Critical Accounting Policies and Estimates The Company's consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these consolidated financial statements requires management to make certain estimates, judgments and assumptions that it believes are reasonable based upon the information available. These estimates and assumptions affect the reported amounts of assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the periods presented. Actual results may differ from these estimates under different assumptions or conditions. The significant accounting policies which management believes are the most critical to assist users in fully understanding and evaluating the Company's reported financial results include the following:
Revenue Recognition
The Company's revenue recognition policy complies with Securities and Exchange Commission ("SEC") Staff Accounting Bulletin No. 104, Revenue Recognition in Financial Statements. Revenue from the sale of products is recognized when title and risk of loss has passed to the customer, typically at the time of shipment, persuasive evidence of an arrangement exists, including a fixed price, and collectibility is reasonably assured. The Company recognizes revenue when persuasive evidence of an arrangement exists, title and risk of loss has passed to the customer, typically at the time of shipment, the price to the buyer is fixed or determinable and collectibility is reasonably assured. Revenue is not recognized at the time of shipment if these criteria are not met. Under certain circumstances, the Company accepts product returns or offers markdown incentives. Material management judgments must be made and used in connection with establishing sales returns and allowances estimates. The Company continuously monitors and tracks returns and allowances and records revenues net of provisions for returns and allowances. The Company's estimate of sales returns and allowances is based upon several factors including historical experience, current market and economic conditions, customer demand and acceptance of the Company's products and/or any notification received by the Company of such a return. Historically, sales returns and allowances have been within management's estimates; however, actual returns may differ significantly, either favorably or unfavorably, from management's estimates depending on actual market conditions at the time of the return. Inventories
Inventories are stated at the lower of cost, as determined using the first-in, first-out ("FIFO") method, or market. Costs include materials, labor and manufacturing overhead. The Company evaluates the carrying value of its inventories taking into account such factors as historical and anticipated future sales compared with quantities on hand and the price the Company expects to obtain for its products in their respective markets. The Company also evaluates the composition of its inventories to identify any slow-moving or obsolete product. These evaluations require material management judgments, including estimates of future sales, continuing market acceptance of the Company's products, and current market and economic conditions. Inventory may be written down based on such judgments for any inventories that are identified as having a net realizable value less than its cost. However, if the Company is not able to meet its sales expectations, or if market conditions deteriorate significantly from management's estimates, reductions in the net realizable value of the Company's inventories could have a material adverse impact on future operating results.
Intangible Assets
The Company accounts for acquisition-related intangible assets in accordance with SFAS No. 141, Business Combinations, and SFAS No. 142, Goodwill and Other Intangible Assets. A portion of the remaining difference between the purchase price and the fair value of net tangible assets at the date of acquisition is included in the balance sheet as acquisition-related intangible assets. Amortization periods for the intangible assets subject to amortization range from seven to fifteen years depending on the nature of the assets acquired. The carrying value of acquisition-related intangible assets, including the related amortization period, is evaluated in the fourth quarter of each fiscal year and whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. If the carrying amount exceeds the fair value, which is determined based upon estimated discounted future cash flows based upon our estimated cost of capital, an impairment loss is reflected in loss from operations. Such estimates are subject to change and we may be required to recognize an impairment loss in the future. Income taxes
A deferred income tax asset or liability is established for the expected future consequences of temporary differences in the financial reporting and tax bases of assets and liabilities. Significant judgment is necessary in the determination of the recoverability, of the Company's deferred tax assets. Deferred tax assets are reviewed regularly for recoverability and the Company establishes a valuation allowance when it is more likely than not that some portion, or all, of the deferred tax assets will not be realized. The Company assesses the recoverability of the deferred tax assets on an ongoing basis. In making this assessment, the Company is required to consider all available positive and negative evidence to determine whether, based on such evidence, it is more likely than not that some portion, or all, of the net deferred assets will be realized in future periods. If it is determined that it is more likely than not that a deferred tax asset will not be realized, the value of that asset will be reduced to its expected realizable value, thereby decreasing net income. If it is determined that a deferred tax asset that had previously been written down will be realized in the future, the value of that deferred tax asset will be increased, thereby increasing net income in the period when the determination is made. Actual results may differ significantly, either favorably or unfavorably, from the evidence used to assess the recoverability of the Company's deferred tax assets.

