UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
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þ
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the quarterly period ended March 31, 2010
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o
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE EXCHANGE ACT
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For the transition period from
to
Commission File Number 000-29211
DAC Technologies Group International, Inc.
(Exact name of registrant as specified in its charter)
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Florida
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65-0847852
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(State or other jurisdiction of
incorporation or organization)
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(I.R.S. Employer
Identification No.)
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12120 Colonel Glenn Road, Suite 6200 Little Rock, AR
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72210
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(Address of principal executive offices)
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(Zip Code)
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(501) 661-9100
(Registrants telephone number)
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Exchange Act of 1934 during the preceding 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.
(1) Yes
x
No
o
(2) Yes
x
No
o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulations S-T (§232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post such files).
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Yes
o
No
Indicate by check mark whether the registrant is a large filer, an accelerated filer, a
non-accelerated filer, or a small reporting company.
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Large accelerated filer
o
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Accelerated filer
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Non-accelerated filer
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Smaller reporting company
x
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act).
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Yes
x
No
State the number of shares outstanding of each of the issuers class of common equity, as of
the latest practicable date. As of May 14, 2010, 6,323,364 shares of Common Stock are issued and
5,789,599 are outstanding.
PART I FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Our
condensed consolidated financial statements are contained in pages 2
through 5 following.
1
DAC TECHNOLOGIES GROUP INTERNATIONAL, INC.
Condensed Consolidated Balance Sheet
March 31, 2010 and December 31, 2009
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March 31
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December 31
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2010
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2009
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(unaudited)
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Assets
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Current assets
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Cash
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$
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278,899
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$
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430,436
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Accounts receivable, less allowance for doubtful
accounts of $20,000 in 2010 and 2009
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562,134
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929,082
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Due from factor
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46,829
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27,592
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Inventories
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3,968,241
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4,479,347
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Prepaid expenses and deferred charges
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116,685
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53,460
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Income tax benefit
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42,094
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Current deferred income tax benefit
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16,159
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11,950
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Total current assets
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5,031,041
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5,931,867
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Property and equipment
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Leasehold improvements
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57,232
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57,232
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Furniture and fixtures
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337,654
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333,161
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Molds, dies, and artwork
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565,518
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560,952
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960,404
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951,345
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Accumulated depreciation
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(687,401
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(674,486
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Net property and equipment
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273,003
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276,859
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Other assets
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Patents and trademarks, net of accumulated
amortization of $140,414 and $135,434 in 2010 and 2009
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112,366
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117,346
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Deposits
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17,351
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17,351
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Advances to employees
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39,783
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29,658
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Note receivable
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Long-term
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20,000
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20,000
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Related party
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72,518
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72,518
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Shareholder
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282,710
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216,377
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Total other assets
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544,728
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473,250
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Total assets
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$
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5,848,772
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$
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6,681,976
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The accompanying selected notes are an integral part of these condensed consolidated financial statements.
2
DAC TECHNOLOGIES GROUP INTERNATIONAL, INC.
Condensed Consolidated Balance Sheet
March 31, 2010 and December 31, 2009
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March 31
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December 31
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2010
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2009
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(unaudited)
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Liabilities and Stockholders Equity
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Current liabilities
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Notes payable
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$
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41,787
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$
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52,454
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Accounts payable
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203,171
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776,093
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Accrued payroll tax withholdings
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26,545
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27,780
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Accrued expenses-other
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41,709
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145,097
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Income taxes payable
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71,166
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Total current liabilities
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313,212
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1,072,590
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Deferred income tax liability
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79,152
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79,152
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Stockholders equity
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Preferred stock, $.001 par value; authorized
10,000,000 shares; none issued and outstanding
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Common stock, $.001 par value; authorized
50,000,000 shares; 6,323,364 shares issued at
March 31, 2010 and December 31, 2009;
5,793,699 shares outstanding at March 31, 2010
and December 31, 2009
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6,323
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6,323
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Additional paid-in capital
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1,963,102
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1,963,102
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Treasury stock, at cost
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(401,043
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(401,043
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Retained earnings
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3,888,026
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3,961,852
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Total stockholders equity
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5,456,408
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5,530,234
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Total liabilities and stockholders equity
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$
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5,848,772
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$
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6,681,976
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The accompanying selected notes are an integral part of these condensed consolidated financial statements.
3
DAC TECHNOLOGIES GROUP INTERNATIONAL, INC.
