Form 10-Q

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)


þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2009


o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission file number 0-14843

DPAC TECHNOLOGIES CORP.

(Exact Name of Registrant as Specified in Its Charter)


CALIFORNIA		33-0033759
(State or Other Jurisdiction of Incorporation or Organization)		(IRS Employer Identification No.)

5675 HUDSON INDUSTRIAL PARK, HUDSON, OHIO		44236
(Address of Principal Executive Offices)		(Zip Code)

(800) 553-1170
(Registrant’s Telephone Number, Including Area Code)

(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)

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 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 Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

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:


Large Accelerated Filer o	Accelerated Filer o	Non-Accelerated Filer o	Smaller Reporting Company þ
		(Do not check if a smaller reporting company)

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

YES o NO þ

The number of shares of common stock, no par value, outstanding as of November 10, 2009 was 107,241,600.

CAUTIONARY STATEMENT RELATED TO FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q includes forward-looking statements as defined within Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, relating to revenue, revenue composition, market conditions, demand and pricing trends, future expense levels, competition in our industry, trends in average selling prices and gross margins, product and infrastructure development, market demand and acceptance, the timing of and demand for next generation products, customer relationships, employee relations, and the level of expected future capital and research and development expenditures. Such forward-looking statements are based on the beliefs of, estimates made by, and information currently available to DPAC Technologies Corp.’s (“DPAC” or the “Company”) management and are subject to certain risks, uncertainties and assumptions. Any other statements contained herein (including without limitation statements to the effect that DPAC or management “estimates,” “expects,” “anticipates,” “plans,” “believes,” “projects,” “continues,” “may,” “will,” “could,” or “would” or statements concerning “potential” or “opportunity” or variations thereof or comparable terminology or the negative thereof) that are not statements of historical fact are also forward-looking statements. The actual results of DPAC may vary materially from those expected or anticipated in these forward-looking statements. The realization of such forward-looking statements may be impacted by certain important unanticipated factors, including those discussed under Part I, Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Because of these and other factors that may affect DPAC’s operating results, past performance should not be considered as an indicator of future performance, and investors should not use historical results to anticipate results or trends in future periods. We undertake no obligation to publicly release the results of any revisions to these forward-looking statements that may be made to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events. Readers should carefully review the risk factors described in this and other documents that DPAC files from time to time with the Securities and Exchange Commission, including subsequent Current Reports on Form 8-K, Quarterly Reports on Form 10-Q or 10-QSB and Annual Reports on Form 10-K or 10-KSB.

HOW TO OBTAIN DPAC’S SEC FILINGS

All reports filed by DPAC with the SEC are available free of charge via EDGAR through the SEC website at www.sec.gov. In addition, the public may read and copy materials filed by the Company with the SEC at the SEC’s public reference room located at 100 F Street, N.E., Washington, DC 20549

PART I—FINANCIAL INFORMATION

Item 1 — Financial Statements.

DPAC Technologies Corp.

Condensed Consolidated Balance Sheets


	September 30,			December 31,
	2009			2008
	(Unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents	$	5,134		$	9,157
Accounts receivable, net		707,294			886,489
Inventories		1,104,493			1,365,947
Prepaid expenses and other current assets		121,701			41,121

Total current assets		1,938,622			2,302,714

PROPERTY, Net		811,779			466,992

FINANCING COSTS, Net		106,370			132,079
GOODWILL AND OTHER NON-AMORTIZING INTANGIBLES		6,405,503			6,405,503
OTHER INTANGIBLE ASSETS, Net		744,189			1,061,704
OTHER ASSETS		18,048			18,048


TOTAL	$	10,024,511		$	10,387,040


LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES:
Revolving credit facility	$	1,465,243		$	1,425,000
Short term note		15,011			—
Current portion of long-term debt		125,000			125,000
Current portion of capital lease obligations		—			9,140
Accounts payable		1,132,958			971,104
Accrued restructuring costs — current		—			42,366
Put warrant liability		145,100			116,100
Other accrued liabilities		323,286			419,400

Total current liabilities		3,206,598			3,108,110

LONG-TERM LIABILITIES:
Capital lease obligation, less current portion		—			11,409
Ohio Development loan, less current portion		1,980,733			2,040,262
Subordinated debt, less current portion		1,407,460			1,397,893

Total long-term liabilities		3,388,193			3,449,564

STOCKHOLDERS’ EQUITY:
Convertible, voting, cumulative, 9% series A preferred stock, no par value; 30,000 shares authorized; 30,000 and 21,250 shares issued and outstanding at September 30, 2009 and December 31, 2008, respectively		2,499,203			2,014,203
Common stock, no par value; 120,000,000 shares authorized; 107,241,600 and 98,006,343 shares outstanding at September 30, 2009 and December 31, 2008, respectively		5,620,354			5,376,609
Preferred stock dividends distributable in common stock		47,813			47,813
Accumulated deficit		(4,737,650	)		(3,609,259	)

Total stockholders’ equity		3,429,720			3,829,366


TOTAL	$	10,024,511		$	10,387,040

See accompanying notes to consolidated financial statements.

DPAC Technologies Corp.

Condensed Consolidated Statements of Operations
(Unaudited)


	For the quarter ended						For the nine months ended
	September 30,			September 30,			September 30,			September 30,
	2009			2008			2009			2008

NET SALES	$	1,425,770		$	1,737,094		$	5,135,724		$	7,325,547

COST OF GOODS SOLD		869,320			1,022,366			3,040,134			4,230,533


GROSS PROFIT		556,450			714,728			2,095,590			3,095,014

OPERATING EXPENSES
Sales and marketing		182,276			274,054			673,686			910,358
Research and development		178,432			116,207			599,036			676,253
General and administrative		260,022			319,984			957,692			1,218,474
Amortization of intangible assets		132,088			122,505			377,098			367,515
Restructuring costs		12,097			—			12,097			—

Total operating expenses		764,915			832,750			2,619,609			3,172,600

LOSS FROM OPERATIONS		(208,465	)		(118,022	)		(524,019	)		(77,586	)

OTHER EXPENSE:
Other		—			—			483			—
Interest expense		146,126			152,509			431,450			574,012
Fair value adjustment for put warrant liability		29,000			—			29,000			64,500

Total other expenses		175,126			152,509			460,933			638,512


LOSS BEFORE INCOME TAXES		(383,591	)		(270,531	)		(984,952	)		(716,098	)

INCOME TAX PROVISION		—			—			—			5,755


NET LOSS	$	(383,591	)	$	(270,531	)	$	(984,952	)	$	(721,853	)

PREFERRED STOCK DIVIDENDS		47,813			47,813			143,439			126,214


NET LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS	$	(431,404	)	$	(318,344	)	$	(1,128,391	)	$	(848,067	)


NET LOSS PER SHARE:
Net Loss — Basic and diluted	$	0.00		$	0.00		$	(0.01	)	$	(0.01	)


WEIGHTED AVERAGE SHARES OUTSTANDING:
Basic and diluted		105,856,000			96,043,000			103,167,000			94,178,000

See accompanying notes to consolidated financial statements.

DPAC Technologies Corp.

Condensed Consolidated Statements of Cash Flows
(Unaudited)


	For the nine months ended
	September 30,			September 30,
	2009			2008
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss	$	(984,952	)	$	(721,853	)

Adjustments to reconcile net loss from operations to net cash used in operating activities:
Depreciation and amortization		442,378			451,265
Loss on the sale of assets		483			—
Provision for bad debts		1,000			25,000
Write off of bad debts		(24,673	)		—
Provision for obsolete inventory		36,000			39,000
Accretion of discount and success fees on debt		43,789			66,274
Amortization of deferred financing costs		35,609			38,368
Adjustment to put warrant liability		29,000			64,500
Non-cash compensation expense		100,306			54,265

Changes in operating assets and liabilities:
Accounts receivable		202,868			758,236
Inventories		25,454			(168,158	)
Prepaid expenses and other assets		(45,580	)		(1,075	)
Accounts payable		235,854			(634,394	)
Accrued restructuring charges		(42,366	)		(228,539	)
Other accrued liabilities		(96,114	)		(119,431	)


Net cash used in operating activities		(40,944	)		(376,542	)


CASH FLOWS FROM INVESTING ACTIVITIES:
Property additions		(61,430	)		(143,925	)
Net cash from sale of assets		150,000			—


Net cash provided by (used in) investing activities:		88,570			(143,925	)


CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowing (repayments) under revolving credit facility		40,243			(617,000	)
Net borrowing under short term notes		15,011			—
Repayments on bank term loan		—			(112,699	)
Repayments on Ohio Development loan		(93,751	)		(93,750	)
Proceeds from Subordinated term debt		—			1,200,000
Repayment of Subordinated Debt		—			(2,000,000	)
Financing costs incurred		(9,900	)		(152,679	)
Principal payments on capital lease obligations		(3,252	)		(8,855	)
Net proceeds from issuance of preferred stock		—			2,064,203


Net cash (used in) provided by financing activities		(51,649	)		279,220


NET DECREASE IN CASH AND CASH EQUIVALENTS		(4,023	)		(241,247	)

CASH & CASH EQUIVALENTS, BEGINNING OF PERIOD		9,157			257,189


CASH & CASH EQUIVALENTS, END OF PERIOD	$	5,134		$	15,942


SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid	$	358,634		$	432,119

Income taxes paid	$	—		$	5,755


NON-CASH INVESTING AND FINANCING ACTIVITIES
Preferred stock fees and dividends paid in common stock	$	143,439		$	176,214

Issuance of preferred stock	$	450,000		$	—

Acquisition of SocketSerial assets	$	(450,000	)	$	—

See accompanying notes to consolidated financial statements.

