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
|
For the quarterly period ended September 30, 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
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(I.R.S. Employer
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incorporation or organization)
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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
þ
No
o
(2) Yes
þ
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).
o
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.
Large accelerated filer
o
|
Accelerated filer
o
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Non-accelerated filer
o
(Do not check if a smaller reporting company)
|
Smaller reporting company
þ
|
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act).
o
Yes
þ
No
State the number of shares outstanding of each of the issuers class of common equity, as of
the latest practicable date. As of November 3, 2010, 6,323,364 shares of Common Stock are issued
and 5,765,771 are outstanding.
PART I FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DAC TECHNOLOGIES GROUP INTERNATIONAL, INC.
Condensed Consolidated Balance Sheets
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Sept. 30
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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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162,094
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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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604,567
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929,082
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Due from factor
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452,059
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27,592
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Inventories
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4,594,740
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4,479,347
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Prepaid expenses and deferred charges
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73,797
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53,460
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Deferred tax asset
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128,975
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11,950
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|
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|
|
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Total current assets
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6,016,232
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5,931,867
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|
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|
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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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346,589
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333,161
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Molds, dies, and artwork
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595,493
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560,952
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999,314
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|
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|
951,345
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|
Accumulated depreciation
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(714,689
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)
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(674,486
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)
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|
|
|
|
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Net property and equipment
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284,625
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276,859
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|
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Other assets
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|
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Patents and trademarks, net of accumulated
amortization of $150,378 and $135,434 in 2010 and
2009
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|
102,402
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|
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117,346
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Deposits
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17,351
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17,351
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Advances to employees
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45,060
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29,658
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Note receivable
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Long-term
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20,000
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20,000
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Related party
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72,518
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72,518
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Shareholder
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389,773
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216,377
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|
|
|
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|
|
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Total other assets
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647,104
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473,250
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|
|
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|
|
|
|
|
|
|
|
|
|
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Total assets
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$
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6,947,961
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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 Balance Sheets
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|
|
|
|
|
|
|
|
|
|
Sept. 30
|
|
|
December 31
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(unaudited)
|
|
|
|
|
|
Liabilities and Stockholders Equity
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|
|
|
|
|
|
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|
|
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|
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Current liabilities
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|
|
|
|
|
|
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|
Notes payable
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|
$
|
15,035
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|
|
$
|
52,454
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|
Accounts payable
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|
1,460,992
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|
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|
776,093
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|
Accrued payroll tax withholdings
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|
26,930
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|
|
27,780
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|
Accrued expenses-other
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|
42,924
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|
145,097
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|
Income taxes payable
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71,166
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|
|
|
|
|
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|
Total current liabilities
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|
1,545,881
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|
1,072,590
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|
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|
|
|
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|
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|
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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
September 30, 2010 and December 31, 2009;
5,765,771 shares outstanding at September 30, 2010
and 5,793,699 at December 31, 2009
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|
|
6,323
|
|
|
|
6,323
|
|
Additional paid-in capital
|
|
|
1,963,102
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|
|
|
1,963,102
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|
Treasury stock, at cost
|
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|
(416,113
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)
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|
(401,043
|
)
|
Retained earnings
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|
3,769,616
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|
|
|
3,961,852
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|
|
|
|
|
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|
|
Total stockholders equity
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|
|
5,322,928
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|
|
5,530,234
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$
|
6,947,961
|
|
|
$
|
6,681,976
|
|
|
|
|
|
|
|
|
The accompanying selected notes are an integral part of these condensed consolidated financial statements.
4
DAC TECHNOLOGIES GROUP INTERNATIONAL, INC.