Condensed Consolidated Statements of Operations
For The Three Months Ended March 31, 2010 and 2009
Unaudited
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2010
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2009
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Net sales
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$
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2,006,676
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$
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3,533,456
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Cost of sales
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1,467,920
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2,461,760
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Gross profit
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538,756
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1,071,696
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Operating expenses
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Selling
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334,361
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445,789
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General and administrative
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301,049
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278,049
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Total operating expenses
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635,410
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723,838
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Income (loss) from operations
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(96,654
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347,858
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Other income (expense)
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Interest expense
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(22,541
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(47,053
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Other income
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14
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Total other income (expense)
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(22,541
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(47,039
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Income (loss) before income tax provision
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(119,195
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300,819
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Provision (benefit) for income taxes
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(45,369
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116,520
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Net income (loss)
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$
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(73,826
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$
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184,299
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Basic and diluted earnings (loss) per share
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$
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(0.01
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$
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0.03
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Weighted average number of common shares:
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Basic and diluted
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5,793,699
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5,857,710
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The accompanying selected notes are an integral part of these condensed consolidated financial statements.
4
DAC TECHNOLOGIES GROUP INTERNATIONAL, INC.
Condensed Consolidated Statements of Cash Flows
For the Three Months Ended March 31, 2010 and 2009
Unaudited
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2010
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2009
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Cash flows from operating activities
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Net income (loss)
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$
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(73,826
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$
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184,299
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Adjustments to reconcile net income to
net cash used in operating activities:
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Depreciation
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12,915
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11,958
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Amortization
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4,980
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3,654
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Deferred income taxes
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(4,209
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)
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Changes in operating assets and liabilities
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Accounts receivable
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366,948
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(152,586
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)
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Due from factor
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(19,237
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(393,377
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Inventories
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511,106
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(1,184,965
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)
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Prepaid expenses and deferred charges
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(63,225
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)
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(56,539
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)
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Income tax benefit
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(42,094
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)
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Advances to employees
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(10,125
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)
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(3,775
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)
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Accounts payable
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(572,922
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)
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1,194,502
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Accrued payroll tax withholdings
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(1,235
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)
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765
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Accrued expenses other
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(103,388
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)
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(21,782
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)
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Income taxes payable
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(71,166
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)
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36,870
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Net cash used in operating activities
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(65,478
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)
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(380,976
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)
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Cash flows from investing activities
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Purchases of property and equipment
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(9,059
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(1,465
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)
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Payments for patents and trademarks
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(790
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Net advances on notes receivable stockholder
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(66,333
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(50,506
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)
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Net cash used by investing activities
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(75,392
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)
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(52,761
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)
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Cash flows from financing activities
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Payments on notes payable
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(10,667
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)
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(12,134
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)
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Purchase of treasury stock
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(28,919
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)
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Net cash used in financing activities
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(10,667
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)
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(41,053
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)
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Net decrease in cash
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(151,537
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)
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|
|
(474,790
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)
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Cash beginning of period
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430,436
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599,103
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Cash end of period
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$
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278,899
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$
|
124,313
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The accompanying selected notes are an integral part of these condensed consolidated financial statements.
5
PART F/S
DAC TECHNOLOGIES GROUP INTERNATIONAL, INC.
SELECTED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Forward-Looking Statements
This document includes forward looking statements within the meaning of Section 27A of the
Securities Act of 1933, as amended, (the Securities Act) and Section 21E of the Securities
Exchange Act of 1934, as amended (the Exchange Act). All statements other than statements of
historical fact contained in this document, including, without limitation, the statements under
Managements Discussion and Analysis of Financial Condition and Results of Operations and
Liquidity and Sources of Capital regarding the Companys strategies, plans, objectives,
expectations, and future operating results are forward-looking statements. Such statements also
consist of any statement other than a recitation of historical fact and can be identified by the
use of forward-looking terminology, such as may, expect, anticipate, estimate, or
continue or the negative thereof or other variations thereon or comparable terminology. Although
the Company believes that the expectations reflected in such forward-looking statements are
reasonable at this
time, it can give no assurance that such expectations will prove to have been correct. Actual
results could differ materially based upon a number of factors including, but not limited to, risks
attending litigation and government investigation, inability to raise additional capital or find
strategic partners, leverage and debt service, governmental regulation, dependence on key
personnel, competition, including competition from other manufacturers of gun locks, and gun
cleaning kits, costs and risks attending manufacturing, expansion of operations, market acceptance
of the Companys products, limited public market and liquidity, shares eligible for future sale,
the Companys common stock (Common Stock) being subject to penny stock regulation and other risks
detailed in the Companys filings with the United States Securities and Exchange Commission (SEC
or Commission).
Nature of Business
DAC Technologies Group International, Inc. (the Company), is in the business of
developing, marketing and outsourcing the manufacture of various consumer products, patented and
non-patented. Since 2003, the Companys primary business has been gun maintenance and gun safety,
with a target consumer base of sportsmen, hunters and outdoorsmen, and recreational enthusiasts.
