10-Q
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 March 31, 2009
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o |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE EXCHANGE
ACT |
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 |
incorporation or organization)
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Identification No.) |
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12120 Colonel Glenn Road, Suite 6200 Little Rock, AR
(Address of principal executive offices)
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72210
(Zip Code) |
(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 during the preceding 12 months
(or for shorter period that the Registrant was required to submit and post such
files). Yes o No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.
See the definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act. (Check one):
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Large accelerated filer o
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Accelerated filer o
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Non-accelerated filer o
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Smaller reporting company þ |
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(Do not check if a smaller reporting company) |
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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). 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 May 14, 2009, 6,323,364 shares of Common Stock are issued and
5,793,699 are outstanding.
Transitional Small Business Disclosure Format: Yes o No þ
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Our financial statements are contained in pages 2 through 5 following.
1
DAC TECHNOLOGIES GROUP INTERNATIONAL, INC.
Condensed Consolidated Balance Sheets
March 31, 2009 and December 31, 2008
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March 31, |
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December 31, |
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2009 |
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2008 |
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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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$ |
124,313 |
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$ |
599,103 |
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Accounts receivable, less allowance for doubtful
accounts of $20,000 in 2009 and 2008 |
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648,304 |
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495,718 |
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Due from factor |
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1,936,295 |
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1,542,918 |
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Inventories |
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3,927,528 |
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2,742,563 |
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Prepaid expenses and deferred charges |
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128,607 |
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72,068 |
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Current deferred income tax benefit |
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31,019 |
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31,019 |
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Total current assets |
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6,796,066 |
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5,483,389 |
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Property and equipment |
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Leasehold improvements |
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55,323 |
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55,323 |
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Furniture and fixtures |
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298,821 |
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297,356 |
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Molds, dies, and artwork |
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536,809 |
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536,809 |
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890,953 |
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889,488 |
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Accumulated depreciation |
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(635,435 |
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(623,477 |
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Net property and equipment |
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255,518 |
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266,011 |
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Other assets |
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Patents and trademarks, net of accumulated
amortization of $123,426 and $119,772 in 2009 and 2008 |
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118,854 |
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121,718 |
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Deposits |
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17,351 |
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17,351 |
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Advances to employees |
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32,392 |
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28,617 |
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Note receivable |
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Long-term |
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20,000 |
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20,000 |
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Related party |
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72,518 |
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72,518 |
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Shareholder |
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220,888 |
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170,382 |
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Total other assets |
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482,003 |
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430,586 |
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Total assets |
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$ |
7,533,587 |
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$ |
6,179,986 |
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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 Sheets
March 31, 2009 and December 31, 2008
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March 31, |
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December 31, |
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2009 |
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2008 |
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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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$ |
92,475 |
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$ |
104,609 |
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Accounts payable |
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1,989,638 |
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795,136 |
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Accrued payroll tax withholdings |
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26,284 |
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25,519 |
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Accrued expenses-other |
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71,068 |
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92,850 |
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Income taxes payable |
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126,570 |
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89,700 |
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Total current liabilities |
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2,306,035 |
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1,107,814 |
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Deferred income tax liability |
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66,574 |
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66,574 |
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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, $.001 par value; authorized
50,000,000 shares; 6,323,364 shares issued at
March 31, 2009 and December 31, 2008; 5,793,699
and 5,882,999 shares outstanding at March 31, 2009
and December 31, 2008, respectively |
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6,323 |
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6,323 |
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Additional paid-in capital |
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1,963,102 |
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1,963,102 |
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Treasury stock, at cost |
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(401,043 |
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(372,124 |
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Retained earnings |
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3,592,596 |
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3,408,297 |
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Total stockholders equity |
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5,160,978 |
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5,005,598 |
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Total liabilities and stockholders equity |
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$ |
7,533,587 |
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$ |
6,179,986 |
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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, 2009 and 2008
(Unaudited)
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2009 |
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2008 |
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Net sales |
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$ |
3,533,456 |
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$ |
2,715,769 |
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Cost of sales |
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2,461,760 |
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1,986,908 |
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Gross profit |
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1,071,696 |
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728,861 |
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Operating expenses |
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Selling |
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445,789 |
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315,762 |
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General and administrative |
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278,049 |
