six months ended February 28, 2009 and February 29, 2008 was $625, $0, $767, and $0, respectively.

NOTE 7 - LINE OF CREDIT

On March 25, 2008, the Company entered into an agreement with an unrelated shareholder of the Company providing for a line of credit to the Company of up to $300,000 with an interest rate of 9%. The agreement provides that principal and interest on amounts borrowed against the line of credit are due nine months from the date of the execution of the agreement or earlier upon the occurrence of an event of default. The line of credit is secured by a first priority security interest in the Company’s inventory and accounts receivable. The agreement was subsequently amended to extend the term until June 19, 2009. Additionally, the agreement, as amended, provides the lender with an option to receive a warrant exercisable for up to 150,000 shares of the Company’s common stock  at an exercise price of $0.075 per share.

On December 19, 2008, the Company repaid $84,986 of principal and accrued interest due under the Company’s line of credit, reducing the principal due under the line of credit to $75,000.

As of February 28, 2009, the outstanding balance on the line of credit was $76,313, which includes accrued interest of $1,313.

9
 
SheerVision, Inc. and Subsidiary
Notes to Consolidated Financial Statements
February 28, 2009
(Unaudited)
 
NOTE 8 – COMMITMENTS AND CONTINGENCIES

Litigations, Claims and Assessments

From time to time, the Company may become involved in various lawsuits and legal proceedings, which arise in the ordinary course of business. However, litigation is subject to inherent uncertainties, and an adverse result in these or other matters may arise from time to time that may harm its business.

In December 2008, the Company received $126,797 from an insurance carrier for a previously settled lawsuit, representing a partial reimbursement of legal fees.


NOTE 9 - STOCKHOLDERS' DEFICIT

Common Stock Issuances

During the six months ended February 29, 2008, 3,750 shares of preferred stock were converted into 41,667 shares of Company common stock. The conversion price was determined by taking the stated value of $10 per share and dividing by a conversion price of $0.90 per share. The transaction was accounted for at par value with no resulting gain or loss on conversion.

During the six months ended February 28, 2009, 1,875 shares of preferred stock were converted into 20,833 shares of common stock. The conversion price was determined by taking the stated value of $10 per share and dividing by a conversion price of $0.90 per share. The transaction was accounted for at par value with no resulting gain or loss on conversion.

Warrants

The following is a summary of the Company’s warrant activity:
   
Warrants
   
Weighted Average Exercise Price
 
Outstanding – August 31, 2007 (audited)
    1,488,989     $ 0.53  
Granted
    -       -  
Exercised
    -       -  
Forfeited
    -       -  
Outstanding – August 31, 2008 (audited)
    1,488,989     $ 0.53  
Granted
    -       -  
Exercised
    -       -  
Forfeited
    -       -  
Outstanding – February 28, 2009 (unaudited)
    1,488,989     $ 0.53  
Exercisable – February 28, 2009 (unaudited)
    1,488,989     $ 0.53  
 
Warrants Outstanding
Warrants Exercisable
Range of
exercise price
Number Outstanding
Weighted
Average Remaining Contractual Life (in years)
Weighted Average
 Exercise Price
Number Exercisable
Weighted Average
Exercise Price
$0.28 - $1.00
1,488,989
0.53 years
$0.53
1,488,989
$0.53

At February 28, 2009 and August 31, 2008, the total intrinsic value of warrants outstanding and exercisable was $0 and $0, respectively.
 
10

SheerVision, Inc. and Subsidiary
Notes to Consolidated Financial Statements
February 28, 2009
(Unaudited)
 
Stock Options
 
The Company maintains the SheerVision Inc. 2007 Stock Option Plan (the “ Plan ”) and the SheerVision Inc. 2007 Stock Option Plan for Independent and Non-Employee Directors (the “ Directors Plan ”). The maximum number of shares reserved under the Plan and Directors Plan is 3,000,000 and 200,000 shares, respectively. Through February 28, 2009, the Company has granted options for 661,000 shares and has had cancellations of 250,000 option shares under the Plan. As of February 28, 2009 and February 29, 2008, there were no options outstanding under the Directors Plan.

The following is a summary of the Company’s stock option activity:

   
Options
   
Weighted Average Exercise Price
 
Outstanding – August 31, 2007 (audited)
    -     $ -  
Granted
    661,000       0.20  
Exercised
    -       -  
Forfeited
    (150,000 )   $ 0.20  
Outstanding – August 31, 2008 (audited)
    511,000     $ 0.20  
Granted
    -       -  
Exercised
    -       -  
Forfeited
    (100,000 )   $ 0.20  
Outstanding – February 28, 2009 (unaudited)
    411,000     $ 0.20  
Exercisable – February 28, 2009 (unaudited)
    411,000     $ 0.20  
Weighted average fair value of options  
granted during the period ended
February 28, 2009
      -     $  -  
Weighted average fair value of options  
exercisable at  February 28, 2009
  $ 84,000     $ 0.20  
 
Options Outstanding
 
Range of
exercise price
   
Number Outstanding
 
Weighted Average Remaining Contractual Life (in years)
 
Weighted Average Exercise Price
 
$ 0.20-$0.25
      411,000  
9.08 years
  $ 0.20  
 
   
Options Exercisable
 
Range of
exercise price
   
Number Exercisable
 
Weighted Average Remaining Contractual Life (in years)
 
Weighted Average Exercise Price
 
$ 0.20-$0.25       411,000  
9.08 years
  $ 0.20  

At February 28, 2009 and August 31, 2008, the total intrinsic value of options outstanding and exercisable was $0 and $0, respectively. 

11
 
SheerVision, Inc. and Subsidiary
Notes to Consolidated Financial Statements
February 28, 2009
(Unaudited)
 
The following summarizes the activity of the Company’s stock options that have not vested for the six months ended February 28, 2009:

   
Options
   
Weighted Average Grant Date Fair Value
 
Outstanding – August 31, 2007 (audited)
    -       -  
    Granted
    661,000     $ 0.20  
    Vested
    (205,500 )     0.20  
    Cancelled or forfeited
    (150,000 )     0.20  
Outstanding – August 31, 2008 (audited)
    305,500     $ 0.20  
    Granted
    -       -  
    Vested
    (205,500 )     0.20  
    Cancelled or forfeited
    (100,000 )     0.20  
Outstanding – February 28, 2009 (unaudited)
    -     $ -  

Total unrecognized share-based compensation expense from non-vested stock options at February 28, 2009 was $0.

Convertible Preferred Stock

The Company’s outstanding Series A, cumulative convertible preferred stock has the following provisions, rights and preferences:

(1)  
Dividends
a.  
Cash dividends at the rate of 9% per year, and are payable on June 30 and December 31 each year.  If there are not sufficient funds to pay these dividends, the Company will continue to accrue until such funds are available for payout.
b.  
Accrued unpaid dividends are payable out of funds legally available on any of the following dates: (i) date of a liquidation event, or (ii) upon conversion of the underlying convertible preferred stock. During 2009, the Company did not have sufficient funds to repay the accrued dividends on the convertible preferred shares that were converted into common shares.  The accrued dividends remain as a current liability.
c.  
During the three and six months ended February 28, 2009, the Company accrued dividends on its preferred stock of $59,917 and $119,834, respectively, resulting in a cumulative balance of $684,979 in accrued dividends.
(2)  
Voting - voted with the common stock on an as converted basis based upon the number of shares of common stock into which the convertible preferred stock is convertible into at the record date for any stockholder action.
(3)  
Stated value is $10 per share.
(4)  
Liquidation rights
a.  
Convertible preferred stock holders are senior to any other classes of stock in liquidation. These will be paid equivalent to $10 per share.
b.  
If traded on a national exchange, the value shall be equal to the average of the closing prices of the securities over a 30 day period ending 3 days prior to the date of the relevant liquidation payment.
(5)  
Conversion price
a.  
$0.90 per share, after giving effect for the stated value per share of $10 per share.
b.  
In the event that the closing price for the common shares shall equal or exceed 200% of the then effective conversion price for 15 of any 30 immediately preceding consecutive trading days, the preferred stock shall convert automatically.

12
 
SheerVision, Inc. and Subsidiary
Notes to Consolidated Financial Statements
February 28, 2009
(Unaudited)
 
NOTE 10 – CONCENTRATIONS OF CREDIT RISK

Statement of Position 94-6 (SOP 94-6), “ Disclosure of Certain Significant Risks and Uncertainties ”, addresses corporate vulnerability to concentrations.

Accounts Receivable

Customer
February 28, 2009
August 31, 2008
A
51%
86%
B
28%
-

Sales – net

Customer
February 28, 2009
February 29, 2008
A
40%
37%

Accounts Payable

Vendor
February 28, 2009
August 31, 2008
A
23%
43%

Purchases

Vendor
February 28, 2009
February 29, 2008
A
23%
25%
B
4%
12%
C
7%
12%


Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. For financial reporting purposes, the Company has incurred substantial losses which have caused management to doubt, based on the available objective evidence whether it was more likely than not that the net deferred tax assets would be fully realizable. Accordingly, the Company has provided for a full valuation allowance against its net deferred tax asset.

The Company's deferred tax assets at February 28, 2009 and February 29, 2008 is comprised of the following components:

 
February 28, 2009 and February 29, 2008
 
 
2009
 
2008
 
Net operating loss carry forwards
  $ 1,448,550     $ 928,092  
Less: Valuation allowance
    (1,448,550 )     (928,092 )
Net deferred tax asset
  $ -     $ -  

The provision for income taxes is summarized as follows:
 
     
February 28, 2009 and February 29, 2008
 
     
2009
   
2008
 
Current
- federal
  $ -     $ -  
 
- state
    800       1,600  
        800       1,600  
                   
Deferred
- federal
    -       -  
 
- state
    -       -  
        -       -  
                   
Total provision
    $ 800     $ 1,600  

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION

This Quarterly Report on Form 10-Q and the documents incorporated herein contain "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause our actual results, performance or achievements, or industry results, to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. When used in this quarterly report, statements that are not statements of current or historical fact may be deemed to be forward-looking statements. Without limiting the foregoing, the words "plan", "intend", "may", "will", "expect", "believe", "could", "anticipate", "estimate", or "continue" or similar expressions or other variations or comparable terminology are intended to identify such forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. Except as required by law, we undertake no obligation to update any forward-looking statements, whether as a result of new information, future events or otherwise. The following information should be read in conjunction with the financial statements and notes thereto appearing elsewhere in this form 10-Q.

Unless the context indicates otherwise, any reference to "SheerVision", the "Company", "we", "us", "our" or the "Registrant" refers to SheerVision, Inc., a Delaware corporation, and its subsidiaries as of February 28, 2009.
 
Overview

SheerVision designs and sells proprietary surgical loupes and light systems for the dental, medical, and veterinary markets. Since our inception in 1999, we have rapidly established a significant base of operations through our strategic marketing programs, aggressive web presence, dedicated sales force, expansion into global markets, and commitment to new product development. Worldwide sales are achieved by sales into direct and indirect sales channels, and by strategic alliances with dental and medical partners. Exclusive partnerships with Asian component manufacturers and domestic assembly and testing facilities, allow us to provide superior quality loupes and light systems at competitive prices.

In 2006, we launched an aggressive marketing campaign with the objective of expanding direct sales and promoting name brand recognition in the dental market. This campaign established SheerVision as one of the premier magnification and illumination providers in the country. In 2007, with our new position in the marketplace, we identified third-party and OEM relationships as a necessary component of an overall strategy to continued realization of our aggressive sales and profitability goals. This revised strategy resulted in our introduction of a number of new product designs to a wider audience in a rapid, cost effective manner.

Our first major strategic alliance was with a large, international Japanese dental company. With momentum from sales generated from this effort, we initiated a fundamental shift in our marketing strategy, focusing primarily on indirect domestic and international sales. Through our aggressive marketing strategies, we continue to identify viable international dealers while at the same time we continue to be approached by a number of international distributors. In addition to the expected effect this change has had on our business, we believe that it has helped minimize our exposure to, and impact of, the current economic challenges currently facing other companies and industries.

We have also looked to develop new distributor relationships through the launch of our International Distributor Program, and have increased our reach by successfully expanding our international distribution network in several countries. In fiscal year 2008, we entered into a sales partnership agreement with a global detailer of quality dental and medical products, and continue to be approached by a number of international distributors. We believe our attraction is our breadth of innovative products which can be resold at strong margins, while maintaining a highly competitive end-user price point.

We intend to continue to commit resources to direct sales and marketing in a targeted, more complimentary manner. This includes participation in trade shows emphasizing the dental, veterinary, and medical markets, and growing our e-commerce powered web store, which has provided us with a cost-effective platform to sell products directly to the end user.
 