In 2005, the Company began developing products in the hunting and camping market, and in 2007 and
2008 added a line of household products. In 2009, the Company eliminated a significant portion of
its hunting and camping products and some of its household products due to their relatively low
gross margins.
Although a significant portion of our business is with the mass-market retailer Wal-Mart
(approximately 55% during 2009), we have been able to considerably increase our business with large
sporting goods retailers, distributors and catalog companies.
Virtually all of the Companys products are manufactured and imported from mainland China and
shipped to the Companys central warehouse facility in Little Rock, Arkansas for distribution.
These products, along with other items manufactured in the United States, are sold primarily to
mass merchants and sporting goods retailers throughout the United States and international
locations.
6
Organization and Summary of Significant Accounting Policies
Organization and Basis of Presentation
The Company was incorporated as a Florida corporation in July 1998 under the name DAC
Technologies of America, Inc. In July, 1999, the Company changed its name to DAC Technologies
Group International, Inc.
Unaudited Interim Condensed Consolidated Financial Statements
The accompanying condensed consolidated financial statements of the Company as of and for the
three months ended March 31, 2010 and 2009, are unaudited, but, in the opinion of management,
reflect the adjustments, all of which are of a normal recurring nature, necessary for a fair
presentation of such financial statements in accordance with accounting principles generally
accepted in the United States. The accompanying condensed consolidated financial statements have
been prepared pursuant to the rules and regulations of the Securities and Exchange Commission.
Certain information and note disclosures normally included in annual financial statements prepared
in accordance with accounting principles generally accepted
in the United States have been condensed or omitted pursuant to those rules and regulations,
although the Company believes that the disclosures made are adequate to make the information not
misleading. It is suggested that these condensed consolidated financial statements be read in
conjunction with the financial statements and the notes thereto included in the Companys latest
10-K. The results of operations for an interim period are not necessarily indicative of the
results for a full year
.
Use of Estimates
The preparation of consolidated financial statements in accordance with accounting principles
generally accepted in the United States of America requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and the disclosures of
contingent assets and liabilities at the date of the consolidated financial statements, and the
reported amounts of revenues and expenses during the reporting period. Actual results may vary
from those estimates.
Cash and Cash Equivalents
The Company considers all highly liquid investments with original maturities of three months
or less at the time of purchase to be cash equivalents. The Company held no cash equivalents at
March 31, 2010 and 2009.
Inventories
Inventories are stated at the lower of weighted average cost or market. Costs include freight
and applicable customs fees. Market is determined based on net realizable value. Appropriate
consideration is given to obsolescence, excessive levels, deterioration and other factors in
evaluating net realizable value. Inventories are shown net of a valuation reserve of $22,203 and
$11,211 at March 31, 2010 and December 31, 2009, respectively. The Company receives inventory from
overseas at terms of F.O.B. shipping point, bearing the risk of loss at that point in time. During
the time period prior to receipt in the warehouse, inventory is classified and recorded as
inventory in transit. Inventory held in the warehouse is classified as finished goods.
7
|
|
|
|
|
|
|
|
|
|
|
Mar. 31, 2010
|
|
|
Dec. 31, 2009
|
|
Inventories consist of:
|
|
|
|
|
|
|
|
|
Finished goods
|
|
$
|
3,893,286
|
|
|
$
|
3,972,207
|
|
Inventory in transit
|
|
|
45,827
|
|
|
|
492,568
|
|
Parts
|
|
|
29,128
|
|
|
|
14,572
|
|
|
|
|
|
|
|
|
|
|
$
|
3,968,241
|
|
|
$
|
4,479,347
|
|
|
|
|
|
|
|
|
Due from Factor
The Company factors some of its receivables, without recourse, under a credit risk factoring
agreement. The fair values of accounts receivables and the amount due to the factor under this
factoring agreement approximate their carrying values due to the short-term nature of the
instruments. The amounts borrowed are collateralized by the outstanding accounts receivable, and
are reflected as a reduction to accounts receivable in the accompanying condensed consolidated
balance sheet. These amounts are as follows:
|
|
|
|
|
|
|
|
|
|
|
Mar. 31, 2010
|
|
|
Dec. 31, 2009
|
|
Accounts receivable factored
|
|
$
|
479,807
|
|
|
$
|
1,081,240
|
|
Amounts advanced and outstanding
|
|
|
432,978
|
|
|
|
1,053,648
|
|
|
|
|
|
|
|
|
Due from factor
|
|
$
|
46,829
|
|
|
$
|
27,592
|
|
|
|
|
|
|
|
|
See Management Discussion and Analysis of Financial Condition
and Results of Operations-Liquidity and Capital
Resources.