Condensed Consolidated Statements of Operations
For The Three Months Ended September 30, 2010 and 2009
(Unaudited)
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|
|
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2010
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|
|
2009
|
|
|
|
|
|
|
|
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Net sales
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|
$
|
2,643,380
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|
$
|
3,098,202
|
|
|
|
|
|
|
|
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|
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Cost of sales
|
|
|
1,927,148
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|
|
|
2,221,830
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
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|
716,232
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|
|
|
876,372
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
Selling
|
|
|
392,670
|
|
|
|
408,310
|
|
General and administrative
|
|
|
291,156
|
|
|
|
305,634
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
683,826
|
|
|
|
713,944
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
32,406
|
|
|
|
162,428
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense)
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(17,171
|
)
|
|
|
(41,668
|
)
|
|
|
|
|
|
|
|
Total other income (expense)
|
|
|
(17,171
|
)
|
|
|
(41,668
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income tax provision
|
|
|
15,235
|
|
|
|
120,760
|
|
|
|
|
|
|
|
|
|
|
Provision for income taxes
|
|
|
7,993
|
|
|
|
47,385
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
7,242
|
|
|
$
|
73,375
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted earnings (loss) per share
|
|
$
|
|
|
|
$
|
0.01
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares:
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
|
5,771,511
|
|
|
|
5,793,699
|
|
|
|
|
|
|
|
|
|
|
The accompanying selected notes are an integral part of these condensed consolidated financial statements.
5
DAC TECHNOLOGIES GROUP INTERNATIONAL, INC.
Condensed Consolidated Statements of Operations
For The Nine Months Ended September 30, 2010 and 2009
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
Net sales
|
|
$
|
6,686,982
|
|
|
$
|
9,774,700
|
|
|
|
|
|
|
|
|
|
|
Cost of sales
|
|
|
4,962,817
|
|
|
|
6,878,764
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
1,724,165
|
|
|
|
2,895,936
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
Selling
|
|
|
1,069,641
|
|
|
|
1,253,450
|
|
General and administrative
|
|
|
902,597
|
|
|
|
882,198
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
1,972,238
|
|
|
|
2,135,648
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
|
(248,073
|
)
|
|
|
760,288
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense)
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(58,530
|
)
|
|
|
(129,987
|
)
|
Other income
|
|
|
|
|
|
|
14
|
|
|
|
|
|
|
|
|
Total other income (expense)
|
|
|
(58,530
|
)
|
|
|
(129,973
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income tax provision
|
|
|
(306,603
|
)
|
|
|
630,315
|
|
|
|
|
|
|
|
|
|
|
Provision (benefit) for income taxes
|
|
|
(114,367
|
)
|
|
|
244,075
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(192,236
|
)
|
|
$
|
386,240
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted earnings (loss) per share
|
|
$
|
(0.03
|
)
|
|
$
|
0.07
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares:
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
|
5,782,552
|
|
|
|
5,814,802
|
|
The accompanying selected notes are an integral part of these condensed consolidated financial statements.
6
DAC TECHNOLOGIES GROUP INTERNATIONAL, INC.
Condensed Consolidated Statements of Cash Flows
For the Nine Months Ended September 30, 2010 and 2009
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
Cash flows from operating activities
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(192,236
|
)
|
|
$
|
386,240
|
|
Adjustments to reconcile net income to
net cash used in operating activities:
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
40,203
|
|
|
|
37,350
|
|
Amortization
|
|
|
14,944
|
|
|
|
11,746
|
|
Deferred income taxes
|
|
|
(117,025
|
)
|
|
|
|
|
Changes in operating assets and liabilities
