ALUF HOLDINGS, INC. - Quarter Report: 2008 March (Form 10-Q)
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
DC 20549
FORM
10-Q
(Mark
One)
| x |
Quarterly
Report under Section 13 or 15(d) of the Securities Exchange Act of
1934
|
For
the
quarterly period ended March
31, 2008
or
| o |
Transition
Report under Section 13 or 15(d) of the Securities Exchange Act of
1934
|
For
the
transition period from _________ to _________
000-13118
(Commission
File No.)
ACTION
PRODUCTS INTERNATIONAL, INC.
(Exact
name of registrant as specified in its charter)
|
Florida
|
59-2095427
|
|
(State
or other jurisdiction of
|
(IRS
Employer Identification No.)
|
|
incorporation
or organization)
|
1101
North Keller Rd., Suite E, Orlando, Florida, 32810
(Address
of principal executive offices, Zip Code)
Registrant's
telephone number, including area code (407)
481-8007
Indicate
by check mark whether the registrant (1) has filed all reports required to
be
filed by Section 13 or 15(d) of the Securities 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. YES x 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
definition of “large accelerated filer”, “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.
|
Large
accelerated filer o
|
|
Accelerated filer o
|
|
Non-accelerated
filer o
|
|
Smaller
reporting company x
|
|
Indicate
by check mark whether registrant is a shell company (as defined in Rule 12b-2
of
the Exchange Act):
YES o NO x
APPLICABLE
ONLY TO CORPORATE ISSUERS:
Indicate
the number of shares outstanding of each of the issuer's classes of common
stock, as of latest practicable date.
|
Class
|
Outstanding
at May 08, 2008
|
|
Common
Stock, $.001 par value
|
5,441,300
|
INDEX
|
Page
Number
|
||
|
PART
I. FINANCIAL INFORMATION
|
||
|
Item
1.
|
Financial
Statements
|
|
|
Condensed
Balance Sheets at March 31, 2008 (unaudited) and December 31,
2007
|
3
|
|
|
Condensed
Statements of Operations - Three months ended March 31, 2008 and
2007
(unaudited)
|
4
|
|
|
Condensed
Statements of Cash Flows - Three months ended March 31, 2008 and
2007
(unaudited)
|
5
|
|
|
Notes
to Condensed Financial Statements (unaudited)
|
6
|
|
|
Item
2.
|
Management's
Discussion and Analysis of Financial Condition and Results of
Operations
|
10
|
|
Item
4.
|
Controls
and Procedures
|
12
|
|
PART
II. OTHER INFORMATION
|
||
|
Item
2.
|
Unregistered
Sales of Securities and Use of Proceeds
|
12
|
|
Item
5.
|
Other
Information
|
13
|
|
Item
6.
|
Exhibits
|
13
|
|
SIGNATURE
PAGE
|
14
|
|
Page
2 of
14
PART
I. FINANCIAL INFORMATION
ITEM
1. Financial Statements
ACTION
PRODUCTS INTERNATIONAL, INC.
CONDENSED
BALANCE SHEETS
|
March 31, 2008
Unaudited
|
December 31,
2007
|
||||||
|
ASSETS
|
|||||||
|
CURRENT
ASSETS
|
|||||||
|
Cash
and cash equivalents
|
$
|
875,700
|
$
|
44,400
|
|||
|
Investment
securities
|
762,100
|
475,000
|
|||||
|
Accounts
receivable, net of allowance of $62,400 and $47,200
|
933,000
|
1,429,800
|
|||||
|
Other
receivable
|
-
|
3,233,700
|
|||||
|
Inventories,