Adoption of New Accounting Guidance
In June 2009, the FASB issued authoritative accounting guidance (Guidance) that in part,
amends de-recognition guidance for transfers of financial assets; eliminates the exemption from
consolidation for qualifying special-purpose entities and requires additional disclosures. This
Guidance is effective for financial asset transfers occurring after the beginning of an entitys
first fiscal year that begins after November 15, 2009 and is effective for the Company beginning in
2010. The adoption of the provisions of this Guidance did not have a material effect on the
consolidated financial position, results of operations or cash flows of the Company.
In June 2009, the FASB issued Guidance that amends the consolidation guidance applicable to
variable interest entities. The provisions of this Guidance require entities to perform an
analysis to determine whether the enterprises variable interest or interests give it a controlling
financial interest in a variable interest entity. The Guidance also requires an enterprise to
assess on an ongoing basis to determine whether it is a primary beneficiary or has an implicit
responsibility to ensure that a variable interest entity operates as designed. This Guidance is
effective as of the beginning of the first fiscal year that begins after November 15, 2009 and is
effective for the Company beginning in 2010. In January 2010, the FASB indefinitely deferred
certain provisions of this Guidance. The adoption of the provisions of this Guidance did not have
a material effect on the consolidated financial position, results of operations or cash flows of
the Company.
Subsequent Events Evaluation Date
The Company evaluated the events and transactions subsequent to its March 31, 2010 unaudited
interim condensed consolidated financial statements in accordance with FASB ASC 885-10-50,
Subsequent Events.
8
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following Management Discussion and Analysis of Financial Condition is qualified by
reference to and should be read in conjunction with our Condensed Consolidated Financial Statements
and the Notes thereto as set forth at the end of this document. We include the following cautionary
statement in this Form 10Q for any forward-looking statements made by, or on behalf of, the
Company. Forward-looking statements
include statements concerning plans, objectives, goals, strategies, expectations, future events or
performances and underlying assumptions and other statements, which are other than statements of
historical facts. Certain statements contained herein are forward-looking statements and,
accordingly, involve risks and uncertainties, which could cause actual results or outcomes to
differ materially from those expressed in the forward-looking statements. The Companys
expectations, beliefs and projections are expressed in good faith and are believed by the Company
to have a reasonable basis, including without limitations, managements examination of historical
operating trends, data contained in the Companys records and other data available from third
parties, but there can be no assurance that managements expectations, beliefs or projections will
result or be achieved or accomplished.
Historically, the identification and development of new products and expansion of the
Companys sales organization have achieved growth. There can be no assurance that we will be able
to continue to develop new products or expand sales to sustain rates of revenue growth and
profitability in future periods. Any future success that the Company may achieve will depend upon
many factors including those that may be beyond the control of the Company or which cannot be
predicted at this time. Although we believe that our expectations are based on reasonable
assumptions within the bounds of our knowledge of our business and operations, actual results may
differ materially from our expectations.
Factors that could cause actual results to differ from expectations include, without
limitations:
|
|
|
achieving planned revenue and profit growth in each of the Companys business units;
|
|
|
|
|
renewal of purchase orders consistent with past experience;
|
|
|
|
|
increasing price, products and services competition;
|
|
|
|
|
emergence of new competitors or consolidation of existing competitors;
|
|
|
|
|
the timing of orders and shipments;
|
|
|
|
|
continuing availability of appropriate raw materials and manufacturing relationships;
|
|
|
|
|
maintaining and improving current product mix;
|
|
|
|
|
changes in customer requirements and in the volume of sales to principal customers;
|
|
|
|
|
changes in governmental regulations in the various geographical regions where the
Company operates;
|
|
|
|
|
general economic and political conditions;
|
|
|
|
|
attracting and retaining qualified key employees;
|
|
|
|
|
the ability of the Company to control manufacturing and operating costs; and
|
|
|
|
|
continued availability of financing, and financial resources on the terms required to
support the Companys future business strategies.
|
9
In evaluating these statements, you should consider various factors, including those
summarized above, and, from time to time, in other reports the Company files with the SEC. These
factors may cause the Companys actual results to differ materially from any forward-looking
statement. The Company disclaims any obligation to publicly update these statements, or disclose
any difference between its actual results and those reflected in these statements. The information
constitutes forward-looking statements within the meaning of the Private Securities Litigation
Reform Act of 1995.