The Company adopted the provisions of FIN 48 on March 1, 2007. As a result of the implementation of FIN 48, the Company recognized no material increase in the liability for unrecognized income tax benefits. At February 28, 2009, unrecognized tax benefits, all of which affect the effective tax rate if recognized, were $0.1 million. Management does not anticipate that there will be a material change in the balance of unrecognized tax benefits within the next 12 months. The Company recognizes interest and penalties related to uncertain tax positions in income tax expense. As of February 28, 2009, accrued interest related to uncertain tax benefit was less than $0.1 million. The tax years 2005-2008 remain open to examination by the major taxing jurisdictions to which the Company is subject. However, the amount of net operating loss carryforwards can be adjusted for federal tax purposes for the three years (four years for the major state jurisdictions in which the Company operates) after the net operating loss is utilized.
Results of Operations
The nature of the Company's business has historically been highly seasonal. Sales in the third quarter ended November 30th each year have been significantly higher than sales achieved in each of the other three fiscal quarters of the year. Management does not expect the Company's sales to be significantly higher in the third quarter ending November 30, 2009, due to the sale of Meade Europe in January 2009 (discontinued operations) compared to the second quarter. However, expenses and, to a greater extent, results from operations generally may significantly vary by quarter. Therefore, caution is advised when appraising results for a period shorter than a full year, or when comparing any period other than to the same period of the previous year.
Three Months Ended August 31, 2009 Compared to Three Months Ended August 31, 2008
The Company reported net sales of $7.6 million for both of the three month periods ended August 31, 2009 and 2008. However, the Company experienced a decrease of approximately $1.1 million in net sales during the three months ended August 31, 2009, compared to the prior year period due to the Company's sale of its former sport optics brands last year and the resulting elimination of the revenue associated with those products. This decrease was offset by increases in new product sales due to new product development and sales of high-end telescopes, the latter of which is primarily attributable to improvements in the Company's manufacturing operations in Mexico. Approximately 26% of the Company's net sales during each of the three month periods ended August 31, 2009 and 2008 were from one customer.
The gross profit margin during the second quarter of fiscal 2010 was 17% of net sales, compared to 13% of net sales in the prior year's comparable three month period. Approximately 2% of this increase in the gross margin was due to lower direct labor and other manufacturing costs as a result of the devaluation of the Mexican Peso relative to the US Dollar. Most of the Company's employees at its manufacturing facility in Mexico, as well as certain other manufacturing costs, are paid in Mexican Pesos. In addition, the Company consolidated its operations in Mexico to one building in June 2009, reducing the Company's monthly rent by half-approximately $30 thousand per month or $90 thousand per quarter. The Company's operating efficiency at its manufacturing facility in Mexico has also improved, reducing the Company's manufacturing costs.
Selling expenses for the three months ended August 31, 2009 were $0.7 million, a 35% decrease from $1.1 million for the same period in the prior year. The decrease was due to headcount reductions and reduced discretionary spending. General and administrative expenses for the three months ended August 31, 2009 were $1.6 million, a decrease of $1.2 million or 44% compared to $2.8 million in the same period in the prior year. Most of the decrease in general and administrative expenses was due to reductions in both headcount and the excess facility costs associated with our former Irvine, California corporate headquarters.