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
324,515
|
|
|
|
(186,761
|
)
|
Due from factor
|
|
|
(424,467
|
)
|
|
|
1,538,005
|
|
Inventories
|
|
|
(115,393
|
)
|
|
|
(3,760,233
|
)
|
Prepaid expenses
and deferred
charges
|
|
|
(20,337
|
)
|
|
|
(1,027
|
)
|
Income taxes
receivable
|
|
|
|
|
|
|
|
|
Advances to
employees
|
|
|
(15,402
|
)
|
|
|
(5,306
|
)
|
Accounts payable
|
|
|
684,899
|
|
|
|
1,379,700
|
|
Accrued payroll tax
withholdings
|
|
|
(850
|
)
|
|
|
1,271
|
|
Accrued expenses
other
|
|
|
(102,173
|
)
|
|
|
(45,902
|
)
|
Income taxes payable
|
|
|
(71,166
|
)
|
|
|
105,925
|
|
|
|
|
|
|
|
|
Net cash (used) provided by operating activities
|
|
|
5,512
|
|
|
|
(538,992
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities
|
|
|
|
|
|
|
|
|
Purchases of property and equipment
|
|
|
(47,969
|
)
|
|
|
(37,698
|
)
|
Payments for patents and trademarks
|
|
|
|
|
|
|
(11,290
|
)
|
Net payments (advances) on notes receivable stockholder
|
|
|
(173,396
|
)
|
|
|
(82,881
|
)
|
|
|
|
|
|
|
|
Net cash used by investing activities
|
|
|
(221,365
|
)
|
|
|
(131,869
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities
|
|
|
|
|
|
|
|
|
Net (payments) proceeds on notes payable
|
|
|
(37,419
|
)
|
|
|
313,002
|
|
Purchase of treasury stock
|
|
|
(15,070
|
)
|
|
|
(28,919
|
)
|
|
|
|
|
|
|
|
Net cash (used) provided by financing activities
|
|
|
(52,489
|
)
|
|
|
284,083
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net decrease in cash
|
|
|
(268,342
|
)
|
|
|
(386,778
|
)
|
|
|
|
|
|
|
|
|
|
Cash beginning of period
|
|
|
430,436
|
|
|
|
599,103
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash end of period
|
|
$
|
162,094
|
|
|
$
|
212,325
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplementary disclosures of cash flow information
|
|
|
|
|
|
|
|
|
Cash paid during the period for:
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
58,546
|
|
|
$
|
129,608
|
|
Taxes
|
|
|
1,724
|
|
|
|
138,150
|
|
The accompanying selected notes are an integral part of these condensed consolidated financial statements.
7
DAC TECHNOLOGIES GROUP INTERNATIONAL, INC.
SELECTED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2010
(UNAUDITED)
1.
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).
2.
Nature of Business and Organization
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 and 48% for the first nine months of 2010 ), 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 warehouse facilities in Little Rock, Arkansas and Los Angeles, California 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.
8
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.
3.
Basis of Presentation
The accompanying condensed consolidated financial statements of the Company as of and for the
nine months ended September 30, 2010 and 2009, and three months ended September 30, 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.
4.
Significant Accounting Policies
Refer to the Companys 2009 annual report on Form 10-K, Note 2 to the Consolidated Financial
Statements, for a description of significant accounting policies. There have been no material
changes to these policies.
5.
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 $42,600 and
$11,211 at September 30, 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.
|
|
|
|
|
|
|
|
|
|
|
Sept. 30, 2010
|
|
|
Dec. 31, 2009
|
|
Inventories consist of:
|
|
|
|
|
|
|
|
|
Finished goods
|
|
$
|
3,837,455
|
|
|
$
|
3,972,207
|
|
Inventory in transit
|
|
|
730,931
|
|
|
|
492,568
|
|
Parts
|
|
|
26,354
|
|
|
|
14,572
|
|
|
|
|
|
|
|
|
|
|
$
|
4,594,740
|
|
|
$
|
4,479,347
|
|
|
|
|
|
|
|
|
6.
Due from Factor
The Company factors some of its receivables without recourse as to the creditworthiness of
the factored accounts 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-
9
term nature of the instruments. The amounts borrowed are collateralized solely 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:
|
|
|
|
|
|
|
|
|
|
|
Sept. 30, 2010
|
|
|
Dec. 31, 2009
|
|
Accounts receivable factored
|
|
$
|
692,063
|
|
|
$
|
1,081,240
|
|
Amounts advanced and outstanding
|
|
|
(240,004
|
)
|
|
|
(1,053,648
|
)
|
|
|
|
|
|
|
|
Due from factor
|
|
$
|
452,059
|
|
|
$
|
27,592
|
|
|
|
|
|
|
|
|
See Management Discussion and Analysis of Financial Condition-Liquidity and Capital
Resources.
7.
