Form 10-QSB

10QSB 1 d10qsb.htm FORM 10-QSB Form 10-QSB

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-QSB

(Mark One)

x	QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2007

¨	TRANSITION REPORT UNDER 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 Small Business Issuer 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

(Issuer’s Telephone Number, Including Area Code)

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

Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

YES x NO ¨

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

YES ¨ NO x

The number of shares of common stock, no par value, outstanding as of October 25, 2007 was 92,843,867.

Transitional Small Business Disclosure Format (check one):

YES ¨ NO x

CAUTIONARY STATEMENT RELATED TO FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-QSB 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 in “Additional Factors That May Affect Our Future Results” under Part I, Item 2, “Management’s Discussion and Analysis or Plan of Operation.” 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. DPAC also provides copies of its Forms 8-K, 10-K, 10-Q, Proxy and Annual Report at no charge to investors upon request and makes electronic copies of its most recently filed reports available through its website at www.dpactech.com as soon as reasonably practicable after filing such material with the SEC.

PART I—FINANCIAL INFORMATION

Item 1.

Financial Statements

DPAC Technologies Corp.

Condensed Consolidated Balance Sheets


	September 30, 2007			December 31, 2006
	September 30, 2007			December 31, 2006
	(Unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents	$	257,298		$	37,929
Accounts receivable, net		1,822,289			1,421,286
Inventories		1,275,804			1,500,245
Prepaid expenses and other current assets		67,269			42,401

Total current assets		3,422,660			3,001,861
PROPERTY, Net		364,417			413,098
FINANCING COSTS, Net		34,167			130,472
TRADEMARKS		2,583,000			2,583,000
GOODWILL		3,822,503			3,822,503
OTHER INTANGIBLE ASSETS, Net		1,674,229			2,041,744
OTHER ASSETS		45,483			80,840

TOTAL	$	11,946,459		$	12,073,518

LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES:
Notes payable	$	15,791		$	—
Revolving credit facility		1,982,000			1,361,000
Current portion of long-term debt		2,398,778			2,097,118
Accounts payable		1,650,523			1,487,916
Accrued restructuring costs - current		306,710			392,081
Other accrued liabilities		651,972			514,300

Total current liabilities		7,005,774			5,852,415
LONG-TERM LIABILITIES:
Accrued restructuring costs, less current portion		120,470			330,325
Ohio Development loan, less current portion		2,139,476			2,199,645
Liability for warrants		326,600			544,300
Capital lease obligations, less current portion		27,819			24,642

Total long-term liabilities		2,614,365			3,098,912
STOCKHOLDERS’ EQUITY:
Common stock, no par value; 120,000,000 shares authorized; 92,843,867 and 92,774,997 shares outstanding at September 30, 2007 and December 31, 2006, respectively		5,047,075			4,992,515
Accumulated deficit		(2,720,755	)		(1,870,324	)

Total stockholders’ equity		2,326,320			3,122,191

TOTAL	$	11,946,459		$	12,073,518

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, 2007			September 30, 2006			September 30, 2007			September 30, 2006
	September 30, 2007			September 30, 2006			September 30, 2007			September 30, 2006
REVENUE	$	3,093,479		$	3,866,449		$	8,828,246		$	10,556,346
COST OF GOODS SOLD		1,676,851			2,129,370			5,045,377			5,797,259

GROSS PROFIT		1,416,628			1,737,079			3,782,869			4,759,087
OPERATING EXPENSES
Sales and marketing		327,641			534,456			1,099,834			1,679,939
Research and development		297,694			233,207			908,993			759,466
General and administrative		396,719			500,048			1,348,412			1,563,691
Amortization of intangible assets		122,505			122,505			367,515			285,845
Restructuring charges		—			—			—			77,942

Total operating expenses		1,144,559			1,390,216			3,724,754			4,366,883

INCOME FROM OPERATIONS		272,069			346,863			58,115			392,204
OTHER EXPENSES:
Interest expense		363,990			383,161			1,121,246			1,098,642
Fair value adjustment for warrant liability		(163,300	)		(108,800	)		(217,700	)		54,800

TOTAL OTHER EXPENSES		200,690			274,361			903,546			1,153,442

INCOME (LOSS) BEFORE INCOME TAXES		71,379			72,502			(845,431	)		(761,238	)

INCOME TAX (PROVISION) BENEFIT		(800	)		(34,000	)		(5,000	)		256,913

NET INCOME (LOSS)	$	70,579		$	38,502		$	(850,431	)	$	(504,325	)

NET INCOME (LOSS) PER SHARE:
Net Income (Loss) - Basic and diluted	$	0.00		$	0.00			($0.01	)		($0.01	)

WEIGHTED AVERAGE SHARES OUTSTANDING:
Basic		92,844,000			92,775,000			92,832,000			87,135,000

Diluted		97,171,000			97,512,000			92,832,000			87,135,000

See accompanying notes to consolidated financial statements.

DPAC Technologies Corp.