Research and development expenses for the three months ended August 31, 2009 were $0.2 million, a decrease of $0.4 million or 74% compared to $0.6 million in the same quarter in the prior year primarily due to completion of its new product introduction (ETX-LS) at the end of the quarter ending May 31,2009. In August 2008, the Company terminated its ESOP and distributed the remaining shares to eligible employees, which resulted in the elimination of this expense. During the second quarter of the prior year, the Company sold its Simmons sport optics brand and associated inventory for gross proceeds of $7.3 million. This sale resulted in a gain of approximately $0.8 million. Excluding this gain, the Company would have reported a net loss of $2.8 million, or $0.12 per share. The Company earned interest income in the second quarter of this fiscal year due to the net cash received from the sale of Meade Europe in January 2009. Interest expense of $30 thousand was incurred in the prior year due to the Company's borrowings on its former credit facility, which was paid off with the proceeds from the sale of the Company's former sport optics brands.
The Company did not record any income tax provision or benefit during the three months ended August 31, 2009 due to its loss from operations, level of net operating loss carry forwards and valuation allowances recorded against the related deferred tax assets due to the Company's recurring historical losses. The Company recorded an income tax benefit of $0.8 million for the quarter ended August 31, 2008 relating almost exclusively to the write-off of a deferred tax liability associated with intangible assets sold as part of the brand sales. As noted above, the Company sold Meade Europe in January 2009. As a result, the results of Meade Europe have been classified as a discontinued operation. Income from discontinued operations, net of tax, was $42 thousand in the three months ended August 31, 2008.
Six Months Ended August 31, 2009 Compared to Six Months Ended August 31, 2008 The Company reported net sales of $11.8 million for the first six months of fiscal year 2010, a decrease of $3.0 million or 20% from net sales of $14.8 million in the same period last year. This decrease was due to a decrease of approximately $3.4 million in net sales due to the Company's sale of its former sport optics brands last year and the resulting elimination of the revenue associated with those products, a decrease of approximately $1.2 million in sales of most of the Company's low-end telescopes and accessories products, which were both partially offset by increases in sales of the Company's high-end and mid-range telescopes. The increase in the sales of the Company's high-end telescopes is attributable to improvements in the Company's manufacturing operations in Mexico, which had just begun full manufacturing operations in the first quarter of fiscal 2009. The increase in sales of the Company's mid-range telescopes was due to new product development. Reduced distribution outlets, increased competition and weak demand were also factors contributing to the decline in sales. Approximately 18% of the Company's net sales during each of the six month periods ended August 31, 2009 and 2008 were from one customer. The gross profit margin during the first six months of fiscal year 2010 increased to 20% of net sales, compared with 13% of net sales in the prior year's comparable six month period. This improvement in the gross profit margin was driven by a favorable change in product mix, and reductions in the Company's manufacturing expenses. Approximately 3% of the improvement in the gross profit margin was due to the devaluation of the Mexican Peso relative to the US Dollar. Most of the Company's employees at its manufacturing facility in Mexico, as well as certain other manufacturing costs, are paid in Mexican Pesos. In addition, the Company consolidated its operations in Mexico to one building in June 2009, reducing the Company's monthly rent by half-approximately $30 thousand per month or $90 thousand per quarter. The Company's operating efficiency at its manufacturing facility in Mexico has also improved, reducing the Company's manufacturing costs.
Selling expenses for the first six months of fiscal year 2010 were $1.3 million, a 41% decrease from $2.3 million in the comparable six month period in the prior year. While the lower sales volume contributed to the lower selling expenses such as freight out and commissions, the overall decrease was also driven by lower headcount and reduced discretionary spending.

General and administrative expenses for the first six months of fiscal year 2010 were $3.0 million, a decrease of $2.2 million or 43% compared to $5.2 million in the prior year's comparable six month period. Most of the decrease in general and administrative expenses was due to reduction in headcounts and excess facility costs associated with our former Irvine, California corporate headquarters.
Research and development expenses for the first six months of fiscal year 2010 were $0.4 million, a decrease of $0.5 million or 53% compared to $0.9 million in the prior year's comparable six month period primarily due to completion of its new product introduction (ETX-LS) at the end of the quarter ending May 31, 2009. In August 2008, the Company terminated its ESOP and distributed the remaining shares to eligible employees, which resulted in the elimination of this expense. During the six months ended August 31, 2008, the Company sold its Simmons, Weaver and Redfield sport optics brands and associated inventory for gross proceeds of $15 million. This sale resulted in a gain of approximately $5.3 million. Excluding this gain, the Company would have reported a net loss of $5.5 million, or $0.24 per share.
The Company earned interest income in the six months ended August 31, 2009, due to the net cash received from the sale of Meade Europe in January 2009. Interest expense of $118 thousand was incurred in the prior year due to the Company's borrowings on its former credit facility during the first six months of the prior year. Due to the cash generated from the sale of Simmons, Weaver and Redfield brands, the Company reduced its usage of credit facilities during the period.
The Company did not record any income tax provision or benefit during the six months ended August 31, 2009 due to its loss from operations, level of net operating loss carry forwards and valuation allowances recorded against the related deferred tax assets due to the Company's recurring historical losses. The Company recorded an income tax benefit of approximately $1.0 million for the six months ended August 31, 2008, relating almost exclusively to the write-off of a deferred tax liability associated with intangible assets sold as part of the brand sales.
As noted above, the Company sold Meade Europe in January 2009. As a result, the results of Meade Europe have been classified as a discontinued operation. Income from discontinued operations, net of tax, was $0.3 million in the first two quarters ending August 31, 2008.
Seasonality
The Company has experienced, and expects to continue to experience, substantial fluctuations in its sales, gross margins and results from operations from quarter to quarter. Factors that influence these fluctuations include the volume and timing of orders received, changes in the mix of products sold, market acceptance of the Company's products, competitive pricing pressures, the Company's ability to meet fluctuating demand and delivery schedules, the timing and extent of research and development expenses, the timing and extent of product development costs and the timing and extent of advertising expenditures. Historically, a substantial portion of the Company's net sales and results from operations typically occurred in the third quarter of the Company's fiscal year primarily due to disproportionately higher customer demand for less-expensive telescopes during the holiday season. Mass merchandises, along with specialty retailers, purchase a considerable amount of their inventories to satisfy seasonal customer demand. These purchasing patterns have caused the Company to increase its level of inventory during its second and third quarters in response to such demand or anticipated demand. As a result, the Company's working capital requirements have correspondingly increased at such times. However, the Company does not expect net sales and results from operations during its third quarter of fiscal 2010 to be substantially greater than its second quarter. While seasonality is not as pronounced as it was prior to the sale of Meade Europe, the Company continues to experience significant sales to mass merchandisers. Liquidity and Capital Resources
At August 31, 2009, we had cash and cash equivalents of $2.1 million, as compared to $5.9 million at February 28, 2009, a decrease of $3.8 million due to changes in working capital and the Company's loss from operations.