net
|
1,872,500
|
2,131,800
|
|||||
|
Prepaid
expenses and other assets
|
270,800
|
197,700
|
|||||
|
TOTAL
CURRENT ASSETS
|
4,714,100
|
7,512,400
|
|||||
|
PROPERTY,
PLANT AND EQUIPMENT
|
3,659,400
|
3,650,400
|
|||||
|
Less
accumulated depreciation and amortization
|
(2,801,200
|
)
|
(2,761,100
|
)
|
|||
|
NET
PROPERTY, PLANT AND EQUIPMENT
|
858,200
|
889,300
|
|||||
|
GOODWILL
|
1,405,300
|
1,405,300
|
|||||
|
OTHER
ASSETS
|
398,800
|
276,100
|
|||||
|
TOTAL
ASSETS
|
$
|
7,376,400
|
$
|
10,083,100
|
|||
|
LIABILITIES
AND SHAREHOLDERS' EQUITY
|
|||||||
|
CURRENT
LIABILITIES
|
|||||||
|
Accounts
payable
|
$
|
430,900
|
$
|
1,811,900
|
|||
|
Accrued
expenses, payroll and related expenses
|
653,600
|
593,900
|
|||||
|
Borrowings
under line of credit
|
1,488,800
|
1,960,400
|
|||||
|
Borrowings
under investment account
|
-
|
141,800
|
|||||
|
Other
current liabilities
|
89,400
|
89,600
|
|||||
|
TOTAL
CURRENT LIABILITIES
|
2,662,700
|
4,597,600
|
|||||
|
SHAREHOLDERS'
EQUITY
|
|||||||
|
Preferred
stock - 10,000,000 shares authorized, zero shares issued and
outstanding
|
|||||||
|
Common
stock -$.001 par value; 15,000,000 authorized; 5,660,000 shares
issued
|
5,700
|
5,700
|
|||||
|
Treasury
stock - 208,600 shares, at par
|
(200
|
)
|
(200
|
)
|
|||
|
Additional
paid-in capital
|
9,326,300
|
9,260,200
|
|||||
|
Unearned
share based compensation cost
|
(188,600
|
)
|
(256,300
|
)
|
|||
|
Accumulated
deficit
|
(4,429,500
|
)
|
(3,523,900
|
)
|
|||
|
TOTAL
SHAREHOLDERS' EQUITY
|
4,713,700
|
5,485,500
|
|||||
|
TOTAL
LIABILITIES AND SHAREHOLDERS' EQUITY
|
$
|
7,376,400
|
$
|
10,083,100
|
|||
See
Accompanying Notes
Page
3 of
14
ITEM
1. Financial Statements (cont.)
ACTION
PRODUCTS INTERNATIONAL, INC.
CONDENSED
STATEMENTS OF OPERATIONS (Unaudited)
|
Three Months Ended March 31
|
|||||||
|
2008
|
2007
|
||||||
|
GROSS
SALES
|
$
|
1,258,300
|
$
|
1,443,500
|
|||
|
SALES
RETURNS AND ALLOWANCES
|
34,600
|
74,300
|
|||||
|
NET
SALES
|
1,223,700
|
1,369,200
|
|||||
|
COST
OF SALES
|
790,800
|
778,000
|
|||||
|
GROSS
PROFIT
|
432,900
|
591,200
|
|||||
|
OPERATING
EXPENSES
|
|||||||
|
Selling
|
393,300
|
478,100
|
|||||
|
General
and administrative
|
942,500
|
678,900
|
|||||
|
TOTAL
OPERATING EXPENSES
|
1,335,800
|
1,157,000
|
|||||
|
LOSS
FROM OPERATIONS
|
(902,900
|
)
|
(565,800
|
)
|
|||
|
OTHER
INCOME (EXPENSE)
|
|||||||
|
Interest
expense
|
(35,700
|
)
|
(22,400
|
)
|
|||
|
Other
|
32,800
|
39,400
|
|||||
|
TOTAL
OTHER INCOME (EXPENSE)
|
(2,900
|
)
|
17,000
|
||||
|
LOSS
BEFORE INCOME TAX PROVISION
|
(905,800
|
)
|
(548,800
|
)
|
|||
|
INCOME
TAX PROVISION
|
-
|
-
|
|||||
|
NET
LOSS
|
$
|
(905,800
|
)
|
$
|
(548,800
|
)
|
|
|
LOSS
PER SHARE
|
|||||||
|
Basic
and Diluted
|
$
|
(0.17
|
)
|
$
|
(0.10
|
)
|
|
|
Weighted
average number of common shares outstanding:
|
|||||||
|
Basic
and Diluted
|
5,451,500
|
5,231,500
|
|||||
See
Accompanying Notes
Page
4 of
14
ITEM
1. Financial Statements (cont.)
ACTION
PRODUCTS INTERNATIONAL, INC.