(a)
Background
We are in the business of developing, outsourcing the manufacture and marketing of, various
consumer products, patented and non-patented. Our products were initially security related,
evolving from various personal, home and automotive electronic security devices, to firearm safety
devices such as gun and
trigger locks, cable locks and safes. Beginning in 2003, with the introduction of our line of
GunMaster
®
gun cleaning kits, we shifted our emphasis to gun cleaning items and related gun
maintenance accessories. This product line accounted for 69% of the Companys sales revenues in
2009. In 2009, we also entered into a trademark licensing agreement with Olin Corporation to market
certain of our gun cleaning items under the Winchester
®
brand name for sale of these items to
Wal-Mart. In the first quarter of 2010 we amended the agreement to allow us to sell these
Winchester
®
branded items to any of our customers.
In 2005, the Company began to develop products for the hunting and camping market which
includes game processing equipment, aluminum camping tables and other items. In 2007, the Company
added a line of household items, including a line of household cleaning dusters and fireplace
screens and related equipment. Sales in these two product lines peaked in 2008, accounting for 19%
and 23%, respectively, of the Companys sales. In 2009, the Company eliminated a number of the low
gross margin items resulting in a reduction of Company sales in these two areas to 9% and 7%
respectively.
Although a significant portion of our business is with the mass-market retailer Wal-Mart
(approximately 55% in 2009), we have been able to considerably increase our business customer base
with large sporting goods retailers, distributors and catalog companies.
Our products can be grouped into four main categories: (a) gun cleaning and maintenance, (b)
hunting and camping, (c) gun safety, and (d) household products. In developing these products, we
focus on developing features, establishing patents, and formulating pricing to obtain a competitive
edge. We currently design and engineer certain of our products with the assistance of our Chinese
trading agent and manufacturers. They are, in addition, responsible for the tooling, manufacture
and packaging of our products.
Gun Cleaning & Maintenance.
We market over fifty (50) different gun cleaning kits, rod sets,
tools and accessories used to clean and maintain virtually any firearm on the market. These kits
are solid brass, and consist of universal kits designed to fit a variety of firearms, caliber
specific kits, as well as replacement brushes, mops, etc. These kits are available in solid wood
or aluminum cases, as well as blister packed. We also market several kits that have been privately
labeled for certain customers. This product area accounted for 57% and 71% of gross sales during
the first three months of 2010 and 2009, respectfully.
10
Hunting and Camping.
This category includes Sportsmans Lighter, game processing kit, two
aluminum camping tables, and a turkey seat. This product area accounted for 9% and 6% of gross
sales during the first three months of 2010 and 2009, respectfully.
Gun Safety.
We market twelve (12) different gun safety locks and five (5) security and
specialty safes. The gun-locks composition range from plastic to steel and keyed trigger locks to
cable locks. The security safes are of heavy-duty, all steel construction and are designed for
firearms, jewelry and other valuables. Eight of the Companys gunlocks and two safes have been
certified for sale consistent with the standards set out by the State of California. This product
area accounted for 24% and 13% of gross sales during the first three months of 2010 and 2009,
respectfully.
Household Products.
We market five household cleaner dusters and a line of household
fireplace screens, tools and accessories. This product area accounted for 10% of gross sales
during the first three months of 2010 and 2009.
(b)
Financial Condition and Results of Operations
Financial Condition
A summary of the more significant changes in the Companys balance sheet as of March 31, 2010
as compared to December 31, 2009 is presented below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase
|
|
|
|
Mar. 31, 2010
|
|
|
Dec. 31, 2009
|
|
|
(Decrease)
|
|
Accounts receivable
|
|
$
|
562,134
|
|
|
$
|
929,082
|
|
|
$
|
(366,948
|
)
|
Inventories
|
|
|
3,968,241
|
|
|
|
4,479,347
|
|
|
|
(511,106
|
)
|
Accounts payable
|
|
|
203,171
|
|
|
|
776,093
|
|
|
|
(572,922
|
)
|
Accrued expenses-other
|
|
|
41,709
|
|
|
|
145,097
|
|
|
|
(103,388
|
)
|
Income taxes benefit/(payable)
|
|
|
42,094
|
|
|
|
(71,166
|
)
|
|
|
(113,260
|
)
|
The decrease in accounts receivable is related to the reduced sales in the first quarter of
2010 as compared to the fourth quarter of 2009. This reduction is normal, as the Companys sales
historically are significantly greater in the fourth quarter as compared to all other quarters.
This historical trend also accounts for the decrease in inventories, and the resulting decrease in
accounts payable due to the decreased inventory.
The decrease in Accrued Expenses-other is directly related to the decrease in the quarterly
licensing fee the Company owed for the Winchester
®
name for sales of those products during the
fourth quarter of 2009 as compared to the first quarter of 2010.
As of December 31, 2009, the Company had income taxes payable of $71,166 as compared to an
income tax benefit of $42,094 as of March 31, 2010. This decrease is due to the operating loss
incurred during the first quarter of 2010.