Condensed Consolidated Statements of Cash Flows

(Unaudited)


	For the nine months ended
	September 30, 2007			September 30, 2006
	September 30, 2007			September 30, 2006
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss	$	(850,431	)	$	(504,325	)
Adjustments to reconcile net loss from operations to net cash used in operating activities:
Depreciation and amortization		472,885			400,651
Provision for bad debts		(841	)		(196	)
Provision for obsolete inventory		28,000			56,001
Accretion of discount and success fees on debt		497,580			533,827
Amortization of deferred financing costs		96,305			81,165
Fair value adjustment of liability for warrants		(217,700	)		54,800
Deferred incomes taxes		—			(256,913	)
Non-cash compensation expense		50,424			35,091
Changes in operating assets and liabilities:
Accounts receivable		(400,162	)		(241,817	)
Inventories		196,441			(203,978	)
Prepaid expenses and other assets		10,489			(29,378	)
Accounts payable		162,607			(697,578	)
Accrued restructuring charges		(295,226	)		(261,089	)
Other accrued liabilities		137,672			(355,843	)

Net cash used in operating activities		(111,957	)		(1,389,582	)

CASH FLOWS FROM INVESTING ACTIVITIES:
Property additions		(42,920	)		(235,863	)
Acquisition, net of cash acquired		—			565,109
Proceeds from the sale of assets		—			118,534
Other		—			(70	)

Net cash provided by (used in) investing activities:		(42,920	)		447,710

CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowing under revolving credit facility		621,000			218,000
Net borrowing (repayments) under short term notes		15,791			(183,260	)
Net proceeds from bank term loan		—			600,000
Repayments on bank term debt		(133,336	)		(116,669	)
Proceeds from Ohio Development loan		—			2,266,612
Principal repayments on Ohio Development loan		(72,916	)		—
Principal repayment on Subordinated Debt		—			(1,500,000	)
Financing costs incurred		—			(185,309	)
Principal payments on capital lease obligations		(60,429	)		(60,977	)
Proceeds from issuance of common stock		4,136			2,372
Dividends paid		—			(19,500	)

Net cash provided by financing activities		374,246			1,021,269

NET INCREASE IN CASH AND CASH EQUIVALENTS		219,369			79,397
CASH & CASH EQUIVALENTS, BEGINNING OF PERIOD		37,929			11,164

CASH & CASH EQUIVALENTS, END OF PERIOD	$	257,298		$	90,561

SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid	$	530,319		$	433,550

Income taxes paid	$	5,000		$	1,610

SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Acquisition of property under capital leases	$	13,769		$	33,150

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, manufactures, 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 and manufactures communication and data acquisition products for personal computer based systems. The Company sells to customers in both domestic and foreign markets.

Basis of Presentation

As indicated in Note 2, certain conditions exist that raise substantial doubt about the Company’s ability to continue as a going concern. The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As such, they do not include adjustments relating to the recoverability of recorded asset amounts and classification of recorded assets and liabilities that might result from the outcome of this uncertainty.

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”). The results of operations are those of QuaTech through the merger date, and combined QuaTech and DPAC after the merger date of February 28, 2006. 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-QSB and Items 10 and 310 of Regulation S-B. 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, 2007 are not necessarily indicative of the results that may be expected for the year ending December 31, 2007.

For further information, refer to the audited financial statements and footnotes thereto of DPAC for the year ended December 31, 2006 which was filed on Form 10-KSB on March 30, 2007 and of QuaTech for the year ended December 31, 2005 which was filed on Form 8-K on May 12, 2006. Additional information can also be found in the Company’s final form of prospectus filed with the Securities and Exchange Commission on January 9, 2006.

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.

Stock-Based Compensation

On January 1, 2006, the Company adopted Statement of Financial Accounting Standards No. 123 (revised 2004), “Share-Based Payment” (or “SFAS 123R”), which supersedes our previous accounting under APB Opinion No. 25, “Accounting for Stock Issued to Employees” (or “APB 25”). SFAS 123R requires the recognition of 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. SFAS 123R requires companies to estimate the fair value of share-based payment awards on the date of grant using an 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. We adopted SFAS 123R using the modified prospective transition method, which requires that compensation expense be recognized in the financial statements for all awards granted after the date of adoption as well as for existing awards which have not vested as of the date of adoption. The modified prospective transition method does not require restatement of prior periods to reflect the impact of SFAS 123R.

In November 2005, the Financial Accounting Standards Board (the “FASB”) issued FASB Staff Position FAS123(R)-3, Transition Election to Accounting for the Tax Effects of Share-Based Payment Awards (“FSP”). This FSP requires an entity to follow either the transition guidance for the additional-paid-in-capital pool as prescribed in SFAS 123(R) or the alternative transition method as described in the FSP. An entity that adopts SFAS 123(R) using the modified prospective method may make a one-time election to adopt the transition method described in this FSP. An entity may take up to one year from the later of its initial adoption of SFAS 123(R) or the effective date of this FSP to evaluate its available transition alternatives and make its one-time election. This FSP became effective in November 2005. The Company has elected to use the alternative transition method.

No stock options were granted during the three month periods ended September 30, 2007 and 2006. During the nine month periods ended September 30, 2007 and 2006 the Company recognized compensation expense for stock options of $50,424 and $35,091, 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, 2007 was $214,000, which is expected to be recognized over a weighted-average period of 3.5 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, 2007		September 30, 2006
Expected life	3.5 Years		4 years
Volatility	131	%	99	%
Interest rate	4.7	%	4.3	%
Dividends	None		None

Stock Option Activity

Under the terms of the Company’s 1996 Stock Option Plan, as amended on February 23, 2006 (the “Plan”), options to purchase 15,000,000 shares of the Company’s common stock are available for issuance to employees, officers, directors, and consultants. The plan calls for an increase to the total number of options in the plan by 4% of the number of outstanding shares of common stock 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.

Options issued under this Plan are granted with exercise prices at fair market value and generally vest at a rate of 25% to 50% per year and expire within 10 years from the date of grant or upon 90 days after termination of employment. At September 30, 2007, 8,085,000 shares were available for future grants under the Plan.

The following table summarizes stock option activity under DPAC’s 1996 Stock Option Plans for the nine months ended September 30, 2007:


	Number of Shares		Weighted- Average Exercise Price		Number of Options Exercisable
Outstanding - December 31, 2006	8,444,102		$	0.86	8,444,102

Granted (weighted-average fair value of $0.08)	3,350,000		$	0.10
Exercised	(68,870	)	$	0.06
Canceled	(712,292	)	$	0.52

Outstanding - September 30, 2007	11,012,940		$	0.66	7,975,440

New Accounting Pronouncement

In June 2006, the FASB issued Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (or “FIN 48”). FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with Statement of Financial Accounting Standards No. 109, “Accounting for Income Taxes” (or “SFAS 109”). This Interpretation defines the minimum recognition threshold a tax position is required to meet before being recognized in the financial statements. FIN 48 is effective for fiscal years beginning after December 15, 2006. The Company adopted the provisions of FIN 48 as of January 1, 2007. The implementation of FIN 48 did not have a material impact on the Company’s financial statements. There were no unrecognized tax benefits as of the date of adoption of FIN 48 and therefore, there is no anticipated effect upon the Company’s effective tax rate. Interest, if any, under FIN 48 will be classified in the financial statements as a component of interest expense and statutory penalties, if any, will be classified as a component of general and administrative expense.

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurement”. This statement defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. This statement applies under other accounting pronouncements that require or permit fair value measurements. SFAS No. 157 is effective for fiscal years beginning after November 15, 2007. The Company is currently assessing the impact, if any, that of the adoption of SFAS No. 157 will have on its consolidated financial statements.

In February 2007, the FASB issued SFAS No. 159. This Statement permits the option to choose to measure selected financial assets and liabilities at fair value. If the fair value option is elected, reporting of unrealized gains and losses on those assets and liabilities occurs in each subsequent reporting date. This statement is effective for fiscal years beginning after November 15, 2007. The Company is currently assessing the impact, if any, that the adoption of SFAS No. 159 will have on its financial statements.

NOTE 2 – Liquidity

At September 30, 2007 we had a cash balance of $257,000 and a deficit in working capital of $3,583,000. This compares to a cash balance of $38,000 and a deficit in working capital of $2,851,000 at the end of fiscal year 2006. The Company had accumulated losses of approximately $2,721,000 at September 30, 2007. Additionally, the Company has Bank loan balances of approximately $2,245,000 which are due and payable on November 30, 2007 and a subordinated debt obligation of approximately $2,000,000 which was due and payable on August 31, 2007.

The Company’s ability to continue its operations is dependant upon its raising of capital through debt or equity financing, in order to meet its debt obligations and working capital needs. These conditions raise substantial doubt about the Company’s ability to continue as a going concern.

Management is currently engaged in seeking additional funds to satisfy the debt obligations either through an equity capital raise or through new debt financing, or a combination of both. We may also seek to merge the Company with another entity or look to sell certain assets of the Company. We do not have a binding agreement for the additional funding with any person or firm. The Company does not have a policy on the amount of borrowing or debt that the Company can incur. The Company may also attempt to negotiate with vendors or customers regarding payment terms. Although management believes that efforts currently underway to obtain additional funding can be successful, we can provide no assurance that we will be able to obtain any necessary financing on satisfactory terms, or if at all.

NOTE 3 – Merger

On April 28, 2005 QuaTech and DPAC entered into a merger agreement, subsequently amended on August 5, 2005 and October 20, 2005, 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. Under terms of the transaction, DPAC issued 64.1 million shares of its common stock for all of QuaTech’s outstanding shares of preferred stock and common stock. 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 29.0 million shares of DPAC common stock outstanding, and the outstanding DPAC options and warrants, are considered as the basis for determining the consideration in the reverse merger transaction. Based on the outstanding shares of QuaTech capital stock and warrants on October 20, 2005, each share of QuaTech preferred stock and common stock was exchanged for approximately 45.9127 shares of DPAC common stock.

In addition, each QuaTech stock option that was outstanding on the closing date was converted to a DPAC option by multiplying the QuaTech options by the same ratio described above. The new exercise price was determined by multiplying the old exercise price by the same ratio. Each of these options is subject to the same terms and conditions that were in effect for the related QuaTech options. Further, as a result of the merger, options to purchase an aggregate of 16,004 shares of QuaTech common stock immediately vested.

DPAC entered into a loan agreement with Development Capital Ventures LP (DCV) on August 5, 2005 to provide $500,000 in senior convertible debt financing. The note automatically converted into approximately 4.9 million shares of DPAC common stock upon consummation of the merger with QuaTech at February 28, 2006, and such shares are included in the outstanding shares of DPAC in calculating the purchase price.

Merger Purchase Price

The consolidated financial statements reflect the merger of QuaTech with DPAC as a reverse merger wherein QuaTech is deemed to be the acquiring entity from an accounting perspective. Under the purchase method of accounting, DPAC’s 29.0 million outstanding shares of common stock and its stock options and warrants were valued using the average closing price on the OTC Bulletin Board of $0.09 per share for the two days prior to through the two days subsequent to the merger and financing amendment announcement date of October 20, 2005. The fair values of the DPAC outstanding options and warrants were determined using the Black-Scholes option pricing model with the following assumptions: stock price of $0.09, which is the value ascribed to the DPAC shares in determining the purchase price; volatility of 82.3% to 101.1%; risk-free interest rate of 2.3% to 4.0%; and an expected life of 0.25 years to 8.0 years.

The purchase price is summarized as follows:


Fair value of DPAC outstanding common stock	$	2,609,248
Fair value of DPAC outstanding stock options		183,863
Fair value of DPAC outstanding warrants		13,974
Estimated merger costs		787,144

Total purchase price	$	3,594,229

Merger Purchase Price Allocation

The purchase price allocation is as follows:


Tangible assets acquired, including $1.0 million in cash	$	1,135,609
Intangible assets acquired		2,400,000
Estimated fair value of goodwill		2,739,644
Liabilities assumed		(2,681,024	)

	$	3,594,229

The fair value of the intangible assets was determined by using the $2.4 million valuation as established in the License Agreement as amended on October 20, 2005. The life of the intangible assets is estimated to be 5 years, which is the period over which the intangibles will be amortized. The purchase price exceeded the estimated fair value of the net tangible and intangible assets acquired by approximately $2,739,644, which was recorded as goodwill.

License Agreement

On August 5, 2005 DPAC concurrently entered into a License Agreement extending to Development Capital Ventures LP (DCV) an exclusive world-wide license to manufacture and distribute all of DPAC’s products in the wireless technology area, with the right to sublicense the technology to QuaTech. Under the License Agreement, QuaTech was obligated to pay DPAC a royalty for each unit shipped. On October 20, 2005 the License Agreement was amended to grant QuaTech an option to elect to prepay any and all license fees for a one-time cash payment of $2.4 million, which the parties have agreed is the fair market value of the exclusive license. Immediately preceding the merger on February 28, 2006, QuaTech elected to exercise its option to prepay the License Agreement.

NOTE 4 – Inventories

Inventories consist of the following:


	September 30, 2007			December 31, 2006
Raw materials and sub-assemblies	$	826,203		$	1,091,566
Finished goods		727,101			658,179
Less: reserve for excess and obsolete inventories		(277,500	)		(249,500	)

Total net inventories	$	1,275,804		$	1,500,245

NOTE 5 – Debt

At September 30, 2007 and December 31, 2006, outstanding debt is comprised of the following:


	September 30, 2007			December 31, 2006
Revolving credit facility	$	1,982,000		$	1,361,000

Short term notes	$	15,791		$	—

Bank term debt	$	262,700		$	396,036
Less: current portion		(262,700	)		(396,036	)

Net long-term portion	$	—		$	—

Capital lease obligations	$	38,897		$	85,557
Less: current portion		(11,078	)		(60,915	)

Net long-term portion	$	27,819		$	24,642

Ohio Development Loan	$	2,264,476		$	2,303,812
Less: current portion		(125,000	)		(104,167	)

Net long-term portion	$	2,139,476		$	2,199,645

Subordinated debt	$	1,500,000		$	1,500,000
Accretion of success fee		500,000			277,780
Less: Unamortized discount on subordinated term loan due to stock warrants		(0	)		(241,780	)
Less: current portion		(2,000,000	)		(1,536,000	)

Net long-term portion	$	—		$	—

Total Current Portion of Long-term debt	$	2,398,778		$	2,097,118

Total Net Long-term Debt	$	2,139,476		$	2,199,645

Liability for warrant	$	326,600		$	544,300

At September 30, 2007, the Company had a $15,791 short-term note outstanding, bearing an annual interest rate of 12%, payable monthly through November 2007. The note was entered into to finance insurance premiums.

On February 28, 2006, QuaTech entered into a Fifth Amendment to the Credit Agreement with National City Bank (“Bank”). Pursuant to the Agreement, QuaTech has borrowed $600,000 as a term loan and has access to a revolving commitment of up to $2,000,000. The term loan was payable in 18 consecutive monthly installments of principal beginning on March 5, 2006 in the amount of $16,667 for the first 17 installments and the unpaid balance payable as the 18th installment was due on August 5, 2007. The revolving commitment allows QuaTech to borrow and repay based upon working capital needs and became due on August 1, 2007. The amount of available borrowing under the revolving commitment is based upon a borrowing base of QuaTech’s eligible accounts receivable and inventory, and was calculated to be $2,000,000 at September 30, 2007 . The interest rate on the term loan is the prime rate plus 2% and is payable monthly. Interest accrues on the revolving credit agreement at a rate that may fluctuate from 0.5% to 4% above the prime rate. National City is secured by all of the assets of QuaTech and Steven Runkel and William Roberts have personally guaranteed QuaTech’s indebtedness to National City under the term loan.

On August 2, 2007, the Company entered into a Reservation of Rights Letter and Loan Continuation Standstill Agreement (“Continuation Agreement”) with the Bank extending the maturity due date for both the term loan and revolving commitment to August 24, 2007, at which time all debt became due and payable. Pursuant to the Continuation Agreement, the Bank will continue to lend under the revolving commitment with interest only payments for both the term loan and revolving commitment being paid on August 5, 2007.

On August 30, 2007, the Company entered into a Reservation of Rights and Loan Continuation Standstill Agreement (the “Standstill Agreement”) with the Bank. The Standstill Agreement replaces the Continuation Standstill Agreement dated August 2, 2007. The Standstill Agreement, among other matters, extends the maturity dates for repayment of certain amounts of indebtedness of the Company under the Credit Agreement until November 30, 2007 (or earlier if the Company defaults or violates the terms of the Standstill Agreement). Further, the Standstill Agreement permits the Company to continue to borrow under the Credit Agreements (subject to the terms thereof with respect to the maximum loan amount(s)) during such period of forbearance and notwithstanding the Company’s noncompliance with certain covenants contained in the Credit Agreement. Under the Standstill Agreement the Company has agreed to pay additional interest of 3% over the applicable rate except that 2% of such additional interest will be deferred until November 30, 2007 and not paid if the loans under the Credit Agreement are repaid before November 30, 2007. Further the Company has agreed to make a mandatory additional payment on its term loan if it receives certain specified customer prepayments. The Standstill Agreement also provides that the Company shall pay a forbearance fee of up to $50,000 payable in installments of $10,000 each on September 1, 2007, October 1, 2007 and November 1, 2007 and $20,000 on November 30, 2007. However if the loans under the Credit Agreement are repaid prior to November 30, 2007, the $20,000 final installment shall be forgiven. Finally, the Company agreed to provide National City Bank with additional financial information including cash flow projections and weekly updates on potential refinancing including any potential merger or sale of the business.

On January 27, 2006 QuaTech entered into a Loan Agreement with the Director of Development of the State of Ohio pursuant to which QuaTech may borrow up to $2,500,000 for certain eligible project financing. The State of Ohio debt accrues interest at the rate of 8.0% 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 National City Bank. The participation is being accrued as additional interest each month over the term of the loan.

On February 28, 2006, QuaTech and DPAC entered into a certain Joinder Agreement and Third Amendment to the Subordinated Loan and Security Agreement with The HillStreet Fund, L.P. The Subordinated Loan and Security Agreement as amended is hereinafter referred to as the “HillStreet Loan Agreement”. Pursuant to the HillStreet Loan Agreement, DPAC and QuaTech, as co-borrowers, have borrowed $1,500,000 (the “HillStreet Debt”) which was to be repaid with interest at the rate of 15% per year on or before August 31, 2007. The HillStreet Debt may be prepaid at any time without penalty. Upon payment of the HillStreet Debt, the Company must also pay HillStreet a success fee of $500,000. The HillStreet Debt is secured by all the assets of the Company which security interest is subordinated to the interest of National City Bank and is pari passu to the security interest of the State of Ohio. The success fee is being accrued as additional interest expense each month over the term of the loan.

The Company did not repay the balance of $2,000,000, including the success fee, which was due and payable on August 31, 2007 and is currently in default of the Hillstreet Loan Agreement. Per the terms of the Hillstreet Loan Agreement, the Company is obligated to pay an additional fee of $25,000 per month until the principal is paid in full and issue additional detachable warrants to purchase 1% of the common stock of the Company. The default interest rate has increased to 19% per year on the balance of the outstanding debt.

In connection with the HillStreet Loan Agreement, the Company issued to HillStreet a warrant to purchase 5,443,457 shares of Company common stock at an exercise price of $0.00001 per share. The warrant expires on February 28, 2016. At any time upon the first to occur of February 28, 2008 or certain specified capital transactions involving the Company, HillStreet has the right to put the warrant or any Company common stock issued in exercise of the warrant to the Company 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.

In accordance with Statement of Financial Accounting Standards No. 150, “Accounting for Certain Financial Instruments with Characteristics of Liabilities and Equity,” (“SFAS 150”), due to the put feature of the warrant, the Company classified the fair value of the warrant, calculated to be $544,000, as a separate liability and accordingly discounted the principal amount of the HillStreet note. The $544,000 discount was accreted to the principal amount of the HillStreet loan amount over the 18 month term of the note and amortized as additional interest expense. Under SFAS 150, the Company is required to adjust the warrants to their fair value through earnings at the end of each reporting period. At September 30, 2007, based on the Company’s common stock share price $0.06, the Company calculated the fair value of the warrant to be $326,600. Accordingly, the Company adjusted the fair value of the liability and recorded a non-cash gain of $163,300 and $217,700 for the three and nine months ended September 30, 2007, respectively.

NOTE 6 – Concentration of Customers

No single customer accounted for more than 10% of net sales for either the three or nine months ended September 30, 2007. During the three and nine months ended September 30, 2006, sales to one major customer accounted for 19% and 21% of net

sales, respectively. Accounts receivable from this customer accounted for 14% of net accounts receivable at September 30, 2006. 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 7 – Net Income (Loss) Per Share

The Company computes net income (loss) per share in accordance with SFAS No. 128, “Earnings Per Share.” Basic income (loss) per share is computed 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,
	2007	2006
Shares used in computing basic net income per share	92,844,000	92,775,000
Dilutive effect of stock options and warrants	4,327,000	4,737,000

Shares used in computing diluted net income per share	97,171,000	97,512,000


	Nine-months ended September 30,
	2007	2006

Shares used in computing basic net loss per share	92,832,000	87,135,000
Dilutive effect of stock options and warrants	—	—

Shares used in computing diluted net loss per share ⁽¹⁾	92,832,000	87,135,000

⁽¹⁾	Potential common shares of 4,595,000 and 4,776,000 have been excluded from diluted weighted average common shares for the nine month periods ended September 30, 2007 and 2006, respectively, as the effect would be anti-dilutive.

The number of shares of common stock, no par value, outstanding at September 30, 2007 was 92,843,867.

NOTE 8 – 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 30% and 25% of net sales for the three and nine months ended September 30, 2007 and 14% and 15% of net sales for the three and nine months ended September 30, 2006. Export sales were primarily to Canada and Western European countries. Foreign sales are made in U.S. dollars. All long-lived assets are located in the United States.

NOTE 9 – 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 in accordance with the provisions of SFAS No. 109, Accounting for Income Taxes, which requires 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 under SFAS No. 109. 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 10 – 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 is party to severance agreements with the current CEO and CFO that provide 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.

Item 2 – Management’s Discussion and Analysis or Plan of Operation.

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, manufactures, 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.

•

Data acquisition products that consist mainly of PC Cards providing analog to digital conversion capability.

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 802.11b 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.

This overview of our business reflects DPAC’s acquisition of QuaTech which was completed by way of a reverse merger (the “Merger”) in which QuaTech became a wholly-owned subsidiary of DPAC. The Merger, as previously reported, was consummated on February 28, 2006.

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.

In addition to the above risks, DPAC is currently in need for significant capital or debt financing to repay existing debt obligations. The Company has Bank loan balances of approximately $2,245,000 which are due and payable on November 30, 2007 and a subordinated debt obligation of approximately $2,000,000 which was due and payable on August 31, 2007, under which the Company is currently in default. The Company does not have the means to repay these obligations without the raising of additional capital, either in the form of equity or debt financing. There can be no assurance that additional financing will be available on terms favorable to the Company, if at all.

These risks should be read in connection with the detailed risks associated with DPAC and QuaTech set forth under the captions “Risk Factors” in Form 10-KSB filed with the SEC on March 30, 2007 and “Risk Factors—Industry and Business Risks Related to DPAC and Its Business” and “Risk Factors—Industry and Business Risks Related to QuaTech and Its Business” in the registration statement of Form S-4/A filed with the SEC on January 9, 2006.

Results of Operations and Financial Condition

Three Months Ended September 30, 2007 and 2006

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-QSB.


	For the Three Months Ended:
	September 30, 2007					September 30, 2006					Change
	Results			% of Net Sales		Results			% of Net Sales		Dollars			%
NET SALES	$	3,093,479		100.0	%	$	3,866,449		100.0	%	$	(772,970	)	-20.0	%
COST OF SALES		1,676,851		54.2	%		2,129,370		55.1	%		(452,519	)	-21.3	%

GROSS PROFIT		1,416,628		45.8	%		1,737,079		44.9	%		(320,451	)	-18.4	%
OPERATING EXPENSES:
Sales and marketing		327,641		10.6	%		534,456		13.8	%		(206,815	)	-38.7	%
Research and development		297,694		9.6	%		233,207		6.0	%		64,487		27.7	%
General and administrative		396,719		12.8	%		500,048		12.9	%		(103,329	)	-20.7	%
Amortization expense		122,505		4.0	%		122,505		3.2	%		—		0.0	%

		1,144,559		37.0	%		1,390,216		36.0	%		(245,657	)	-17.7	%

INCOME FROM OPERATIONS		272,069		8.8	%		346,863		9.0	%		(74,794	)	-21.6	%
OTHER EXPENSE:
Interest expense		363,990		11.8	%		383,161		9.9	%		(19,171	)	-5.0	%
Fair value adjustment for warrant liability		(163,300	)	-5.3	%		(108,800	)	-2.8	%		(54,500	)	50.1	%

INCOME BEFORE INCOME TAXES		71,379		2.3	%		72,502		1.9	%		(1,123	)	-1.5	%

INCOME TAX BENEFIT (PROVISION)		(800	)	0.0	%		(34,000	)	-0.9	%		33,200		-97.6	%

NET INCOME		70,579		2.3	%		38,502		1.0	%		32,077		83.3	%

Net Sales. Net sales of $3.1 million for the quarter ended September 30, 2007 decreased by $773,000 or 20% as compared to net sales for the prior year third quarter. Net sales related to the Company’s Device Connectivity products decreased $904,000, or 32% from the quarter ended September 30, 2006, while net sales related to the Company’s Device Networking products, including the Airborne wireless product line, increased by $131,000, or 12% over the quarter ended September 30, 2006.

Gross Profit. Gross profits decreased by $320,000 or 18% as a direct result of the decrease in net sales. The increase in gross profit as a percentage of net sales is due to the change in product mix.

Sales and Marketing Expenses. Sales and marketing expense for the quarter ended September 30, 2007 of $328,000 decreased by $207,000 or 39% from the quarter ended September 30, 2006. The decrease is due primarily to a decrease in personnel costs, including benefits and travel related costs, of $151,000 and a decrease in advertising and Internet search engine costs of $32,000. These cost reductions are the result of the Company’s efforts to integrate the sales and marketing departments of DPAC and Quatech since the date of the Merger.

Research and Development Expenses. Research and development expenses of $298,000 for the third quarter of 2007 increased by $64,000 or 28% as compared to the third quarter of 2006. The increase is due to increased personnel costs to support the Airborne wireless product line. 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 third quarter of 2007 of $397,000 decreased by $103,000 or 21% from the prior year period. The decrease was due primarily to decreases in facilities rent and utilities related to the Company’s Southern California facilities. Effective April 1, 2007, the Company terminated its lease and relocated out of its Garden Grove, CA facility into office space sized appropriately for the Company’s needs.

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.

Interest Expense. The Company incurred interest expense of $364,000 during the third quarter of fiscal year 2007, as compared to $383,000 incurred in the same period of the prior year. Interest expense in the current year period included additional fees in the amount of $37,500 due the extension of the Bank loan agreement and the default condition associated with our Subordinated debt. The following non-cash charges are included in interest expense during the third quarter of 2007: accretion of success fees of $67,000, amortization of deferred financing costs of $24,000, and amortization of the discount for warrants of $60,000.

Fair Value Adjustment of Warrant Liability. The company recorded a $163,300 gain related to the adjustment of the liability for the warrant associated with the subordinated debt. Under SFAS 150, the Company is required to adjust the warrant to its fair value through earnings at the end of each reporting period. At September 30, 2007, based on the Company’s common stock share price $0.06, the Company calculated the fair value of the warrant to be $326,600. Accordingly, the Company adjusted the liability for the warrant from the previous amount of $489,900 at June 30, 2007 and recorded a gain of $163,300 for the quarter ended September 30, 2007.

Income Taxes. In the fourth quarter of fiscal year 2006, a full valuation allowance was recorded against the Company’s related deferred tax assets. No income tax provision or benefit has been provided during the three months ended September 30, 2007. 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.

The Company recorded a provision for income taxes of $34,000 or 47% of the pre-tax income for the quarter ended September 30, 2006.

Nine Months Ended September 30, 2007 and 2006


	For the Nine Months Ended:
	September 30, 2007					September 30, 2006					Change
	Results			% of Net Sales		Results			% of Net Sales		Dollars			%
NET SALES	$	8,828,246		100.0	%	$	10,556,346		100.0	%	$	(1,728,100	)	-16.4	%
COST OF SALES		5,045,377		57.2	%		5,797,259		54.9	%		(751,882	)	-13.0	%

GROSS PROFIT		3,782,869		42.8	%		4,759,087		45.1	%		(976,218	)	-20.5	%
OPERATING EXPENSES:
Sales and marketing		1,099,834		12.5	%		1,679,939		15.9	%		(580,105	)	-34.5	%
Research and development		908,993		10.3	%		759,466		7.2	%		149,527		19.7	%
General and administrative		1,348,412		15.3	%		1,563,691		14.8	%		(215,279	)	-13.8	%
Amortization expense		367,515		4.2	%		285,845		2.7	%		81,670		28.6	%
Restructuring charges		—		0.0	%		77,942		0.7	%		(77,942	)	-100.0	%

		3,724,754		42.2	%		4,366,883		41.4	%		(642,129	)	-14.7	%

INCOME FROM OPERATIONS		58,115		0.7	%		392,204		3.7	%		(334,089	)	-85.2	%
OTHER (INCOME) EXPENSE:
Interest expense		1,121,246		12.7	%		1,098,642		10.4	%		22,604		2.1	%
Fair value adjustment for warrant liability		(217,700	)	-2.5	%		54,800		0.5	%		(272,500	)	-497.3	%

LOSS BEFORE INCOME TAXES		(845,431	)	-9.6	%		(761,238	)	-7.2	%		(84,193	)	11.1	%
INCOME TAX BENEFIT (PROVISION)		(5,000	)	-0.1	%		256,913		2.4	%		(261,913	)	-101.9	%

NET LOSS		(850,431	)	-9.6	%		(504,325	)	-4.8	%		(346,106	)	68.6	%

Net Sales. Net sales for the nine months ended September 30, 2007 of $8.8 million decreased by $1.7 million or 16% as compared to net sales for the same period in the prior year. Net sales related to the Company’s Device Connectivity products decreased $2.7 million, or 32% from the nine months ended September 30, 2006, while net sales related to the Company’s Device Networking products, including the Airborne wireless product line, increased by $923,000, or 40% over the prior year period.

Gross Profit. Gross profits decreased by $976,000 or 21% as a direct result of the decrease in net sales. The reduction in gross profit as a percentage of net sales is due to the lower sales volume over which fixed production costs are absorbed and the change in product mix.

Sales and Marketing Expenses. Sales and marketing expense for the nine months ended September 30, 2007 of $1.1 million decreased by $580,000 or 35% from the prior year period. The decrease is due primarily to a decrease in personnel costs,

including benefits and travel related costs, of $420,000 and a decrease in advertising and Internet search engine costs of $84,000. These cost reductions are the result of the Company’s efforts to integrate the sales and marketing departments of DPAC and Quatech since the date of the Merger.

Research and Development Expenses. Research and development expenses of $909,000 for the nine months ended September 30, 2007 increased by $150,000 or 20% as compared to the same period in the prior year. The increase is due to increased personnel costs to support development within the Airborne wireless product line. 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 first nine months of 2007 of $1.3 million decreased by $215,000 or 14% from the same period in the prior year. The decrease was due primarily to decreases in facilities rent and utilities related to the Company’s Southern California facilities. Effective April 1, 2007, the Company terminated it lease and relocated out of its Garden Grove, CA facility into office space sized appropriately for the Company’s current needs.

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.

Restructuring Charge. The restructuring charge incurred in the nine months ended September 30, 2006 related to accrued severance costs for the termination of a former officer as a result of the Merger. No restructuring costs were recorded in the current fiscal year period.

Interest Expense. Interest expense incurred of $1,121,000 for the first nine months of fiscal year 2007 increased by $23,000 as compared to the same period in the previous fiscal year. The current year period included additional fees in the amount of $37,500 due the extension of the Bank loan agreement and the default condition associated with our Subordinated debt. The following non-cash charges are included in interest expense during the first nine months of 2007: accretion of success fees of $256,000, amortization of deferred financing costs of $96,000, and amortization of the discount for warrants of $242,000.

Fair Value Adjustment of Warrant Liability. For the nine months ended September 30, 2007, the company recorded a net gain of $217,700 related to the adjustment of the liability for the warrant associated with the subordinated debt. Under SFAS 150, the Company is required to adjust the warrant to its fair value through earnings at the end of each reporting period. At September 30, 2007, based on the Company’s common stock share price $0.06, the Company calculated the fair value of the warrant to be $326,600. The Company recorded a charge to earning of $54,800 in the prior year period related to the fair value adjustment for the warrant liability.

Income Taxes. In the fourth quarter of fiscal year 2006, a full valuation allowance was recorded against the Company’s related deferred tax assets. No income tax provision or benefit has been provided during the nine months ended September 30, 2007. 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.

The Company recorded an income tax benefit of $257,000 or 34% of the pre-tax loss for the nine months ended September 30, 2006.

Liquidity and Capital Resources

The amount of cash the Company can generate from future operations will not be sufficient to satisfy the debt obligations. The Company is in default of the subordinated debt obligation and will be in default of the Bank loan obligation if the Company does not raise sufficient equity or debt financing to pay its loan balances on the respective due date above.

The Company’s ability to continue its operations is dependant upon its raising of capital through debt or equity financing, in order to meet its debt obligations and working capital needs.

negotiate with vendors or customers regarding payment terms. There can be no assurance that additional financing will be available on terms favorable to the Company, if at all. Any future sale of our equity securities would likely dilute or subordinate the ownership interest of existing shareholders. Although the rate at which cash will be consumed is dependent on the amount of revenues realized during each period and on the amount of costs incurred, management believes that our cash position and borrowings available under our line of credit will be adequate to continue to maintain liquidity to support our operating activities for the near term, exclusive of the repayment of the aforementioned debt obligations.

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. 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, 2007 was $112,000 as compared to $1.4 million used in the first nine months of 2006. The net loss of $850,000 incurred in the first nine months of 2007 was off-set by non-cash items, including depreciation, amortization, accretion of success fees and warrant liability, totaling $927,000. Additional cash was used due to increases in accounts receivable of $400,000 and decreases in accrued restructuring charges of $295,000.

Net cash used in investing activities in the nine months ended September 30, 2007 consisted of property additions of $43,000. Net cash provided by investing activities of $447,000 for the nine months ended September 30, 2006 consisted of cash acquired in the acquisition, net of the license payment, of $565,000 and proceeds from the sale of the data acquisition product line of $118,000. This was partially offset by equipment purchases of $235,000.

Net cash provided by financing activities for the nine months ended September 30, 2007 was $374,000 as compared to $1.0 million provided during the first nine months of 2006. Net cash provided in the current year period consisted of net borrowing on the revolving line of credit of $621,000 and net short term borrowing of $18,000 to finance insurance premiums. These amounts were partially offset by principal payments on the bank term loan of $133,000, on capital leases of $60,000 and on the Ohio Development loan of $73,000.

As of September 30, 2007, we were not in compliance with certain bank financial covenants. The bank has not granted a waiver to the relevant financial covenants, but has extended the loan agreement until November 30, 2007.

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

The Company does not expect to acquire more than $100,000 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, 2007, 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 six 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. As a result of the merger, the Company is party to severance agreements with former DPAC employees and is obligated to continue payments on these agreements, with the latest obligation being due in April 2009. The balance due as a result of these arrangements and including the accrued severance charges incurred during the first quarter of 2006 is $307,000 in short-term obligations and $120,000 in long-term obligations at September 30, 2007.

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-KSB, 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 acquired intangibles, goodwill and trademarks, accounting for costs associated with business combinations, accrual of bonus, accrual of income tax liability estimates 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. Revenue is recognized from the sale of products at the point of passage of title, which is at the time of shipment to customers, including OEM’s, distributors and other strategic end user customers. Sales to certain customers are made with certain rights of return and price protection provisions. Estimated reserves are established by the company for future returns and price protection based on an analysis of authorized returns compared to received returns, current on hand inventory at certain customers, and sales to certain customers for the current period. 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.

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.

In accordance with SFAS No. 142, 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 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 periodically reviews the recoverability of the carrying value of goodwill using the methodology prescribed in SFAS No. 142. 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, 2006. No event has occurred as of or since the period ended December 31, 2006 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.

In accordance with Statement of Financial Accounting Standard 141 – Business Combinations, direct costs associated with a business combination are capitalized. Upon completion of the business combination, such costs are included in the total acquisition costs associated with the business combination. If completion of the business combination does not occur, all direct costs associated with the business combination are expensed when it is reasonably determinable that the arrangement will not be finalized.

The Company records bonus estimates as a charge against earnings. The bonus is based on meeting budgeted sales and operating results. These estimates are adjusted to actual based on final results of operations achieved during the year.

Deferred taxes and liabilities are recorded based on SFAS 109. 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.

Effective January 1, 2006, the Company adopted SFAS No. 123R using the modified prospective method. Under this method, compensation cost recognized includes: (a) compensation cost for all share-based payments granted prior to, but not yet vested as of January 1, 2006, based on the grant date fair value estimated in accordance with the original provisions of SFAS No. 123 amortized over the options’ vesting period, and (b) compensation cost for all share-based payments granted subsequent to January 1, 2006, based on the grant-date fair value estimated in accordance with the provisions of SFAS No. 123R amortized on a straight-line basis over the options’ vesting period.

Item 3 – 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, 2007, 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 a 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


10.1		Reservation of Rights and Loan Continuation Standstill Agreement dated August 1, 2007 (incorporated by reference herein to Exhibit 10.1 to the registrant’s Current Report on Form 8-K filed with the SEC on August 6, 2007).

10.2		Reservation of Rights and Loan Continuation Standstill Agreement dated August 29, 2007 (incorporated by reference herein to Exhibit 10.1 to the registrant’s Current Report on Form 8-K filed with the SEC on August 31, 2007).

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.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


	DPAC TECHNOLOGIES CORP.
	(Registrant)

November 14, 2007	By:	/s/ STEVEN D. RUNKEL
Date		Steven D. Runkel,
		Chief Executive Officer



November 14, 2007	By:	/s/ STEPHEN J. VUKADINOVICH
Date		Stephen J. Vukadinovich,
		Chief Financial Officer

EXHIBIT INDEX


Exhibit No.		Description

10.1		Reservation of Rights and Loan Continuation Standstill Agreement dated August 1, 2007 (incorporated by reference herein to Exhibit 10.1 to the registrant’s Current Report on Form 8-K filed with the SEC on August 6, 2007).

10.2		Reservation of Rights and Loan Continuation Standstill Agreement dated August 29, 2007 (incorporated by reference herein to Exhibit 10.1 to the registrant’s Current Report on Form 8-K filed with the SEC on August 31, 2007).

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.