SVSO SheerVision Inc (CE)

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, 2010

 

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)

 

 

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.

State the number of shares outstanding of each of the issuer's classes of common equity, as of April 8, 2010: 12, 756 ,023 shares outstanding of the Company’s common stock, par value, $..001

Transitional Small Business Disclosure Format (check one):

 

TABLE OF CONTENTS

 

 

ITEM 1. FINANCIAL STATEMENTS

 

PART 1. FINANCIAL INFORMATION

 

 

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, 2010.

 

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.

We have had a successful history producing products for major industry leaders long before we became a public entity in 2006. This included a major long-term strategic alliance with one of the world’s leading optical companies. Since then we also formed a major strategic alliance with a large Japanese dental company and we domestically launched a private label business with a large dental products distributor. With momentum  from sales generated from these major strategic alliances, we are refocusing our attention on two areas: 1) indirect domestic and international sales; and, 2) domestic direct sales to dentists and surgeons. Beginning in the first quarter of fiscal 2010, we have determined that there is significant opportunity to improve brand awareness and sales by strategically placing direct sales people to sell directly to dentists and surgeons in the U.S. This is the first time that we have attempted, on a large scale, to sell directly to these customers. Our previous direct sales efforts were primarily targeted towards the dental hygienist market. As of the end of March we have increased our direct sales force from three to seven, and we have plans to add several more during the coming months.

In fiscal 2009, we hired a full-time International Sales Manager to build new distributor relationships using our previously launched International Distributor Program, and have increased our reach by successfully expanding our international distribution network in several countries. 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.

In 2009, we intend to continue to commit resources to direct sales and marketing in a targeted, more complimentary manner. In addition to the previously mentioned expansion of our outside direct sales force, 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. In addition, we believe there may be selected opportunities to pursue additions to our current product lines by purchasing businesses with products that can now be distributed through our maturing distribution channels effectively.

 

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. 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. In 2009, we are continuing the investment in lighting products with the introduction of a new generation of headlights for the surgical, dental and veterinary markets that have higher light intensity, lower weight, and lighter, smaller battery cables. We wish to boost the awareness of our brand name and our reputation in the lighting markets by building upon the technical achievements and performance of our current designs that have the highest beam intensity and quality in the industry.

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 innovation, 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 Ultralight light system have also received an endorsement by a highly acclaimed and prestigious leading independent non-profit dental education and product testing foundation. Our Ultralight LED was recently named by this foundation as having the highest light intensity.

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:

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

The Company accounts for income taxes in accordance with accounting guidance now codified as the Financial Accounting Standards Board (“ FASB ”) ASC Topic 740, “ Income Taxes ,” which requires that the Company recognize deferred tax liabilities and assets based on the differences between the financial statement carrying amounts and the tax bases of assets and liabilities, using enacted tax rates in effect in the years the differences are expected to reverse. Deferred income tax benefit (expense) results from the change in net deferred tax assets or deferred tax liabilities. A valuation allowance is recorded when it is more likely than not that some or all deferred tax assets will not be realized.

Accounting guidance now codified as FASB ASC Topic 740-20, “Income Taxes – Intraperiod Tax Allocation,” clarifies the accounting for uncertainties in income taxes recognized in accordance with FASB ASC Topic 740-20 by prescribing guidance for the recognition, de-recognition and measurement in financial statements of income tax positions taken in previously filed tax returns or tax positions expected to be taken in tax returns, including a decision whether to file or not to file in a particular jurisdiction. FASB ASC Topic 740-20 requires that any liability created for unrecognized tax benefits is disclosed. The application of FASB ASC Topic 740-20 may also affect the tax bases of assets and liabilities and therefore may change or create deferred tax liabilities or assets. The Company recognizes interest and penalties related to unrecognized tax benefits in income tax expense. At February 28, 2010 and 2009, the Company did not record any liabilities for uncertain tax positions.

Recent Accounting Pronouncements

In April 2009, the FASB issued guidance now codified as FASB ASC Topic 820, “ Fair Value Measurements and Disclosures,” which amends previous guidance to require disclosures about fair value of financial instruments in interim as well as annual financial statements in the current economic environment. This pronouncement was effective for periods ending after June 15, 2009. The adoption of this pronouncement did not have a material impact on the Company’s business, financial condition or results of operations; however, these provisions of FASB ASC Topic 820 resulted in additional disclosures with respect to the fair value of the Company’s financial instruments.

In May 2009, the FASB issued guidance now codified as FASB ASC Topic 855, “ Subsequent Events ,” which establishes general standards of accounting for, and disclosures of, events that occur after the balance sheet date but before financial statements are issued or are available to be issued. This pronouncement was effective for interim or fiscal periods ending after June 15, 2009. The adoption of this pronouncement did not have a material impact on the Company’s business, results of operations or financial position; however, the provisions of FASB ASC Topic 855 resulted in additional disclosures with respect to subsequent events.

