CRAFTMADE INTERNATIONAL INC 10-Q

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q


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

For the quarterly period ended September 30, 2009


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

Commission File Number 000-26667

CRAFTMADE INTERNATIONAL, INC.

(Exact name of registrant as specified in its charter)


DELAWARE		75-2057054
(State or other jurisdiction of		(I.R.S. employer
incorporation or organization)		identification no.)

650 SOUTH ROYAL LANE, SUITE 100
COPPELL, TEXAS 75019
(Address of principal executive offices)
(Zip code)

(972) 393-3800
(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 þ No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):


Large accelerated filer o	Accelerated filer o	Non-accelerated filer o	Smaller reporting company þ
		(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.) Yes o No þ

The number of shares outstanding of the registrant’s common stock, par value $0.01 per share, was 5,704,500 as of November 6, 2009.

CRAFTMADE INTERNATIONAL, INC.
AND SUBSIDIARIES

TABLE OF CONTENTS



Part I. Financial Information

Item 1. Financial Statements			1

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			19

Item 3. Quantitative and Qualitative Disclosures About Market Risk			30

Item 4. Controls and Procedures			30

Part II. Other Information

Item 1. Legal Proceedings			31

Item 1A. Risk Factors			31

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			31

Item 3. Defaults Upon Senior Securities			31

Item 4. Submission of Matters to a Vote of Security Holders			31

Item 5. Other Information			32

Item 6. Exhibits			33

Exhibit 31.1
Exhibit 31.2
Exhibit 32.1
Exhibit 32.2

PART I
FINANCIAL INFORMATION


Item 1.		Financial Statements

CRAFTMADE INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share amounts)
(Unaudited)


	Three Months Ended
	September 30,			September 30,
	2009			2008
Net sales	$	21,048		$	30,165
Cost of goods sold		(15,231	)		(21,695	)

Gross profit		5,817			8,470

Gross profit as a percentage of net sales		27.6	%		28.1	%

Selling, general and administrative expenses		(5,876	)		(7,897	)
Depreciation and amortization		(263	)		(238	)

Total operating expenses		(6,139	)		(8,135	)


Income (loss) from operations		(322	)		335

Interest expense, net		(343	)		(359	)
Other income		—			5


Loss before income taxes		(665	)		(19	)
Income tax benefit		288			51


Net income (loss)		(377	)		32

Less: Net income attributable to noncontrolling interest		218			161


Net loss attributable to Craftmade International	$	(595	)	$	(129	)


Weighted average common shares outstanding:
Basic		5,705			5,705
Diluted		5,705			5,705

Basic loss per common share	$	(0.10	)	$	(0.02	)


Diluted loss per common share	$	(0.10	)	$	(0.02	)

SEE ACCOMPANYING NOTES TO CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS

CRAFTMADE INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)


	September 30,			June 30,
	2009			2009
	(Unaudited)
ASSETS
Current assets
Cash	$	126		$	384
Accounts receivable, net		21,326			25,290
Inventories, net		20,078			20,563
Income taxes receivable		2,052			1,780
Deferred income taxes		1,392			1,367
Prepaid expenses and other current assets		2,569			2,443

Total current assets		47,543			51,827


Property and equipment, net		10,955			11,141
Goodwill		15,249			14,947
Other intangibles, net		1,050			1,097
Other assets		2,290			1,856

Total non-current assets		29,544			29,041


Total assets	$	77,087		$	80,868


LIABILITIES, MINORITY INTEREST AND STOCKHOLDERS’ EQUITY
Current liabilities
Book overdrafts	$	191		$	8
Accounts payable		7,273			7,231
Other accrued expenses		1,732			2,422
Current portion of long-term obligations		826			542

Total current liabilities		10,022			10,203

Non-current liabilities
Long-term obligations		26,638			29,886
Deferred income taxes		1,127			1,122

Total non-current liabilities		27,765			31,008


Total liabilities		37,787			41,211


Stockholders’ equity
Craftmade International stockholders’ equity:
Common stock, $0.01 par value, 15,000,000 shares authorized; 10,204,420 shares issued		102			102
Additional paid-in capital		22,353			22,335
Retained earnings		51,220			51,814
Less: treasury stock, 4,499,920 common shares at cost		(38,126	)		(38,126	)

Total Craftmade International stockholders’ equity		35,549			36,125

Noncontrolling interest		3,751			3,532

Total equity		39,300			39,657


Total liabilities and stockholders’ equity	$	77,087		$	80,868

SEE ACCOMPANYING NOTES TO CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS

CRAFTMADE INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands, unaudited)


	Three Months Ended
	September 30,			September 30,
	2009			2008

Net cash provided by (used in) operating activities	$	2,789		$	(1,801	)

Cash flows from investing activities
Additional contingent consideration		(170	)		(201	)
Additions property, equipment and tooling		(98	)		(646	)

Cash used in investing activities		(268	)		(847	)


Cash flows from financing activities
Net proceeds from (payments on) notes payable		3,331			(113	)
Net proceeds from (payments on) lines of credit		(6,283	)		2,145
Increase (decrease) in book overdrafts		185			(164	)
Principal payments on capital lease		(12	)		(11	)