CONDENSED
STATEMENTS OF CASH FLOWS (Unaudited)
|
Three Months Ended March 31
|
|||||||
|
2008
|
2007
|
||||||
|
CASH
FLOWS FROM OPERATING ACTIVITIES
|
|||||||
|
Net
Loss
|
$
|
(905,800
|
)
|
$
|
(548,800
|
)
|
|
|
Adjustments
to reconcile net loss to net cash provided by/(used in) operating
activities
|
|||||||
|
Depreciation
|
40,000
|
44,600
|
|||||
|
Amortization
|
13,800
|
5,900
|
|||||
|
Unrealized
(gain)/loss on investment securities
|
(9,500
|
)
|
17,800
|
||||
|
Stock
based compensation expense
|
133,800
|
12,500
|
|||||
|
Provision
for bad debts
|
24,200
|
(8,300
|
)
|
||||
|
Loss
on disposal of other assets
|
-
|
52,400
|
|||||
|
Changes
in:
|
|||||||
|
Litigation
settlement receivable
|
3,233,700
|
-
|
|||||
|
Accounts
receivable
|
472,500
|
740,100
|
|||||
|
Investment
securities
|
(277,600
|
)
|
(585,800
|
)
|
|||
|
Inventories
|
259,300
|
77,400
|
|||||
|
Prepaid
expenses
|
(73,000
|
)
|
23,500
|
||||
|
Other
assets
|
(136,500
|
)
|
(39,600
|
)
|
|||
|
Accounts
payable
|
(1,381,000
|
)
|
(78,900
|
)
|
|||
|
Accrued
expenses, payroll and related expenses
|
59,800
|
(36,200
|
)
|
||||
|
Deferred
revenue
|
-
|
(6,200
|
)
|
||||
|
NET
CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES
|
1,453,700
|
(329,600
|
)
|
||||
|
CASH
FLOWS FROM INVESTING ACTIVITIES
|
|||||||
|
Acquisition
of property, plant and equipment
|
(9,000
|
)
|
(41,500
|
)
|
|||
|
NET
CASH USED IN INVESTING ACTIVITIES
|
(9,000
|
)
|
(41,500
|
)
|
|||
|
CASH
FLOWS FROM FINANCING ACTIVITIES
|
|||||||
|
Repayment
of mortgage principal
|
-
|
(20,300
|
)
|
||||
|
Common
stock options and warrants issuance costs
|
-
|
(800
|
)
|
||||
|
Net
change in borrowings under line of credit
|
(471,600
|
)
|
244,000
|
||||
|
Net
change in borrowings under investment account
|
(141,800
|
)
|
251,400
|
||||
|
NET
CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES
|
(613,400
|
)
|
474,300
|
||||
|
NET
INCREASE IN CASH AND CASH EQUIVALENTS
|
831,300
|
103,200
|
|||||
|
CASH
AND CASH EQUIVALENTS AT BEGINNING OF PERIOD
|
44,400
|
369,900
|
|||||
|
CASH
AND CASH EQUIVALENTS AT END OF PERIOD
|
$
|
875,700
|
$
|
473,100
|
|||
|
Supplemental
disclosures - cash paid for:
|
|||||||
|
Interest
|
$
|
35,700
|
$
|
22,400
|
|||
|
Income
Taxes
|
$
|
-
|
$
|
-
|
|||
See
Accompanying Notes
Page
5 of
14
ACTION
PRODUCTS INTERNATIONAL, INC.
NOTES
TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
| 1. |
Condensed
financial statements. In
the opinion of management, the accompanying unaudited condensed financial
statements contain all normal recurring adjustments necessary to
present
fairly the financial position of Action Products International, Inc.
(the
“Company”), at March 31, 2008 and December 31, 2007, the results of its
(i) operations for the three month periods ended March 31, 2008 and
2007
and (ii) cash flows for the three month periods ended March 31, 2008
and
2007. The financial information included herein is taken from the
books
and records of the Company and is unaudited.
|
Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted. These condensed financial statements should be read in
conjunction with the audited financial statements and notes thereto included
in
the Company’s annual report on Form 10-KSB for the year ended December 31, 2007.
The results of operations for the three-month period ended March 31, 2008 are
not necessarily indicative of the operating results for the full year. Through
March 31, 2008, the Company has been able to meet its obligations as they come
due; however, it is at least reasonably possible that if the Company continues
to incur losses and negative cash flows, it will have to obtain additional
sources of debt or equity financing to maintain its liquidity (See Note 3).
There can be no assurance that such financing will be available or available
on
terms acceptable to the Company, if needed.
|
2.
|
Operations.
The Company incurred significant losses in the current quarter. In
its
effort to eliminate these losses, the Company has recently changed
certain
key members of management, has focused efforts on increasing sales
and is
evaluating its product lines for profitable margin contributions.
Management believes that it will be successful in its plans to return
the
Company to profitability: accordingly, no adjustments have been made
to
the accompanying financials that might be necessary if the Company
were
unable to return to profitable
operations.
|
|
3.
|
Line
of credit. The
Company maintains a working capital line of credit with a financial
institution. The agreement, as amended, stipulates, among other things,
a
borrowing limit of the lesser of $2,000,000 or the sum of 85% of
eligible
accounts receivable and 50% of eligible inventory, as further defined
in
the agreement. Borrowings are currently collateralized by all accounts
receivable, inventories and the warehouse property in Ocala, Florida.