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281,587 |
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Total operating expenses |
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723,838 |
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597,349 |
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Income from operations |
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347,858 |
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131,512 |
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Other income (expense) |
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Interest expense |
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(47,053 |
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(62,877 |
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Other income |
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14 |
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Total other income (expense) |
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(47,039 |
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(62,877 |
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Income before income tax provision |
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300,819 |
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68,635 |
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Provision for income taxes |
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116,520 |
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26,661 |
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Net income |
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$ |
184,299 |
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$ |
41,974 |
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Basic and diluted earnings per share |
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$ |
0.03 |
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$ |
0.01 |
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Weighted average number of common shares: |
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Basic and diluted |
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5,857,710 |
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6,036,168 |
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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, 2009 and 2008
(Unaudited)
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2009 |
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2008 |
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Cash flows from operating activities |
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Net income |
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$ |
184,299 |
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$ |
41,974 |
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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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11,958 |
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12,171 |
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Amortization |
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3,654 |
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3,867 |
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Changes in operating assets and liabilities |
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Accounts receivable |
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(152,586 |
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(288,691 |
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Due from factor |
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(393,377 |
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426,532 |
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Inventories |
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(1,184,965 |
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(52,454 |
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Prepaid expenses and deferred charges |
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(56,539 |
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(65,463 |
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Income taxes receivable |
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26,661 |
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Advances to employees |
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(3,775 |
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(559 |
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Accounts payable |
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1,194,502 |
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(389,470 |
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Accrued payroll tax withholdings |
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765 |
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179 |
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Accrued expenses other |
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(21,782 |
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(4,075 |
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Income taxes payable |
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36,870 |
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Net cash used in operating activities |
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(380,976 |
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(289,328 |
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Cash flows from investing activities |
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Purchases of property and equipment |
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(1,465 |
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(15,264 |
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Payments for patents and trademarks |
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(790 |
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Net payments (advances) on notes receivable stockholder |
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(50,506 |
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9,202 |
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Net cash used by investing activities |
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(52,761 |
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(6,062 |
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Cash flows from financing activities |
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Payments on notes payable |
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(12,134 |
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(35,660 |
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Purchase of treasury stock |
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(28,919 |
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(6,800 |
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Net cash used in financing activities |
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(41,053 |
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(42,460 |
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Net decrease in cash |
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(474,790 |
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(337,850 |
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Cash beginning of period |
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599,103 |
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402,468 |
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Cash end of period |
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$ |
124,313 |
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$ |
64,618 |
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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 has continued to develop
this market. In 2007 and 2008, the Company added a line of household products, which includes
cleaning dusters and fireplace equipment.
Although a significant portion of our business is with the mass-market retailer Wal-Mart
(approximately 71% during 2008), 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.
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.
6
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, 2009 and 2008, 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.
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 $61,011 at
March 31, 2009 and December 31, 2008. The Company receives inventory from overseas at terms of
F.O.B. shipping point, bearing the risk of loss at that point in time. During the time period
prior to receipt in the warehouse, inventory is classified and recorded as inventory in transit.
Inventory held in the warehouse is classified as finished goods.
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Mar. 31, 2009 |
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Dec. 31, 2008 |
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Inventories consist of: |
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Finished goods |
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$ |
2,562,878 |
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$ |
2,314,319 |
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Inventory in transit |
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1,337,638 |
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415,102 |
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Parts |
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27,012 |
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13,142 |
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$ |
3,927,528 |
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$ |
2,742,563 |
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7
Due from Factor
The Company factors a majority 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:
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Mar. 31, 2009 |
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Dec. 31, 2008 |
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Accounts receivable factored |
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$ |
2,567,353 |
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$ |
4,724,918 |
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Amounts advanced and outstanding |
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631,058 |
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3,182,000 |
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Due from factor |
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$ |
1,936,295 |
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$ |
1,542,918 |
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Earnings per Share: Dilutive Effect
Basic earnings per share of common stock are computed by dividing net income applicable to
common shares by the weighted average number of common shares outstanding during the period.
Diluted earnings per share are computed using the weighted average number of common shares and, if
dilutive, the incremental common shares issuable upon the exercise of outstanding stock warrants
(using the treasury stock method). For the three months ended March 31, 2009 and 2008, there was
no dilutive effect related to these outstanding stock warrants as their exercise price of $2.57 was
greater than the average market price of the common stock during the period.