Net cash provided by (used in) financing activities		(2,779	)		1,857


Net decrease in cash		(258	)		(791	)
Cash at beginning of period		384			1,269

Cash at end of period	$	126		$	478

SEE ACCOMPANYING NOTES TO CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS

CRAFTMADE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Note 1 — BASIS OF PREPARATION AND PRESENTATION

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America and with the rules and regulations of the Securities and Exchange Commission (“SEC”) for interim financial reporting, and include all adjustments which are, in the opinion of management, necessary for a fair presentation. The condensed consolidated financial statements include the accounts of Craftmade International, Inc., a Delaware corporation (“Craftmade”), and its wholly-owned subsidiaries, including Trade Source International, Inc., a Delaware corporation (“TSI”), Prime/Home Impressions, LLC, a North Carolina limited liability company (“PHI”), CM-Real Estate, LLC, a Texas limited liability company (“CM-Real Estate”), Woodard-CM, LLC, a Delaware limited liability company (“Woodard-CM”) and one 50% owned limited liability company, Design Trends, LLC, a Delaware limited liability company (“Design Trends”). References to “Craftmade,” “we,” “our,” “us,” “its,” and the “Company” refer to Craftmade and its subsidiaries, including TSI, PHI, CM-Real Estate, Woodard-CM and Design Trends unless the context requires otherwise.

The balance sheet at June 30, 2009, was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America. Accordingly, certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. In management’s opinion, all adjustments necessary for a fair statement are reflected in the interim periods presented. All significant intercompany accounts and transactions have been eliminated in consolidation.

The Company believes that the disclosures are adequate to provide fair presentation of the results of operations and financial position for the interim periods. The current interim period information reported herein should be read in conjunction with the financial statements and the notes thereto in our Annual Report on Form 10-K for the fiscal year ended June 30, 2009, filed with the SEC on September 28, 2009. The financial data for the interim periods may not necessarily be indicative of results to be expected for the year. Certain amounts in the prior periods’ financial statements have been reclassified to conform to the current period presentation.

CRAFTMADE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Note 2 — ACQUISITIONS

Acquisition of Certain Assets of Woodard LLC.

On January 2, 2008, Woodard-CM completed the purchase of substantially all of the assets of Woodard, LLC (“Woodard”), a leading Chicago-based designer, manufacturer and distributor of a broad line of outdoor furniture products and related accessories pursuant to the Asset Purchase Agreement, dated as of December 18, 2007 (the “Agreement”), by and among Craftmade, Woodard and Henry Crown and Company d/b/a CC Industries, Inc. In the acquisition, the Company initially paid Woodard $19,265,000 plus a working capital adjustment of $954,000 and warrants (the “Warrants”) to purchase up to 200,000 shares of Craftmade common stock (the “Common Stock”) for 10 years from the date of issuance at a purchase price of $8.10 per share, valued at $279,000. The purchase price consideration included 500,000 shares of Common Stock valued at $8.10 per share based on the average closing price of the Common Stock for the three days prior to signing the Agreement for an aggregate price of $4,050,000 (price of Common Stock for financial reporting is $8.00 per share based on the average closing price of the Common Stock on the two days prior, two days after and day of the announcement of the signing of the Agreement, for an aggregate price of $4,000,000), with the remaining purchase price paid in cash at closing. The Agreement allowed the parties to adjust the purchase price to accurately reflect the working capital up to 60 days after the closing of the acquisition, resulting in a working capital adjustment of $1,272,000 due the Company. Including the working capital adjustment, the total adjusted cash consideration for the acquisition is $14,896,000.

In connection with the acquisition, the Company incurred approximately $655,000 in professional fees associated with the transaction. The Company has charged $692,000 for expected restructuring costs. During the quarter ended June 30, 2008, the Company began relocating and integrating certain of identified positions, which resulted in closing the Chicago, Illinois office in February 2009. The Company has since opened a small satellite office in Chicago to house the few remaining Chicago-based Woodard personnel.

CRAFTMADE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Purchase Price Summary
(Dollars in thousands)


Cash paid at closing	$	16,168
GAAP value of 500,000 shares issued		4,000	⁽¹⁾
Value of 200,000 Warrants		279	⁽²⁾
Purchase price adjustment (Settled April, 2008)		(1,272	)

Total consideration	$	19,175


(1)		The value of the 500,000 shares of common stock was based on the average closing prices of Craftmade’s common stock, $0.01 par value per share, for the two days before, the day of, and the two days after the date of the announcement of the merger or $8.00 per share.

(2)		The 200,000 common stock warrants were valued using the Black-Scholes calculation at a warrant price of $1.39 per share using the following assumptions:


Expected volatility		33	%
Risk-free interest rate		3.81	%
Expected lives	10 years
Dividend yield		5.8	%

Criteria have been established by FASB for business combinations which determine whether intangible assets should be recognized separately from goodwill. The amounts included in the following allocation include $2.5 million that was placed in an escrow account for a period of 18 months from the closing date for indemnifications made by the seller in relation to its representations, warranties or covenants pursuant to the Agreement.