Interest is payable monthly based on a variable rate equal to the
financial institution’s prime rate (institution’s prime rate was 5.25% at
March 31, 2008) plus 150 basis points. The agreement also requires,
among other things, that the Company maintain certain financial ratios
measured on an annual basis. The original term of the agreement expired
August 30, 2006. The Company has received various extensions under
the
agreement and the term of the current extension ends May 31, 2008.
The
Company is reviewing alternative financing opportunities with other
financial institutions. At December 31, 2007 the Company was in compliance
with the covenants specified in the agreement. The Company had $1,488,800
and $1,960,400 of borrowings outstanding under the line of credit
as of
March 31, 2008 and December 31, 2007, respectively.
|
Cash
paid
for interest on all borrowing arrangements and lease obligations was $35,700
and
$22,400 for the three months ended March 31, 2008 and March 31, 2007,
respectively.
|
4.
|
Borrowings
under Investment Account. As
part of the normal arrangement with the broker handling our marketable
securities investments, the Company has the opportunity to borrow
under a
margin arrangement, for investment, when appropriate. The balance
on the
borrowing is secured by the securities in the portfolio and interest
is
charged at a variable rate on the average balance. The rate at March
31,
2008 ranged from 4.24 percent to 7.24 percent based on the balance
borrowed. Borrowings under this account were zero and $141,800 as
of March
31, 2008 and December 31, 2007,
respectively.
|
Page
6 of
14
NOTES
TO CONDENSED FINANCIAL STATEMENTS (Continued)
|
5.
|
Earnings
(loss) per share. Common
stock equivalents were not included in the computation of diluted
earnings
(loss) per share for the three-month periods ended March 31, 2008
and
2007, as their effect would have been anti-dilutive. Common share
equivalents excluded from the diluted earnings per share computations
were
6,986,300 and 7,137,600 for the three months ended March 31, 2008
and
March 31, 2007 respectively.
|
|
6.
|
Common
Stock and Equity Securities.
On
May
17, 2007,
the Board of Directors authorized effective immediately, a program
to
repurchase up to 150,000 of the outstanding common shares. Repurchases
may
be made by the Company from time to time in the open market at prevailing
prices, in either block purchases or in privately negotiated transactions.
The share repurchase program does
not have a fixed expiration date. However, the Board may discontinue
or
suspend the program at any time. As of December 31, 2007, the Company
had
repurchased 2,900
common shares and
147,100 remain available under
the plan.
The
Company did not repurchase
any shares of its common stock during the first quarter of
2008.
|
In
2003,
the Company’s shareholders were issued one warrant for each share of common
stock owned as of June 12, 2003, the record date. Each warrant entitles the
holder to purchase one common share at an exercise price of $2.00. On June
6,
2006, the Company’s Board of Directors extended the expiration date of the
warrants from June 9, 2006 to December 31, 2010. All other terms of the warrants
remain the same. As of March 31, 2008 approximately 3,272,100 warrants had
been
issued and 1,566,700 had been exercised.
In
2006,
the Company’s shareholders were issued one warrant for each share of common
stock owned as of January 18, 2006, the record date. Each warrant entitles
the
holder to purchase one common share at exercise prices of $3.25 and $3.75.
On
January 30, 2008, the Company’s Board of Directors extended the expiration dates
of the warrants such that the warrants will allow the holders of each warrant
owned to purchase one share of common stock at an exercise price of $3.25 per
share until January 31, 2009 or $3.75 per share from February 1, 2009 until
January 31, 2011. As of March 31, 2008 5,197,200 warrants had been issued and
none had been exercised.
Share-Based
Compensation.
The
Company has a stock-based employee compensation plan (the “Plan”) that provides
incentives through the grant of stock options. The exercise price of stock
options granted under the Plan shall not be less than the fair market value
of
the shares on the date of grant. As of March 31, 2008, 1,400,000 shares of
common stock are reserved for issuance under the Plan.
Share-based
compensation is recorded in accordance with SFAS 123R. Share-based compensation
cost is measured at date of grant, based on the fair value of each employee
and
director grant of options to purchase common stock using the Black-Scholes
option-pricing model. The fair value of restricted common stock grants is
measured based upon the quoted market price of the Company’s common stock on the
date of grant. Compensation expense is recognized over the requisite service
period underlying the arrangement. On March 31, 2008 the Company had one
share-based compensation plan. The compensation costs charged as operating
expense for grants under the plan were approximately $45,800 and $12,500 for
the
three months ended March 31, 2008 and March 31, 2007 respectively.