DPAC TECHNOLOGIES CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

NOTE 1 — Summary of Significant Accounting Policies

Nature of Operations

DPAC Technologies Corp., (“DPAC”) through its wholly owned subsidiary, QuaTech Inc., (“QuaTech”) designs and sells device connectivity and device networking solutions for a broad market. QuaTech sells its products through a global network of distributors, system integrators, value added resellers, and original equipment manufacturers (“OEM”). QuaTech designs communication and data acquisition products for personal computer based systems. The Company sells to customers in both domestic and foreign markets.

Basis of Presentation

On April 28, 2005, DPAC entered into a merger agreement, as amended, with QuaTech for a transaction to be accounted for as a purchase under accounting principles generally accepted in the United States of America. The merger was approved by both QuaTech and DPAC shareholders on February 23, 2006 and was consummated on February 28, 2006. For accounting purposes, the transaction is considered a “reverse merger” under which QuaTech is considered the acquirer of DPAC. Accordingly, the purchase price was allocated among the fair values of the assets and liabilities of DPAC, while the historical results of QuaTech are reflected in the results of the combined company (the “Company”). All intercompany transactions and balances have been eliminated in consolidation.

Some historical amounts have been reclassified to be consistent with the current financial presentation.

Interim financial Statements

The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and in accordance with the instructions to Form 10-Q and Article 8-03 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of management, all material adjustments (consisting of normal recurring accruals) necessary for a fair presentation have been included. Operating results for the three and nine months ended September 30, 2009 are not necessarily indicative of the results that may be expected for the year ending December 31, 2009.

We have evaluated subsequent events through November 16, 2009, which is the date the financial statements were issued.

For further information, refer to the audited financial statements and footnotes thereto of DPAC for the year ended December 31, 2008 which were filed on Form 10-K on April 15, 2009.

Use of Estimates

In accordance with accounting principles generally accepted in the United States, management utilizes estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements as well as the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. These estimates and assumptions relate to recording net revenue, collectibility of accounts receivable, useful lives and impairment of tangible and intangible assets, accruals, income taxes, inventory realization, stock-based compensation expense and other factors. Management believes it has exercised reasonable judgment in deriving these estimates. Consequently, a change in conditions could affect these estimates.

Fair Value Measurements

In September 2006, the FASB issued ASC No. 820, Fair Value Measurements (“ASC 820,” and previously referred to as Statement No. 157). The accounting pronouncement establishes a three-level hierarchy which prioritizes the inputs used in measuring fair value. In general, fair value determined by Level 1 inputs utilize quoted prices in active markets for identical assets or liabilities. Fair values determined by Level 2 inputs utilize data points that are observable such as quoted prices, interest rates and yield curves. Fair values determined by Level 3 inputs are unobservable data points for the asset or liability, and includes situations in which there is little, if any, market activity for the asset or liability.

The following table represents our financial assets and liabilities measured at fair value on a recurring basis and the basis for that measurement:

Fair Value Measurement at June 30, 2009 Using:

Significant

Quoted Prices in

Other

Significant

Total

Active Markets

Observable

Unobservable

Fair Value

for Identical Assets

Inputs

Measurement

(Level 1)

(Level 2)

(Level 3)

Put Warrant Liability

145,100

—

145,100

—

The Company values the put warrant liability by calculating the difference between the Company’s closing stock price at the end of a reporting period and the exercise price per share multiplied by the number of warrants granted. The Company has classified the fair value of the warrants as a liability and changes in the fair value of the warrants are recognized in the earnings of the Company. The Company recognized a $29,000 charge for the nine months ended September 30, 2009 and recognized a charge of $64,500 for the nine months ended September 30, 2008 related to the change in value of the put warrant liability. In addition, the actual settlement amount of the put warrant liability could differ materially from the value determined based on the Company’s stock price. There was no change in the valuation technique used by the Company since the last reporting period.

The Subordinated Debt Agreement, which funded on January 31, 2008, provides for a formula driven success fee equal to 7.0 times the trailing twelve months EBITDA minus indebtedness plus cash, times 5.5%, to be paid at maturity or a triggering event. The success fee is being accounted for as a separate contingent component of the note and will be revalued at each reporting period. The success fee is calculated at the end of each reporting period based on the trailing twelve months EBITDA, with the resultant amount multiplied times the percentage of the loan period remaining at each measurement date. As such, the liability is trued up at each reporting period based on the time elapsed, with the remaining unamortized portion of the success fee accreted monthly as additional interest expense over the remaining term of the loan. Based on the results of the above calculation, the Company recorded no liability for the success fee as of September 30, 2009. There was no change in the valuation technique used by the Company since the last reporting period.

New Accounting Pronouncements

In June 2009 the Financial Accounting Standards Board (“FASB”) issued Financial Accounting Standards (“FAS”) No. 168, The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Standards (“FAS 168”). FAS 168 established the FASB Accounting Standards Codification (“ASC”), also known collectively as the “Codification”, as the single source of authoritative nongovernmental U.S. GAAP. The Codification superseded all existing non-SEC accounting and reporting standards. We adopted the provisions of FAS 168 on a prospective basis effective September 30, 2009. The adoption of FAS 168 had no effect on our consolidated financial statements other than current references to GAAP which were replaced with references to the applicable Codification.

In October 2009, the FASB issued authoritative guidance that amends existing guidance for identifying separate deliverables in a revenue-generating transaction where multiple deliverables exist, and provides guidance for allocating and recognizing revenue based on those separate deliverables. The guidance is expected to result in more multiple-deliverable arrangements being separable than under current guidance. This guidance is effective for the Company beginning on January 1, 2011 and is required to be applied prospectively to new or significantly modified revenue arrangements. The Company is currently assessing the impact this guidance may have on its financial statements.

Note 2 — Liquidity and Operations

The Company incurred a net loss of $384,000 for the third quarter of 2009 and $985,000 for the nine months ended September 30, 2009, and ended the period with a cash balance of $5,000 and a deficit in working capital of $1,268,000. The Company incurred a net loss of approximately $799,000 for 2008 and ended the year with a cash balance of $9,000 and a deficit in working capital of $805,000. These factors created substantial doubt about the Company’s ability to continue as a going concern. In order to mitigate these negative factors, the Company has undertaken a number of initiatives and has implemented various other plans.

Although the Company has reported net losses in recent periods, a significant portion of our operating expenses are non-cash. During the first nine months of 2009, non-cash operating expenses included depreciation and amortization of $443,000, non-cash compensation for stock options of $100,000, and non-cash interest expense of $79,000. For the year ended December 31, 2008, non-cash expenses included depreciation and amortization of $603,000, non-cash interest expense of $116,000, and non-cash compensation expense for stock options of $74,000.

During the quarter ended March 31, 2008, the Company consummated an equity and financing transaction that provided $491,000 in net cash after paying off the then due existing debt of $2,113,000, and which funds were used for working capital purposes and to bring our payables to a more current position. In addition, in October 2008, the Company secured additional Senior Subordinated Debt financing of $250,000.

In the third quarter of 2008, the Company took actions to reduce its cash operating expenses to align its cost structure with current economic conditions and a downturn in the Company’s revenue levels. It is anticipated that these reductions will result in annualized operating cost savings of approximately $600,000. Additionally, during the first quarter of 2009, the Company consummated an agreement with one of its contract manufacturers and sold certain equipment and inventory, sublet a portion of its facility to the manufacturer, and will further engage the manufacturer to produce more of the Company’s products (see Note 12). This transaction is expected to improve the operating efficiency of the Company and provide an increase in short term cash flows.

In the third quarter of 2009, the Company implemented additional cost reduction measures by reducing headcount by 3 individuals and implementing a salary reduction program for all employees of 10%. These measures are expected to result in annual operating costs reductions of approximately $400,000.

On September 30, 2009, the Company acquired the SocketSerial product line in a non cash transaction for the Company. Management believes that margins generated from future revenues of this product line will help enable the Company to maintain a cash flow break even from operations.