The excess value of certain assets acquired over purchase price has been recorded as a reduction of the fair value of the Owosso, Michigan facility that would otherwise have been recorded.

CRAFTMADE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Purchase Price Allocation


Initial estimated purchase price				$	20,168
Less: Working capital adjustment					(1,272	)
Value of warrants					279

Total Purchase Consideration					19,175


Acquired Assets (Adjusted to estimated fair value)
Accounts receivable, net	$	12,708
Inventories, net		8,212
Prepaid expenses and other current assets		2,450
Plant, property and equipment		2,929
Other assets		1,528

Total Assets					27,827

Assumed Liabilities
Accounts payable	$	5,852
Other accrued expenses		1,702

Other liabilities incurred during transaction
Professional fees associated with acquisition		655
Restructuring reserve		692
Deferred tax asset for restructuring reserve		(249	)

Total Liabilities					8,652


Total Purchase Price				$	19,175

The Company reserved $692,000 which was charged to the acquisition, related to restructuring costs at the date of the acquisition. In the quarter ended September 30, 2009 there were severance related cash payments of $142,000 charged to the reserve, and an aggregate of $679,000 has been paid since the date of acquisition.

CRAFTMADE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Acquisition of Marketing Impressions, Inc.

Effective July 1, 2006, TSI acquired Marketing Impressions, Inc., a Georgia corporation (“Marketing Impressions”). Marketing Impressions owned the remaining 50% interest in the Company’s limited liability company PHI and also supplied the Company with certain fan accessory products. This acquisition increased the Company’s effective ownership of PHI to 100% and has been accounted for using the purchase method of accounting. The acquisition is more fully described in our Annual Report on Form 10-K for the fiscal year ended June 30, 2007.

The purchase price is based on a known initial payment plus a contingent amount that is based upon percentage of gross profit without any reductions for vendor displays and annual reset costs (“Adjusted Gross Profit”). The purchase price is summarized as follows:

Purchase Price Summary
(Dollars in thousands)


As of September 30, 2009:
Amount paid at closing, net of cash acquired	$	1,287
Contingent payments earned		3,116
Acquisition-related costs		220

Total consideration as of September 30, 2009	$	4,623


Percent of Adjusted Gross Profit
July 1, 2006 to August 31, 2011		22	%

Additional Percent of Adjusted Gross Profit
July 1, 2006 to June 30, 2007 (not to exceed $750)		15	%

The Company has estimated the total remaining payout based on future levels of Adjusted Gross Profit through August 31, 2011, to be approximately $826,000. In accordance with FASB standards for business combinations, contingent consideration is recorded when a contingency is satisfied and additional consideration is issued or becomes issuable.

CRAFTMADE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

The amount of goodwill allocated to the purchase price was $2,164,000, all of which is deductible for tax purposes over a 15 year period. In connection with the acquisition, the Company acquired certain identifiable intangible assets, including patents, trademarks and covenants not-to-compete. The gross amounts of such assets along with the range of amortizable lives are as follows:

Summary of Acquired Intangibles
(Dollars in thousands)


	Life		Gross
	in Years		Amount
Patents and trademarks		15	$	710
Non-compete covenants		7		820

			$	1,530

The purchase price was allocated based on the respective market value of the net assets acquired. Annual amortization expense is estimated to be $164,000 per fiscal year.

CRAFTMADE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Note 3 — LOSS PER SHARE

The following is a reconciliation of the numerator and denominator used in the basic and diluted EPS calculations:


	Three Months Ended
	September 30,			September 30,
	2009			2008
	(In thousands, except per share data)
Basic and diluted loss per share:

Numerator
Net loss attributable to Craftmade International	$	(595	)	$	(129	)

Denominator for basic loss per share
Weighted average common shares outstanding		5,705			5,705

Denominator for diluted loss per share
Weighted average common shares outstanding		5,705			5,705
Incremental shares for stock options/warrants		—			—

Dilutive weighted average common shares		5,705			5,705

Basic loss per share	$	(0.10	)	$	(0.02	)


Diluted loss per share	$	(0.10	)	$	(0.02	)

Anti-dilutive options and warrants have been excluded from the computation of diluted earnings per share because assumed proceeds upon exercise, as defined by FASB standards on stock based compensation, were greater than the cost to re-acquire the same number of shares at the average market price, and therefore the effect would be anti-dilutive. On September 30, 2009 and September 30, 2008 there were 339,200 and 360,200, respectively, common stock options outstanding that were anti-dilutive and therefore were excluded from the calculation of diluted earnings per share. As discussed further in Note 2 — Acquisitions, on January 2, 2008 the Company issued 200,000 warrants. Accordingly, the Company has included the dilutive effects, if any, of the warrants from its earnings per share calculation since January 2, 2008.

CRAFTMADE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Note 4 — SEGMENT INFORMATION

As of September 30, 2009, the Company operates in two reportable segments, Specialty and Mass.

The Specialty segment primarily derives its revenue from home furnishings, including ceiling fans, light kits, bath-strip lighting, lamps, light bulbs, door chimes, ventilation systems, outdoor patio furniture and other accessories offered primarily through lighting showrooms, patio dealers, hospitality customers and catalog houses. The Mass segment derives its revenue from outdoor lighting, outdoor patio furniture, portable lamps, indoor lighting and fan accessories marketed solely to mass retailers and certain major retail chains.

The accounting policies of the segments are the same as those described in Note 2 — Summary of Significant Accounting Policies to the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2009, as filed with the SEC on September 28, 2009. The Company evaluates the performance of its segments and allocates resources to them based on their income from operations and cash flows.

CRAFTMADE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

The following table presents net sales, gross profit, and income (loss) from operations for the reportable segments:

Summary of Segment Information


	Three Months Ended
	September 30,			September 30,
	2009			2008
	(In thousands)
Net sales
Specialty	$	14,394		$	20,471
Mass		6,654			9,694

Total	$	21,048		$	30,165


Gross profit
Specialty	$	4,110		$	6,657
Mass		1,707			1,813

Total	$	5,817		$	8,470


Income (loss) from operations
Specialty	$	(566	)	$	443
Mass		244			(108	)

Total	$	(322	)	$	335

CRAFTMADE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Note 5 — STOCK-BASED COMPENSATION

Per FASB standards, the Company uses the modified prospective method which requires compensation expense to be recorded for all unvested stock options and restricted shares.

The options to purchase Common Stock are issued at fair market value on the date of the grant. Generally, the options vest and become exercisable ratably over a four-year period, commencing one year after the grant date, and expire ten years from issuance. The fair value of each option is recognized as compensation expense on a straight-line basis between the grant date and the date the options become fully vested. The Company has recognized compensation cost for all stock-based payments in the consolidated financial statements as follows:

Stock-Based Compensation Expense
(Dollars in thousands)


	Three Months Ended
	September 30,		September 30,
	2009		2008
Stock-based compensation expense recognized:
Selling, general & administrative	$	27	$	30

CRAFTMADE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Total future compensation cost related to non-vested options is expected to be amortized over the following future periods as follows:

Future Stock-Based Compensation Expense
(Dollars in thousands)


	Expected
	Future
	Compensation
Fiscal Year Ending	Cost
June 30, 2010 (remaining 9 months)	$	81
June 30, 2011		55
June 30, 2012		17

	$	153

CRAFTMADE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

The following table summarizes information about outstanding and exercisable options at September 30, 2009:

Summary of Stock Options


				Weighted				Weighted
				Average		Exercise		Average
				Exercise		Price		Remaining
	Shares			Price		Range		Life (Years)

Outstanding at June 30, 2009		159,200			13.53
Granted		—			—
Exercised		—			—
Forfeited		(20,000	)		8.01

Outstanding at September 30, 2009		139,200		$	14.32	$	6.75-$25.20		7.1

Exercisable at September 30, 2009		65,975		$	14.26	$	6.75-$25.20		6.4

The fair value of each option grant is calculated on the date of grant using the Black-Scholes option pricing model.

CRAFTMADE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Note 6 — INCOME TAXES

The Company’s effective tax rate is summarized in the following table:

Summary of Effective Tax Rate

The effective tax rate is calculated by dividing income tax expense by income after net income attributable to noncontrolling interest and before income taxes. The effective tax rates presented are weighted averages of our multiple legal entities with effective income tax rates that differ from the statutory United States federal income tax rate of 34% due to the impact of state income taxes. The resulting consolidated effective rate can be significantly different than the statutory United States federal income tax rate of 34% due to the effect of operating losses in certain legal entities of the Company being offset by gains in other entities. The resulting consolidated effective tax rate is not necessarily representative of the effective tax rate in any of the individual tax entities of the Company. The Company expects to realize the benefit of current tax losses in future periods and therefore has not provided an allowance towards these losses. The tax provisions for the current fiscal year are based on our estimate of the Company’s annualized income tax rate.

The Company and its subsidiaries file income tax returns in the U.S. federal jurisdiction and various states and foreign jurisdictions. The statute of limitations has lapsed for all U.S. federal returns prior to and including the fiscal year ended June 30, 2004. In May 2007, the Internal Revenue Service completed an examination of the Company’s U.S. income tax return for the fiscal year ended June 30, 2005. There were no material adjustments, penalties or interest resulting from this examination.

The Company believes that adequate amounts of tax, interest and penalties have been provided for in the accompanying financial statements for any adjustments that might be incurred due to state, local or foreign audits.

On July 1, 2007, the Company adopted the standard of FASB covering accounting for uncertainty in income taxes. At the date of adoption, the gross amount of unrecognized tax benefits, interest and penalties was $290,000 that, if recognized, would affect the effective tax rate. As a result of the implementation of this standard, we recognized no additional adjustments in the liability for unrecognized income tax benefits. Additionally, adoption of this standard resulted in the reclassification of certain accruals for uncertain tax positions in the amount of $190,000 from current to other long-term expenses.

CRAFTMADE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

For the three months ended September 30, 2009, there was no change in our unrecognized income tax benefits:

Reconciliation of Unrecognized Tax Benefits
(Dollars in thousands)


			Increases/(Decreases) in Unrecognized
			Tax Benefits As a Result of
			Tax Positions from						Lapse in
	July 1,		Prior		Current				Statute of		September 30,
	2009		Periods		Period		Settlements		Limitations		2009

Reserve for state nexus issues	$	190	$	—	$	—	$	—	$	—	$	190
Valuation allowance for Texas franchise tax refunds		19		—		—		—		—		19
State net operating loss and credit carryforwards		56		—		—						56

Unrecognized tax benefits	$	265	$	—	$	—	$	—	$	—	$	265

During the twelve months ended June 30, 2009 the Company decreased its unrecognized tax benefits as a result of clarifying certain claims related to Texas franchise tax refunds it received and closed out. These amounts were partially offset by an increase in unrecognized tax benefits due to state net operating loss and credit carryforwards.

It is reasonably possible that the amount of the unrecognized benefit with respect to certain of our unrecognized tax positions could significantly increase or decrease within the next 12 months as a result of settling ongoing tax matters. At this time, an estimate of the range of the reasonably possible outcomes cannot be made.

The Company has historically recognized interest relating to income tax matters as a component of interest expense and recognized penalties relating to income tax matters as a component of selling, general and administrative expense. Such interest and penalties have historically been immaterial. Upon adoption of this standard, the Company recognized accrued interest and penalties related to income tax matters in income tax expense. There was $48,000 in interest and penalties related to unrecognized tax benefits accrued at the date of adoption and as of September 30, 2009.

Note 7 — RELATED PARTY TRANSACTIONS

The Company purchases a majority of its outdoor patio furniture for the Mass segment from a Chinese factory that is 50% owned by an affiliate of Henry Crown and Company. Henry Crown and Company owns Woodard, LLC, from which the Company purchased certain assets in January 2008. As part of the purchase price in that transaction, Henry Crown and Company became the beneficial owner of more than 5% of our Common Stock. For the three months ended September 30, 2009, the Company purchased approximately $500,000 in products from the joint venture, which were sold to various customers. The Company currently does not have any agreements in place that compel either party to operate in any manner that differs from standard customer/vendor relationships. Based on this factor, the Company’s management has determined that the transactions between the two parties are at arms-length.

CRAFTMADE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

In addition, the Company formerly leased approximately 20,000 square feet of office space in Chicago, Illinois from an affiliate of Henry Crown and Company for $31,935 per month. This lease covered the former Woodard, LLC Chicago offices and expired on February 28, 2009. The Company subsequently initiated a new agreement with Henry Crown and Company for 1,989 square feet that commenced on January 15, 2009 and ended at the end of September 2009. The Company paid $4,475 per month for this space. The Company’s management has determined that the terms of both agreements represent fair market value.

Effective March 16, 2009, Todd Teiber accepted the position of Senior Vice-President of Specialty Sales with the Company. The Company acquired Teiber Lighting from Mr. Teiber in 2005, and Mr. Teiber has been party to a consulting agreement with the Company since that time, for which Mr. Teiber receives $100,000 per year. Under the terms of the Teiber Lighting acquisition, Mr. Teiber’s consulting agreement will end February 28, 2010. Mr. Teiber is also owner of Teiber Lighting Sales, which provides sales representation to the Company for its lighting and accessory products in the Specialty segment, in certain geographies. Mr. Teiber is no longer employed by Teiber Lighting Sales, but retains ownership of the company. Craftmade paid commissions of $69,000 to Teiber Lighting Sales in the quarter ending September 30, 2009. Based on an evaluation of similar transactions, the Company’s management has determined that the terms of Mr. Teiber’s employment as well as the use of Teiber Lighting Sales to represent Craftmade products both represent fair market value transactions.

Note 8 — COMMITMENTS AND CONTINGENCIES

The Company is involved in various claims, lawsuits and proceedings arising in the ordinary course of business. There are uncertainties inherent in the ultimate outcome of such matters and it is difficult to determine the ultimate costs that we may incur. We believe the resolution of such uncertainties and the incurrence of such costs will not have a material adverse effect on our consolidated financial position, results of operations or cash flows.


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

Disclosure Regarding Forward-looking Statements

With the exception of historical information, the matters discussed in this document contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Readers are cautioned not to place undue reliance on forward-looking statements. Such forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of Craftmade to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. These forward-looking statements include, but are not limited to, (i) statements concerning future financial condition and operations, including future cash flows, revenues, gross margins, earnings and variations in quarterly results, (ii) statements relating to anticipated completion dates for new products and (iii) other statements identified by words such as “may,” “will,” “should,” “could,” “might,” “expects,” “plans,” “anticipates,” “believes,” “estimates,” “projects,” “predicts,” “forecasts,” “intends,” “potential,” “continue,” and similar words or phrases. These factors that could affect our financial and other results can be found in the risk factors section of our Annual Report on Form 10-K for the fiscal year ended June 30, 2009, filed with the SEC on September 28, 2009. The forward-looking statements included in this Quarterly Report on Form 10-Q are made only as of the date of this filing with the SEC, and we undertake no obligation to update the forward-looking statements to reflect subsequent events or other circumstances.

Critical Accounting Policies and Estimates

Management’s discussion and analysis of the Company’s financial condition and results of operations is based upon the Company’s consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires the Company’s management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. The Company’s estimates are based on historical experience and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for the Company’s conclusions. The Company continually evaluates the information used to make these estimates as its business and the economic environment change. The Company’s management believes that certain estimates, assumptions and judgments derived from the accounting policies have significant impact on its financial statements, so the Company considers these to be its critical accounting policies. A summary of significant accounting policies and a description of accounting policies that are considered critical may be found in the Company’s Annual Report on Form 10-K for the year ended June 30, 2009, as filed with the SEC on September 28, 2009.

The Company assesses the carrying values of goodwill annually as of June 30 or when circumstances dictate that the carrying value might be impaired. Impairment testing for goodwill is analyzed at the reporting unit level, which for Craftmade has been defined as Mass and Specialty. An impairment loss generally would be recognized when the carrying amount of the reporting unit’s net assets exceeds the estimated fair value of the reporting unit. In the event that an impairment is determined to have occurred, the Company will reduce the carrying value of the asset in that period.

The estimated fair value of reporting units as of June 30, 2009 was determined using a combination of the income approach (discounted cash flow or “DCF” analysis) and the market approach (application of relevant revenue or income multiples, based on comparable companies).

The discounted cash flow method calculates the present value of future cash flows of each reporting unit. In order to determine the present value of these future cash flows for each reporting unit, it was necessary to forecast future revenues, cost of revenues, other operating expenses and capital expenditures. Management based these forecasts on current information and expectations about our operations, activities and strategies, as well as the impact of the economic environment and actions on our suppliers, customers and competitors. It should be noted that any such forecasts are subjective and inherently uncertain. Each DCF was prepared on an invested capital basis. Invested capital refers to the aggregate of all classes of debt and equity invested in the business. In preparing a DCF analysis on an invested capital basis, forecasted debt-free cash flow is discounted to present value at the reporting unit’s respective weighted average cost of capital. Interest expense is excluded from the forecast as debt-free cash flow represents an economic benefit that is available to all capital holders of an enterprise. The result of this analysis is to develop a measure of invested capital value.

The market approach involves gathering information about comparable publicly traded guideline companies. Guideline companies provide a reasonable basis for comparison to the relative investment characteristics of the entity being valued. For our analysis, we were able to select representative publicly traded companies that operate in similar industries as Craftmade. We analyzed the latest financials and operating statistics of each of these publicly traded companies. We calculated the high, low, mean, and median for the invested capital to revenue and the invested capital to EBITDA multiples. From this analysis, we selected the appropriate multiple and applied it to Craftmade’s reporting unit’s associated figure. We then weighted the resulting values based on our assessment of the credibility and appropriateness of the given multiple, resulting in a market based measure of invested capital.

We believe that both of these approaches have strengths and drawbacks. The DCF analysis captures management’s best estimates of earnings potential for the Company’s reporting units from a detailed level although numerous educated estimates are required throughout the process, which come with an inherent level of uncertainty. The market approach incorporates results of operations for several comparable companies in determining the revenue and EBITDA multiples applicable, but it can be difficult to find appropriate comparable companies and this approach ignores specific information about future strategies and actions that can be explicitly factored into the DCF approach. Our final valuation took into consideration both approaches, although we placed more weight on the DCF analysis versus the publicly traded guideline approach. We also applied a working capital adjustment to the concluded present value of invested capital for each reporting unit to normalize the surpluses or deficits in working capital at the reporting unit level.

In order to assess whether or not goodwill was impaired at the reporting unit level, the values developed in this process were compared with the book value of total equity of each reporting unit. If the reporting unit’s fair value of total equity is greater than the book value of total equity, then goodwill is not impaired and no further undertakings are required.

The Company will engage in interim testing for goodwill impairment if events or circumstances exist that create a significant likelihood that the fair value of a reporting unit has declined below its carrying amount. In doing so, the Company will follow the guidance given in the FASB standard on goodwill and other intangible assets, to help determine if such an event is likely. Based on this guidance the Company does not believe that an event has occurred since June 30, 2009 that creates a significant likelihood that the fair value of a reporting unit has declined below its carrying amount, therefore no additional evaluation has been performed.

Subsequent Events — In the preparation of its consolidated financial statements for the current quarter, the Company considered subsequent events through November 16, 2009, which was the date the Company’s consolidated financial statements were issued.

Results of Operations

Management reviews a number of key indicators to evaluate the Company’s financial performance, including net sales, gross profit and selling, general and administrative expenses by segment.

This discussion and analysis includes references to historical Craftmade. Historical Craftmade consists of ceiling fans, lighting, door chimes and pushbutton sales and related operations that have historically comprised the Company’s operations prior to the acquisition of certain net assets of Woodard, LLC.

Three Months Ended September 30, 2009 Compared to Three Months Ended September 30, 2008

An unaudited, condensed overview of results for the three months ended September 30, 2009, and the corresponding prior year period is summarized as follows:

Summary Income Statement by Segment
(Dollars in thousands)


	Three Months Ended									Three Months Ended
	September 30, 2009									September 30, 2008
	Specialty			Mass			Total			Specialty			Mass			Total
Net sales	$	14,394		$	6,654		$	21,048		$	20,471		$	9,694		$	30,165
Cost of goods sold		(10,284	)		(4,947	)		(15,231	)		(13,814	)		(7,881	)		(21,695	)

Gross profit		4,110			1,707			5,817			6,657			1,813			8,470
As a % of net sales		28.6	%		25.7	%		27.6	%		32.5	%		18.7	%		28.1	%

Selling, general and administrative		(4,459	)		(1,417	)		(5,876	)		(6,042	)		(1,855	)		(7,897	)
As a % of net sales		31.0	%		21.3	%		27.9	%		29.5	%		19.1	%		26.2	%

Depreciation and amortization		(217	)		(46	)		(263	)		(172	)		(66	)		(238	)

Total operating expenses		(4,676	)		(1,463	)		(6,139	)		(6,214	)		(1,921	)		(8,135	)


Income (loss) from operations	$	(566	)	$	244			(322	)	$	443		$	(108	)		335


Interest expense, net								(343	)								(359	)
Other income								—									5


Loss before income taxes								(665	)								(19	)
Income taxes benefit								288									51


Net income (loss)								(377	)								32
Less: Net income attributable to noncontrolling interest								218									161


Net loss attributable to Craftmade International							$	(595	)							$	(129	)

Net Sales. Net sales for the Company decreased $9,117,000 or 30% to $21,048,000 for the quarter ended September 30, 2009, from $30,165,000 for the quarter ended September 30, 2008. The decrease is due to the reduced sales in both Specialty and Mass segments, as a result of the extreme decline in the housing market and dramatic overall economic downturn experience in the last year.

Management believes that the decline in the housing market and the overall economic downturn will continue to negatively impact the sales of the Company’s various product lines, particularly in the Specialty segment which is more closely correlated to new home starts. The Company continues to pursue its strategic growth plans, while also being highly focused on developing and implementing more immediate plans to mitigate the impact of the current economic downturn. The Company believes it is well situated to benefit from an economic recovery, but the timing of such recovery remains highly uncertain.

Net sales from the Specialty segment decreased $6,077,000 or 30% to $14,394,000 for the quarter ended September 30, 2009, compared to $20,471,000 for the quarter ended September 30, 2008, as summarized in the following table.

Net Sales of the Specialty Segment
(Dollars in thousands)


	Fans			Woodard
	Lighting &			Outdoor			Segment
Three Months Ended	Accessories			Furniture			Total
September 30, 2009	$	9,050		$	5,344		$	14,394
September 30, 2008		12,359			8,112			20,471

Dollar increase (decrease)	$	(3,309	)	$	(2,768	)	$	(6,077	)

Percent increase (decrease)		(27	%)		(34	%)		(30	%)

Sales of fans, lighting related products and outdoor furniture continue to be affected by the extremely weak overall housing market, a difficult credit environment and reduced consumer spending. Management continues to focus on introducing new products and expanding accounts to offset the weak housing market and economic downturn. Management believes that long-term growth will be favorably affected by additional product offerings through enhanced product development efforts, as well as cross-selling outdoor furniture products to lighting showrooms and outdoor lighting and ceiling fans to patio dealers, and focusing efforts on the hospitality markets.

Net sales of the Mass segment decreased $3,040,000 or 31% to $6,654,000 for the quarter ended September 30, 2009, from $9,694,000 for the quarter ended September 30, 2008, as summarized in the following table:

Net Sales of Mass Segment
(Dollars in thousands)


	Fans			Woodard
	Lighting &			Outdoor			Segment
Three Months Ended	Accessories			Furniture			Total
September 30, 2009	$	5,444		$	1,210		$	6,654
September 30, 2008		7,359			2,335			9,694

Dollar increase (decrease)	$	(1,915	)	$	(1,125	)	$	(3,040	)

Percent increase (decrease)		(26	%)		(48	%)		(31	%)

Sales of lighting products and fan and lamp accessories to the Mass segment are primarily from the Company’s TSI and Design Trends subsidiaries, both of which experienced declines in the quarter ended September 30, 2009. The decrease in net sales of lighting and accessories was primarily the result of: (i) a decline in orders from Lowe’s related to indoor lighting; (ii) lower sales of non-core drop shipped products; and (iii) lower sales of fan accessories.

The decline in lighting net sales was primarily due to reduced retail sales of the mix and match portable lamp program through Lowe’s. Currently, Design Trends supplies mix and match portable lamps to all 13 Lowe’s regional distribution centers.

Woodard sales were primarily composed of direct import sales to its various mass merchant customers. Most of its products are shipped directly from China. Due to the seasonal nature of outdoor furniture sales, most sales to mass merchants occur from January to April each year.