11
Results of Operations
For the three months ended March 31, 2010, the Company had a net loss of $73,826 on net sales
of $2,006,676, as compared to net income of $184,299 on net sales of $3,533,456 for the same period
ending March 31, 2009.
The decrease in net sales of $1,526,780 is primarily related to a decrease in sales to the
Companys three largest customers which, in turn, was due to the timing of the quantity of
purchases by such customers between the fourth quarters of 2008 and 2009 and the following first
quarters of 2009 and 2010, respectively. None of these customers have reduced the variety of the
Companys products they carry, with the exception of one large gun cleaning kit by Wal-Mart, which
was dropped at the end of the second quarter in 2009. This item will again be carried by Wal-Mart
commencing in the third quarter of 2010. In addition, the decrease was also due, in part, to the
entire gun-related market having experienced declines in retail sales during 2010. This is to be
contrasted with the upward spike in gun and gun related sales beginning in the fourth quarter of
2008, and continuing through the second quarter of 2009,as a precursor to the commencement of the
Obama administration and its then unpredictable position regarding gun controls.See Gun
Legislation.
The Companys gross margins decreased from 30% for the three months ended March 31, 2009 to
27% for the three months ended March 31, 2010. This decrease is attributable to the licensing fee
the Company now pays for the Winchester
®
name for products sold to Wal-Mart, as well as price
reductions extended to Wal-Mart in mid-2009.
Operating expenses for the three months ended March 31, 2010 were $635,410, a decrease of
$88,428, or 12% over the three months ended March 31, 2009. This decrease is related primarily to
reduced sales commissions and shipping costs resulting from the decrease in sales.
(c)
Liquidity and Capital Resources
Our liquidity needs arise primarily from inventory. Our primary source of cash is funds from
our operations. We believe that external sources of liquidity could be obtained in the form of bank
loans, letters of credit, etc. The Company maintains a factoring agreement wherein it assigns
substantially all of its receivables (excluding Wal-Mart) on a non-recourse basis. The factor
performs all credit and collection functions, and assumes all risks associated with the collection
of the receivables. The Company pays a fee of 65/100ths of 1% of the face value of each
receivable for this service. This fee is included in interest expense on the Companys condensed
consolidated statements of operations. The factor may also, at its discretion, advance funds prior
to the collection of our accounts, for which the Company is charged interest. The interest rate
charged is the JPMorgan Chase Bank prime rate plus 1%, or 4%, whichever is greater. Advances are
payable to the factor on demand. As of March 31, 2010, the Company had an outstanding advance
balance with its factor in the amount of $432,978.
In December 2009, the Company entered into a Receivables Purchase Agreement with Wachovia
Bank/Wells Fargo wherein the Company sells its receivables from Wal-Mart at a discounted price to
Wells Fargo. Wells Fargo purchases these receivables (normally within 10 to 14 days of creation)
at a price equal to their face value, discounted at an annual rate equal to the 90 day LIBOR rate
plus 1.75% for the number of days remaining until the receivables come due under our normal payment
terms with Wal-Mart. Since this is a purchase, as opposed to a factoring arrangement, there are no
interest charges to the Company for the period between funding from Wells Fargo and payment by
Wal-Mart.
12
In addition, the Company has a $1,000,000 line of credit with its local bank, collateralized
by its inventory. This line of credit expired on February 10, 2010
and was renewed and extended to April 10, 2011. As of March 31, 2010, there was no
outstanding balance on this line of credit.
We believe that the sources of capital described above will continue to be available to us in
the future and will be sufficient to meet our short-term and long-term liquidity requirements.
(d)
Trends
In prior years, our business faced the issue of increased manufacturing costs and margin
erosion as a result of raw material, fuel and other utility price increases, and a weak U.S.
dollar. This put pressure on our margins and overhead costs. During 2009, this trend reversed
itself, as decreases in raw materials and other costs resulted in decrease manufacturing costs for
the Companys products. It is difficult to determine whether
this trend will continue, or reverse itself again, during 2010. Should these costs increase,
it could result in increased prices for our products, which could result in declining margins.
(e)
Gun Legislation
Several federal laws, including the National Firearms Act (1934), Gun Control Act (1968),
Firearms Owners Protection Act (1986), Brady Handgun Violence Prevention Act (1993), the 1994
Omnibus Crime Control Act and other laws, regulate the ownership, purchase and use of handguns.
Notwithstanding these and other laws, there is not any federal law that requires the use of
gunlocks, despite numerous attempts in Congress to pass such legislation.