Going forward, the Company is dependent on financing its operations through the use of its bank line of credit and the contribution from future revenues. Management believes that the actions it has taken will enable the Company to generate sufficient cash flows from operations and funding from its bank line of credit to maintain liquidity for the near term, at currently projected revenue levels. However, a further downturn in our revenue levels can severely impact the availability under our line of credit and limit our ability to meet our obligations on a timely basis and finance our operations as needed. At September 30, 2009, we had remaining net availability under our line of credit of approximately $77,000. The Company was not in compliance with certain bank financial covenants at September 30, 2009. Future availability may be impacted by the amount of qualifying receivables and there is no assurance that the Company will be able to obtain additional funding if and when it may need it.

NOTE 3 — Product Line Acquisition

On September 30, 2009, in a non-cash transaction for the Company, the Company acquired from Socket Mobile, Inc. (“Socket”) the SocketSerial product line and all assets of Socket which pertain to Socket’s serial card business (the “Business”), including the tangible personal property and assets of Socket related to the Business; rights to any contract, purchase order, license or other agreement to the ownership, manufacture and distribution of the assets; certain rights to the intellectual property and proprietary rights related to or useful in connection with the Business and customer lists. (collectively, the “Assets”).

The Assets were acquired for a purchase price of $500,000, of which $450,000 was payable at closing, and a contingent $50,000 payment would be payable upon the attainment by QuaTech of $250,000 in quarterly sales revenue from the sale of SocketSerial products in any quarter through the quarter ending December 31, 2010. The purchase price was allocated as follows:


Equipment	$	10,000
Developed software		390,000
Customer list		50,000

Total	$	450,000

Development Capital Ventures, L.P. (“DCV”), a majority shareholder of the Company, agreed to serve as an intermediary in the transaction by funding the purchase and taking initial ownership of the Acquired Assets, and, upon completion of the transaction immediately transferred the Acquired Assets to QuaTech in consideration for the issuance of 8,750 shares of Series A Convertible Preferred Stock. DCV and QuaTech agreed that the shares of Preferred Stock would be exchanged for a senior subordinated secured note and related Preferred Stock purchase warrant under terms and conditions agreed to between the parties, to occur upon the earlier of December 31, 2009 or the date upon which all necessary consents to such exchange have been obtained. It is unknown at this time whether or not the necessary consents will be obtained.

NOTE 4 — Inventories

Inventories consist of the following:


	September 30,			December 31,
	2009			2008
Raw materials and sub-assemblies	$	631,773		$	878,669
Finished goods		743,397			671,955
Less: reserve for excess and obsolete inventories		(270,677	)		(184,677	)

Total net inventories	$	1,104,493		$	1,365,947

Purchases of finished assemblies from three major vendors represented 48%, 22% and 10% of the total inventory purchased in the three months ended September 30, 2009, and two vendors accounted for 45% and 21% for the nine month period ended September 30, 2009. The Company has arrangements with these vendors to purchase product based on purchase orders periodically issued by the Company.

NOTE 5 — Property

Property consist of the following:


	September 30,			December 31,
	2009			2008
Leasehold improvements	$	103,714		$	103,714
Machinery and equipment		390,048			519,288
Computer software and equipment		610,569			609,792
Office furniture and equipment		79,602			79,602
Internally developed software		191,657			162,375
Developed software		390,000			—

		1,765,590			1,474,771
Less: Accumulated depreciation and amortization		(953,811	)		(1,007,779	)

Net property	$	811,779		$	466,992

NOTE 6 — Debt

At September 30, 2009 and December 31, 2008, outstanding debt is comprised of the following:


	September 30,			December 31,
	2009			2008
Revolving credit facility	$	1,465,243		$	1,425,000

Short term note	$	15,011		$	—


Long term debt:
Ohio Development Loan	$	2,105,733		$	2,165,262
Less: current portion		(125,000	)		(125,000	)

Net long-term portion	$	1,980,733		$	2,040,262


Subordinated debt	$	1,450,000		$	1,450,000
Less: Unamortized discount for stock warrants		(42,540	)		(52,107	)

		1,407,460			1,397,893

Less: current portion		—			—

Net long-term portion	$	1,407,460		$	1,397,893


Total Current Portion of Long-term Debt	$	125,000		$	125,000

Total Net Long-term Debt	$	3,388,193		$	3,438,155


Put warrant liability	$	145,100		$	116,100

On January 31, 2008, the Company consummated an equity and financing transaction which consisted of an issuance of preferred stock and the funding of a new senior bank line of credit and subordinated term loan. In conjunction with the closing on January 31, 2008, the Company terminated its lending relationships with and paid in full its debt obligations with National City Bank and the Subordinated Loan Agreement with the HillStreet Fund, notwithstanding the put warrant liability for the HillStreet Fund.

Revolving Credit Facility

The Company has a revolving line of credit with a bank providing for a maximum $2,000,000 working capital line of credit through December 31, 2009, and $1,500,000 thereafter. The facility bears a floating interest rate at the 30 day LIBOR (.24% at September 30, 2009) plus 6.5%. Availability under the line of credit is formula driven based on applicable balances of the Company’s accounts receivable and inventories. Based on the formula, at September 30, 2009 the Company had availability to draw up to a maximum of approximately $1,542,000. The line of credit contains certain financial covenants that the Company was in not in compliance with at September 30, 2009. The Credit Facility is secured by substantially all of the assets of the Company and expires on January 31, 2010.

Short Term Note

The short term note is with a financial institution and was funded for $67,549 to finance insurance premiums. The note bears interest at 8.24% per annum, and calls for 9 monthly payments of $7,765 beginning in April 2009.

Ohio Development Loan

On January 27, 2006 QuaTech entered into a Loan Agreement with the Director of Development of the State of Ohio pursuant to which QuaTech borrowed $2,267,000 for certain eligible project financing. The State of Ohio debt accrues interest at the rate of 9.0% per year. Payments of interest only were due and payable monthly from March 2006 through February 2007. Thereafter, QuaTech is obligated to make 48 consecutive monthly principal payments of $10,417 plus interest with the balance due on February 1, 2011. On February 1, 2011 QuaTech must also pay the State of Ohio a participation fee equal to the lesser of 10% of the maximum principal amount borrowed or $250,000. The State of Ohio debt is secured by all the assets of QuaTech which security interest is subordinated to the interest of the Bank. The participation fee is being accrued to the note obligation as additional interest each month over the term of the loan.

Subordinated Debt

On January 31, 2008, the Company entered into a Senior Subordinated Note and Warrant Purchase Agreement (“Agreement”) with Canal Mezzanine Partners, L.P. (“Canal”), for $1,200,000. The subordinated note has a stated annual interest rate of 13% and a five year maturity date. Interest only payments are payable monthly during the first five years of the note with all principal due and payable on the fifth anniversary of the note. The Agreement also provides for a formula driven success fee based on a multiple of the trailing twelve months EBITDA, to be paid at maturity or a triggering event, and for issuance of warrants entitling Canal to purchase 3% of the Company’s fully diluted shares at time of exercise at a nominal purchase price.

The warrants have a 10 year life and are exercisable at any time. The subordinated note has been discounted by the fair value of the detachable warrants, with a corresponding contribution to capital. The discount, calculated to be $63,800 at time of issuance, is amortized as additional interest expense and accretes the note to face value at maturity. The Company determined the fair value of the warrant by using the Black-Scholes pricing model and calculating 3% of fully diluted shares at time of issuance, including a potential 50 million common shares for the conversion of the outstanding Series A preferred stock, which equated to approximately 4.9 million shares and using the closing stock price on the date of the transaction of $0.014 per share.

The success fee is defined as equal to 7.0 times the trailing twelve months EBITDA minus indebtedness plus cash, times 5.5%, to be paid at maturity or a triggering event. The success fee is being accounted for as a separate contingent component of the note and will be revalued at each reporting period. The success fee is calculated at the end of each reporting period based on the trailing twelve months EBITDA, with the resultant amount multiplied times the percentage of the loan period remaining at each measurement date. As such, the liability is trued up at each reporting period based on the time elapsed, with the remaining unamortized portion of the success fee accreted monthly as additional interest expense over the remaining term of the loan.

In October 2008, the Company entered into an Amendment to the Agreement securing additional Senior Subordinated Debt financing from Canal for $250,000, which was due and payable on February 15, 2009, and which maturity date could have been extended by the Company until January 31, 2013, upon payment of an extension fee of $25,000. The Company is currently in negotiations with Canal to extend the maturity date. The additional debt bears interest at 13% per annum, payable monthly. In connection with the Amendment, Canal is entitled to exercise an additional warrant to purchase the common stock of the Company in an amount representing 0.75% of the Company’s fully diluted common stock on the date of exercise, and to increase the multiplier in the success fee, as described above, from 5.5% to 6.0%.