Fair Value of Financial Instruments
The fair values of cash and cash equivalents, accounts receivables and notes payable approximate
their carrying values due to the short-term nature of the instruments. The fair value of notes
receivable, which is based on discounted cash flows using current interest rates, approximates the
carrying value at March 31, 2009 and 2008.
Accounting Changes
In December 2007, the FASB issued SFAS No. 160, Non-controlling Interest in Consolidated
Financial Statements. SFAS No. 160 amends Accounting Research Bulletin No. 51, Consolidated
Financial Statements, to establish accounting and reporting standards for non-controlling interest
in a subsidiary and for the deconsolidation of a subsidiary. This statement clarifies that a
non-controlling interest in a subsidiary is an ownership interest in the consolidated entity and
should be reported as equity in the financial statements, rather than in the liability or mezzanine
section between liabilities and equity. SFAS No. 160 also requires consolidated net income be
reported at amounts that include the amounts attributable to both the parent and the
non-controlling interest. SFAS No. 160 is effective for fiscal years, and interim periods within
those fiscal years, beginning on or after December 15, 2008. The Company adopted the provisions of
SFAS No. 160 on January 1, 2009. There was no immediate impact on these consolidated financial
statements as a result of the adoption of the standard.
8
In May 2008, the FASB issued SFAS No. 162, The Hierarchy of Generally Accepted Accounting
Principles. SFAS No. 162 identifies the sources of accounting principles and the
framework for selecting the principles used in the preparation of financial statements of
nongovernmental entities that are presented in conformity with generally accepted accounting
principles in the United States. SFAS No. 162 will be effective 60 days following the SECs
approval of the Public Company Accounting Oversight Board amendments to AU Section 4 1 1, The
Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles. The Company
does not expect the implementation of SFAS No. 162 to have a material effect on its consolidated
financial statements.
In March 2008 the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and
Hedging Activities. This statement amends and expands the disclosure requirements of SFAS No. 133
with the intent to provide users of financial statements with an enhanced understanding of: how
and why an entity uses derivative instruments; how derivative instruments and related hedged items
are accounted for under SFAS No. 133 and its related interpretations; and how derivative
instruments and related hedged items affect an entitys financial position, financial performance
and cash flows. To meet those objectives, this statement requires qualitative disclosures about
objectives and strategies for using derivatives, quantitative disclosures about fair value amounts
of and gains and losses on derivative instruments, and disclosures about credit-risk-related
contingent features in derivative agreements. This pronouncement is effective for consolidated
financial statements issued for fiscal years and interim periods beginning November 15, 2008, with
early application encouraged. The Company adopted the provisions of SFAS No. 161 on January 1,
2009. There was no immediate impact on these consolidated financial statements as a result of the
adoption of these standards.
Treasury Stock Transactions
During the three months ended March 31, 2009 and 2008, the Company purchased 89,300
and 8,500 shares of its common stock for $28,919 and $6,800,
respectively. These shares are accounted for as treasury stock 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
9
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:
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achieving planned revenue and profit growth in each of the Companys business units; |
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renewal of purchase orders consistent with past experience; |
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increasing price, products and services competition; |
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emergence of new competitors or consolidation of existing competitors; |
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the timing of orders and shipments; |
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continuing availability of appropriate raw materials and manufacturing relationships; |
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maintaining and improving current product mix; |
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changes in customer requirements and in the volume of sales to principal customers; |
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changes in governmental regulations in the various geographical regions where the
Company operates; |
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general economic and political conditions; |
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attracting and retaining qualified key employees; |
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the ability of the Company to control manufacturing and operating costs; and |
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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 consist of gun cleaning kits and
accessories, gun safety items such as gun locks, trigger locks and security safes, hunting and
camping accessories, and household items.
10
A significant portion of our business is with mass-market retailers, primarily Wal-Mart, as
well as gun manufacturers. With the addition of our Gunmaster gun cleaning kits, we continue to
increase our business with sporting goods retailers and distributors.
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 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 71% and 58% of gross sales during
the first three months of 2009 and 2008, respectively.
Hunting and camping. This category includes three meat processing items, Sportsmans Lighter,
game processing kit, two aluminum camping tables, and a turkey seat. This product area accounted
for 6% and 13% of gross sales during the first three months of 2009 and 2008, respectively.