In June 2009, the FASB issued guidance now codified as FASB Accounting Standards Codification (ASC) Topic 105, “ Generally Accepted Accounting Principles ,” as the single source of authoritative non-governmental U.S. GAAP. FASB ASC Topic 105 does not change current U.S. GAAP, but is intended to simplify user access to all authoritative U.S. GAAP by providing all authoritative literature related to a particular topic in one place. All existing accounting standard documents will be superseded and all other accounting literature not included in the FASB Codification will be considered non-authoritative. These provisions of FASB ASC Topic 105 were effective for interim and annual periods ending after September 15, 2009 and, accordingly, were effective for the Company for the current fiscal reporting period. The adoption of this pronouncement did not have an impact on the Company’s business, financial condition or results of operations, but will impact the Company’s financial reporting process by eliminating all references to pre-codification standards. On the effective date of FASB ASC Topic 105, the Codification superseded all then-existing non-SEC accounting and reporting standards, and all other non-grandfathered non-SEC accounting literature not included in the Codification became non-authoritative.

In January 2010, the FASB issued updated guidance to amend the disclosure requirements related to recurring and nonrecurring fair value measurements. This update requires new disclosures on significant transfers of assets and liabilities between Level 1 and Level 2 of the fair value hierarchy (including the reasons for these transfers) and the reasons for any transfers in or out of Level 3. This update also requires a reconciliation of recurring Level 3 measurements about purchases, sales, issuances and settlements on a gross basis. In addition to these new disclosure requirements, this update clarifies certain existing disclosure requirements. For example, this update clarifies that reporting entities are required to provide fair value measurement disclosures for each class of assets and liabilities rather than each major category of assets and liabilities. This update also clarifies the requirement for entities to disclose information about both the valuation techniques and inputs used in estimating Level 2 and Level 3 fair value measurements. This update will become effective for the Company with the interim and annual reporting period beginning January 1, 2010, except for the requirement to provide the Level 3 activity of purchases, sales, issuances, and settlements on a gross basis, which will become effective for the Company with the interim and annual reporting period beginning January 1, 2011. The Company will not be required to provide the amended disclosures for any previous periods presented for comparative purposes. Other than requiring additional disclosures, adoption of this update will not have a material effect on the Company’s consolidated financial statements.

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:

 

Second quarter of fiscal year 2010 revenues continued a trend that we expect to see for the foreseeable future, trending up 30% from the first quarter, which we believe was the low point for the Company’s sales caused primarily by the economic slowdown. Light sales continue to improve over all prior performances and have become our leading revenue producer. 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.

Continued cost containment efforts that dramatically lowered sales and marketing and general and administrative expenses helped improve margins but the Company’s revenues still did not allow us to reach an operating profit. We showed an operating loss of $184,306 for the six months ended February 28, 2010.

We continue to concentrate efforts on reducing operating costs and building our direct sales force.

 

  

Management believes that we have positioned ourselves for steady sales growth during our fiscal year 2010 and through the cost cutting measures already established, we expect to be in a stronger financial position by the end of the fiscal year.

Six Months Ended February 28, 2010 Compared to the Six Months Ended February 28, 2009

Net Sales

Net sales decreased by $766,277 or 37.5%, from $2,043,722 for the six months ended February 28, 2009 to $1,277,445 for the six months ended February 28, 2010. During the first six months of fiscal 2008, our largest distributor, who was then a relatively new strategic partner, made non-recurring initial inventory purchases of approximately $817,397 to build up its inventory for initial purchases and for use by its salespeople. During the first six months of fiscal 2009, this distributor made purchases of approximately $344,301. Net revenues from this distributor were also down as a result of the impact of the general economic downturn which caused this distributor to reduce its inventory levels for items that were not selling as well as originally projected and to discount products to drive sales in a more price-conscious market. Reduced net sales were also more generally attributable to the general economic downturn, the effect of which we felt more fully during the first quarter of fiscal 2010.

Gross Profit

Gross profit decreased by $339,713, or 27.5%, from $1,237,316 for the six months ended February 28, 2009 to $897,603 for the six months ended February 28, 2010. Gross margin was up, however to 70.3% of net sales for the six-month period ended February 28, 2010 compared to 60.5% of net sales for the six-month period ended February 28, 2009. The increase in gross profit percentage is directly attributable to a reduction in cost of goods sold as a result of a one-time inventory adjustment that reinstated previously written off items to inventory because it was determined during our 2009 audit that these items had value and could be sold if repaired or reworked.

 

Operating Expenses

Operating expenses, which include selling and marketing expenses and general and administrative expenses decreased by $184,551, or 14.6%, to $1,081,909 for the six months ended February 28, 2010 as compared to $1,266,460 for the six months ended February 28, 2009.

Selling and marketing expenses were $476,538 for the six months ended February 28, 2010, a decrease of $50,318 or 9.6%, compared with $526,856 for the six months ended February 28, 2009. This decrease is mainly related to our enhanced channel sales efforts where we decreased our direct sales, marketing, advertising and direct mail campaigns. We also realized decreased travel costs related to our redirected and refocused sales efforts.