Adoption of New Accounting Guidance
In January 2010, the FASB issued ASU No. 2010-06, Fair Value Measurements and Disclosures
(Topic 820): Improving Disclosures about Fair Value Measurements (ASU 2010-06). Reporting
entities will have to provide information about movements of assets among Levels 1 and 2, and a
reconciliation of purchases, sales, issuance, and settlements of activity valued with a Level 3
method, of the three-tier fair value hierarchy established by FASB Statement No. 157, Fair Value
Measurements (ASC 820). The ASU 2010-06 also clarifies the existing guidance to require fair
value measurement disclosures for each class of assets and liabilities. ASU 2010-06 is effective
for interim and annual reporting periods beginning after December 15, 2009 for Level 1 and 2
disclosure requirements and after December 15, 2010 for Level 3 disclosure requirements.
Management does not anticipate the adoption of this guidance will have a material impact on the
consolidated financial statements.
8.
Treasury Stock Transactions
During the nine months ended September 30, 2010 the Company purchased 27,928 shares of its
common stock in the open market at a total cost of $15,070. These shares are accounted for as
treasury stock (at cost) in the accompanying condensed consolidated financial statements.
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.
10
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.
|
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, marketing and outsourcing the manufacture of various
consumer products, patented and non-patented. Our products were initially security related,
evolving from various personal, home and automotive 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
11
equipment. Sales in these two product lineshunting and camping and household items 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 and 48% for the first nine months of 2010), we have been able to
considerably increase our business customer base with large sporting goods retailer, 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 60% and 62% of gross sales during
the first nine months of 2010 and 2009, respectfully.
Hunting and Camping.
This category includes Sportsmans Lighter, game processing kit, two
aluminum camping tables, and a turkey seat. This product area accounted for 15% and 13% of gross
sales during the first nine 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 19% and 17% of gross sales during the first nine 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 6% and 8% of gross sales
during the first nine months of 2010 and 2009, respectively.
(b) Financial Condition and Results of Operations
Financial Condition
A summary of the more significant changes in the Companys balance sheet as of September 30,
2010 as compared to December 31, 2009 is presented below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase
|
|
|
Sept. 30, 2010
|
|
Dec. 31, 2009
|
|
(Decrease)
|
Accounts receivable
|
|
$
|
604,567
|
|
|
$
|
929,082
|
|
|
$
|
(324,515
|
)
|
Due from factor
|
|
|
452,059
|
|
|
|
27,592
|
|
|
|
424,467
|
|
12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase
|
|
|
Sept. 30, 2010
|
|
Dec. 31, 2009
|
|
(Decrease)
|
Inventories
|
|
|
4,594,740
|
|
|
|
4,479,347
|
|
|
|
115,393
|
|
Deferred tax asset
|
|
|
128,975
|
|
|
|
11,950
|
|
|
|
117,025
|
|
Accounts payable
|
|
|
1,460,992
|
|
|
|
776,093
|
|
|
|
684,899
|
|
Accrued expenses-other
|
|
|
42,924
|
|
|
|
145,097
|
|
|
|
(102,173
|
)
|
Income taxes payable
|
|
|
|
|
|
|
71,166
|
|
|
|
(71,166
|
)
|
The decrease in accounts receivable is related to the reduced sales in the third 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.
Due from factor represents the net amount due the Company after reducing the total accounts
receivables factored by the outstanding amount loaned by the factor against these receivables.
This amount fluctuates based upon the Companys cash flow needs. As discussed below under
Liquidity and Capital Resources, the Company entered into a Receivables Purchase Agreement with
Wachovia Bank in December 2009 with regards to its receivables with Wal-Mart. The Company did not
receive its first funding under this agreement until February 2010, thus requiring it to borrow
more funds from its factor to meet cash flow needs. As of September 30, 2010, cash flows generated
under this new Wachovia purchase agreement was sufficient to meet cash flow needs, resulting in
reduced borrowings from our factor.