In March 2008, the U. S. Supreme Court decided the case of
District of Columbia vs. Heller
,
relating to the issue of whether the gun control laws of Washington, D. C. on non-government
persons violated the Second Amendment to the U. S. Constitution, the right to bear arms. The
District of Columbia law banned handgun possession by making it a crime to carry an unregistered
firearm and prohibiting the registration of handguns. The law separately provided that no person
may carry an unlicensed handgun, but authorizes the police chief to issue 1-year licenses; and
requires residents to keep lawfully owned firearms unloaded and disassembled or bound by a trigger
lock or similar device. The Supreme Court held the Second Amendment to the U.S. Constitution
protects an individual right to possess a firearm unconnected with service in a militia, and to use
that firearm for traditionally lawful purposes, such as self-defense within the home. The
Districts total ban on handgun possession in the home amounts to a prohibition on an entire class
of arms that Americans overwhelmingly choose for the lawful purpose of self-defense. The Court
also held the handgun ban and the trigger-lock requirement (as applied to self-defense) violate the
Second Amendment, finding the requirement that any lawful firearm in the home be disassembled or
bound by a trigger lock makes it impossible for citizens to use firearms for the core lawful
purpose of self-defense and is hence unconstitutional. It is unknown what impact, if any, this
ruling will have on our business.
In addition to federal gun laws, most states and some local jurisdictions have imposed their
own firearms restrictions. Some states have passed Child Access Prevention (or CAP) Laws which
hold gun owners responsible if they leave guns easily accessible to children and a child improperly
gains access to the weapon. Additionally, the State of California has enacted legislation that
establishes basic performance standards for firearm safety devices, lock-boxes and safes
California law also requires every gun to be sold with a state-approved child-safety lock to make
it easier for gun owners to lock up their weapons. The locks must be of sufficient quality to meet
state approval. The state contracts with independent laboratories to test gun locks to make sure
the locks will work and cannot be easily removed by unauthorized people.
13
The fact that gun safety laws are passed by federal, state, or local governments does not
ensure that the demand for our products will increase. With the election of President Barack Obama
his views on gun control may have an impact on our sales of gun safety devices. While in the US
Senate, Obama has supported several gun control measures, including restricting the purchase of
firearms at
gun shows
and the reauthorization of the
Federal Assault Weapons Ban
. Obama voted
against legislation protecting firearm manufacturers from certain liability suits, which gun-rights
advocates say are designed to bankrupt the firearms industry. Obama did vote in favor of the 2006
Vitter Amendment
to prohibit the confiscation of lawful firearms during an emergency or major
disaster, which passed. More recently, Obama initially voiced support of Washington DCs handgun
ban. Following the Supreme Court decision that the ban was unconstitutional, he revised his
position in support of the decision overturning the law, saying and affirming that the Second
Amendment protects the right of individuals to bear arms.
(f)
Critical Accounting Estimates
The Company prepares its condensed consolidated financial statements in accordance with
accounting principles generally accepted in the United States of America. The Companys
significant accounting policies are discussed in detail in Note 2 to the December 31, 2009 audited
consolidated financial statements included in the Companys Form 10-K. The quarterly financial
statements for the period ended March 31, 2010, attached hereto, should therefore be read in
conjunction with that discussion. Certain of these accounting policies as discussed below require
management to make estimates and assumptions about future events that could materially affect the
reported amounts of assets, liabilities, revenues and expenses and disclosure of contingent assets
and liabilities. Accounting estimates and assumptions discussed in this section are those that we
consider to be the most critical to an understanding of our financial statements because they
inherently involve significant judgments and uncertainties. For all of these estimates, we caution
that future events rarely develop exactly as forecast, and the best estimates routinely require
adjustment. Since December 31, 2009, there have been no changes in our critical accounting
policies and no significant change to the assumptions and estimates related to them.
Long-lived Assets
. Depreciation expense is based on the estimated useful lives of the
underlying property and equipment. Although the Company believes it is unlikely that any
significant changes to the useful lives of its property and equipment will occur in the near term,
an increase or decrease in the estimated useful lives would result in changes to depreciation
expense.
The Company continually reevaluates the carrying value of its long-lived assets, for events or
changes in circumstances, which indicate that the carrying value may not be recoverable. As part
of this reevaluation, if impairment indicators are present, the Company estimates the future cash
flows expected to result from the use of the asset and its eventual disposal. If the sum of the
expected future cash flows (undiscounted and without interest charges) is less than the carrying
value of the asset, an impairment loss is recognized to reduce the carrying value of the long-lived
asset to the estimated fair value of the asset.
Inventories.
Inventories are valued at the lower of weighted cost or market. Market is
determined based on net realizable value. Appropriate consideration is given to obsolescence,
excessive levels, deterioration and other factors in evaluating net realizable value. The Company
records a valuation reserve for inventories for which costs exceed the net realizable value.