During
the quarter ended March 31, 2008, the Company granted to its directors options
to purchase up to 70,000 shares of common stock. A summary of option activity
under the plan as of March 31, 2008, and changes during the three months then
ended are presented below:
Page
7 of
14
NOTES
TO CONDENSED FINANCIAL STATEMENTS (Continued)
Common
Stock and Equity Securities (cont.)
|
Weighted-
|
Weighted-
|
||||||||||||
|
Weighted-
|
Average
|
Average
|
|||||||||||
|
Number of
|
Average
|
Remaining
|
Grant Date Fair
|
||||||||||
|
Options
|
Options
|
Exercise Price
|
Contractual Term
|
Value
|
|||||||||
|
Outstanding
at January 1, 2008
|
204,000
|
|
$3.13
|
1.2
|
|
$1.84
|
|||||||
|
Grants
|
70,000
|
|
$1.20
|
4.3
|
|
$0.59
|
|||||||
|
Exercises
|
-
|
|
$-
|
-
|
-
|
||||||||
|
Cancellations
|
(10,000)
|
|
|
$3.04
|
-
|
|
$1.36
|
||||||
|
Outstanding
at March 31, 2008
|
264,000
|
|
$2.62
|
1.9
|
|
$1.57
|
|||||||
|
Shares
exercisable at March 31, 2008
|
244,000
|
|
$2.74
|
2.3
|
|
$1.65
|
|||||||
The
Company’s weighted-average assumptions used in the pricing model and resulting
fair values were as follows:
|
Three months ended
March 31, 2008
|
||||
|
Risk-free
rate
|
3.6%
|
|
||
|
Expected
option life (in years)
|
4.4
|
|||
|
Expected
stock price volatility
|
63%
|
|
||
|
Dividend
yield
|
0.0%
|
|
||
|
Weighted
average grant date value
|
|
$0.59
|
||
On
November 5, 2007 the Company’s Board of Directors granted 225,000 shares of
common stock to its new Chief Financial Officer as part of his compensation
package.
The
shares vest as follows:
|
Date
|
Number of Shares
|
|||
|
April
1, 2008
|
31,250
|
|||
|
June
1, 2008
|
31,250
|
|||
|
September
1, 2008
|
31,250
|
|||
|
January
1, 2009
|
31,250
|
|||
|
April
1, 2009
|
25,000
|
|||
|
June
1, 2009
|
25,000
|
|||
|
September
1, 2009
|
25,000
|
|||
|
January
1, 2010
|
25,000
|
|||
|
Total
|
225,000
|
|||
The
compensation value was based on $1.40 per share market value on the date of
grant. The compensation expense for each layer is being recognized over the
vesting period of the individual layers. Unearned compensation cost from this
grant was $168,300 and $256,300 as of March 31, 2008 and December 31, 2007
respectively.
In
January 2008, the Company issued a warrant for services which entitles the
holder to purchase 12,500 shares of common stock at an exercise price of $1.28
per share. The warrant expires on December 31, 2012 and is subject to redemption
by the Company at $.001 per share following a 21 day written
notice.
Page
8 of
14
NOTES
TO CONDENSED FINANCIAL STATEMENTS (Continued)
Common
Stock and Equity Securities (cont.)
As
of
March 31, 2008 there was approximately $188,600 of total unrecognized
compensation cost related to non-vested share-based compensation arrangements.
This unearned share-based compensation cost is expected to be expensed in
accordance with the following schedule:
|
Nine
months ended December 31, 2008
|
$
|
144,300
|
||
|
Year
ended December 31, 2009
|
$
|
44,300
|
||
|
$
|
188,600
|
|
7.
|
Investment
Securities.
Investment
securities are categorized as trading securities and stated at market
value. Market value is determined using the quoted closing or latest
bid
prices. Realized gains and losses on investment transactions are
determined by specific identification and are recognized as incurred
in
the statement of operations. Net unrealized gains and losses are
reported
in the statement of operations and represent the change in market
value of
investment holdings during the period. At March 31, 2008 marketable
securities consisted of the
following:
|
|
Value At March 31, 2008
|
Cumulative Unrealized
Gain(Loss) At March 31, 2008
|
||||||
|
Equity
Securities
|
|
$762,100
|
|
$(68,300)
|
|
||
|
Stock
Options
|
|
$(87,200)
|
|
|
$3,000
|
||
|
Total
|
|
$674,900
|
|
$(65,300)
|
|
||
|
8.
|
Related
Party Transactions.
