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DAC Technologies (OTCPK:DAAT) sells gun maintenance and safety products, as well as hunting and camping accessories. It outsources the design and manufacturing of its products and sells them through retailers such as Wal-Mart (NYSE:WMT), which comprises approximately 50% of its revenues in any given year, and via mail-order.

I became interested in DAAT when it showed up on one of my regular stock screens. It trades between $0.31 and $0.41 per share (this is a fairly large band, but given the fact that it trades OTC with fairly low volume, it is to be expected), but has NCAV of $0.76/share, no bank debt, and a fairly variable production process given its outsourcing.

Besides the concentrated revenues (which are somewhat expected for such a small company), the real problem I have with DAAT is its relationship with its employees.

For its CEO, the company has entered into an unwritten but quite cozy lease agreement, whereby the company leases 1,500 square feet of the CEO’s home at a rate of $5,500 per month (included in this is secretarial support). This is in addition to the $570,000 the CEO took home last year (which is an astonishing figure, given that the company had earnings in the same year of just $550,000!).

Beyond its CEO’s compensation, the company also has a habit of advancing money to employees that are both unsecured and non-interest bearing! From its recent 10-K:

During the years ended December 31, 2009 and 2008, the Company made periodic advances to certain employees of the Company. At December 31, 2009 and 2008, the outstanding balances of advances to these individuals were $29,658 and $28,617, respectively.

At December 31, 2009 and 2008, the Company held a note receivable of $216,377 and $170,382, respectively, due from an individual, who is both an employee and a stockholder, which is due on December 31, 2010. This note is unsecured and noninterest bearing.

At December 31, 2009 and 2008, the Company held a note receivable of $72,518 due from a related party entity, which is owned by the individual discussed above, which is due on December 31, 2010. This note is unsecured and noninterest bearing. The note receivable has been classified as noncurrent in the accompanying consolidated balance sheets because repayment is not anticipated during the next year.

For the years ended December 31, 2009 and 2008, consulting service fees in the amount of $60,000 were paid to a related party entity, which is owned by the individual discussed above. The related party provides consulting services to the Company on an ongoing basis.

By classifying some of these advances as non-current, the investor is left loaning this employee money with no return (they are non-interest bearing) for an indeterminate period of time.

So, the same employee has a $29k adance, a $216k loan, owns an entity, which has another $72k in loans and is paid $60k per year for consulting. This, combined with the above, is a big red flag for value investors. This has been a recurring theme on this site, in that I have found dozens of small companies like this which lack the corporate governance policies of larger companies. I believe this is why these companies trade below NCAV for long periods of time.

Author Disclosure: No position.

Source: DAC Technologies Group's Bright Red Flag