Inventories remained virtually unchanged from December 31, 2009. Accounts payable, which is
most significantly affected by inventory purchases, increased from December 31, 2009 due to the
timing of purchases. The Companys payment terms for inventory purchases are 60 days from ship
date. Inventory shipments during the last two months of the third quarter 2010 were significantly
greater than during the last two months of 2009, resulting in an increase in accounts payable
As of December 31, 2009, the Company had income taxes payable of $71,166 as compared to a
deferred tax asset of $128,975 as of September 30, 2010. Included in the deferred tax asset as of September 30, 2010 is a current year income tax benefit of $103,944
resulted from the operating loss incurred during the first nine months of 2010.
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 third quarter of 2010.
Results of Operations
Three Months Ended September 30, 2010
For the three months ended September 30, 2010, the Company had net income of $7,242 on net
sales of $2,643,380, as compared to net income of $73,375 on net sales of $3,098,202 for the same
period ending September 30, 2009.
The decrease in net sales of $454,822, or 15% was affected, in part, by general economic
conditions. In addition, the decrease was also a result of the rollout to all Wal-Mart stores of
the Companys new Winchester
®
items in June and July of 2009. No rollout was required in 2010 as
these items were already fully stocked. Even though net sales decreased 15%, this reflects
improvement over the decrease during the first six months of 2010 of 39%.
The Companys gross margins decreased slightly, from 28% for the three months ended September
30, 2009 to 27% for the three months ended September 30, 2010. For the first six months, gross
margins had
13
decreased from 30% in 2009 to 25% in 2010, mainly due 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. Beginning with the third quarter, these two issues no longer affect
comparison of gross margins, resulting in virtually no change from 2009.
Operating expenses for the three months ended September 30, 2010 were $683,826, a decrease of
$30,118 or 4% over the three months ended September 30, 2009. This decrease is related primarily
to reduced sales commissions and shipping costs resulting from the decrease in sales.
Nine Months Ended September 30, 2010
For the nine months ended September 30, 2010, the Company had a net loss of $192,236 on net
sales of $6,686,982 as compared to net income of $386,240 on net sales of $9,774,700 for the same
period ending September 30, 2009.
The decrease in net sales for the nine months ended September 30, 2010 is again a result of
the same issues discussed above and in the Companys previous 10-Q reports. Mainly, the declines
experienced by the entire gun-related market during the first six months of 2010 as compared to the
significant increases during the first six months of 2009 resulting from the commencement of the
Obama administration and its then unpredictable position regarding gun controls.
The Companys gross margins decreased from 30% for the nine months ended September 30, 2009 to
26% for the nine months ended September 30, 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. As discussed above, these two issues only affected
the first six months/.
Operating expenses for the nine months ended September 30, 2010 were $1,972,238, a decrease of
$163,410, or 8% over the nine months ended September 30, 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 purchases. Our primary source of cash are
revenues generated 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 except for chargebacks. The factor performs all credit and collection
functions, and assumes all risks relating to the creditworthiness of the accounts 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 September 30, 2010, the Company had an
outstanding advance balance with its factor in the amount of $240,004.
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
14
days remaining until the receivables come due under our normal payment terms with Wal-Mart. Since
this is a purchase arrangement, 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.
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 September 30, 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
15
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..
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 June 30, 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.
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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.
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, has 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 is not affiliated 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 September 30, 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
17
management believe that it had any effect on the accuracy of the Companys financial
statements for the current reporting period.
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 4. REMOVED AND RESERVED
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:
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Exhibits
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2
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Acquisition Agreement
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3(i)
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Articles of Incorporation
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3(ii)
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By-laws
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Exhibits required by Item 601 of Regulation S-K attached:
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Exhibits
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31.1
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Certification of David A. Collins Pursuant to Rule 13a-14(a)/15d-14(a)
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Exhibits
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31.2
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Certification of Robert C. Goodwin Pursuant to Rule 13a-14(a)/15d-14(a)
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32.1
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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
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32.2
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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
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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:
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By:
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/s/ David A. Collins
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David A. Collins, Chairman, CEO and Principal Executive Officer
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By:
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/s/ Robert C. Goodwin
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Robert C. Goodwin, Principal Accounting Officer and Principal Financial Officer
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Dated: November 12, 2010
20
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