14
 
We also continue to develop new products that not only enhance the SheerVision product portfolio, but also add greater value for our third party clients. In fiscal year 2008, we introduced our upgraded FireFly Infinity Ultra™ LED head light system, featuring our new Lithium Polymer battery pack. This revolutionary light system, which we believe employs the most advanced battery technology available for this application, has been rated a top performer by one of the most prestigious non-profit, independent dental labs in the country. The development and launch of our Signature Flip-Up Prism (high magnification) Loupe product line expanded our penetration into horizontal and vertical market segments where we have historically had only limited success. Additionally, in August 2008, we introduced a new sports frame, to appeal to the younger, more fashionable demographic of the dental market. Continued success of these products, and future success of products currently in our pipeline, validates and ensures continued support of R&D efforts.

With the sophisticated design and engineering teams currently available to us, we have the ability to not only modify and incorporate SheerVision products into other company’s offerings, but to also extend our design, engineering, and manufacturing capabilities to other company’s product development.  Toward that end, we are constantly evaluating new, small medical devices.

Throughout our recent history we have earned a reputation for leadership and value in optical and lighting technology, supporting dentists, dental hygienists, and doctors throughout the world. Our Ultra-Light Loupes have received the “Best of the Best” award by Dental Lab Products’ Buyers Guide - 2006 Edition and named a Dentistry Today top 100 product for 2006.
 
SheerVision loupes and our FireFly light system have also received an endorsement by a highly acclaimed and prestigious leading independent non-profit dental education and product testing foundation. Our Firefly light system is the only LED light system to receive the coveted “Highly Rated” designation.

Critical Accounting Policies

Our financial statements are prepared in accordance with accounting principles generally accepted in the United States. The preparation of our financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues, expenses and related disclosures. We base our estimates on historical experience and 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. Below is a brief description of our critical accounting policies:
 
15
 
Accounts Receivable

Accounts receivable are reported net of any write-off for uncollectible accounts. Accounts are written off when significantly past due after exhaustive efforts at collection.

Revenue Recognition

Our surgical loupes and lighting products need no installation and are ready for use upon receipt by the customer. Products sold are delivered by shipments made through common carrier and revenue is recognized upon shipment to the customer. Discounts and sales incentives are recognized as a reduction of revenue at the time of sale. We offer an unconditional satisfaction guarantee for a 30-day period and permit product returns within 30 days of purchase, at which time returns are accepted and refunds are made. Shipping charges and special orders are nonrefundable. Allowances for returns are provided for based upon an analysis of our historical patterns of product returns. To date, there have been no significant product returns and such returns have been within our estimates.

Inventory

Inventory is stated at the lower of cost (first-in, first-out method) or market and consists of finished goods. Materials associated with the manufacturing of our product lines are readily available within the US and international markets with relatively short ordering cycles and therefore inventory on hand normally represents a two to three month selling cycle. Inventory valuations depend on quantities on hand, sales history and expected near term sales prospects. On a regular basis, we evaluate inventory balances for excess quantities and obsolescence by analyzing estimated demand, inventory on hand, sales levels and other information. Based on these evaluations, inventory balances are reduced, if necessary.

Income Taxes

We account for income taxes using the liability method as prescribed by Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes . Deferred income taxes reflect temporary differences in reporting assets and liabilities for income tax and financial accounting purposes. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized.
 
16

Recent Accounting Pronouncements

Statements of Financial Accounting Standards (SFAS):

SFAS 157, Fair Value Measurements — defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements.

SFAS 159, The Fair Value Option for Financial Assets and Financial Liabilities—including an amendment of FASB Statement No. 115 — permits entities to choose to measure many financial instruments and certain other items at fair value.

SFAS 162, The Hierarchy of Generally Accepted Accounting Principles — FAS 162 is effective 60 days following the SEC’s approval of the Public Company Accounting Oversight Board Auditing amendments to AU Section, 411 The Meaning of “Present Fairly in Conformity with Generally Accepted Accounting Principles" . The statement is intended to improve financial reporting by identifying a consistent hierarchy for selecting accounting principles to be used in preparing financial statements that are presented in conformity with U.S. Generally Accepted Accounting Principles (GAAP).

FASB Staff Positions (FSP):

FSP FAS 142-3, Determination of the Useful Life of Intangible Assets — amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under FASB Statement No. 142, Goodwill and Other Intangible Assets.

FSP FAS 157-1, Application of FASB Statement No. 157 to FASB Statement No. 13 and Other Accounting Pronouncements That Address Fair Value Measurements for Purposes of Lease Classification or Measurement under Statement 13 — amends FASB Statement No. 157, Fair Value Measurements.