Put Warrant Liability

In connection with the Subordinated Loan Agreement between the Company and the HillStreet Fund, entered into on February 28, 2006 and which was paid in full on January 31, 2008, the Company issued 5,443,457, and per certain default provisions is obligated to issue 1,006,000 additional, 10-year warrants (“Put Warrants”) at an exercise price of $0.00001 per share. The warrants expire on February 28, 2016. The Put Warrants continue to remain outstanding and can be “put” to the Company at any time based on criteria set forth in the warrant agreement at a price equal to the greatest of (i) the fair market value as established by a capital transaction or public offering; (ii) six times the Company’s EBITDA for the trailing 12 month period; and (iii) an appraised value. The Company has determined to value the put warrant liability by calculating the difference between the Company’s closing stock price at the end of a reporting period and the exercise price per share multiplied by the number of warrants granted. The Company has classified the fair value of the warrants as a liability and changes in the fair value of the warrants are recognized in the earnings of the Company. The Company recorded a $29,000 charge to earning for the three and nine months ended September 30, 2009, based on the change in the Company’s share price and estimated put warrant liability. A charge to earnings of $0 and $64,500 was recorded for the three and nine months ended September 30, 2008, respectively. The actual settlement amount of the put warrant liability could differ materially from the value determined based on the Company’s stock price.

The aggregate amounts of combined long term debt, exclusive of the put warrant liability and unamortized discount for stock warrants, maturing as of September 30th in future years is $125,000 in 2010, $1,980,733 in 2011, $0 in 2012, and $1,450,000 in 2013.

NOTE 7 — Concentration of Customers

Sales to two customers each accounted for 15% and 10% of net sales for the three months ended September 30, 2009. No single customer accounted for more than 10% of net sales for the three or nine months ended September 30, 2008. Accounts receivable from one customer accounted for 16% of net accounts receivable at September 30, 2009. The Company has and will have customers ranging from large OEM’s to startup operations. Any inability to collect receivables from any such customers could have a material adverse effect on the Company’s financial position and liquidity.

NOTE 8 — Net Income (Loss) Per Share

The Company computes net income (loss) per share by dividing the net income (loss) by the weighted-average number of common shares outstanding for the period. Diluted earnings per share reflect the potential dilution of securities by including other common stock equivalents, such as stock options and warrants, in the weighted-average number of shares outstanding for a period. Common stock equivalents are excluded from the calculation in loss periods, as the effect is anti-dilutive.

The tables below set forth the reconciliation of the denominator of the income (loss) per share calculations:


	Three-months ended
	September 30,
	2009		2008
Shares used in computing basic net income per share		105,856,000		96,043,000
Dilutive effect of stock options and warrants(1)(3)		—		—

Shares used in computing diluted net income per share		105,856,000		96,043,000


	Nine-months ended
	September 30,
	2009		2008
Shares used in computing basic net income per share		103,167,000		94,178,000
Dilutive effect of stock options and warrants(2)(3)		—		—

Shares used in computing diluted net income per share		103,167,000		94,178,000


(1)		Potential common shares of 8,076,000 and 7,923,000 for the exercise of stock options and warrants have been excluded from diluted weighted average common shares for the three month periods ended September 30, 2009 and 2008, respectively, as the effect would be anti-dilutive.

(2)		Potential common shares of 8,089,000 and 7,813,000 for the exercise of stock options and warrants have been excluded from diluted weighted average common shares for the nine month periods ended September 30, 2009 and 2008, respectively, as the effect would be anti-dilutive.

(3)		Also excluded from both 2009 and 2008 three and nine month computations are the potential of approximately 71 million common shares that would be issued upon the conversion of the total number of shares of Preferred Stock outstanding, at the option of the preferred shareholders.

The number of shares of common stock, no par value, outstanding at September 30, 2009 was 107,241,600.

At September 30, 2009 the Company had outstanding 30,000 shares of convertible, voting, cumulative, 9% Series A preferred stock. Dividends accrue and are payable quarterly in arrears at the annual rate of 9% of the Original Issue Price of $100 per share, either in cash or common stock, at the decision of the Company. If the Company is not listed for trading on the American Stock Exchange, a NASDAQ Stock Market or the New York Stock Exchange on December 31, 2009, effective beginning January 1, 2010 dividends shall accrue and be paid quarterly in arrears at the annual rate of 15%. For purposes of valuing the common stock payable to holders of Series A Preferred in lieu of cash with respect to such quarterly dividends, the value shall be deemed to be the average of the closing bid or sale prices (whichever is applicable) over the 10 day period ending the day prior to the dividend payment date. To date, the Company has elected to pay such dividends in common stock. At September 30, 2009, accrued dividends of $47,813 equate approximately to 2,214,000 common shares issuable.

8,750 shares of the of the Series A Convertible preferred stock outstanding at September 30, 2009 are subject to an agreement between DCV and QuaTech that provides for these shares to be exchanged for a senior subordinated secured note and related Preferred Stock purchase warrant agreement, to occur upon the earlier of December 31, 2009 or the date upon which all necessary consents to such exchange have been obtained. It is unknown at this time whether or not the necessary consents will be obtained. (See note 3)

Series A preferred stock can, at the option of the holder, be converted into fully paid shares of common stock. The number of shares of common stock into which shares of Series A preferred may be converted shall be obtained by multiplying the number of shares of Series A preferred to be converted by the Original Issue Price of $100 and dividing the result by the product of $0.034 (the “Reference Price”) times 1.25, which equates to approximately 71 million common shares should the total number of outstanding preferred shares be converted. After December 31, 2009, the Company can redeem the Series A preferred shares at a price per share equal to the Original Issue Price. The holders of preferred stock have preference in the event of liquidation or dissolution of the Company over the holders of common stock.

NOTE 9 — Stock Options

Stock-Based Compensation

The Company recognizes compensation expense, using a fair-value based method, for costs related to all share-based payments including stock options and stock issued under our employee stock plans. The Company estimates the fair value of share-based payment awards on the date of grant using a Black-Scholes option-pricing model. The value of the portion of the award that is ultimately expected to vest is recognized as expense on a straight-line basis over the requisite service periods in our consolidated statements of operations.

Under the terms of the Company’s 1996 Stock Option Plan, (the “Plan”), qualified and nonqualified options to purchase shares of the Company’s common stock are available for issuance to employees, officers, directors, and consultants. As amended on February 23, 2006, the Plan authorized 15,000,000 option shares with an annual increase to the total number of option shares available in the plan of 4% of the total number of common shares outstanding each year until the end of the option plan. On February 23, 2006, the termination date for the plan was extended to January 11, 2011. At September 30, 2009, 12,030,000 shares were available for future grants under the Plan.

Options issued under this Plan are granted with exercise prices equal to the closing stock price on the date of grant and generally vest immediately for options granted to directors and at a rate of 25% per year for options granted to employees, and expire within 10 years from the date of grant or 90 days after termination of employment.

During the nine-month periods ended September 30, 2009 and 2008, the Company recognized compensation expense for stock options of $100,306 and $54,265 respectively. The expense is included in the consolidated statement of operations as general and administrative expense. Total unamortized compensation expense related to non-vested stock option awards at September 30, 2009 was $148,000, which is expected to be recognized over a weighted-average period of 1.3 years. The Company’s calculations were made using the Black-Scholes option-pricing model, with the following weighted average assumptions:


	For the Nine Months Ended
	September 30,
	2009			2008
Expected life	6.5 Years			6.5 Years
Volatility		297	%		195	%
Interest rate		2.0	%		2.8	%
Dividend yield	None			None

Expected volatilities are based on historical volatility of the Company’s stock. The Company used historical experience with exercise and post employment termination behavior to determine the options’ expected lives. The expected life represents the period of time that options granted are expected to be outstanding. The risk-free rate is based on the U.S. Treasury rate with a maturity date corresponding to the options’ expected life. The dividend yield is based upon the historical dividend yield.

The following table summarizes stock option activity under DPAC’s 1996 Stock Option Plans for the nine months ended September 30, 2009:


				Weighted-
				Average		Weighted-Average	Aggregate
	Number of			Exercise		Remaining	Intrinsic
	Shares			Price		Contractual Life	Value
Outstanding — December 31, 2008		12,882,125		$	0.50
Granted (weighted-average fair value of $0.03)		2,050,001		$	0.03
Exercised		—			—
Canceled		(275,500	)	$	1.40

Outstanding —September 30, 2009		14,656,626		$	0.42	6.2 Years	$	13,700

Exercisable — September 30, 2009		11,281,626		$	0.53	5.6 Years	$	13,700

NOTE 10 — Segment Information

Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the Company’s chief operating decision-maker, or decision-making group, in deciding how to allocate resources and in assessing performance. The Company’s Chief Executive Officer reviews financial information and makes operational decisions based upon the Company as a whole. Therefore, the Company reports as a single segment.

The Company had export sales of 22% and 20% of net sales for the three and nine months ended September 30, 2009 and 37% and 28% of net sales for the three and nine months ended September 30, 2008, respectively. Export sales were primarily to Canada, Brazil, Singapore, and Western European countries. Foreign sales are made in U.S. dollars. All long-lived assets are located in the United States.

NOTE 11 — Income Taxes

The Company recognizes deferred tax assets and liabilities based on the differences between the financial statement carrying values and the tax bases of assets and liabilities. The Company exercises significant judgment relating to the projection of future taxable income to determine the recoverability of any tax assets recorded on the balance sheet. DPAC regularly reviews its deferred tax assets for recoverability and establishes a valuation allowance based on historical taxable income, projected future taxable income, and the expected timing of the reversals of existing temporary differences. To the extent that recovery is not believed to be more likely than not, a valuation allowance is established. The Company has established a valuation allowance associated with its net deferred tax assets.

The valuation allowance was calculated by using an assessment of both negative and positive evidence when measuring the need for a valuation allowance. Evidence evaluated by management included operating results during the most recent three-year period and future projections, with more weight given to historical results than expectations of future profitability, which are inherently uncertain. The Company’s net losses in recent periods represented sufficient negative evidence to require a full valuation allowance against its net deferred tax assets. This valuation allowance will be evaluated periodically and could be reversed partially or totally if business results have sufficiently improved to support realization of deferred tax assets.

NOTE 12 — Sale of Manufacturing Capability

The Company entered into an Equipment Purchase Agreement (the “Agreement”) that was consummated in the first quarter of 2009 with one of its contract manufacturers (“Manufacturer”) and sold certain of its manufacturing capability (consisting of manufacturing equipment, fixtures, tools, shelving and tables) for a sale price of $74,000. The Manufacturer also assumed the obligations of QuaTech under a certain capital lease with a remaining balance of approximately $21,000 at December 31, 2008. Also pursuant to the Agreement, QuaTech sold certain inventory valued at a sum of $150,000. QuaTech and Manufacturer have agreed that Manufacturer will purchase additional active inventory from QuaTech as required. Also pursuant to the Agreement, the Company sublet to Manufacturer 4,911 square feet of space at the Company’s manufacturing facility located in Hudson, OH. Additionally, the Company has agreed to utilize Manufacturer as its manufacturer of all products and parts for existing products of the Company (other than under the Company’s Airborne wireless product line) for a period of 24 months under terms and conditions to be determined by the parties. A negligible loss was recorded with regard to the transaction as the assets were sold at the Company’s approximate net carrying value of the assets.

NOTE 13 — Commitments and Contingencies

Legal Proceedings

We are subject to various legal proceedings and threatened legal proceedings from time to time as part of our business. We are not currently party to any legal proceedings nor are we aware of any threatened legal proceedings, the adverse outcome of which, individually or in the aggregate, we believe would have a material adverse effect on our business, financial condition and results of operations. However, any potential litigation, regardless of its merits, could result in substantial costs to us and divert management’s attention from our operations. Such diversions could have an adverse impact on our business, results of operations and financial condition.

Other Contingent Contractual Obligations

Over time, the Company has made and continues to make certain indemnities, commitments and guarantees under which it may be required to make payments in relation to certain transactions. These include: indemnities to past, present and future directors, officers, employees and other agents pursuant to the Company’s Articles, Bylaws, resolutions, agreements or otherwise; indemnities to various lessors in connection with facility leases for certain claims arising from such facility or lease; indemnities to vendors and service providers pertaining to claims based on the negligence or willful misconduct of the Company; and indemnities pursuant to contracts involving protection of selling security holders against claims by third parties arising from any alleged inaccuracy of information in registration statements filed by the Company with the SEC or involving indemnification of the other parties to contracts from any damages arising from misrepresentations made by the Company. The Company may also issue a guarantee in the form of a standby letter of credit as security for contingent liabilities under certain customer contracts. The duration of these indemnities, commitments and guarantees varies and, in certain cases, may be indefinite. The majority of these indemnities, commitments and guarantees may not provide for any limitation of the future payments that the Company could potentially be obligated to make. The Company has not recorded any liability for these indemnities, commitments and guarantees in the accompanying balance sheets.

The Company’s written severance agreements with the current CEO and CFO that provided for compensation equivalent to one year of compensation and six months of compensation, respectively, should either individual be terminated for any reason other than cause, expired as of June 30, 2009. The Company anticipates that new contracts with similar terms will be implemented.

Item 2 — Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Please refer to the Cautionary Statement Related to Forward-Looking Statements set forth on page 2 of this Report, which is incorporated herein by reference. The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the condensed financial statements and notes to those statements included elsewhere in this Report.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

Introduction/Business Overview

DPAC, through its wholly owned subsidiary, QuaTech, designs and sells device connectivity and device networking solutions for a broad market. QuaTech sells its products through a global network of distributors, system integrators, value added resellers, and original equipment manufacturers (“OEM”). QuaTech also offers data acquisition products to a limited number of OEM customers and resellers.

QuaTech products can be categorized into two broad product lines:

Our Device Connectivity products include:

	•		Multi-port serial boards that add ports to desktop computers to allow for the connection of multiple peripherals with standard interfaces. These products are used in a variety of industries including banking, transportation management, kiosks, satellite communications, and retail point of sale.

	•		Mobile products that add ports for laptop and handheld computers. These products include multi-port serial adapters, parallel port adapters, and Bluetooth products.

	•		USB to Serial products that add standard serial ports to any computing environment through a USB port. These products address the need to add connectivity through a solution that is external to the computer. These products are used in several markets including retail point of sale and kiosks.

Our Device Networking products include:

	•		Serial device server products that connect peripherals to a local area network through a standard TCP/IP interface. This product line was introduced in 2003 and was extended in 2004 through the introduction of product models that connect to the local area network through a wireless 802.11 interface.

	•		Industrial rated, embedded wireless modules that enable OEM customers to add standard 802.11 connectivity capabilities to their products. These modules address the needs of a number of industries including transportation, telematics, warehouse and logistic, and point of sale.

Risks

Period-to-period comparisons of our financial results are not necessarily meaningful and should not be relied upon as indications of future performance. It is likely that from time to time our operating results will be below the expectations of some investors and not above the expectations of enough investors. In such events, the market price of our common stock would be adversely affected, in some proportion, and perhaps disproportionately. We ourselves have difficulties forecasting, and there are numerous risks and uncertainties concerning the timing of our customers’ initiating their production orders and the amounts of such orders, fluctuating market demand for and declines in the selling prices of similar products, decreases or increases in the costs of the components, uncertain market acceptance, our competitors, delays, or other problems with new products, software, manufacturing inefficiencies, cost overruns, fixed overhead costs, competition from new wireless products using 802.11 with newer technology, and challenges managing production from overseas suppliers, among other factors, each of which will make it more difficult for us to meet expectations.

Other primary factors that may in the future affect our results of operations include our efforts to reduce our operating expenses and our fixed overhead. Our costs in any particular period could include higher costs associated with stock-based compensation and /or higher costs associated with adjusting the liability for warrants to their fair value through earnings at each reporting period.

These risks should be read in connection with the detailed risks associated with DPAC and QuaTech set forth under the caption “Risk Factors” contained in the Registrant’s Annual Report on Form 10-K filed with the SEC on April 15, 2009.

Results of Operations and Financial Condition

Three Months Ended September 30, 2009 and 2008

The following table sets forth certain Condensed Consolidated Statement of Operations data in total dollars, as a percentage of net revenues and as a percentage change from the same period in the prior year. This information should be read in conjunction with the Consolidated Financial Statements included elsewhere in this Form 10-Q.


	For the Three Months Ended
	September 30, 2009						September 30, 2008						Change
	Results			% of Sales			Results			% of Sales			Dollars			%

NET SALES	$	1,425,770			100	%	$	1,737,094			100	%	$	(311,324	)		-18	%
COST OF GOODS SOLD		869,320			61	%		1,022,366			59	%		(153,046	)		-15	%

GROSS PROFIT		556,450			39	%		714,728			41	%		(158,278	)		-22	%
OPERATING EXPENSES
Sales and marketing		182,276			13	%		274,054			16	%		(91,778	)		-33	%
Research and development		178,432			13	%		116,207			7	%		62,225			54	%
General and administrative		260,022			18	%		319,984			18	%		(59,962	)		-19	%
Amortization of intangible assets		132,088			9	%		122,505			7	%		9,583			8	%
Restructuring costs		12,097			1	%		—			0	%		12,097			—

Total operating expenses		764,915			54	%		832,750			48	%		(67,835	)		-8	%

LOSS FROM OPERATIONS		(208,465	)		-15	%		(118,022	)		-7	%		(90,443	)		77	%

OTHER EXPENSE:
Interest expense		146,126			10	%		152,509			9	%		(6,383	)		-4	%
Fair value adjustment for warrant liability		29,000			2	%		—			0	%		29,000			—

Total other expenses		175,126			12	%		152,509			9	%		22,617			15	%

LOSS BEFORE INCOME TAXES		(383,591	)		-27	%		(270,531	)		-16	%		(113,060	)		42	%
INCOME TAX PROVISION		—			0	%		—			0	%		—			—

NET LOSS	$	(383,591	)		-27	%	$	(270,531	)		-16	%	$	(113,060	)		42	%

PREFERRED STOCK DIVIDENDS		47,813			3	%		47,813			3	%		—			—

NET LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS	$	(431,404	)		-30	%	$	(318,344	)		-18	%	$	(113,060	)		36	%

Net Sales. Net sales of $1.4 million for the quarter ended September 30, 2009 decreased by $311,000 or 18% as compared to the prior year third quarter net sales. Net sales related to the Company’s Device Connectivity products decreased $368,000, or 32% from the quarter ended September 30, 2008, and net sales related to the Company’s Device Networking products, including the Airborne wireless product line, increased by $57,000, or 10% from the prior year period. The decrease in revenues is primarily due to a general decrease in IT infrastructure spending across the industries to which we sell, which impacted the majority of our customer base beginning in the second half of 2008 and has continued through the third quarter of 2009.

Gross Profit. Gross profit decreased by $153,000 or 22% as a result of the decrease in net sales. Gross profit as a percentage of net sales decreased from 41% to 39% due primarily to the decrease in revenues and the change in product mix. During the first quarter of 2009, the Company sold certain of its manufacturing capability to one of its contract manufacturing vendors. Going forward the Company will cease to manufacture its products and will purchase completed assemblies from contract manufacturers.

Sales and Marketing Expenses. Sales and marketing expenses for the quarter ended September 30, 2009 of $183,000 decreased by $92,000 or 33% from the prior year third quarter. The decrease is due primarily to a decrease in salary and benefits of $53,000 and in advertising, trade shows, travel and related expenses totaling $36,000.

Research and Development Expenses. Research and development expenses of $178,000 for the third quarter of 2009 increased by $82,000 or 28% as compared to the third quarter of 2008. The increase was the result of $88,000 of costs incurred during the third quarter of 2008 related to software development being capitalized, thereby reducing the expense recognized in that period. The Company will continue to invest in research and development to expand and develop new wireless products. See “Forward-Looking Statements.”

General and Administrative Expenses. General and administrative expenses of $260,000 incurred for the third quarter of 2009 decreased by $60,000 or 19% from the prior year period. The decrease is due to a decrease in bad debt expense of $25,000, legal and accounting fees of $17,000, and a general decrease in most expense line items.

Amortization of Intangible Assets. $122,000 of amortization expense is related to the amortization of purchased intangible assets acquired in the Merger on February 28, 2006 being amortized over 5 years, and in the current year period, an additional $10,000 is for the amortization of internally developed software being capitalized over 5 years.

Restructuring Costs. Restructuring costs of $12,000 in the current year period are for severance payments made to 3 individuals terminated in the third quarter. All costs were paid during the period and no additional restructuring costs are anticipated.

Interest Expense. The Company incurred interest and financing costs of $146,000 during the third quarter of 2009, as compared to $153,000 incurred in the same period of the prior year. The decrease is due to lower average effective interest rates. The following non-cash charges are included in interest expense for the third quarter of 2009: accretion of success fees of $11,000, amortization of deferred financing costs of $14,000, and amortization of the discount for warrants of $3,000. The following non-cash charges are included in interest expense for the third quarter of 2008: accretion of success fees of $20,000, amortization of deferred financing costs of $17,000, and amortization of the discount for warrants of $3,000.

Fair Value Adjustment of Put Warrant Liability. Based on the Company’s share price, the Company adjusts the liability for the put warrant associated with the HillStreet Fund to its fair value, through earnings, at the end of each reporting period. During the third quarter of 2009, the company recorded a $29,000 charge to earnings.

Income Taxes. The Company has recorded a full valuation allowance against the Company’s related deferred tax assets. Recent net operating losses represent sufficiently negative evidence to require a continued valuation allowance against the net deferred tax assets. This valuation allowance will be evaluated periodically and could be reversed partially or totally if business results have sufficiently improved to support realization of our deferred tax assets.

Preferred Stock Dividends. The Company has outstanding shares of convertible, cumulative, 9% series A preferred stock, $100 par value. The dividends are payable quarterly and, to date, the Company has elected to pay the dividends in common stock.

Nine Months Ended September 30, 2009 and 2008


	For the Nine Months Ended
	September 30, 2009						September 30, 2008						Change
	Results			% of Sales			Results			% of Sales			Dollars			%

NET SALES	$	5,135,724			100	%	$	7,325,547			100	%	$	(2,189,823	)		-30	%
COST OF GOODS SOLD		3,040,134			59	%		4,230,533			58	%		(1,190,399	)		-28	%

GROSS PROFIT		2,095,590			41	%		3,095,014			42	%		(999,424	)		-32	%
OPERATING EXPENSES
Sales and marketing		673,686			13	%		910,358			12	%		(236,672	)		-26	%
Research and development		599,036			12	%		676,253			9	%		(77,217	)		-11	%
General and administrative		957,692			19	%		1,218,474			17	%		(260,782	)		-21	%
Amortization of intangible assets		377,098			7	%		367,515			5	%		9,583			3	%
Restructuring costs		12,097			0	%		—			0	%		12,097			—

Total operating expenses		2,619,609			51	%		3,172,600			43	%		(552,991	)		-17	%

LOSS FROM OPERATIONS		(524,019	)		-10	%		(77,586	)		-1	%		(446,433	)		575	%

OTHER EXPENSE:
Other		483			0	%		—						483
Interest expense		431,450			8	%		574,012			8	%		(142,562	)		-25	%
Fair value adjustment for warrant liability		29,000			1	%		64,500			1	%		(35,500	)		-55	%

Total other expenses		460,933			9	%		638,512			9	%		(177,579	)		-28	%

LOSS BEFORE INCOME TAXES		(984,952	)		-19	%		(716,098	)		-10	%		(268,854	)		38	%
INCOME TAX PROVISION		—			0	%		5,755			0	%		(5,755	)		-100	%

NET LOSS	$	(984,952	)		-19	%	$	(721,853	)		-10	%	$	(263,099	)		36	%

PREFERRED STOCK DIVIDENDS		143,439			3	%		126,214			2	%		17,225

NET LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS	$	(1,128,391	)		-22	%	$	(848,067	)		-12	%	$	(280,324	)		33	%

Net Sales. Net sales of $5.1 million for the nine months ended September 30, 2009 decreased by $2.2 million or 30% as compared to net sales for the comparable prior year period. Net sales related to the Company’s Device Connectivity products decreased $1.1 million, or 26% from the nine months ended September 30, 2008, and net sales related to the Company’s Device Networking products, including the Airborne wireless product line, decreased by $1.1 million, or 35% from the prior year period.

Gross Profit. Gross profit decreased by $999,000, or 32%, for the nine month period as a result of the decrease in revenues. Gross profit as a percentage of net sales decreased from 42% to 41% due to the decreased revenue levels and change in product mix. During the first quarter of 2009, the Company sold certain of its manufacturing capability to one of its contract manufacturing vendors. Going forward the Company will cease to manufacture its products and will purchase completed assemblies from contract manufacturers.

Sales and Marketing Expenses. Sales and marketing expenses for the nine months ended September 30, 2009 of $674,000 decreased by $237,000 or 26% from the prior year period. The decrease is due primarily to a decrease in salaries and related expenses of $105,000 and in advertising related expenses of $122,000.

Research and Development Expenses. Research and development expenses of $599,000 for the first nine months of 2009 decreased by $77,000 or 11% as compared to the same period of 2008. The decrease is due primarily to a decrease in personnel costs incurred of $99,000 and consulting fees of $50,000. Additionally, during the 2009 period approximately $29,000 of payroll related expenses were capitalized as software development costs as compared to $88,000 of incurred costs capitalized during the 2008 period. The Company will continue to invest in research and development to expand and develop new wireless products. See “Forward-Looking Statements.”

General and Administrative Expenses. General and administrative expenses incurred for the nine months ended September 30, 2009 of $958,000 decreased by $261,000 or 21% from the prior year period. The decrease was due primarily to decreases in salaries and benefits of $88,000, director fees of $49,000, legal and accounting fees of $47,000 and a general decrease in most expense line items.

Amortization of Intangible Assets. Amortization expense is related to the amortization of purchased intangible assets acquired in the Merger on February 28, 2006 being amortized over 5 years, and in the current year period, an additional $10,000 of expense for the amortization of internally developed software being capitalized over 5 years.

Interest Expense. The Company incurred interest and financing costs of $431,000 during the first nine months of 2009 as compared to $574,000 incurred in the prior year period. The decrease is due to lower average debt balances and lower effective interest rates. The following non-cash charges are included in interest expense during the first nine months of 2009: accretion of success fees of $34,000, amortization of deferred financing costs of $36,000, and amortization of the discount for warrants of $10,000. The following non-cash charges are included in interest expense during the first nine months of 2008: accretion of success fees of $58,000, amortization of deferred financing costs of $38,000, and amortization of the discount for warrants of $9,000. Also included in 2008 is the write-off of deferred financing fees in the amount of $50,000 due to the termination of a financing placement agreement.

Fair Value Adjustment of Put Warrant Liability. For the nine months ended September 30, 2009, the company recorded a $29,000 charge to earnings compared to a $64,500 charge to earnings for the 2008 period, related to the adjustment of the liability for the warrant associated with the Hillstreet subordinated debt. Company adjusts the put warrant liability to its fair value through earnings at the end of each reporting period based on the Company’s share price at the end of each reporting period.

Preferred Stock Dividends. During the quarter ended March 31, 2008, the Company issued 21,250 shares of convertible, cumulative, 9% series A preferred stock, $100 par value. The dividends are payable quarterly and, to date, the Company has elected to pay the dividends in common stock.

Liquidity and Capital Resources

In the third quarter of 2008, the Company took actions to reduce its cash operating expenses to align its cost structure with current economic conditions and a downturn in the Company’s revenue levels. It is anticipated that these reductions will result in annualized operating cost savings of approximately $600,000. Additionally, during the first quarter of 2009, the Company consummated an agreement with one of its contract manufacturers and sold certain equipment and inventory, sublet a portion of its facility to the manufacturer, and will further engage the manufacturer to produce more of the Company’s products. This transaction is expected to improve the operating efficiency of the Company and provide an increase in short term cash flows.

In the third quarter of, 2009, the Company implemented additional cost reduction measures by reducing headcount by 3 individuals and implementing a salary reduction program for all employees of 10%. These measures are expected to result in annual operating costs reductions of approximately $400,000.

Going forward, the Company is dependent on financing its operations through the use of its bank line of credit and the contribution from future revenues. Management believes that the actions it has taken will enable the Company to generate sufficient cash flows from operations and funding from its bank line of credit to maintain liquidity for the near term, at currently projected revenue levels. However, a further downturn in our revenue levels can severely impact the availability under our line of credit and limit our ability to meet our obligations on a timely basis and finance our operations as needed. At September 30, 2009, we had remaining net availability under our line of credit of approximately $77,000. Future availability may be impacted by the amount of qualifying receivables and there is no assurance that the Company will be able to obtain additional funding if and when it may need it.

The Company has a revolving line of credit with a bank providing for a maximum $2,000,000 working capital line of credit through December 31, 2009, and $1,500,000 thereafter. The facility bears a floating interest rate at the 30 day LIBOR (.24% at September 30, 2009) plus 6.5%. Availability under the line of credit is formula driven based on applicable balances of the Company’s accounts receivable and inventories. Based on the formula, at September 30, 2009 the Company had availability to draw up to a maximum of approximately $1,542,000. The line of credit contains certain financial covenants that the Company was in not in compliance with at September 30, 2009. The Credit Facility is secured by substantially all the assets of the Company and expires on January 31, 2010.

The actual amount and timing of working capital and capital expenditures that we may incur in future periods may vary significantly and will depend upon many factors, including the amount and timing of the receipt of revenues from operations, any potential acquisitions or divestitures, an increase in manufacturing capabilities, the reduction of liabilities, the timing and extent of the introduction of new products and services and growth in personnel and operations. If needed, there can be no assurance that additional financing will be available on terms favorable to the Company, if at all. If internally generated funds are inadequate, we may scale back expenditures or seek other financing, which might include sales of equity securities that could dilute existing shareholders. See “Cautionary Statements.”

Net cash used in operating activities for the nine months ended September 30, 2009 was $41,000 as compared to $377,000 used in the first nine months of 2008. The net loss of $985,000 incurred in the first nine months of 2009 was partially offset by non-cash items, including depreciation and amortization, non-cash compensation expense, accretion of success fees and amortization of deferred financing costs, totaling $664,000. Cash was used to fund an increase in prepaid assets of $46,000, pay down other accrued liabilities by $96,000 and accrued restructuring costs by $42,000. A decrease in accounts receivable of $203,000 and an increase in accounts payable of $236,000 contributed to cash.

Net cash provided by investing activities of $89,000 for the nine months ended September 30, 2009 consisted of cash received from the sale of assets of $150,000 and partially offset by property additions of $61,000.

Net cash used in financing activities for the nine months ended September 30, 2009 was $52,000 as compared to $279,000 provided during the first nine months of 2008. Cash used in the current year period consisted of principal repayments on the Ohio Development loan of $94,000, and financing costs incurred of $10,000, partially offset by net borrowing under the revolving credit facility and short term notes totaling $55,000. Cash provided in the prior year period consisted of proceeds from the issuance of preferred stock of $2.1 million and proceeds from new subordinated term debt of $1.2 million. These amounts were partially offset by the principal pay-off of the previously existing subordinated term debt of $2.0 million, net repayments under revolving credit facilities of $617,000, pay-off of bank term debt of $113,000, principal payments on the Ohio Development loan of $94,000, and deferred financing costs incurred of $153,000.

As of September 30, 2009, we were not in compliance with certain of our bank financial covenants.

The Company operates at leased premises in Hudson, Ohio, which are adequate for the Company’s needs for the near term.

The Company does not expect to acquire more than $50,000 in capital equipment during the remainder of the fiscal year.

Off Balance Sheet Arrangements

Our off-balance sheet arrangements consist primarily of conventional operating leases, purchase commitments and other commitments arising in the normal course of business, as further discussed below under “Contractual Obligations and Commercial Commitments.” As of September 30, 2009, we did not have any relationships with unconsolidated entities or financial partners, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.

Contractual Obligations and Commercial Commitments

Purchase Commitments with Contract Manufacturers. We generally issue purchase orders to our contract manufacturers with delivery dates from four to eight weeks from the purchase order date. In addition, we regularly provide such contract manufacturers with rolling six-month forecasts of material and finished goods requirements for planning and long-lead time parts procurement purposes only. We are committed to accept delivery of materials pursuant to our purchase orders subject to various contract provisions which may in certain limited circumstances allow us to delay receipt of such orders or cancel orders beyond certain agreed lead times. Such cancellations, if any, may or may not result in cancellation costs payable by us. Cancellation without contractual permission to do so would result in additional potential losses, damages and costs. In the past, we have been required to take delivery of materials from our suppliers that were in excess of our actual requirements at the time of delivery, and we have previously recognized charges and expenses related to such excess material. If we are unable to adequately manage our commitments to contract manufacturers and adjust such commitments for changes in demand, we may incur additional costs and expenses, including without limitation inventory expenses related to excess and obsolete inventory. Such costs and expenses could have a material adverse effect on our business, financial condition and results of operations.

Other Purchase Commitments. We also incur various purchase obligations with other vendors and suppliers for the purchase of inventory, as well as other goods and services, in the normal course of business. These obligations are generally evidenced by purchase orders with delivery dates from four to six weeks from the purchase order date, and in certain cases, supply agreements that contain the terms and conditions associated with these purchase arrangements. We are committed to accept delivery of such materials pursuant to such purchase orders subject to various contract provisions which allow us to delay receipt of such orders or cancel orders beyond certain agreed lead times. Such cancellations may or may not result in cancellation costs payable by us. In the past, we have been required to take delivery of materials from our suppliers that were in excess of our requirements and we have previously recognized charges and expenses related to such excess material. If we are not able to adequately manage our supply chain and adjust such commitments for changes in demand, we may incur additional inventory expenses related to excess and obsolete inventory. Such expenses could have a material adverse effect on our business, financial condition and results of operations.

Severance Agreement Commitments. The Company was party to severance agreements with former employees and was obligated to make payments under these agreements through April 2009. These obligations were paid in full and there is no further liability for theses agreements at September 30, 2009. The severance liability primarily arose from the accrued restructuring costs assumed at time of the merger and is included in accrued restructuring costs in the financial statements.

Critical Accounting Policies

The preparation of financial statements and related disclosures in conformity with accounting principles generally accepted in the United States of America and the Company’s discussion and analysis of its financial condition and results of operations requires the Company’s management to make judgments, assumptions, and estimates that affect the amounts reported in its financial statements and accompanying notes. Note 1 of the notes to DPAC’s audited financial statements, filed on Form 10-K, describes the significant accounting policies and methods used in the preparation of the Company’s financial statements. Management bases its estimates on historical experience and on various other assumptions that it believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities. Actual results may differ from these estimates.