Net cash used in operating activities decreased from $7.9 million in fiscal 2009 to $4.1 million in fiscal 2010-a decrease of $3.8 million or 48% due primarily to the decrease in operating loss excluding gain on brand sales, which decreased from $6.1 million during the six months ended August 31, 2008 to $2.3 million during the six months ended August 31, 2009-a decrease of $3.8 million or 62%, due to an improved gross margin and lower operating expenses. Approximately $2.5 million or 61% of the $4.1 million of cash used from operating activities during the six months ended August 31, 2009, related to changes in working capital associated with seasonality of the Company's business.
In addition, approximately $0.7 million or 17% of the $4.1 million of cash used in operating activities during fiscal 2010 consisted of restructuring costs associated with officer severance and the lease termination fee associated with the relocation of the Company's corporate headquarters in February 2009. The following table illustrates certain of the key liquidity and capital structure ratios that management uses in evaluating the Company's liquidity and capital structure:

                                       August 31,       February 28,
                                          2009              2009
                                              (In thousands)
                Current Ratio:
                Current assets        $     17,540     $       18,526
                Current liabilities   $      5,863     $        5,032

                Current ratio                 2.99               3.68


                Quick Ratio:
                Current assets        $     17,540     $       18,526
                Inventories, net      $     (8,701 )   $       (8,895 )

                Quick assets          $      8,839     $        9,631
                Current liabilities   $      5,863     $        5,032

                Quick ratio                   1.51               1.91

The Company currently has in place an undrawn $10.0 million secured credit facility with First Capital. Availability of funds under this facility is based on a percentage of eligible accounts receivable and inventory. Availability on this facility amounted to $2.7 million as of August 31, 2009, and was based solely in accounts receivable, as the Company was still in the process of working with its lender to determine availability on the $3.0 million inventory component of the facility. While the Company's credit facility does not contain explicit financial covenants, the agreement provides the Company's lender with significant latitude in restricting, reducing or withdrawing the Company's credit facility at its sole discretion with limited notice, as is customary with these types of arrangements.
In the event the Company requires more capital than is presently anticipated due to unforeseen factors, the Company may need to rely on its credit facility. In such an instance, if its lender restricts, reduces or eliminates the Company's access to credit, or requires immediate repayment of the amounts outstanding under the agreement, the Company would be required to pursue additional or alternative sources of liquidity such as equity financings or a new debt agreement with other creditors, either of which may contain less favorable terms. The Company cannot assure that such additional sources of capital would be available on reasonable terms, if at all.
The Company currently anticipates that cash on hand and funds generated from operations, including cost saving measures the Company has taken and additional measures it could still take, will be sufficient to meet the Company's anticipated cash requirements during fiscal 2010.
Capital expenditures, aggregated $45 thousand and $75 thousand for the six months ended August 31, 2009 and 2008, respectively. The Company had no material capital expenditure commitments at August 31, 2009.

Inflation
The Company believes that inflation in China has had a material effect on the Company's results of operations. During fiscal 2009 and 2010, the Company has experienced cost increases on product imported from China, but in many cases has not been able to pass on the price increases to customers due to U.S. market characteristics, thereby reducing the Company's gross margin on sales of products imported from China. There can be no assurance that the Company's business will not be further affected by inflation in fiscal 2010 and beyond. New Accounting Pronouncements
In June 2009, the FASB issued SFAS No. 168, "The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles - A . . .