FSP FAS 157-2, Effective Date of FASB Statement No. 157 — delays the effective date of FASB Statement No. 157, Fair Value Measurements.

FSP EITF 03-6-1, Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities.

SEC Staff Accounting Bulletin (SAB)

SAB 110 expresses the views of the SEC staff regarding the use of a “simplified” method, as discussed in SAB No. 107 (SAB 107), in developing an estimate of expected term of “plain vanilla” share options in accordance with SFAS No. 123 (R), Share-Based Payment.  In particular, the staff indicated in SAB 107 that it will accept a company’s election to use the simplified method, regardless of whether the company has sufficient information to make more refined estimates of expected term. At the time SAB 107 was issued, the staff believed that more detailed external information about employee exercise behavior (e.g., employee exercise patterns by industry and/or other categories of companies) would, over time, become readily available to companies. Therefore, the staff stated in SAB 107 that it would not expect a company to use the simplified method for share option grants after December 31, 2007. The staff understands that such detailed information about employee exercise behavior may not be widely available by December 31, 2007. Accordingly, the staff will continue to accept, under certain circumstances, the use of the simplified method beyond December 31, 2007. The Company currently uses the simplified method for “plain vanilla” share options and warrants, and will assess the impact of SAB 110 for fiscal year 2009.
 
17

 
The Company is currently evaluating the aforementioned new accounting guidance but does not believe that adoption of any of the pronouncements will have a material impact on the Company’s financial position or results of operations.
 

Results of Operations

The following table sets forth, for the periods indicated, financial information related to operations, as well as expressed as a percentage of our net sales:
 
   
SIX MONTHS ENDED February 28, 2009 and February 29, 2008
   
(in thousands)
   
2009
 
2008
                                 
Net Sales
  $ 2,043       100.0 %   $ 1,951       100.0 %
Cost of Goods Sold
    806       39.0 %     702       36.0 %
Gross Profit
    1,237       61.0 %     1,249       64.0 %
Operating Expenses
                               
Shipping Expenses
    68       3.4 %     63       3.2 %
Selling Expenses
    527       25.9 %     496       25.4 %
General & Administrative Exp
    675       33.0 %     795       40.8 %
Product Development Expenses
    17       1.1 %     31       1.6 %
Total Operating Expenses
    1,287       63.0 %     1,385       71.0 %
Income (Loss) from Operations
    (50 )     (2.4 )%     (136 )     (7.0 )%
Other (Income)/Expense
    122       5.9% %     (2 )     0.1  
Provision (Benefit) for Income Tax
    1       -       1       0.0  
Net Income (Loss)
  $ 71       3.5 %   $ (135 )     (6.90 )%

Second quarter of fiscal year 2009 revenues overall were higher than expected due to continued strong sales of our LED light systems. After adding a new manufacturer capable of producing the quantity of LED lighting systems currently demanded by our customers, we have been able to reduce the time it takes to fulfill orders for the LED light systems. However, second quarter revenues were adversely affected by the normal seasonal slump in December and early January, and total revenue for the quarter was consequently lower than in the first quarter.

Continued cost containment efforts that dramatically lowered sales and marketing and general and administrative expenses and a large payment from our insurer representing partial reimbursement of legal fees allowed us to report second quarter net income of $4,970.

We continue to concentrate efforts on reducing operating costs and streamlining our sales and marketing efforts. As we focus more heavily on distributor relationships to generate sales, the exposure to escalating costs in sales and travel related expenses in the domestic retail market is being mitigated. Through large orders from a growing number of distributors, we anticipate that these efforts will continue to improve the operating income in future quarters.
 
18
 
We reduced the retail sales force to a level that will support those existing demographic areas producing the greatest volume of sales. The number of tradeshows for 2008-2009 has been scaled down as well, and several of the smaller localized shows, which in the past generated exposure to our product lines but not necessarily immediate revenues, have been eliminated. This action will also reduce excessive travel related expenses which have increased due to cost pressures in the travel industry.

Management believes that we have positioned ourselves for steady sales growth during our fiscal year 2009 and through the cost cutting measures already established, this should result in a stronger financial position during this fiscal year.