General and administrative expenses were $605,371 for the six months ended February 28, 2010 a decrease of $134,233, or 18.2% compared to $739,604 for the six months ended February 28, 2009. This decrease is primarily attributable to a decline in legal costs associated with a legal settlement that occurred in fiscal year 2008, a decrease in salary payments as a result of the departure of our former President and Secretary and a reduction in external accounting costs.

Income (Loss) from Operations

The net loss from operations for the six months ended February 28, 2010 increased by $155,162 or 532.4% to $184,306 as compared to $29,144 for the six months ended February 28, 2009. This loss was primarily attributable to the reduction in sales to our largest distributor as described above.

 

Other Income (Expense)

 

 

Net Income (Loss)

The net loss for the six months ended February 28, 2010 was $526,701 compared with net income of $70,777 for the six months ended February 28, 2009. The loss per share was ($0.05) for the six months ended February 28, 2010, compared with a net income per share of $0.01 for the six months ended February 28, 2009.

 

Three Months Ended February 28, 2010 Compared to the Three Months Ended February 28, 2009

Net Sales

Net sales decreased by $154,637 or 17.7%, from $871,360 for the three months ended February 28, 2009 to $716,723 for the three months ended February 28, 2010. During the second quarter of fiscal 2008, our largest distributor, who was then a relatively new strategic partner, made non-recurring initial inventory purchases of approximately $264,591 to build up its inventory for initial purchases and for use by its salespeople. During the second quarter of fiscal 2009, this distributor made purchases of approximately $162,661. Net revenues from this distributor were also down as a result of the impact of the general economic downturn which caused this distributor to reduce its inventory levels for items that were not selling as well as originally projected and to discount products to drive sales in a more price-conscious market. Reduced net sales were also more generally attributable to the general economic downturn, the effect of which we felt more fully during the first quarter of fiscal 2010.

Gross Profit

Gross profit decreased by $74,622, or 14%, from $531,431 for the three months ended February 28, 2009 to $456,809 for the three months ended February 28, 2010. Gross margin was 63.7% of net sales for the three-month period ended February 28, 2010 compared to 61% of net sales for the three-month period ended February 28, 2009. The increase in gross margin percentage is directly attributable to the increase share of our sales derived from LED light systems which have a higher gross profit than loupe systems.

Operating Expenses

Operating expenses, which include selling and marketing expenses and general and administrative expenses  decreased by $32,877, or 5.1%, to $607,377 for the three months ended February 28, 2010 as compared to $640,254 for the three months ended February 28, 2009.

Selling and marketing expenses were $267,635 for the three months ended February 28, 2010, an increase of $1,999 or 1.8%, compared with $265,636 for the three months ended February 29, 2009. This decrease is mainly related to our enhanced channel sales efforts where we decreased our direct sales, marketing, advertising and direct mail campaigns. We also realized decreased travel costs related to our redirected and refocused sales efforts.

General and administrative expenses were $339,732 for the three months ended February 28, 2010 a decrease of $34,876, or 9.3% compared to $374,618 for the quarter ended February 28, 2009. This decrease is primarily attributable to a decline in legal costs associated with a legal settlement that occurred in fiscal year 2008, a decrease in salary payments as a result of the departure of our former President and Secretary and a reduction in external accounting costs.

 

Income (Loss) from Operations

Loss from operations for the quarter ended February 28, 2010 increased by $41,745 or 38.4% to $150,568 as compared to $108,823 for the quarter ended February 28, 2009. This loss was primarily attributable to the reduction in sales to our largest distributor as described above.

Other Income (Expense)

Net Income (Loss)

The net loss for the three months ended February 28, 2010 was $519,140 compared with net income of $4,970 for the quarter ended February 28, 2009. Earnings per share were ($0.05) for the three months ended February 28, 2010, compared with a earnings per share of $0.00 for the three months ended February 28, 2009.

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, 2010, we had a cash overdraft  of ($36,356).

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, 2010, we had an accumulated deficit of $6,236,346 and negative working capital of $1,331,570.  These factors, among others, raise doubt about our ability to continue as a going concern.

However, taking all significant financial indicators into account, we are aggressively expanding our direct sales force to the medical and dental markets, using the cost savings that were achieved by restructuring in fiscal 2009. International sales are also on the increase due to the addition of a full-time dedicated international sales manager in 2009. We expect to see an improvement in our working capital position going forward because of these alterations in our previous distribution channels.

Net cash provided by (used in) operating activities was $(34,007) and $49,277 for the six months ended February 28, 2010 and February 28, 2009, respectively. The increase in net cash provided by operating activities is a direct result of the increase in net revenue from direct sales during the second quarter of fiscal 2010.

We repaid $20,000 in principal of our LOC during the second quarter of fiscal 2010, and expect to completely retire the line of credit by the close of the third quarter of fiscal 2010. Payment of dividends on Series A Preferred Stock in the amount of $922,257 are not anticipated to be paid within the next 12 months.

Contractual Obligations

We lease space under a non-cancellable lease expiring June 15, 2014. The lease obligation based on minimum monthly rents is expected to be as follows: