DOVER SADDLERY INC - FORM 10-Q

DOVER SADDLERY INC - FORM 10-Q - August 14, 2012

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EX-32.1 - EX-32.1 - DOVER SADDLERY INC	d395152dex321.htm
EX-31.1 - EX-31.1 - DOVER SADDLERY INC	d395152dex311.htm
EX-31.2 - EX-31.2 - DOVER SADDLERY INC	d395152dex312.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

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

For the Fiscal Quarter Ended June 30, 2012

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

Commission File Number 000-51624

Dover Saddlery, Inc.

(Exact name of registrant as specified in its charter)

DELAWARE

04-3438294

(State of other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

525 Great Road, Littleton, MA 01460

(Address of principal executive offices)

(978) 952-8062

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.

YES x NO ¨

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 ¨ NO x

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 definitions of “large accelerated filer”, “accelerated filer”, and “smaller reporting company”, in Rule 12b-2 of the Exchange Act. (Check one):

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

Yes ¨ No x

Shares outstanding of the registrant’s common stock (par value $0.0001) on August 2, 2012: 5,332,738

DOVER SADDLERY, INC. AND SUBSIDIARIES

INDEX TO QUARTERLY REPORT ON FORM 10-Q

FOR THE QUARTER ENDED JUNE 30, 2012


PART I. FINANCIAL INFORMATION

Item 1. Condensed Consolidated Financial Statements (unaudited)			3

Condensed Consolidated Balance Sheets – June 30, 2012 and December 31, 2011			3

Condensed Consolidated Statements of Income and Comprehensive Income – three and six months ended June 30, 2012 and 2011			4

Condensed Consolidated Statements of Cash Flows – six months ended June 30, 2012 and 2011			5

Notes to Unaudited Condensed Consolidated Financial Statements			6

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			13

Item 3. Quantitative and Qualitative Disclosures about Market Risk			20

Item 4. Controls and Procedures			20

PART II. OTHER INFORMATION

Item 1. Legal Proceedings			21

Item 1A. Risk Factors			21

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			23

Item 3. Defaults Upon Senior Securities			23

Item 4. Mine Safety Disclosures			23

Item 5. Other Information			23

Item 6. Exhibits			24

SIGNATURES			25

EXHIBIT INDEX			26

Ex.-31.1 Certification of Principal Executive Officer
Ex.-31.2 Certification of Principal Financial Officer
Ex.-32.1 Certification by Chief Executive Officer and Chief Financial Officer

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements.

DOVER SADDLERY, INC. AND SUBSIDIARIES

Condensed Consolidated Balance Sheets

(In thousands, unaudited)


	June 30, 2012			December 31, 2011
ASSETS
Current assets:
Cash and cash equivalents	$	177		$	313
Accounts receivable		832			811
Inventory		20,140			19,383
Prepaid catalog costs		890			1,273
Prepaid expenses and other current assets		949			896
Deferred income taxes		243			261

Total current assets		23,231			22,937
Net property and equipment		4,364			3,667
Other assets:
Deferred income taxes		1,099			1,018
Intangibles and other assets, net		655			571

Total other assets		1,754			1,589

Total assets	$	29,349		$	28,193

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Current portion of capital lease obligation and outstanding checks	$	643		$	1,100
Accounts payable		1,313			2,201
Accrued expenses and other current liabilities		4,181			5,741
Income taxes payable		—			308

Total current liabilities		6,137			9,350

Long-term liabilities:
Revolving line of credit		4,554			987
Term Note		5,500			5,500
Capital lease obligation, net of current portion		160			16
Interest rate swap contract		341			322

Total long-term liabilities		10,555			6,825
Stockholders’ equity:
Common Stock, par value $0.0001 per share; 15,000,000 shares authorized; 5,332,738 issued and outstanding as of June 30, 2012 and December 31, 2011, respectively		1			1
Additional paid in capital		45,840			45,716
Treasury stock, 795,865 shares at cost		(6,082	)		(6,082	)
Other comprehensive loss		(200	)		(190	)
Accumulated deficit		(26,902	)		(27,427	)

Total stockholders’ equity		12,657			12,018

Total liabilities and stockholders’ equity	$	29,349		$	28,193

See accompanying notes.

DOVER SADDLERY, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Income

(In thousands, except share and per share data)

(unaudited)


	Three Months Ended						Six Months Ended
	June 30, 2012			June 30, 2011			June 30, 2012			June 30, 2011
Revenues, net	$	20,971		$	20,247		$	39,259		$	37,533
Cost of revenues		13,153			12,767			24,381			23,484

Gross profit		7,818			7,480			14,878			14,049
Selling, general and administrative expenses		7,117			6,306			13,654			12,227

Income from operations		701			1,174			1,224			1,822
Interest expense, financing and other related costs, net		153			103			262			477
Other investment income		(24	)		(37	)		(30	)		(16	)

Income before income tax provision		572			1,108			992			1,361
Provision for income taxes		268			481			467			609

Net income	$	304		$	627		$	525		$	752

Net income per share
Basic	$	0.06		$	0.12		$	0.10		$	0.14

Diluted	$	0.05		$	0.12		$	0.09		$	0.14

Number of shares used in per share calculation
Basic		5,333,000			5,288,000			5,333,000			5,287,000
Diluted		5,567,000			5,413,000			5,580,000			5,339,000

DOVER SADDLERY, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Comprehensive Income

(In thousands, unaudited)


	Three Months Ended						Six Months Ended
	June 30,			June 30,			June 30,			June 30,
	2012			2011			2012			2011
Net income	$	304		$	627		$	525		$	752
Other comprehensive loss:
Change in fair value of interest rate swap contract, net of tax		(20	)		(103	)		(10	)		(103	)

Total comprehensive income	$	284		$	524		$	515		$	649

See accompanying notes.

DOVER SADDLERY, INC. AND SUBSIDIARIES

Condensed Consolidated Statement of Cash Flows

(In thousands, unaudited)


	Six Months Ended
	June 30, 2012			June 30, 2011
Operating activities:
Net income	$	525		$	752
Adjustments to reconcile net income to net cash used in operating activities
Depreciation and amortization		424			369
Deferred income taxes		(54	)		(36	)
Income from investment in affiliates, net		(30	)		(16	)
Stock-based compensation		124			124
Gift card breakage income		(770	)		—
Non-cash interest expense		6			213
Payment of deferred interest		—			(423	)
Changes in current assets and liabilities:
Accounts receivable		(21	)		(293	)
Inventory		(757	)		(2,416	)
Prepaid catalog costs and other current assets		330			(143	)
Accounts payable		(909	)		(149	)
Accrued expenses, other current liabilities and income taxes payable		(1,098	)		(1,898	)

Net cash used in operating activities		(2,230	)		(3,916	)
Investing activities:
Purchases of property and equipment		(945	)		(402	)
Investment in affiliates		(10	)		—
Change in other assets		(37	)		—

Net cash used in investing activities		(992	)		(402	)
Financing activities:
Borrowings under revolving line of credit, net		3,567			3,450
Repayment of subordinated notes		—			(5,000	)
Borrowing under term note		—			5,500
Change in outstanding checks		(436	)		—
Payments on capital leases		(32	)		(43	)
Payment of debt commitment fees		(13	)		(54	)
Proceeds from exercise of stock options		—			15

Net cash provided by financing activities		3,086			3,868

Net decrease in cash and cash equivalents		(136	)		(450	)

Cash and cash equivalents at beginning of period		313			745

Cash and cash equivalents at end of period	$	177		$	295

Supplemental disclosure of cash flow information
Cash paid during the period for:
Interest	$	265		$	712

Income taxes	$	892		$	981

Supplemental disclosure of non-cash financing activities
Equipment acquired under capital leases	$	176		$	—

Change in fair value of interest rate swap	$	(19	)	$	(174	)

See accompanying notes.

DOVER SADDLERY, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

A. Nature of Business and Basis of Preparation

Dover Saddlery, Inc., a Delaware corporation (the “Company”), is a leading specialty retailer and the largest multi-channel marketer of equestrian products in the United States. The Company sells its products through a multi-channel strategy, including direct and retail, with stores located in Massachusetts, New Hampshire, Delaware, Texas, Maryland, Virginia, New Jersey, Georgia, Colorado, Illinois, Pennsylvania and Rhode Island. The Company provides a complete line of equestrian products, as well as specially–developed, private label offerings from its direct marketing headquarters, warehouse, and call center facility in Littleton, Massachusetts.

Revenues are recognized when payment is reasonably assured, the product is shipped and title and risk of loss have transferred to the customer. For direct merchandise sales, this occurs when product is delivered to the common carrier at the Company’s warehouse. For retail sales, this occurs at the point of sale.

The Company’s quarterly product sales have ranged from a low of approximately 20% to a high of approximately 32% of any calendar year’s results. The beginning of the spring outdoor riding season in the northern half of the country has typically generated a slightly stronger second quarter of the year, and the holiday buying season has generated additional demand for our equestrian product line in the fourth quarter of the year. Revenues for the first and third quarters of the calendar year have tended to be somewhat lower than the second and fourth quarters. The Company anticipates that its revenues will continue to vary somewhat by season.

The Company offers a comprehensive selection of products required to own, train and ride a horse, selling from under $1.00 to over $10,000 per product. The Company’s equestrian product line includes a broad variety of separate items, such as saddles, tack, specialized apparel, footwear, horse clothing, horse health and stable products. Separate reporting of the revenues of these numerous items is not practical.

The Company views its operations and manages its business as one operating segment utilizing a multi-channel distribution strategy. Market channel revenues are as follows (dollars in thousands):


	Three Months Ended				Six Months Ended
	June 30, 2012		June 30, 2011		June 30, 2012		June 30, 2011
Revenues, net – direct	$	11,574	$	12,172	$	23,034	$	24,240
Revenues, net – retail stores		9,397		8,075		16,225		13,293

Revenues, net – total	$	20,971	$	20,247	$	39,259	$	37,533

The accompanying condensed consolidated financial statements comprise those of the Company, its wholly-owned subsidiaries, and its investment in affiliates. All inter-company accounts and transactions have been eliminated in consolidation. The accompanying condensed consolidated financial statements as of June 30, 2012 and for the three and six months ended June 30, 2012 and 2011 are unaudited. In management’s opinion, these unaudited condensed consolidated financial statements have been prepared on the same basis as the audited consolidated financial statements for the year ended December 31, 2011 and include all adjustments, consisting of only usual recurring adjustments, necessary for a fair presentation of the results for such interim periods. The results of operations for the three and six months ended June 30, 2012 are not necessarily indicative of the results expected for the full year ended December 31, 2012.

Certain footnote disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles have been condensed or omitted pursuant to pertinent rules and regulations, although the Company believes that the disclosures in these financial statements are adequate to make the information presented not misleading. The accompanying unaudited condensed consolidated financial statements should be read in conjunction with the audited December 31, 2011 financial statements, which are included in our Annual Report on Form 10-K, filed on March 29, 2012.

B. Gift Certificates and Gift Certificate Breakage

The Company’s proceeds from the sale of gift cards are recorded as a liability and are recognized as net sales when the cards are redeemed for merchandise. Through the year ending December 31, 2011, all unredeemed gift card proceeds were reflected as a liability until redeemed. During the first quarter of 2012, the Company identified a history of redemption and breakage patterns associated with its gift cards, which support a change in the estimate of the term over which the Company should recognize income on gift card breakage. Accordingly, beginning with the first quarter of 2012, the Company began to recognize income from the breakage of gift cards when the likelihood of redemption of the gift card is remote and there is no legal obligation for the Company to remit the value of such unredeemed gift cards to any relevant jurisdiction.

The Company determines its gift card breakage rate based upon historical redemption patterns. Based on this historical information, the likelihood of a gift card remaining unredeemed can be reasonably estimated at the time of gift card issuance. From the point which the likelihood of redemption is deemed to be remote (gift cards that were issued three years prior and remain unredeemed) and for which there is no legal obligation to remit the value of such unredeemed gift cards to any relevant jurisdictions, breakage income is recognized over a two year period. Breakage income for the three months ending June 30, 2012 of $43,088 was recognized as revenue, net, in the accompanying condensed consolidated statement of income and comprehensive income. Breakage income for the six months ending June 30, 2012 of $770,182, which including the cumulative impact of the change of $684,007, was recognized as revenue, net, in the accompanying condensed consolidated statement of income and comprehensive income. There was no breakage recorded for the same periods in 2011.

C. Accounting for Stock-Based Compensation

The Company recognizes, as stock-based compensation, the fair value of stock-based awards on a straight-line basis over the requisite service period of the award. Stock-based compensation for the three months ended June 30, 2012 and 2011 was $62,000 and $62,000, respectively. For the six months ended June 30, 2012 and 2011, stock-based compensation was $124,000 and $124,000, respectively.

There was no activity related to stock option grants, exercises or forfeitures for the six months ended June 30, 2012.

The amount of future stock-based compensation expense that may be recognized for outstanding, unvested options as of June 30, 2012 was approximately $691,000, to be recognized on a straight-line basis over the employee’s remaining weighted average requisite service period of 3.6 years. As of June 30, 2012, the intrinsic value of all “in the money” outstanding options was approximately $837,000.

D. Inventory

Inventory consists of finished goods in the Company’s mail-order warehouse and retail stores. The Company’s inventories are stated at the lower of cost, with cost determined by the first-in, first-out (FIFO) method, or net realizable value. The Company maintains a reserve for excess and obsolete inventory. This reserve was $120,000 as of June 30, 2012 and December 31, 2011. The Company continuously monitors the salability of its inventories to ensure adequate valuation of the related merchandise.

E. Advertising

The Company recognizes deferred costs over the period of expected future revenue, which is typically less than one year. Deferred costs as of June 30, 2012 and December 31, 2011 were $890,000 and $1,273,000, respectively and consisted of catalog costs. The combined marketing and advertising costs charged to selling, general, and administrative expenses for the three months ended June 30, 2012 and 2011 were $2,186,000 and $2,155,000, respectively. For the six months ended June 30, 2012 and 2011, combined marketing and advertising costs charged to selling, general, and administrative expenses were $4,285,000 and $3,677,000, respectively.

F. Other Comprehensive Loss

Other comprehensive loss is defined as the change in net assets of a business enterprise during a period from transactions generated from non-owner sources. Other comprehensive loss includes all changes in equity during a period except those resulting from investments by owners and distributions to owners. The Company’s only item of other comprehensive loss was the change in fair value of an interest rates swap. The other comprehensive loss, net of taxes, for the three months ended June 30, 2012 and 2011 was $20,000 and $103,000, respectively. The other comprehensive loss, net of taxes, for the six months ended June 30, 2012 and 2011 was $10,000 and $103,000, respectively.

G. Net Income Per Share

A reconciliation of the number of shares used in the calculation of basic and diluted net income per share is as follows (in thousands):


	Three Months Ended				Six Months Ended
	June 30, 2012		June 30, 2011		June 30, 2012		June 30, 2011
Basic weighted average common shares outstanding		5,333		5,288		5,333		5,287
Add: Dilutive effect of assumed stock option and warrant exercises less potential incremental shares purchased under the treasury method		234		125		247		52
Diluted weighted average common shares outstanding		5,567		5,413		5,580		5,339

For the three and six months ended June 30, 2012 and 2011, approximately 369,000 options and 423,000 options, respectively, to acquire common stock were excluded from the diluted weighted average shares calculation as the effect of such options is anti-dilutive.

H. Financing Agreements

Revolving Credit Facility

On March 28, 2011, the Company and its bank, RBS Citizens, N.A., amended the revolving line of credit agreement in connection with the refinancing of the $5,000,000 senior subordinated notes. On May 10, 2012, the Company extended the revolving line of credit to April 30, 2014. Under the amended revolving line of credit, the Company can borrow up to $13,000,000, of which up to $1,000,000 can be in the form of letters of credit, and increase this amount up to $20,000,000 at the discretion of the bank. Any outstanding balances borrowed under the credit facility are due April 30, 2014. The credit facility bears interest at the base rate, announced from time to time by the bank, plus an applicable margin determined by the Company’s funded debt ratio. As of June 30, 2012, the LIBOR rate (base rate) was 0.24%, plus the applicable margin of 2.20%. Interest is payable monthly. At its option, the Company may have all or a portion of the unpaid principal under the credit facility bear interest at a base rate using either LIBOR or the prime rate.

The Company is obligated to pay commitment fees of 0.20% per annum on the average daily, unused amount of the line of credit during the preceding quarter. All assets of the Company collateralize the senior revolving credit facility. Under the terms of the credit facility, the Company is subject to certain covenants including, among others, maximum funded debt ratios, maximum debt to tangible net worth ratios, minimum fixed charge ratios, current asset ratios, and capital expenditures.

At June 30, 2012, the Company had the ability to borrow $13,000,000 on the revolving line of credit, subject to certain covenants, of which there was $4,554,000 outstanding, bearing interest at the net revolver rate of 2.44%. At December 31, 2011, the Company had $987,000 outstanding. At June 30, 2012, the Company was in compliance with all of the covenants under the revolving line of credit.

Term Notes, Senior Subordinated Notes Payable and Warrants

On March 28, 2011, the Company borrowed $5,500,000 in the form of a 7-year term note from the bank to refinance the $5,000,000 senior subordinated notes and deferred interest on those notes. The initial floating rate interest on the $1,600,000 of principal (the variable interest rate portion of the term note) was 5.4% consisting of a 1.0% LIBOR floor plus a 4.4% margin. The initial floating rate interest on the $3,900,000 of principal (fixed portion of the term note with the interest rate swap discussed below) was LIBOR plus 4.4%. On April 1, 2011, the Company entered into an interest rate swap contract to fix the interest rate at 7.4% on $3,900,000 of the term note principal. The remaining $1,600,000 of the principal bears a floating rate based on a base rate, with a minimum of 1.0% as announced from time to time by the bank, plus a 4.4% margin. As of June 30, 2012, the LIBOR rate (base rate) was 0.24%. The combined interest rate of 1.0% and 4.4% resulted in a total interest rate of 5.4% at June 30, 2012. Interest is payable monthly. The Company is obligated to repay $786,000 of principal annually commencing in April 2013 and extending to March 2018. The Company is further obligated to accelerate repayment of up to $1,600,000 in principal in the event it has excess cash flow determined by a cash flow recapture formula. All assets of the Company collateralize the term note facility. Under the terms of the term note facility, the Company is subject to certain covenants including, among others, maximum funded debt ratios, minimum fixed charge ratios, current asset ratios, and maximum capital expenditures. At June 30, 2012, the Company was in compliance with all of the covenants under the term note facility.

In connection with the issuance of the retired subordinated notes, the Company issued warrants to the note holders, exercisable at any time after December 11, 2007 for an initial 118,170 shares of its common stock, which warrants have an exercise price of $2.75 per share. The number of shares to be received for the warrants, upon exercise, is subject to change in the event of additional equity issuances and/or stock splits. The warrants were estimated to have a fair value of $272,000, which was reflected as a discount of the note’s proceeds. The discount was amortized through interest expense while the notes were outstanding and the unamortized discount was fully expensed at refinancing. The warrants issued in connection with the subordinated notes are still outstanding and terminate on December 10, 2016.

As of June 30, 2012 and December 31, 2011, the $5,500,000 of term notes on the condensed consolidated balance sheets, reflect the $5,500,000 face value.

Cash and Cash Equivalents

The Company considers all highly liquid investments with original maturities of three months or less at the time of purchase to be cash equivalents. Outstanding checks, net of cash balances in accounts with RBS Citizens, N.A., are included in current portion of capital lease obligation and outstanding checks in current liabilities.

Financial Instruments

The Company’s financial instruments consist of cash and cash equivalents, accounts receivable, accounts payable, line of credit advances, capital leases and notes payable. The carrying value of cash and cash equivalents, accounts receivable, and accounts payable reflects fair value due to their short-term nature using level 3 inputs (see Note N for fair value disclosures).

The Company’s outstanding amounts under the unsecured revolving credit facility and term note (“Credit Facility”) are not measured at fair value on the accompanying condensed consolidated balance sheets. The Company determines the fair value of the amounts outstanding under the Credit Facility using an income approach, utilizing a discounted cash flow analysis based on current market interest rates for debt issues with similar remaining years to maturity, adjusted for applicable credit risk. Our Credit Facility is valued using level 2 inputs. The results of these calculations yield fair values that approximate carrying values. The fair value of our Credit Facility was $10,054,000 and $6,487,000 as of June 30, 2012 and December 31, 2011, respectively.

I. Investment in Affiliates

On April 11, 2008, the Company acquired 40% of the common stock of Hobby Horse Clothing Company (“HH”), a privately-owned company, in exchange for 81,720 shares of unregistered Dover common stock. The Company accounts for this investment using the equity method. The total acquisition costs included $380,000 in common stock, as well as $33,300 in professional fees. Based on the purchase allocation, the total acquisition cost of $413,300 was allocated to the fair value of the Company’s share of net assets acquired, including approximately $138,000 of intangible assets, which represents the difference between the costs and underlying equity in HH’s net assets at the date of acquisition.

The Company’s equity share of HH’s net income, including the intangible asset customer list amortization (resulting from the purchase price allocation) is reflected as other investment income in the accompanying consolidated statements of income and comprehensive income. The Company recorded a net gain of approximately $26,000 for the three months ending June 30, 2012 compared to a net gain recorded of approximately $41,000 for the same period in 2011. The Company recorded a net gain of approximately $34,000 for the six months ending June 30, 2012 compared to a net gain recorded of approximately $24,000 for the same period in 2011. The resulting carrying value at June 30, 2012 and December 31, 2011 is approximately $314,000 and $270,000, respectively and is included in intangibles and other assets, net, in the accompanying condensed consolidated balance sheets.

In May 2010, the Company launched a joint venture to provide equine pharmaceuticals to the equine marketplace. The venture, HorsePharm.com, LLC (“HP”), was established as a limited liability company, and Dover has a non-controlling interest of 50%. The Company accounts for this investment using the equity method. Thus, during the second quarter of 2010, Dover recorded its portion of the initial investment in HP of $60,000. For the second quarter of 2012 the Company recorded a net loss of approximately $(2,000) for its share of the joint venture’s operating results compared to a net loss recorded of approximately $(4,000) for the same period in 2011. The Company recorded a net loss of approximately $(3,000) for the six months ending June 30, 2012 compared to a net loss recorded of approximately $(8,000) for the same period in 2011. The carrying value at June 30, 2012 and December 31, 2011 is approximately $26,000 and $30,000, respectively, which is included in intangibles and other assets, net, in the accompanying condensed consolidated balance sheets. The operating agreement governing HP contains a buy/sell feature that can be exercised for a price established by the HP member who initiates the buy/sell feature. The HP member that receives the offer can elect to buy the other member’s interest or sell its interest at the offered price.

J. Income Taxes

At June 30, 2012, the Company maintains a liability of $33,000, for unrecognized tax benefits. Although the Company believes it has adequately reserved for our uncertain tax positions, no assurance can be given that the final tax outcome of these matters will not be different. The Company adjusts these reserves in light of changing facts and circumstances, such as the closing of a tax audit or the refinement of an estimate. To the extent that the final tax outcome of these matters is different than the amounts recorded, such differences will impact the provision for income taxes in the period in which such determination is made. The provision for income taxes includes the impact of reserve provisions and changes to reserves that are considered appropriate, as well as the related net interest.

The Company records interest and penalties related to income taxes as a component of provision for income taxes. The Company recognized nominal interest and penalty expense for the six months ended June 30, 2012 and 2011.

Tax years 2006 through 2011 remain subject to examination by the IRS; 2007 through 2010 tax years remain subject to examination by Massachusetts; and 2006 through 2010 tax years remain subject to examination by various other jurisdictions.

K. Related Party Transactions

On October 26, 2007, the disinterested members of the Audit Committee of the Board of Directors approved a $5,000,000 subordinated debt financing facility in the form of senior subordinated notes as part of a plan to refinance the Company’s former subordinated debt with Patriot Capital. The new sub-debt facility was led by BCA Mezzanine Fund, L.P., which participated at $2,000,000 (in which Company Board member Gregory Mulligan holds a management position and indirect economic interest). The subordinated notes were consummated as of December 11, 2007. Except as noted above with respect to Mr. Mulligan, there is no relationship, arrangement or understanding between the Company and any of the subordinated holders or any of their affiliates, other than in respect of the loan agreement establishing and setting forth the terms and conditions of the subordinated notes. For the six months ended June 30, 2011 the Company recognized $175,000 in interest expense for the subordinated notes payable, which was paid on March 28, 2011.

On March 28, 2011, the Company repaid these subordinated notes and $423,000 of deferred interest from the proceeds of $5,500,000 in term notes. The warrants issued in connection with the subordinated notes are still outstanding and terminate on December 10, 2016.

In October of 2004, the Company entered into a lease agreement with a minority stockholder. The agreement, which relates to the Plaistow, NH retail store, is a five-year lease with options to extend for an additional fifteen years. In October 2009, the Company exercised its first option to extend the lease for an additional five years. During the three months ended June 30, 2012 and 2011, the Company expensed in connection with this lease $53,000 and $52,000, respectively. During the six months ended June 30, 2012 and 2011, the Company expensed in connection with this lease $107,000 and $105,000, respectively.

In order to expedite the efficient build-out of leasehold improvements in its new retail stores, the Company utilizes the services of a real estate development company owned by a non-executive Company employee and minority stockholder to source construction services and retail fixtures. Total payments made to the real estate development company for the three months ended June 30, 2012 and 2011, consisting primarily of reimbursements for materials and outside labor for the fit-up of stores, were $129,000 and $91,000, respectively. For the six months ended June 30, 2012 and 2011, reimbursements for materials and outside labor for the fit-up of stores, were $271,000 and $111,000, respectively.

L. Commitments and Contingencies

Lease Commitments

The Company leases its facilities and certain fixed assets that may be purchased for a nominal amount on the expiration of the leases under non-cancelable operating and capital leases that extend through 2022. These leases, which may be renewed for periods ranging from one to five years, include fixed rental agreements as well as agreements with rent escalation clauses.

In connection with retail locations, the Company enters into various operating lease agreements, with escalating rental payments. The effects of variable rent disbursements have been expensed on a straight-line basis over the life of the lease. As of June 30, 2012 and December 31, 2011, there was approximately $654,000 and $618,000, respectively, of deferred rent recorded in accrued expenses and other current liabilities.

Contingencies

From time to time, the Company is exposed to litigation relating to our products and operations. The Company is not currently engaged in any legal proceedings that are expected, individually or in the aggregate, to have a material, adverse affect on our financial condition or results of operations.

M. Interest Rate Swap

The Company uses an interest rate swap contract as a cash flow hedge to eliminate the cash flow exposure of interest rate movements on variable rate debt. The Company accounts for its interest rate swap contract in accordance with FASB ASC 815, Derivatives and Hedging. FASB ASC 815 requires all derivatives, including interest rate swaps, to be recorded on the balance sheet at fair value. The increase or decrease in the fair value of the hedge is initially included as a component of other comprehensive income and is subsequently reclassified into earnings and recorded as interest expense, when interest on the related debt is paid. The Company values the interest rate swap contract in accordance with FASB ASC 820, Fair Value Measurement and Disclosures. The Company documents its risk management strategy and hedge effectiveness at the inception of and during the term of the hedge. The Company’s interest rate risk management strategy is to stabilize cash flow requirements by maintaining the interest rate swap contract to convert variable rate debt to fixed rate debt.

The Company is exposed to interest rate risk primarily through its borrowing activities. The Company uses an interest rate swap contract as a cash flow hedge to eliminate the cash flow exposure of interest rate movements on variable rate debt. The Company’s term note is a variable rate instrument. On April 1, 2011, the Company entered into a 7-year interest rate swap contract on the notional value of $3,900,000 of the term note which requires payment of a fixed interest rate of interest (7.4%) and the receipt of a variable rate of interest, based on one month LIBOR rate, on the $3,900,000.

The Company designated this interest rate swap contract as an effective cash flow hedge. The Company adjusts the interest rate swap to fair value with the change accounted for through other comprehensive income, as the contracts are considered effective in offsetting the interest rate exposure of the forecasted interest rate payments hedged. The Company anticipates that this contract will continue to be effective as long as there are no pre-payments of the hedged portion of the term note. The Company does not believe any of the amounts currently reported in accumulated other comprehensive loss will be reclassified into earnings in 2012. The fair value of the interest rate swap at June 30, 2012 and December 31, 2011 was a liability of $340,782 and $321,879, respectively.

The Company does not hold any derivative instruments that are not designated as a hedging instrument. The following table presents information about the fair value of the Company’s derivative instruments that have been designated as hedging instruments as of June 30, 2012 and December 31, 2011.

Liability Derivatives as of:

June 30, 2012

December 31, 2011

Balance Sheet Location

Fair Value

Balance Sheet Location

Fair Value

Interest rate swap contract

Interest rate swap derivative

340,782

Interest rate swap derivative

321,879

The following table presents information about the effects of the Company’s derivative instruments:


	Location of Loss Recognized on	Amount of Loss Recognized Net of Tax, in Other Comprehensive Loss for the six months ended June 30
	Derivative	2012		2011
Interest rate swap contact	Other comprehensive loss	$	10,270	$	103,266

N. Fair Value

FASB ASC 820, Fair Value Measurements and Disclosures, defines fair value, and establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy under FASB ASC 820 are described below:

Level 1 —

Pricing inputs are quoted prices available in active markets for identical investments as of the reporting date. The Company does not have any investments meeting the criteria of Level 1 inputs.

Level 2 —

Pricing inputs are quoted prices for similar investments, or inputs that are observable, either directly or indirectly, for substantially the full term through corroboration with observable market data. The Company’s derivatives discussed above, meet the criteria of a Level 2 input.

Level 3 —

Pricing inputs include unobservable inputs that reflect the reporting entity’s own assumptions about the assumptions market participants would use in pricing the asset or liability, which are developed based on the best information available. Level 3 includes private investments that have no market activity. The Company does not have any investments meeting the criteria of Level 3 inputs.

The Company accounts for its interest rate swap as a derivative financial instrument in accordance with the related guidance. Under this guidance, derivatives are carried on the balance sheet at fair value. The fair value of the Company’s interest rate swap is determined based on observable market data in combination with expected cash flows. The fair value of the Company’s interest rate swap was determined using projected future cash flows, discounted at the mid-market implied forward LIBOR. The value at June 30, 2012 is included in long-term liabilities.

The following table presents the financial instruments carried at fair value as of June 30, 2012 in accordance with the FASB ASC 820 hierarchy noted above:


	Level 1		Level 2			Level 3		Total
Interest Rate Swap Derivative as of June 30, 2012		—	$	(340,782	)		—	$	(340,782	)

O. Recent Accounting Pronouncements

In May 2011, the FASB issued an amendment to ASU 2011-04, Fair Value Measurement and disclosure. Among other things, the guidance expands the disclosure requirements around fair value measurements categorized in Level 3 of the fair value hierarchy and requires disclosure of the level in the fair value hierarchy of items that are not measured at fair value in the statement of financial position but whose fair value must be disclosed. It also clarifies and expands upon existing requirements for measurement of the fair value of financial assets and liabilities as well as instruments classified in shareholders’ equity. The guidance is effective for interim and annual periods beginning after December 15, 2011. The adoption of this accounting pronouncement did not have a material impact on our financial statements.

ASU 2011-05, Presentation of Comprehensive Income, amends the guidance in ASC 220, Comprehensive Income, by eliminating the option to present components of other comprehensive income (OCI) in the statement of stockholders’ equity. Instead, the new guidance now requires entities to present all non-owner changes in stockholders’ equity either as a single continuous statement of comprehensive income or as two separate but consecutive statements. The components of OCI have not changed, nor has the guidance on when OCI items are reclassified to net income; however, the amendments require entities to present all reclassification adjustments from OCI to net income on the face of the statement of comprehensive income. For public entities, the amendments in the ASU are effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2011. The amended guidance must be applied retrospectively and early adoption is permitted. The Company adopted this disclosure guidance as of December 31, 2011.

P. Subsequent Events

On May 31, 2012, the Company entered into a purchase agreement with Fools & Horses, LLC (“F&H”) for the purchase of its intangible assets for the price of $145,000. The Company also agreed to purchase inventory from F&H that the Company currently sells. F&H owned and operated an equestrian product store in Durham, NC located within the same market as a new store in Raleigh, NC the Company plans to open in Q4 of 2012. For the three months ending June 30, 2012 the Company made an initial payment of $25,000. In July, 2012 the Company made an additional payment of $25,000, at closing (anticipated to be August, 2012) the Company will pay $75,000 and the remaining balance of $20,000 shall be paid one year after the closing date. The $25,000 initial payment is included in intangibles and other assets, net in the accompanying condensed consolidated balance sheets.

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

This Quarterly Report on Form 10-Q, including the following discussion, contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 that involve substantial risks and uncertainties. For this purpose, any statements contained herein that are not statements of historical fact may be deemed to be forward-looking statements. Without limiting the generality of the foregoing, the words “projected”, “anticipated”, “planned”, “expected”, and similar expressions are intended to identify forward-looking statements. In particular, statements regarding future financial targets or trends are forward-looking statements. Forward-looking statements are not guarantees of our future financial performance, and undue reliance should not be placed on them. Our actual results, performance or achievements may differ significantly from the results, performance or achievements discussed in or implied by the forward-looking statements. Factors that could cause such a difference detailed in “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2011(“fiscal 2011”) and in our subsequent periodic reports on Form 10-Q. We disclaim any intent or obligation to update any forward-looking statement.

Overview

The Company is a leading, specialty retailer and the largest multi-channel marketer of equestrian products in the U.S. For over 35 years, Dover Saddlery has been a premier upscale marketing brand in the English-style riding industry. We sell our products through a multi-channel strategy, including direct and retail. This multi-channel strategy has allowed us to use catalogs and our proprietary database of over two million names of equestrian enthusiasts as the primary marketing tools to increase catalog sales and to drive additional business to our e-commerce websites and retail stores.

The Company achieved revenue growth during 2011 and for the first quarter and second quarter of 2012, especially in its retail stores. As a result the Company opened two new stores in 2011, opened an additional store in Warrington, PA in June of 2012 and will potentially be opening two additional stores in the third quarter of 2012. The Company will continue to seek other new store locations that may be opened in 2012. However, our strategy to increase the number of retail store locations is based on finding optimal locations where demand for equestrian products is high and adequate capital to invest in its store expansion plan.

Consolidated Performance and Trends

The Company reported net income for the three months ended June 30, 2012 of $304,000 or $0.05 per share, compared to net income of $627,000 or $0.12 per share for the corresponding period in 2011, a decrease of 51.5%. The Company reported net income for the six months ended June 30, 2012 of $525,000 or $0.09 per share, compared to net income of $752,000 or $0.14 per share for the corresponding period in 2011.

The second quarter of 2012 results reflect our continuing efforts to execute our growth strategy in the retail market channel where revenues increased 16.4% to $9.4 million in the quarter. This trend of increased revenue in the retail market channel may be slowed or eroded by delays in the execution of our new store expansion strategy, constraints in available capital, and interim declines in consumer demand at our retail stores impacted by lingering effects of depressed consumer confidence stemming from the financial and credit crisis. The Company responds to fluctuations in revenues primarily by delaying the opening of new stores, adjusting marketing efforts and operations to support our retail stores and managing costs. The success of our new store growth plan is dependent upon the response of our customers to these marketing strategies and evolving market conditions. Our direct market channel revenues decreased 4.9%, to $11.6 million in the second quarter of 2012, due to a reduced consumer spending and a shift by some consumers to shop more in stores. We respond to fluctuations in our direct customers’ response by adjusting the quantities of catalogs mailed and other internet marketing and customer-related strategies and tactics in order to maximize revenues and manage costs.

Given continued economic uncertainty, it is very difficult to accurately predict economic trends; however, the increase in retail channel revenues since 2008 and the Company’s store sales, have given us confidence to resume our store rollout strategy which commenced in the second quarter of 2011 and will continue throughout 2012.

Single Reporting Segment

The Company operates and manages its business as one operating segment utilizing a multi-channel distribution strategy.

Results of Operations

The following table sets forth our unaudited results of operations as a percentage of revenues for the periods shown (1):


	Three Months Ended						Six Months Ended
	June 30, 2012			June 30, 2011			June 30, 2012			June 30, 2011
Revenues, net		100.0	%		100.0	%		100.0	%		100.0	%
Cost of revenues		62.7			63.1			62.1			62.6
Gross profit		37.3			36.9			37.9			37.4
Selling, general and administrative expenses		33.9			31.1			34.8			32.6
Income from operations		3.3			5.8			3.1			4.9
Interest expense, financing and other related costs, net		0.7			0.5			0.7			1.3
Other investment income		0.1			0.2			0.1			0.0
Income before income tax provision		2.7			5.5			2.5			3.6
Provision for income taxes		1.3			2.4			1.2			1.6
Net Income		1.4			3.1			1.3			2.0

(1)	Certain of these amounts may not properly sum due to rounding.

The following table presents certain selected unaudited operating data (dollars in thousands):


	Three Months Ended						Six Months Ended
	June 30,			June 30,			June 30,			June 30,
	2012			2011			2012			2011
Revenues, net – direct	$	11,574		$	12,172		$	23,034		$	24,240
Revenues, net – retail stores		9,397			8,075			16,225			13,293

Revenues, net – total	$	20,971		$	20,247		$	39,259		$	37,533

Other operating data:
Number of retail stores(1)		16			14			16			14
Capital expenditures		679			281			1,121			402
Gross profit margin		37.3	%		36.9	%		37.9	%		37.4	%
Adjusted EBITDA(2)		980			1,422			1,772			2,315
Adjusted EBITDA margin(2)		4.7	%		7.0	%		4.5	%		6.2	%

(1)	Includes fifteen Dover-branded stores and one Smith Brothers store. The Warrington, PA Dover-branded store opened in June, 2012.

(2)

When we use the term “Adjusted EBITDA”, we are referring to net income minus interest income and other income plus interest expense, income taxes, non-cash stock-based compensation, depreciation, amortization and other investment (income) loss, net. We present Adjusted EBITDA because we consider it an important supplemental measure of our performance and believe it is frequently used by securities analysts, investors and other interested parties in the evaluation of companies in our industry.

Adjusted EBITDA has some limitations as an analytical tool and you should not consider it in isolation or as a substitute for net income, operating income, cash flows from operating, investing or financing activities or any other measure calculated in accordance with U.S. generally accepted accounting principles. Some of the limitations are:

•

Adjusted EBITDA does not reflect our cash expenditures or future requirements for capital expenditures or capital commitments;

•

Adjusted EBITDA does not reflect changes in, or cash requirements for, our working capital needs;

•

Adjusted EBITDA does not reflect the impact of an impairment charge that might be taken, when future results are not achieved as planned, in respect of goodwill resulting from any premium the Company might pay in the future in connection with potential acquisitions;

•

Adjusted EBITDA does not reflect the interest expense or cash requirements necessary to service interest or principal payments on our debt;

•

Although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future, and Adjusted EBITDA does not reflect any cash requirements for such replacements;

•

Although stock-based compensation is a non-cash charge, additional stock options might be granted in the future, which might have a future dilutive effect on earnings and earnings per share; and

•

Other companies in our industry may calculate Adjusted EBITDA differently than we do, limiting its usefulness as a comparative measure.

The following table reconciles net income to Adjusted EBITDA (in thousands):


	Three Months Ended						Six Months Ended
	June 30,			June 30,			June 30,			June 30,
	2012			2011			2012			2011
Net income	$	304		$	627		$	525	*	$	752
Depreciation		217			184			424			365
Amortization of intangible assets		—			2			—			4
Stock-based compensation		62			62			124			124
Interest expense, financing and other related costs, net		153			103			262			477
Other investment income		(24	)		(37	)		(30	)		(16	)
Provision for income taxes		268			481			467			609

Adjusted EBITDA	$	980		$	1,422		$	1,772	*	$	2,315

(*)	Includes the cumulative impact of the change in gift card breakage income of $684,007 recorded in the first quarter of 2012. There was no breakage recorded for the same period in 2011.

Three Months Ended June 30, 2012 Compared to the Three Months Ended June 30, 2011

Revenues

Total revenues increased $0.7 million, or 3.6%, to $21.0 million for the three months ended June 30, 2012 from $20.2 million for the three months ended June 30, 2011. Revenues in our direct market channel decreased $0.6 million, or 4.9%, to $11.6 million from $12.2 million in the corresponding period in 2011. Revenues in our retail market channel increased $1.3 million, or 16.4%, to $9.4 million from $8.1 million in 2011. The decrease in our direct market channel was due to weakness in consumer spending in this channel. The increase in revenues from our retail market channel was due to strong sales growth from our newer stores as they mature, two additional retail stores and promotions. Same store sales for the three month period increased 2.1% over the prior year. In addition, breakage income of $43,088 was recognized during the three months ending June 30, 2012. There was no breakage recorded for the same period in 2011.

Gross Profit

Gross profit for the three months ended June 30, 2012 increased $0.3 million, or 4.5%, to $7.8 million as compared to the corresponding period in 2011. Gross profit, as a percentage of revenues, for the three months ended June 30, 2012 increased 0.4% to 37.3% from 36.9% for the corresponding period in 2011. The increase in gross profit as a percentage of revenues was attributable to lower costs of managing inventory this year.

Selling, General and Administrative

Selling, general and administrative expenses increased $0.8 million, or 12.9% to $7.1 million for the three months ended June 30, 2012 from $6.3 million for the three months ended June 30, 2011. SG&A expenses, as a percentage of revenues, increased to 33.9% of revenues from 31.1% of revenues for the corresponding period in 2011 as a result of increased costs in 2012 and slow sales growth. SG&A increased primarily as a result of an additional $714,000 in labor, lease expense, professional fees and marketing costs. Labor and lease expense increased primarily due to the additional number of stores as compared to last year. Professional and marketing costs largely reflect our ongoing investments to improve our Internet channel.

Interest Expense

Interest expense, including amortization of financing costs, attributed to our term note and revolving credit facility increased $51,000 or 49.2%, to $153,000 from $103,000 due to the increased outstanding balance of our revolving line of credit.

Other Investment Income

Net income from investment activities consists of the Company’s share of net earnings or loss of its affiliate as they occur. The Company’s net investment gain for the three months ending June 30, 2012 was $24,000, a decrease of $13,000 over its net investment gain of $37,000 in 2011. The Company’s investment income or loss from investment activities are related to our investments in Hobby Horse Clothing Company, Inc. (“HH”) and Horsepharm, LLC.

Income Tax Provision

The provision for income taxes was $268,000 for the three months ended June 30, 2012, reflecting an effective tax rate of 47%, compared to $481,000 for the corresponding period in 2011, reflecting an effective tax rate of 43%. The effective tax rate for the quarter was based upon management’s best estimates of the estimated effective rates for each entire year.

Net Income

The net income for the second quarter of 2012 decreased by $323,000, or 51.5%, to $304,000, compared to $627,000 in the second quarter of 2011. This decrease in the net income was due primarily to increased revenue from the retail market channel, offset by SG&A expenses related to marketing, lease expense, professional fees and labor costs. The resulting quarterly income per diluted share decreased to $0.05 in the second quarter of 2012 compared to $0.12 per diluted share for the corresponding period in 2011.

Six Months Ended June 30, 2012 Compared to the Six Months Ended June 30, 2011

Revenues

Total revenues increased $1.7 million, or 4.6%, to $39.3 million for the six months ended June 30, 2012 from $37.5 million for the year ended June 30, 2011. Revenues in our direct market channel decreased $1.2 million, or 4.8%, to $23.0 million from $24.2 million in the corresponding period in 2011. Revenues in our retail market channel increased $2.9 million, or 22.1%, to $16.2 million from $13.3 million in 2011. The decrease in our direct market channel was due to weakness in consumer spending in this channel and a shift from direct to retail for some of their purchases. The increase in revenues from our retail market channel was due to strong sales growth from our newer stores as they mature, two additional retail stores and promotions. Same store sales for the six month period increased 7.6% over the prior year. In addition, breakage income of $770,182, including a cumulative impact of $684,007, was recognized during the six months ending June 30, 2012. There was no breakage recorded for the same period in 2011.

Gross Profit

Gross profit for the six months ended June 30, 2012 increased $0.8 million, or 5.9%, to $14.9 million from $14.0 million for the corresponding period in 2011. Gross profit, as a percentage of revenues, for the six months ended June 30, 2012 increased 0.5% to 37.9% from 37.4% for the corresponding period in 2011. The increase in gross profit of $0.8 million was attributable to increased revenues in the retail channel, breakage income and improved product margins. The increase in gross profit as a percentage of revenues was attributable to variations in our overall product mix, breakage income and pricing.

Selling, General and Administrative

Selling, general and administrative expenses increased $1.4 million, or 11.7%, for the six months ended June 30, 2012 to $13.6 million from $12.2 million for the corresponding period in 2011. Increased marketing costs of $608,000, lease expense of $178,000, professional fees of $171,000 and labor costs of $345,000 were the primary causes for this increase in SG&A expenses. SG&A expenses, as a percentage of revenues, increased to 34.8% of revenues from 32.6% of revenues for the corresponding period in 2011 due to increased marketing, lease expense, professional fees and labor costs. Labor and lease expense increased primarily due to the additional number of stores as compared to last year. Professional and marketing costs largely reflect our ongoing investments to improve our Internet channel.

Interest Expense

Interest expense, including amortization of financing costs, attributed primarily to our term note and revolving credit facility decreased $215,000 or 45.0% to $262,000 for the six months ended June 30, 2012 from $477,000 for the same period in 2011. In the first quarter of 2011, there was an increase of $243,000 which was attributed to expensing unamortized, deferred financing costs and the debt discount upon the refinancing of the senior subordinated notes on March 28, 2011.

Other Investment Income

Net income from investment activities consists of the Company’s share of net earnings or loss of its affiliate as they occur. The Company’s net investment gain for the six months ended June 30, 2012 was $30,000, an increase of $14,000 over its net investment income of $16,000 in 2011. The Company’s investment income from investment activities are related to our investments in Hobby Horse Clothing Company, Inc. (“HH”) and Horsepharm, LLC.

Income Tax Provision

The provision for income taxes was $467,000 for the six months ended June 30, 2012, reflecting an effective tax rate of 47%, compared to $0.6 million for the corresponding period in 2011, reflecting an effective tax rate of 45%. The effective tax rates were based upon management’s best estimates of the estimated effective rates for each entire year.

Net Income

The net income for the six months ended June 30, 2012 decreased $227,000 or 30.2%, to $525,000 from $752,000 for the corresponding period in 2011. This decrease in profitability of $227,000 was due primarily to increased SG&A expenses related to marketing, lease expense, professional fees and labor costs that increased at a higher pace than revenue and gross margin. In addition weaker than expected direct sales reduced the gross margin contribution. The resulting income per diluted share decreased to $0.09 for the six months ended June 30, 2012 as compared to $0.14 for the corresponding period in 2011.

Seasonality and Quarterly Fluctuations

Since 2001, our quarterly product sales have ranged from a low of approximately 20% to a high of approximately 32% of any calendar year’s results. The beginning of the spring outdoor riding season in the northern half of the country has typically generated a slightly stronger second quarter of the year, and the holiday buying season has generated additional demand for our normal equestrian product lines in the fourth quarter of the year. Revenues for the first and third quarters of the calendar year have tended to be somewhat lower than the second and fourth quarters. We anticipate that our revenues will continue to vary somewhat by season. The timing of our new retail store openings has had, and is expected to continue to have, a significant impact on our quarterly results. We will incur one-time expenses related to the opening of each new store. As we open new stores, (i) revenues may spike and then settle, and (ii) pre-opening expenses, including occupancy and management overhead, are incurred, which may not be offset by correlating revenues during the same financial reporting period. As a result of these factors, new retail store openings may result in temporary declines in operating profit, both in dollars and as a percentage of sales.

Liquidity and Capital Resources

For the six months ended June 30, 2012 our cash was reduced by $136,000. Cash was utilized primarily for seasonal working capital requirements. The source for cash generated related to increased balances in depreciation and amortization and increased borrowings under our revolving credit facility. On March 28, 2011, the Company amended its line of credit facility with the bank with the potential to increase the available credit from $13,000,000 up to $20,000,000 at the bank’s discretion. As of June 30, 2012, the Company had outstanding borrowings under the line of credit of $4,554,000. On March 28, 2011, the Company also refinanced the $5,000,000 Senior Subordinated Notes plus deferred interest from proceeds of a $5,500,000 term note facility from the bank at a reduced interest rate. The Company was in compliance with all covenants under both credit facilities as of June 30, 2012. As of April 30, 2012 the tangible net worth covenant has been eliminated

If necessary, we plan in the future to seek additional financing from banks and leasing companies, or through public offerings or private placements of debt or equity securities, strategic relationships, or other arrangements. In the event we fail to meet our financial covenants with our bank, we may not have access through our line of credit to sufficient working capital to pursue our growth strategy, or if our covenant non-compliance triggers a default, our loans may be called requiring the repayment of all amounts on our loans.

Operating Activities

Cash utilized in our operating activities for the six months ended June 30, 2012 was $2.2 million compared to $3.9 million for the corresponding period in 2011. For the six months ended June 30, 2012, cash outflows consisted primarily of seasonal increases in inventory and initial stocking of new stores of $0.8 million, as well as reductions in accrued expenses and other current liabilities, gift certificate liability, accounts payable and income taxes payable of $2.8 million. Cash inflows were attributable to the results of operations which consisted of net income and reductions in non-cash expenses of depreciation and amortization, stock based compensation and prepaid catalog and other assets totaling $1.4 million of cash. For the six months ended June 30, 2011, cash outflows consisted primarily of seasonal increases in inventory, increases in accounts receivable, payment of deferred interest and prepaid and other assets of $3.3 million, as well as reductions in accrued expenses, income taxes payable, other current liabilities, and accounts payable of $2.0 million. Cash inflows were attributable to the results of operations which consisted of net income, non-cash expenses of depreciation, amortization and non-cash interest and other expenses, totaling $1.4 million of cash.

Investing Activities

Cash utilized from our investing activities was $992,000 for the six months ended June 30, 2012 compared to utilized cash of $402,000 for the corresponding period in 2011. Investing activities consisted primarily of retail store improvement costs and new store fixtures. As additional stores are opened, the Company invests in inventory in order to initially stock the store with product.

Financing Activities

Net cash provided by our financing activities was $3.1 million for the six months ended June 30, 2012, compared to $3.9 million provided in the corresponding period in 2011. For the six months ended June 30, 2012, we funded our seasonal operating activities with net borrowings of $3.6 million under our revolving credit. For the six months ended June 30, 2011, we funded our seasonal operating activities with net borrowings of $3.4 million under our revolving credit facility as well as paying our subordinated note of $5.0 million and borrowing under a note term note for $5.5 million.

Revolving Credit Facility

Term Notes, Senior Subordinated Notes Payable and Warrants

As of June 30, 2012 and December 31, 2011, the $5,500,000 of term notes on the condensed consolidated balance sheets, reflect the $5,500,000 face value.

Working Capital and Capital Expenditure Needs

The Company believes our existing cash, cash equivalents, expected cash to be provided by our operating activities, and funds available through our revolving credit facility will be sufficient to meet our currently planned working capital and capital expenditure needs over at least the next twelve months. We anticipate increasing capital expenditures by adding stores in 2012 and beyond. Our future capital requirements will depend on many factors, including our rate of revenue growth, the expansion of our marketing and sales activities, the expansion of our retail stores, the acquisition of new capabilities or technologies and the continuing market acceptance of our products. To the extent that existing cash, cash equivalents, cash from operations and cash from our revolving credit facility under the conditions and covenants of our credit facilities are insufficient to fund our future activities, we may need to raise additional funds through public or private equity or debt financing. Although we are currently not a party to any agreement or letter of intent with respect to potential investments in, or acquisitions of, businesses, services or technologies which we anticipate would require us to seek additional equity or debt financing, we may enter into these types of arrangements in the future. There is no assurance that additional funds would be available on terms favorable to us or at all. Funds from our revolving credit facility may not be available if we fail to meet the financial covenants contained in the loan agreements with our lender. At June 30, 2012, the Company was in compliance with all of its covenants under the credit facility.

Critical Accounting Policies and Estimates

The Company’s consolidated financial statements are prepared in accordance with accounting principles generally accepted in the U.S. The preparation of these consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, costs and expenses, and related disclosures. We evaluate our estimates and assumptions on an ongoing basis. Our actual results may differ from these estimates. A summary of significant accounting policies and a description of accounting policies that are considered critical may be found in our 2011 Annual Report on Form 10-K, filed on March 29, 2012, in Note 2 of the Notes to the Consolidated Financial Statements and the “Critical Accounting Policies and Estimates” section of Management’s Discussion and Analysis of Financial Condition and Results of Operations; as supplemented by the disclosures in this Quarterly Report in the Notes to Condensed Consolidated Financial Statements. As discussed in Note B of the Notes to the unaudited Condensed Consolidated Financial Statements, beginning in the first quarter of 2012, we began to recognize income from the breakage of gift cards when the likelihood of redemption of the gift card is remote. In addition, we define our same store sales to include sales from all stores open for a full fifteen months following a grand opening, or a conversion to a Dover-branded store.

Item 3. Quantitative and Qualitative Disclosures about Market Risk.

At June 30, 2012, there had not been a material change in any of the market risk information disclosed by the Company in our Annual Report on Form 10-K for the year ended December 31, 2011. More detailed information concerning market risk can be found in Item 7A under the sub-caption “Quantitative and Qualitative Disclosures about Market Risk” of the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations” on page 32 of our Annual Report on Form 10-K for the year ended December 31, 2011.

The Company’s objectives in managing our long-term exposure to interest rate and foreign currency rate changes are to limit the material impact of the changes on cash flows and earnings and to lower our overall borrowing costs. We have calculated the effect of a 10% change in interest rates over a month-long period for both our debt obligations and our marketable securities investments and determined the effect to be immaterial. We do not foresee or expect any significant changes in the management of foreign currency or interest rate exposures or in the strategies we employ to manage such exposures in the near future.

Foreign Currency Risk

Nearly all of the Company’s revenues are derived from transactions denominated in U.S. dollars. We purchase products in the normal course of business from foreign manufacturers. As such, we have exposure to adverse changes in exchange rates associated with those product purchases, but this exposure has not been significant.

Interest Rate Sensitivity

The Company had cash and cash equivalents totaling $177,000 at June 30, 2012. The unrestricted cash and cash equivalents are held for working capital purposes. We do not enter into investments for trading or speculative purposes. We intend to maintain our portfolio of cash equivalents, including money market funds and certificates of deposit. Due to the short-term nature of these investments, we believe that we do not have any material exposure to changes in the fair value as a result of changes in interest rates. As of June 30, 2012, all of our investments were held in money market funds.

The Company’s exposure to market risk also relates to the increase or decrease in the amount of interest expense we must pay our outstanding debt instruments, primarily certain borrowings under our revolving credit facility and on the $1,600,000 of the term notes that bear interest at a floating rate. The advances under this revolving credit facility and the $1,600,000 of principal of the term note bear a variable rate of interest determined as a function of the prime rate and the published LIBOR rate at the time of the borrowing. If interest rates were to increase by two percent, the additional interest expense as of June 30, 2012 would be approximately $91,000 annually. At June 30, 2012, $4,553,932 was outstanding under our revolving credit facility.

Item 4. Controls and Procedures.

The Company’s management, with the participation of our chief executive officer and chief financial officer, evaluated the effectiveness of our disclosure controls and procedures as of June 30, 2012. The term “disclosure controls and procedures”, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, or the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure.

Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives, and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on the evaluation of our disclosure controls and procedures as of June 30, 2012, our chief executive officer and chief financial officer concluded that, as of such date, our disclosure controls and procedures were effective at the reasonable assurance level.

The Company maintains certain internal controls over financial reporting that are appropriate, in management’s judgment with similar cost-benefit considerations, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles. No change in our internal control over financial reporting occurred during the fiscal quarter ended June 30, 2012 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings.

Item 1A. Risk Factors.

An investment in our common stock involves a high degree of risk. You should carefully consider the specific risk factors listed under Part I, Item 1A of our Annual Report for the year ended December 31, 2011 on Form 10-K filed with the SEC on March 29, 2012, together with all other information included or incorporated in our reports filed with the Securities and Exchange Commission. Any such risks may materialize, and additional risks not known to us, or that we now deem immaterial, may arise. In such event, our business, financial condition, results of operations or prospects could be materially adversely affected. If that occurs, the market price of our common stock could fall, and you could lose all or part of your investment.

This Quarterly Report on Form 10-Q includes or incorporates forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. You can identify these forward-looking statements by the use of the words “believes”, “anticipates”, “plans”, “expects”, “may”, “will”, “would”, “intends”, “estimates”, and other similar expressions, whether in the negative or affirmative. We cannot guarantee that we actually will achieve the plans, intentions or expectations disclosed in the forward-looking statements made. We have included important factors in the cautionary statements below that we believe could cause actual results to differ materially from the forward-looking statements contained herein. The forward-looking statements do not reflect the potential impact of any future acquisitions, mergers or dispositions. We do not assume any obligation to update any forward-looking statements contained herein. In addition to the list of significant risk factors set forth in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2011, we continue to call your attention to the following information that might be considered material in evaluating the risks of our business and an investment in our common stock:

A decline in discretionary consumer spending and related externalities could reduce the Company’s revenues.

The Company’s revenues depend to a degree on discretionary consumer spending, which may decrease due to a variety of factors beyond our control. These include unfavorable general business, financial and economic conditions, increases in interest rates, increases in inflation, stock market uncertainty, war, terrorism, fears of war or terrorism, increases in consumer debt levels and decreases in the availability of consumer credit, adverse or unseasonable weather conditions, adverse changes in applicable laws and regulations, increases in taxation, adverse unemployment trends and other factors that adversely influence consumer confidence and spending. Any one of these factors could result in adverse fluctuations in our revenues generally. Our revenues also depend on the extent to which discretionary consumer spending is directed towards recreational activities generally and equestrian activities and products in particular. Reductions in the amounts of discretionary spending directed to such activities would reduce our revenues.

The Company’s customers’ purchases of discretionary items, including our products, may decline during periods when disposable income is lower, or periods of actual or perceived unfavorable economic conditions. If this occurs, our revenues would decline, which may have a material adverse effect on our business.

Material changes in cash flow and debt levels may adversely affect the Company’s growth and credit facilities, require the immediate repayment of all our loans, and limit the ability to open new stores.

During seasonal and cyclical changes in our revenue levels, to fund our retail growth strategy, and to fund increases in our direct business, we make use of our credit facilities, which are subject to EBITDA, fixed charge ratio, maximum capital expenditure limitations, total debt, tangible net worth and related covenants. If we are out of compliance with our covenants at the end of a fiscal period, it may adversely affect our growth prospects, require the consent of our lender to open new stores or in the worst case, trigger a loan default and require the repayments of all amounts then outstanding on our loans. In the event of our insolvency, liquidation, dissolution or reorganization, the lender under our revolving credit facility and term note would be entitled to payment in full from our assets before distributions, if any, were made to our stockholders.

In order to execute our retail store expansion strategy, we may need to borrow additional funds, raise additional equity financing or finance our planned expansion from profits. Our borrowings may be restricted by financial covenants; or we may also need to raise additional capital in the future to respond to competitive pressures or unanticipated financial requirements. We may not be able to obtain additional financing, including the extension or refinancing of our revolving credit facility, on commercially reasonable terms or at all. A failure to obtain additional financing or an inability to obtain financing on acceptable terms could require us to incur indebtedness at high rates of interest or with substantial restrictive covenants, including prohibitions on payment of dividends.

We may obtain additional financing by issuing equity securities that will dilute the ownership interests of existing shareholders. If we are unable to obtain additional financing, we may be forced to scale back operations or be unable to address opportunities for expansion or enhancement of our operations.

The Company’s market is highly competitive, and we may not continue to compete successfully.

The Company competes in a highly competitive marketplace with a variety of retailers, dealers and distributors. The equestrian products market is highly fragmented with approximately 10,000 retail store locations nationwide. Many of these are small businesses that have a loyal customer base that compete very effectively in their local markets. We plan to apply our historic disciplines to confront the significant competition that we face in each of our local markets. We may, therefore, not be able to generate sufficient sales to support our new retail store locations. There are also a significant number of sporting goods stores, mass merchandisers and other better funded companies that could decide to enter into or expand their equestrian products offerings. Liquidating inventory sales by our former competitors may cause us temporarily to lose business and perhaps even to lose customers. In addition, if our continuing competitors reduce their prices and continue free shipping practices, we may have to reduce our prices in order to compete. Our cost cutting and overhead efficiency measures in fiscal 2010 may also have had some negative effect on our market share in the short run. We may be forced to increase our advertising or mail a greater number of catalogs in order to generate the same or even lower level of sales. Any one of these competitive factors could adversely affect our revenues and profitability. It is possible that increased competition or improved performance by our competitors may reduce our market share, may reduce our profit margin, and may adversely affect our business and financial performance in other ways.

The Company’s business may be adversely affected by pricing pressures from fluctuations in energy and/or commodity costs.

Fluctuations in the price, availability and quality of fabrics and other raw materials used to manufacture the Company’s products, as well as the price for labor and transportation have contributed to, and may continue to contribute to, ongoing pricing pressures throughout the Company’s supply chain. The price and availability of such inputs to the manufacturing process may fluctuate significantly, depending on several factors, including commodity costs (such as higher cotton prices), energy costs (such as fuel), inflationary pressures from emerging markets, increased labor costs, weather conditions and currency fluctuations. Any or all of these impacts could have a material adverse impact on the Company’s business, financial condition and results of operations. We may be unable to pass such price increases along to the Company’s customers and be unable to maintain the Company’s gross margins. In addition, the increase in energy and commodity costs could adversely affect consumer spending and demand for the Company’s products.

The Company’s cost savings initiatives may have a negative impact on our market share in the short run.

During 2009 and 2010, through our cost-cutting initiatives, we reduced operating expenses. Much of these savings were achieved through decreased marketing expenditures and reductions in labor hours, which were continued through the first quarter of 2011. We believe these measures were necessary and appropriate to maintain the health of our business in response to current economic conditions. However, as we renew our efforts to stimulate demand, some of our historic cost-cutting measures may also have some negative effects on our ability to accelerate sales growth in the short run.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

The Company did not issue or sell any equity securities in the three months ended June 30, 2012.

Item 3. Defaults Upon Senior Securities.

There were no defaults on the Company’s senior securities in the three months ended June 30, 2012.

Item 4. Mine Safety Disclosures.

Not applicable.

Item 5. Other Information.

On May 31, 2012, the Company entered into a purchase agreement with Fools & Horses, LLC (“F&H”) for the purchase of its intangible assets for the price of $145,000. The Company also agreed to purchase inventory from F&H that the Company currently sells. F&H owned and operated an equestrian product store in Durham, NC located within the same market as a new store in Raleigh, NC the Company plans to open in Q4 of 2012. For the three months ending June 30, 2012 the Company made an initial payment of $25,000. In July, 2012 the Company made an additional payment of $25,000, at closing the Company will pay $75,000 and the remaining balance of $20,000 shall be paid one year after the closing date. The $25,000 initial payment is included in intangibles and other assets, net in the accompanying condensed consolidated balance sheets.

Item 6. Exhibits.

Exhibit List


Number		Description

*31.1		Certification of Principal Executive Officer of Periodic Report Pursuant to Rule 13a-14(a) or Rule 15d-14(a)

*31.2		Certification of Principal Financial Officer of Periodic Report Pursuant to Rule 13a-14(a) or Rule 15d-14(a)

‡32.1		Certification by Chief Executive Officer and Chief Financial Officer of Periodic Report Pursuant to 18 U.S.C. Section 1350

*	Filed herewith.

‡	Furnished herewith.

†	Indicates a management contract or compensatory plan or arrangement

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.

EXHIBIT INDEX


Number		Description

*31.1		Certification of Principal Executive Officer of Periodic Report Pursuant to Rule 13a-14(a) or Rule 15d-14(a)

*31.2		Certification of Principal Financial Officer of Periodic Report Pursuant to Rule 13a-14(a) or Rule 15d-14(a)

‡32.1		Certification by Chief Executive Officer and Chief Financial Officer of Periodic Report Pursuant to 18 U.S.C. Section 1350

*	Filed herewith.

‡	Furnished herewith.

†	Indicates a management contract or compensatory plan or arrangement

Large accelerated filer

Accelerated filer

Non-accelerated filer

¨ (Do not check if smaller reporting company)

Smaller reporting company