Six Months Ended February 28, 2009 Compared to the Six Months Ended February 29, 2008

Net Sales

Net Sales increased by $92,477 or 4.7%, from $1,951,245 for the six months ended February 29, 2008 to $2,043,722 for the six months ended February 28, 2009. This increase was directly related to our strategic shift from selling directly to end users to indirectly through international distributors, OEM and third party relationships. In addition, we have experienced a significant increase in the sales of our LED light systems that offset decreases in sales of our optical devices through all of our channels of distribution.

Gross Profit

Gross profit decreased by $12,063 or 1.0%, from $1,249,379 for the six months ended February 29, 2008 to $1,237,316 for the six months ended February 28, 2009. Gross margin was 61% of net sales for the six-month period ended February 28, 2009 compared to 64% of net sales for the six-month period ended February 29, 2008. The decrease in gross profit and margin was attributable to a physical inventory adjustment for TTL parts to reflect actual parts owned by the Company. This one-time adjustment reduced cost of goods sold by about $29,000 and increased inventory by the same amount. New inventory controls in place should prevent such one-time adjustments in the future.

Operating Expenses

Operating expenses, which include shipping expenses, selling and marketing expenses, general and administrative expenses and product development decreased by $97,819, or 7.1%, to $1,287,550 for the six months ended February 28, 2009 as compared to $1,385,369 for the six months ended February 29, 2008.

Shipping expenses increased by $4,577 or 7.2% to $67,860 or 3.3% of net sales for the six months ended February 28, 2009 as compared to $63,283 or 3.2% of net sales for the six months ended February 29, 2008 attributable to escalating transportation costs from increases in oil prices during the first quarter of fiscal 2009.

Selling and marketing expenses were $526,856 for the six months ended February 28, 2009, a decrease of $30,644 or 6.2%, compared with $496,212 for the six months ended February 29, 2008. This decrease was mainly related to our changes that reduced our direct sales force and increased use of OEM distributors and dealers.

General and administrative expenses were $675,342 for the six months ended February 28, 2009 a decrease of $119,869, or 15.1% compared to $795,211 for the six months ended February 29, 2008. This decrease is attributable to the reduction in legal expenses related to the defense and settlement of two competitor lawsuits alleging product copyright, trade dress and patent infringement on specific components of our surgical loupes. 

Product development costs decreased by $13,171 or 43%, from $30,663 for the six months ended February 29, 2008 to $17,492 for the six months ended February 28, 2009. Our elevated light development activity in the six months ended February 29, 2008, resulted in a decrease in costs as compared to the same period in 2009. Product development costs are expected to increase in the future as we continue to expend resources to enhance our existing product lines as well as develop new products.
 
19
 
Income (Loss) from Operations

Loss from operations for the six months ended February 28, 2009 decreased by $85,756 or 63.1% to $50,234 as compared to $135,990 for the six months ended February 29, 2008. The reduction in loss from operations during what is traditionally a seasonal low for us is related to the continuing refinement of our business model to reflect the changing distribution channel strategy and the one-time impact of the settlement of legal actions. These efforts have led to significant cost savings related to shipping, marketing, sales and customer service labor, and travel expenses. We anticipate improved operating profit performances in the upcoming quarters related to these changes.

Other Income (Expense)

Interest expense for the six months ended February 28, 2009 was $5,382 as compared to $2,402 in interest income for the quarter ended February 29, 2008. These changes reflected the use of a line of credit established in fiscal year 2008 that was partially tapped during the second quarter of fiscal year 2009. During the second quarter of 2009 we received a one-time payment of $126,797 for an insurance settlement arising out of a claim filed by us partially reimbursing legal expenses incurred in the defense of a competitor lawsuit.

Net Income (Loss)

Net income for the six months ended February 28, 2009 was $70,777 compared with a net loss of $135,188 for the six months ended February 29, 2008. Earnings per share were $0.00 for the six months ended February 28, 2009, compared with a loss per share of $0.02 for the six months ended February 28, 2008.

Three Months Ended February 28, 2009 Compared to the Three Months Ended February 29, 2008

Net Sales

Net Sales increased by $44,213 or 5.3%, from $827,147 for the three months ended February 29, 2008 to $871,360 for the three months ended February 28, 2009. This increase was directly related to our strategic shift from selling directly to end users to indirectly through international distributors, OEM and third party relationships. In addition, we have experienced a significant increase in the sales of our LED light systems that offset decreases in sales of our optical devices through all of our channels of distribution.

Gross Profit

Gross profit increased by $27,325, or 5.4%, from $504,106 for the three months ended February 29, 2008 to $531,431 for the three months ended February 28, 2009. Gross margin was 61% of net sales for the three-month period ended February 28, 2009 compared to 61% of net sales for the three-month period ended February 29, 2008. The increase in gross profit and margin was attributable to a physical inventory adjustment for TTL parts to reflect actual parts owned by the Company. This one-time adjustment reduced cost of goods sold by about $29,000 and increased inventory by the same amount. New inventory controls in place should prevent such one-time adjustments in the future.

Operating Expenses

Operating expenses, which include shipping expenses, selling and marketing expenses, general and administrative expenses and product development decreased by $8,951, or 1.4%, to $651,247 for the three months ended February 28, 2009 as compared to $660,198 for the three months ended February 29, 2008.

Shipping expenses decreased $2,328 or 7.2% to $30,017 or 3.4% of net sales for the three months ended February 28, 2009 as compared to $32,345 or 3.9% of net sales for the three months ended February 29, 2008 attributable to a reduction in previously escalating transportation costs from increases in oil prices.

Selling and marketing expenses were $225,739 for the three months ended February 28, 2009, a decrease of $18,732 or 7.5%, compared with $244,111 for the three months ended February 29, 2008. This decrease was mainly related to our changes that reduced our direct sales force and increased use of OEM distributors and dealers.
 
20
 
General and administrative expenses were $385,611 for the three months ended February 28, 2009, an increase of $15,891, or 4.3% compared to $369,720 for the quarter ended February 29, 2008. This increase is attributable to a change in the structure of the compensation packages for the officers of the Company that increases the base salary and reduces the bonus pool.

Product development costs decreased by $4,142 or 29.5%, from $14,022 for the three months ended February 29, 2008 to $9,880 for the three months ended February 28, 2009. Our elevated light development activity in the three months ended February 28, 2008 resulted in a decrease in costs as compared to the same period in 2009. Product development costs are expected to increase in the future as we continue to expend resources to enhance our existing product lines as well as develop new products.

Income (Loss) from Operations

Loss from operations for the quarter ended February 28, 2009 decreased by $36,276 or 23.2% to $119,816 as compared to $156,092 for the quarter ended February 29, 2008. The reduction in loss from operations during what is traditionally a seasonal low for us is related to the continuing refinement of our business model to reflect the changing distribution channel strategy and the one-time impact of the settlement of legal actions. These efforts have led to significant cost savings related to shipping, marketing, sales and customer service labor, and travel expenses. We anticipate dramatically improved operating profit performances in the upcoming quarters related to these changes.

Other Income (Expense)

Interest expense for the three months ended February 28, 2009 was $2,011 as compared to $1,116 in interest income for the quarter ended February 29, 2008. These changes reflected the use of a line of credit established in fiscal year 2008 that was partially tapped during the second quarter of fiscal year 2008.  During the second quarter of 2009 we received a one-time payment of $126,797 for an insurance settlement arising out of a claim filed by us, partially reimbursing legal expenses incurred in the defense of a competitor lawsuit.

Net Income (Loss)

Net income for the three months ended February 28, 2009 was $4,970 compared with a net loss of $154,976 for the quarter ended February 29, 2008. Earnings per share were $0.00 for the three months ended February 28, 2009, compared with a loss per share of $0.02 for the three months ended February 29, 2008.

Liquidity and Capital Resources

We assess our liquidity by our ability to generate cash to fund operations. Significant factors in the management of liquidity are: funds generated by operations; levels of accounts receivable; inventories, accounts payable and capital expenditures; adequate lines of credit; and financial flexibility to attract long-term capital on satisfactory terms. As of February 28, 2009, we had cash of $70,158.

To date, we have financed operations principally through lines of credit and equity capital. Our ability to generate positive operational cash flow is dependent upon increasing revenues through the sales of existing product lines. Our historical uses of cash have primarily been for operations, capital expenditures, and payments of principal and interest on outstanding debt obligations. 

The accompanying consolidated financial statements have been prepared assuming we will continue as a going concern, which contemplates, among other things, the realization of assets and satisfaction of liabilities in the ordinary course of business. As of February 28, 2009, we had an accumulated deficit of $5,277,799 and negative working capital of $449,270.  These factors, among others, raise doubt about our ability to continue as a going concern. In response to these problems, the Company is expanding its revenue base beyond direct sales to OEM and third party sales, aggressively signing up new international distributors through our International Distributor Program and seeking third party financing.
 