Although the Company believes it is unlikely that any significant changes to the valuation reserve
will be necessary in the near term, changes in demand for our products would result in changes to
the valuation reserve.
14
Patents and Trademarks.
Amortization expense is based on the estimated economic useful lives
of the underlying patents and trademarks. Although the Company believes it is unlikely that any
significant changes to the useful lives of its patents and trademarks will occur in the near term,
rapid changes in technology or changes in market conditions could result in revisions to such
estimates that could materially affect the carrying value of these assets and the Companys future
consolidated operating results.
(g)
Off-Balance Sheet Arrangements
Since 2003, our Chief Executive Officer, David Collins, leased a portion of his home in Miami,
Florida to the Company, which serves as the Companys executive office. The Company pays a monthly
office
allowance to Mr. Collins of $5,500, for approximately 1,200 square feet and secretarial
support. There is no lease agreement for these premises. This office arrangement was not the
product of arms length negotiation; however, the Company has determined the arrangement to be
competitive with comparable office space and secretarial support.
The Company does not use affiliation with special purpose entities, variable interest entities
or synthetic leases to finance its operations. Additionally, the Company has not entered into any
arrangement requiring it to guarantee payment of third party debt or to fund losses of an
unconsolidated special purpose entity.
ITEM 4. CONTROLS AND PROCEDURES
We maintain disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e)
under the Securities Exchange Act of 1934, as amended (the Exchange Act), that are designed to
ensure that information required to be disclosed by us in reports we file or submit under the
Exchange Act is recorded, processed, summarized and reported within the time periods specified in
the Securities and Exchange Commissions rules and forms, and that such information is accumulated
and communicated to our management, including our principal executive officer and principal
financial officer, as appropriate, to allow timely decisions regarding required disclosure. In
designing and evaluating our disclosure controls and procedures, management recognized that
disclosure controls and procedures, no matter how well designed and operated, can provide only
reasonable assurance of achieving the desired control objectives, and we necessarily are required
to apply our judgment in evaluating the cost-benefit relationship of possible disclosure controls
and procedures.
As of March 31, 2010, the Company carried out an evaluation, under the supervision and with
the participation of the Companys management, including the Companys principal executive officer
and principal financial officer, of the effectiveness of the design and operation of the Companys
disclosure controls and procedures. Based upon that evaluation, the Companys principal executive
officer and principal financial officer concluded the Companys disclosure controls and procedures
were not effective, because certain deficiencies involving internal controls constituted a material
weakness as more fully detailed in Item 9A of the Companys December 31, 2009 Form 10-K. The
material weakness identified did not result in the restatement of any previously reported financial
statements or any other related financial disclosure, nor does management believe that it had any
effect on the accuracy of the Companys financial statements for the current reporting period.
15
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 1A. RISK FACTORS
There have been no material changes in risk factors affecting the Companys business from
those disclosed in the Companys Form 10-K for the fiscal year ending December 31, 2009.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS
The following documents are incorporated by reference from Registrants Form 10SB filed with
the Securities and Exchange Commission (the Commission), File No. 000-29211, on January 28, 2000:
|
|
|
|
|
Exhibits
|
|
|
|
|
|
|
2
|
|
|
Acquisition Agreement
|
|
3
|
(i)
|
|
Articles of Incorporation
|
3(ii)
|
|
By-laws
|
Exhibits required by Item 601 of Regulation S-K attached:
|
|
|
|
|
Exhibits
|
|
|
|
|
|
|
31.1
|
|
|
Certification of David A. Collins Pursuant to Rule 13a-14(a)/15d-14(a)
|
|
31.2
|
|
|
Certification of Robert C. Goodwin Pursuant to Rule 13a-14(a)/15d-14(a)
|
|
32.1
|
|
|
Certification of David A. Collins Pursuant to Rule 13a-14(b) or Rule
15d-14(c) of the Securities Exchange Act of 1934 and 18U.S.C. Section 1350
|
|
32.2
|
|
|
Certification of Robert C. Goodwin Pursuant to Rule 13a-14(b) or Rule
15d-14(c) of the Securities Exchange Act of 1934 and 18U.S.C. Section 1350
|
16
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused this report
to be signed on its behalf by the undersigned, hereunto duly authorized:
|
|
|
|
|
|
|
|
|
By:
|
/s/ David A. Collins
|
|
|
|
David A. Collins, Chairman, CEO and Principal Executive Officer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
By:
|
/s/ Robert C. Goodwin
|
|
|
|
Robert C. Goodwin, Principal Accounting Officer and Principal Financial Officer
|
|
|
|
|
|
|
Dated: May 17, 2010
17
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