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 13% and 17% of gross sales during the first three months of 2009 and 2008,
respectively.
Household Products. We market five household cleaner dusters and a line of household
fireplace screens, tools and accessories. This product area accounted for 10% and12% of gross
sales during the first three months of 2009 and 2008, respectively.
(b) Financial Condition and Results of Operations
Financial Condition
There has been no material change in the overall financial condition of the Company for the
period ending March 31, 2009 as compared to December 31, 2008.
The only significant changes on the Companys balance sheet at March 31, 2009 as compared to
December 31, 2008 were in inventories and accounts payable. Inventories increased $1,184,965 and
accounts payable accordingly increased $1,194,502. These increases are normal and expected based on
the seasonality of the Companys line of products.
Results of Operations
For the three months ended March 31, 2009, the Company had net income of $184,299 on net sales
of $3,533,456, as compared to net income of $41,974 on net sales of $2,715,769 for the same period
ending
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March 31, 2008. The increase in net income of $142,325 represents a 339% over 2008, while the
increase in net sales of $817,687 is a 30% increase over 2008.
Sales of the Companys gun cleaning and maintenance products increased $1,013,481, or 63%,
over 2008. Since President Barack Obama has taken office, there has been a tremendous increase in
the sales of all types of firearms, due to the uncertainty of what steps the new administration may
take in regards to restricting the sale of firearms. Gun and ammunition manufacturers have had
difficulty filling orders. It is assumed that the increase in sales of the Companys gun cleaning
items is a result of the increase in firearm sales.
The Companys gross margins increased from 26.8% for the three months ended March 31, 2008, to
30.3% for the three months ended March 31, 2009. Over the past two years, the Companys gross
margins had been decreasing due to increases in the costs of the Companys products due to
increasing commodity, oil and freight costs, as well as a weak U.S. dollar against the Chinese
currency. Beginning in the later part of 2008, this trend began to reverse, as commodity and oil
prices began to decline. Accordingly, the Company has been able to negotiate lower prices on the
cost most of its products while its wholesale pricing has not changed, which is now beginning to be
reflected in the increased margins. While there was no significant impact to the Companys gross
margins during the first quarter, the Company increased its wholesale pricing to its smaller
customers in January 2009.
Operating expenses for the three months ended March 31, 2009 were $723,838, an increase of
$126,489, or 21% over the three months ended March 31, 2008. This increase is related primarily to
the increase in sales, resulting in increased sales commissions, freight costs and other related
warehouse costs.
In March 2009, the Company opened an office in Bentonville, Arkansas and hired a former
assistant buyer for Wal-Mart to operate this new office. In addition to his knowledge of Wal-Mart
operations, this new employee brings a wealth of knowledge and experience in the areas of
merchandising and retail sales that is expected to be of great benefit to the Company by
expandingits business, not only with Wal-Mart, but with its overall customer base as well.
(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 its
receivables (on a non-recourse basis). Consequently, should our sales revenues significantly
decline, it could affect our short-term liquidity. 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, or 4%, whichever is greater. Advances are payable to the factor on demand. For the
three-month period ending March 31, 2009, our factor had advanced us $631,058.
(d) Trends
Our business has 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
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overhead costs. This trend began to reverse during the later part of 2008, as global
commodity prices and oil prices began to decrease. This reversal has benefited the Company as
reflected in its increased gross margins. Should this trend continue, the Company would continue
to benefit. Accordingly, any reversal of this current trend 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.
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.
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(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, 2008 audited
consolidated financial statements included in the Companys Form 10-K. The quarterly financial
statements for the period ended March 31, 2009, 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, 2008, 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 re-evaluates 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 re-evaluation, 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.
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.
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(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 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
None.
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, 2009, 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, 2008 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.
Item 4T. CONTROLS AND PROCEDURES
There was no material change to the Companys internal control over financial reporting during its
most recent fiscal quarter from that of December 31, 2008.
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PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 1A. RISK FACTORS
Our operations and financial results are subject to various risks and uncertainties that
could adversely affect our business, financial condition, results of operations, and
trading price of our common stock. Please refer to our annual report on Form 10-K for
fiscal year 2008 for additional information concerning these and other uncertainties that
could negatively impact the Company.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
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:
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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 |
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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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 |
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 15, 2009
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