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Net cash provided by operating activities was $49,277 and net cash used in operating activities was $48,448 for the six months ended February 28, 2009 and February 29, 2008, respectively. The improvement in operating cash flows was a direct result of our strategic shift from selling directly to end users to indirectly through international distributors, OEM and third party relationships. Utilization of our partner resources to market and sell our products allowed for the reduction in internal sales and marketing expenditures.

Net cash used in investing activities during the six months ended February 28, 2009 and February 29, 2008 was $16,006 and $10,461, respectively. These expenditures were mainly related to the purchase of capital equipment.

Net cash used in financing activities during the six months ended February 28, 2009 and February 29, 2008 was $75,000 and $0, respectively. As of February 28, 2009, the outstanding balance due under our line of credit was $76,313. We also owe as of February 28, 2009 accrued dividends on Series A Preferred Stock in the amount of $684,979 which is not anticipated to be paid within the next 12 months.


Contractual Obligations

We lease space under a non-cancellable lease expiring December 1, 2010. The lease obligation based on minimum monthly rents is expected to be as follows:

Fiscal Years Ended
     
2009
   
26,898
 
2010
   
56,657
 
   
$
83,555
 

Rent expense for the six months ended February 28, 2009 and February 29, 2008 was $26,898, and $25,566, respectively.

Off Balance Sheet Arrangements

We have no off-balance sheet arrangements.


ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are exposed to certain financial market risks, including changes in interest rates. All of our revenue, expenses and capital spending are transacted in U.S. dollars. Our exposure to market risk for changes in interest rates relates primarily to our cash and cash equivalent balances. The majority of our investments are in short-term instruments and subject to fluctuations in US interest rates. Due to the nature of our short-term investments, we believe that there is no material risk exposure.


ITEM 4T CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, have evaluated the effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this report. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of such period, our disclosure controls and procedures are effective to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is (i) recorded, processed, summarized and reported, within the time periods specified in the SEC's rules and forms; and (ii) accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
 
Changes in Internal Control Over Financial Reporting

There were no changes in our internal controls over financial reporting which occurred during the most recent fiscal quarter covered by this report that has materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting.


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PART II. OTHER INFORMATION
 
ITEM 1.
LEGAL PROCEEDINGS

None.

ITEM 2.
UNREGISTERED SALE OF EQUITY SECURITIES AND USE OF PROCEEDS

None.
 
ITEM 3.
DEFAULTS UPON SENIOR SECURITIES

None.
 
ITEM 4.
SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS

None.
 
 
ITEM 5.
OTHER INFORMATION
 
The following disclosure would have otherwise been filed on Form 8-K under the heading “Item 5.02 - Departure of Directors or Certain Officers; Election of Directors; Appointment of Certain Officers; Compensatory Arrangement of Certain Officers”:

 On April 14, 2009, our Board of Directors terminated the appointment of Steve Rochman as our Interim Chief Financial Officer. On the same day, our Board of Directors appointed Patrick Adams as our Chief Financial Officer, effective immediately.

Mr. Adams, aged 51, was previously Chief Financial Officer for Dualstar Entertainment Group, Inc. from 2007 until 2008 and for Performance Publishing Group, Inc. from 1994 until 2007. He has over 25 years of experience in operational finance and accounting positions. Prior to his position at Performance Publishing Group, Inc. he held management positions in large, publicly held companies including Northwest Natural Gas Company (NYSE), The Times Mirror Company (NYSE), and Knott’s Berry Farm. He holds a Master of Business Administration degree from American University in Washington, D.C. and a Bachelor of Arts degree from Duke University in Durham, North Carolina.

 We agreed to employ Mr. Adams at a salary of $100,000 per annum. Mr. Adams is also entitled to contributions to medical insurance and other standard employee benefits in accordance with our practices for other management personnel.
 
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ITEM 6.
 EXHIBITS


Exhibit 31.1
Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
   
Exhibit 31.2
Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
   
Exhibit 32.1
Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
   
Exhibit 32.1
Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

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SIGNATURE
 
In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
     
   
SHEERVISION, INC.
Registrant
 
 
Dated: April 14, 2009
     
       
 
 
/s/ Suzanne Lewsadder
 
    Suzanne Lewsadder,  
   
Chief Executive Officer
 
       
       
       
Date: April 14, 2009
 
/s/ Patrick Adams
 
   
Patrick Adams,  Chief Financial Officer
 
       

 
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