During the three months ended March 31, 2008 and 2007, the Company
paid
$24,300 and $11,300, respectively, to Warren Kaplan and $2,100 and
$28,700, respectively, to Ronel Management Company, wholly owned
by Warren
Kaplan, former Chairperson of the Board and Judith Kaplan, former
Board
member, for consulting services.
|
|
9.
|
Other
Commitments. In
January 2006, the Company renewed its License Agreement (the “Agreement”)
with Porchlight Entertainment, Inc., for the rights to market certain
toy
lines including a wooden adventure system and die cast metal collection
under the Jay Jay The Jet Plane™ name. The term of the Agreement is for
two years expiring on December 31, 2008, subject to the Company meeting
certain minimum sales objectives and royalty requirements.
|
In
February 2007 the Company signed an agreement exiting the exclusive licensing
agreement with Taffy Entertainment, LLC, to develop and distribute various
lines
of soft toys based on the new preschool entertainment series ToddWorld®. The
term of the original Agreement was four years expiring on February 28, 2009,
with a two-year extension through February 28, 2011 subject to the Company
meeting certain minimum royalty requirements during the initial term. As a
result of less than planned sales in 2005 and 2006 with no future expected
benefit to the Company, Taffy Entertainment, LLC and the Company mutually
agreed, in February, 2007, to terminate the contract for a final settlement
amount of $35,000 plus the return of the remaining licensed product.
In
May of
2007 the Company entered into a merchandising license agreement with the
American Museum of Natural History to produce and sell its Ology brand products.
The agreement expires June 30, 2010 and contains sales quotas and minimum
royalty payments due for each annual period ending on June 30.
In
November 2007 the Company entered into a product development and royalty
agreement with a consultant to revamp packaging of existing Curiosity Kits
products and produce new product concepts for the Curiosity Kits brand. The
agreement expires September 30, 2008 and provides for royalty payments on annual
aggregate net sales for the life of the products specified in the
agreement.
Page
9 of
14
NOTES
TO CONDENSED FINANCIAL STATEMENTS (Continued)
|
10.
|
Subsequent
Event. On
May 5, 2008, the Company received notice from the Nasdaq Listing
Qualifications Department (the “Staff”) stating that for 30 consecutive
business days the bid price for the Company’s common stock has closed
below the minimum $1.00 per share requirement for continued inclusion
under Marketplace Rule 4310(c)(4) (the "Rule").
|
In
accordance with Marketplace Rule 4310(c)(8)(D), the Company will be provided
180
calendar days, or until November 3, 2008, to regain compliance with the Rule.
The Company may regain compliance if at any time before November 3, 2008, the
bid price of the Company’s common stock closes at $1.00 per share or above for a
minimum of 10 consecutive trading days.
If
compliance with the Rule cannot be demonstrated by November 3, 2008, the Nasdaq
Listing Qualifications Department will determine whether the Company meets
The
Nasdaq Capital Market initial listing criteria as set forth in Marketplace
Rule
4310(c), except for the bid price requirement. If it meets the initial listing
criteria, the Staff will notify the Company that it has been granted an
additional 180 calendar day compliance period. If the Company is not eligible
for an additional compliance period, the Staff will provide written notification
that the Company’s common stock will be delisted. At that time, the Company may
appeal the Staff’s determination to delist its common stock.
The
Company intends to actively monitor the bid price for its common stock between
now and November 3, 2008, and consider implementation of various options
available to the Company if its common stock does not trade at a level that
is
likely to regain compliance.
ITEM
2. Management's
Discussion and Analysis of Financial Condition and Results of
Operations
Forward-looking
Statements:
Forward-looking
statements in this Form 10-Q including, without limitation, statements relating
to our plans, strategies, objectives, expectations, intentions and adequacy
of
resources, are made pursuant to the safe harbor provisions of the Private
Securities Litigation Reform Act of 1995. All statements made in this report,
other than statements of historical fact, are forward-looking statements. These
forward-looking statements involve known and unknown risks, uncertainties and
other factors that may cause our actual results, performance or achievements
to
be materially different from any future results, performance or achievements
expressed or implied by the forward-looking statements. The following factors,
among others, could cause actual results to differ materially from those set
forth in the forward-looking statements — our ability
to
successfully develop our brands and proprietary products through internal
development, licensing and/or mergers and acquisitions. Additional factors
include, but are not limited to, the size and growth of the market for our
products, competition, pricing pressures, market acceptance of our products,
the
effect of economic conditions, intellectual property rights, the results of
financing efforts, risks in product development and other risks identified
in
this report and our other periodic filings with the Securities and Exchange
Commission.