Management believes the Company’s critical accounting policies are those related to revenue recognition, allowance for doubtful accounts, warranty reserves, inventory valuation, valuation of long-lived assets including capitalized developed software, acquired intangibles, goodwill and trademarks, accrual of income tax liability estimates, accounting for our put warrant liability, and accounting for stock-based compensation. Management believes these policies to be critical because they are both important to the portrayal of the Company’s financial condition and results of operations, and they require management to make judgments and estimates about matters that are inherently uncertain.

We recognize product revenue when persuasive evidence of an arrangement exists, delivery has occurred, the sales price is fixed or determinable and collectibility is probable and there are no post–delivery obligations other than warranty. In those instances where customers have right of return, which typically would be for initial stocking orders for distributors, revenue is deferred until confirmation has been received from the customer indicting that the product has shipped and completed the sales cycle. Some distributors have annual stock rotation or return provisions which are typically limited to 5% of the previous twelve months of shipments. In these situations, we reserve the appropriate percentage against shipments throughout the period as deferred revenue. We do not typically have any post delivery obligations other than warranty. The Company also offers marketing incentives to certain customers. These incentives are incurred based on the level of expenses the customers incur and are charged to operations as expenses in the same period. Development revenue is recognized when services are performed and was not material for any of the periods presented.

We establish an allowance for doubtful accounts and a warranty reserve based on historical experience and believe the collection of revenues, net of these reserves, is reasonably assured.

The allowance for doubtful accounts is an estimate for potential non-collection of accounts receivable based on historical experience and known circumstances regarding collectibility of customer accounts. Accounts will be written off as uncollectible if the company determines the amount cannot be collected. The Company has not experienced a non-collection of accounts receivable materially affecting its financial position or results of operations. If the financial condition of the Company’s customers were to deteriorate causing an impairment of their ability to make payments, additional provisions for bad debts may be required in future periods.

The Company records a warranty reserve as a charge against earnings based on historical warranty claims and estimated costs. If actual returns are not consistent with the historical data used to calculate these estimates, additional warranty reserves could be required.

Inventories consist principally of raw materials, sub-assemblies and finished goods, which are stated at the lower of average cost or market. The Company records an inventory reserve as a charge against earnings for potential slow-moving or obsolete inventory. The reserve is evaluated quarterly utilizing both historical movement over a three year period as compared to quantities on-hand and qualitative factors related to the age of product lines. Significant changes in market conditions, including potential changes in technology, in the future may require additional inventory reserves.

We capitalize certain software development costs after a product becomes technologically feasible and before its general release to customers. Significant judgment is required in determining when a product becomes ‘‘technologically feasible.’’ Capitalized development costs are then amortized over the product’s estimated life beginning upon general release of the product. Periodically, we compare a product’s unamortized capitalized cost to the product’s net realizable value. To the extent unamortized capitalized cost exceeds net realizable value based on the product’s estimated future gross revenues (reduced by the estimated future costs of completing and selling the product) the excess is written off. This analysis requires us to estimate future gross revenues associated with certain products and the future costs of completing and selling certain products. Changes in these estimates could result in write-offs of capitalized software costs. As of September 30, 2009, $191,657 of software development costs were capitalized. Amortization of these costs began in the third quarter of 2009 over a 5 year period.

Goodwill is subject to an impairment assessment at least annually which may result in a charge to operations if the fair value of the reporting unit in which the goodwill is reported declines. The Company tests goodwill and trademarks on at least an annual basis at the end of the fourth quarter, and more often if circumstances should dictate, for impairment. Other intangible assets are amortized over their estimated useful lives. The determination of related estimated useful lives of other intangible assets and whether goodwill and trademarks are impaired involves judgments based upon long-term projections of future performance. The Company operates in a single business segment as a single business unit and annually reviews the recoverability of the carrying value of goodwill using the methodology prescribed in FASB guidance. Recoverability of goodwill is determined by comparing the fair value of the entire Company to the accounting value of the underlying net assets. Based on the results of the most recently completed analysis, the Company’s goodwill and trademarks were not impaired as of December 31, 2008. No event has occurred as of or since the period ended December 31, 2008 that would give management an indication that an impairment charge was necessary that would adversely affect the Company’s financial position or results of operations.

Deferred tax assets and liabilities are recorded in accordance with FASB guidance. The Company records an estimated income tax liability to recognize the amount of income taxes payable or refundable for the current year and deferred income tax liabilities and assets for the future tax consequences of events that have been recognized in the Company’s financial statements or income tax returns. Judgment is required in estimating the future income tax consequences of events that have been recognized in the Company’s financial statements or the income tax returns. The Company estimates and provides an allowance for deferred tax assets based on estimated realization of the asset utilizing information related to historical taxable income and projected taxable income.

The Company values the put warrant liability by calculating the difference between the Company’s closing stock price at the end of a reporting period and the exercise price per share multiplied by the number of warrants granted. In accordance with FASB guidance, the Company has classified the fair value of the put warrants as a liability and changes in the fair value of the warrants are recognized in the earnings of the Company. Changes in our stock price can have a material impact to the put warrant valuation and, therefore, to our financial statements. Additionally, the actual settlement amount of the put warrant liability could differ materially from the value determined based on the Company’s stock price.

The Company amortizes deferred debt issuance costs using the effective interest method.

Item 4T — Controls and Procedures.

An evaluation was carried out under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and the Company’s Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures as of September 30, 2009, the end of the period covered by this report, as required by Exchange Act Rule 13a–15(b). The Company’s disclosure controls were designed to provide reasonable assurance that information required to be disclosed in reports filed or furnished under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission. It should be noted that the design of any system of controls is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions, regardless of how remote. However, the Company’s disclosure controls have been designed to provide reasonable assurance of achieving the controls’ stated goals. Based on the foregoing evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective at the reasonable assurance level. There were no changes in the Company’s internal control over financial reporting that occurred during the Company’s most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II—OTHER INFORMATION

Item 1 — Legal Proceedings.

We are or could be subject to various legal proceedings and threatened legal proceedings from time to time as part of the conduct of our business. We believe we are not currently party to any material legal proceedings nor are we aware of any threatened material legal proceedings, the adverse outcome of which, individually or in the aggregate, would have a material adverse effect on our business, financial condition and results of operations. However, any potential litigation, regardless of its merits, could result in substantial costs to us and divert management’s attention from our operations. Such costs and diversions could have a material adverse impact on our business, results of operations and financial condition.

Item 6 — Exhibits.


Exhibit No.		Description

	2.1	Asset Purchase Agreement among Socket Mobile, Inc., Development Capital Ventures, L.P. and QuaTech Inc., dated September 30, 2009 (incorporated herein by reference to Exhibit 10.1 to the registrant’s current report on Form 8-K filed October 6, 2009).

	10.1	Supply and Licensing Agreement between QuaTech, Inc. and Socket Mobile, Inc., dated September 30, 2009 (incorporated herein by reference to Exhibit 10.2 to the registrant’s current report on Form 8-K filed October 6, 2009).

	31.1	Certifications of Chief Executive Officer and Chief Financial Officer pursuant to Securities Exchange Act Rule 13a-14(a)/15d-14(a).

	32.1	Certifications of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.


	DPAC TECHNOLOGIES CORP. (Registrant)
Date: November 16, 2009	By:	/s/ STEVEN D. RUNKEL
		Steven D. Runkel,
		Chief Executive Officer

Date: November 16, 2009	By:	/s/ STEPHEN J. VUKADINOVICH
		Stephen J. Vukadinovich,
		Chief Financial Officer

	(a)		Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

	(b)		Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

	(c)		Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

	(d)		Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

	(a)		Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

	(b)		Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

	(c)		Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

	(d)		Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and


/s/ STEVEN D. RUNKEL
Steven D. Runkel
Chief Executive Officer
November 16, 2009


/s/ STEPHEN J. VUKADINOVICH
Stephen J. Vukadinovich
Chief Financial Officer
November 16, 2009

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PART I—FINANCIAL INFORMATION			4

Item 1. Financial Statements			4

Item 2 — Management’s Discussion and Analysis of Financial Condition and Results of Operations			16

Item 4T — Controls and Procedures			25

PART II—OTHER INFORMATION			26

Item 1 — Legal Proceedings			26

Item 6 — Exhibits			26

SIGNATURES			27

EXHIBIT INDEX			28

Exhibit 31.1
Exhibit 32.1

1.		I have reviewed this quarterly report on Form 10-Q of DPAC Technologies Corp.;

2.		Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.		Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.		The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

	(a)		All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

	(b)		Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.


/s/ STEVEN D. RUNKEL
Steven D. Runkel
Chief Executive Officer