Results
of Operations:
Three
Months Ended March 31, 2008 Compared With Three Months Ended March 31,
2007
The
following should be read in conjunction with our financial statements and the
related notes thereto included elsewhere herein. The following table sets forth,
as a percentage of sales, certain items appearing in our statements of
operations.
Page
10
of 14
ITEM
2. Management's
Discussion and Analysis of Financial Condition and Results of Operations
(Continued)
|
Quarter Ended March
31,
2008
|
Quarter Ended March
31,
2007
|
||||||
|
Net
Sales
|
100.0%
|
|
100.0%
|
|
|||
|
Cost
of Sales
|
64.6%
|
|
56.8%
|
|
|||
|
Gross
Profit
|
35.4%
|
|
43.2%
|
|
|||
|
Selling
Expense
|
32.1%
|
|
34.9%
|
|
|||
|
General
and Administrative Expense
|
77.1%
|
|
49.6%
|
|
|||
|
Total
Operating Expense
|
109.2%
|
|
84.5%
|
|
|||
|
Loss
from Operations
|
(73.8)%
|
|
(41.3)%
|
|
|||
|
Other
Income (Expense)
|
(0.2)%
|
|
1.2%
|
|
|||
|
Loss
before income taxes
|
(74.0)%
|
|
(40.1)%
|
|
|||
|
Taxes
|
-
|
-
|
|||||
|
Net
Loss
|
(74.0)%
|
|
(40.1)%
|
|
|||
Net
sales for
the
three months ended March 31, 2008 were $1,223,700 compared with net sales of
$1,369,200 for the three months ended March 31, 2007. Management attributes
much
of the $145,500 or 10.6% decrease in net sales, to
a
decrease in Curiosity Kits sales resulting from a transition to new product
package expected to be available for shipment mid-year and a decrease in I
Dig
sales.
Gross
profit decreased
by $158,300
to $432,900 for the three months ended March 31, 2008, compared with $591,200
for the three months ended March 31, 2007. The
gross
profit percentage decreased from 43.2% to 35.4% for
the
three-month periods ended March 31, 2007 and 2008 respectively. The decrease
in
gross profit percentage was almost entirely attributable to sales of certain
quantities of slow moving product at approximately net realizable values
previously recorded and higher importation costs.
Selling,
general and administrative (SG&A) expenses increased
by $178,800 to $1,335,800 for the three-month period ended March 31, 2008 from
$1,157,000 for the three-month period ended March 31, 2007. This 15.5% increase
in SG&A expenses is due primarily
to
the
following:
|
·
|
An
increase in compensation and related benefit costs of $196,300 principally
as the result of an increase in stock based compensation;
|
|
·
|
An
increase in professional services of $101,100 primarily resulting
from
Sarbanes-Oxley compliance consulting services, legal and investor
relations services; and
|
|
·
|
An
increase in bad debt expense of $
24,200.
|
These
increases were partially offset by:
|
·
|
A
decrease in brand licensing expense of $68,600;
and
|
|
·
|
A
decrease in advertising and promotion of
$67,600.
|
Interest
expense related
to current debt was $35,700 and $22,400 for the three-month periods ended March
31, 2008 and 2007, respectively. The $13,300 increase was principally due to
the
higher borrowings under the line of credit, offset slightly by a decrease in
the
lending rate.
Other
income and (expense), net
during
the three-month
periods ended March 31, 2008
and 2007
was $32,800 and $39,400, respectively. The
$6,600 change was mainly attributable to lower net gains from
investments.
Net
loss,
as a
result of the foregoing, was $905,800 for the three months ended March 31,
2008,
compared with $548,800 for the three months ended March 31, 2007.
Page
11
of 14
Financial
Condition, Liquidity, and Capital Resources:
As
of
March 31, 2008, we had cash and cash equivalents of $875,700, representing
an
increase of $831,300 compared to $44,400 as of December 31, 2007.
After
taking account of non-cash items and other adjustments, our cash provided by
operations for the three months ended March 31, 2008 was $1,453,700. The
principal sources of cash from operating activities for the three months ended
March 31, 2008 were from collection of the litigation judgment $3,233,700,
net
decrease in accounts receivable of $472,500 and net decrease in inventory of
$259,300. The principal uses of cash from operating activities for the same
period were a decrease of $1,381,000 in accounts payable and an increase of
$277,600 in investment securities.
The
principle use of cash from investing activities of $9,000 was for molds utilized
in toy production.
The
use
of cash from financing activities of $613,400 resulted from decreases in
borrowings under the line of credit of $471,600 and borrowings under investment
account of $141,800.
At
March
31, 2008, borrowing under our line of credit was $1,488,800, a decrease of
$471,600 from $1,960,400 as of December 31, 2007. The line of credit agreement,
as amended, stipulates, among other things, a borrowing limit of the lesser
of
$2,000,000 or the sum of 85% of eligible accounts receivable and 50% of eligible
inventory, as further defined in the agreement. The original term of the
agreement expired August 30, 2006. The Company has received various extensions
under the agreement and the term of the current extension ends May 31, 2008
and
is
reviewing options with other financial institutions to replace the existing
facility.
ITEM
4. Controls
and Procedures Evaluation of Disclosure Controls and
Procedures.
Our
management,
with the
participation of the
Chief
Executive Officer and Chief Financial Officer, evaluated
the
effectiveness of our disclosure controls and procedures as of the end of the
period covered by this report. Based on that evaluation, our Chief Executive
Officer and Chief Financial Officer concluded that our disclosure controls
and
procedures as of the end of the period covered by this report were effective
such that the information required to be disclosed by us in reports filed under
the Securities Exchange Act of 1934 is (i) recorded, processed, summarized
and
reported within the time periods specified in the SEC’s rules and forms and (ii)
accumulated and communicated to our management, including our Chief Executive
Officer and Chief Financial Officer, as appropriate to allow timely decisions
regarding disclosure.
There
were no changes in the company's internal control over financial reporting
known
to the Chief Executive Officer and Chief Financial Officer that occurred during
the period covered by this report that have materially affected, or are
reasonably likely to materially affect, the company's internal control over
financial reporting.
PART
II. OTHER INFORMATION
ITEM
2. Unregistered
Sales of Securities and Use of Proceeds
Recent
Sales of Unregistered Securities
In
January 2008, we issued to an investor relations firm for professional services,
warrants entitling the holders to purchase up to 12,500 shares of common stock
at $1.28 per share. The warrants were issued directly to two principals of
the
investor relations firm. The warrants expire on December 31, 2012 and we may
redeem the warrants for $12.50 following a 21 day written notice period. The
issuance of the warrants were determined to be exempt from registration under
Section 4(2) of the Securities Act and Rule 506 thereunder as transactions
by an
issuer not involving a public offering solely to “accredited investors”. The
recipients of warrants represented their intention to acquire the securities
for
investment only and not with a view to or for sale in connection with any
distribution therefore and appropriate legends were affixed to the warrants
and
the shares of common stock issuable upon exercise of the warrants are deemed
restricted securities for the purposes of the Securities Act.
Page
12
of 14
Repurchase
of Securities
On May
17,
2007,
our
Board of Directors authorized,
effective immediately, a program to repurchase up to 150,000 of our outstanding
common shares. Repurchases may be made by us from time to time in the open
market at prevailing prices, in either block purchases or in privately
negotiated transactions. The share repurchase program does
not
have a fixed expiration date. However, our Board may discontinue or suspend
the
program at any time. As of March 31, 2008, we have repurchased 2,900
of
our
common shares and
147,100 remain available under
the plan.
ITEM
5. Other
Information
|
(a)
|
None.
|
| (b) | None. |
ITEM
6. Exhibits
A.
|
Exhibit No.
|
Description
|
|
|
31.1
|
Chief
Executive Officer - Sarbanes-Oxley Act Section 302
Certification*
|
|
|
31.2
|
Chief
Financial Officer - Sarbanes-Oxley Act Section 302
Certification*
|
|
|
32.1
|
Chief
Executive Officer - Sarbanes-Oxley Act Section 906
Certification*
|
|
|
32.2
|
Chief
Financial Officer - Sarbanes-Oxley Act Section 906
Certification*
|
Page
13
of 14
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant
has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
ACTION
PRODUCTS INTERNATIONAL, INC.
|
Date:
May
09, 2008
|
By:
|
/s/
RONALD S. KAPLAN
|
|
Ronald
S. Kaplan
|
||
|
Chief
Executive Officer (Principal Executive Officer)
|
||
|
Date:
May
09, 2008
|
By:
|
/s/
ROBERT BURROWS
|
|
Robert
Burrows
|
||
|
Chief
Financial Officer (Principal Financial and
|
||
|
Accounting
Officer)
|
Page
14
of 14