Management believes that sales to Lowe’s will increase in the coming fiscal year. Based on various line reviews, management believes that it will continue to be a primary vendor for Lowe’s mix and match portable lamps through Design Trends, and for Lowe’s lamp accessory/ceiling medallion programs through PHI, although based on feedback from Lowe’s the Company expects to see a reduction in the number of fan accessory SKUs it provides. Based on the number of outdoor furniture SKUs the Company has placed with Lowe’s for the upcoming year, the Company expects to see sales growth in this segment.

The Company believes that it will continue to be invited to participate in each of Lowe’s scheduled line reviews for its existing and new product lines. The line reviews occur on approximately an annual basis for each product category throughout the year and give us the potential to add new SKUs to the Lowe’s program. However, participation in line reviews could also result in a partial or complete reduction of either subsidiary’s existing SKUs in the product lines currently offered to Lowe’s.

While competitive pricing is essential in the Mass segment, management believes that future growth is contingent upon the success of the Company’s ongoing efforts to introduce new products, styles and marketing concepts to existing customers and the expansion of the business to new customers.

Gross Profit. Gross profit of the Company as a percentage of net sales decreased 0.5% to 27.6% for the quarter ended September 30, 2009, from 28.1% for the quarter ended September 30, 2008, primarily due to a decrease in margins in the Specialty segment, which was partially offset by increased margins in Mass, driven by margin improvements in lighting.

Gross profit as a percentage of net sales of the Specialty segment decreased 3.9% to 28.6% for the quarter ended September 30, 2009, from 32.5% in the quarter ended September 30, 2008. The decrease is summarized in the following table.

Gross Profit as a Percentage of Net Sales of Specialty Segment


	Fans			Woodard
	Lighting &			Outdoor			Segment
Three Months Ended	Accessories			Furniture			Total
September 30, 2009		32.4	%		22.1	%		28.6	%
September 30, 2008		34.0	%		30.3	%		32.5	%

Percent increase (decrease)		(1.6	%)		(8.2	%)		(3.9	%)

The gross margin for ceiling fans and lighting was down slightly due to sales mix, while outdoor furniture margins saw a decrease due to inefficiencies created by lower utilization of production facilities, and higher than average returns and allowances.

Gross profit as a percentage of net sales of the Mass segment increased 7.0% to 25.7% of net sales for the quarter ended September 30, 2009, from 18.7% of net sales in the same prior year period, as summarized in the following table:

Gross Profit as a Percentage of Net Sales of Mass


	Fans			Woodard
	Lighting &			Outdoor			Segment
Three Months Ended	Accessories			Furniture			Total
September 30, 2009		31.0	%		1.7	%		25.7	%
September 30, 2008		23.2	%		4.6	%		18.7	%

Percent increase (decrease)		7.8	%		(2.9	%)		7.0	%

Gross profit as a percentage of net sales for lighting and accessories in the Mass segment increased partially due to some reduction in costs experienced in our Design Trends subsidiary, as well as product mix shift driven by reduced sales in some lower margin items. Mass gross profit as a percent of net sales for Woodard outdoor furniture is low relative to other channels as all sales are direct import. Current quarter margins were exceptionally low due to high freight costs experience on a low sales base, given that the current quarter represents the off-season for Mass furniture sales.

Selling, General and Administrative Expenses. Total selling, general and administrative (“SG&A”) expenses of the Company decreased $2,021,000 to $5,876,000 or 27.9% of net sales for the quarter ended September 30, 2009, from $7,897,000 or 26.2% of net sales for the same period last year.

Total Company
Selling, General and Administrative Expenses
(Dollars in thousands)


					Increase/
	Three Months Ended				(Decrease)
	September 30,		September 30,		Over Prior
	2009		2008		Year Period
Salaries and wages	$	1,959	$	2,482		(523	)
Advertising		532		865	$	(333	)
Commissions		905		1,164		(259	)
Accounting, legal and consulting		381		629		(248	)
Health Insurance		182		343		(161	)
Contract labor		150		311		(161	)
Travel		119		274		(155	)
Bank Charges		216		91		125
Other		1,432		1,738		(306	)

	$	5,876	$	7,897	$	(2,021	)

The decrease in expenses was due to significant cost cutting efforts across all categories, including savings in salaries and wages and contract labor related to headcount reductions, lower advertising spending, and reductions in travel. The Company also experienced lower commissions due to reduced sales versus prior year. The Company expects to continue to see significant savings in SG&A expense versus last year, due to the continuing impact of the extensive cost cutting efforts noted above.

Additionally, on November 9, 2009 the Company announced its intention to delist its common stock from the NASDAQ Global Market “Nasdaq”. The Company also intends to subsequently deregister its common stock with the SEC and suspend its reporting obligations under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). The Company intends to move its common stock listing to OTCQX, the premier tier of the U.S. over-the-counter market, operated by Pink OTC Markets Inc. In addition to suspending its reporting requirements under the Exchange Act, if it is successful in these actions the Company will no longer bear the significant financial burden of complying with the Sarbanes-Oxley Act of 2002. The Company expects the cumulative impact of these actions to result in additional savings of $500,000 to $700,000 per year, although given the timing of the change these savings will not be fully realized in the current fiscal year.

Interest Expense. Net interest expense of the Company decreased $16,000 to $343,000 for the quarter ended September 30, 2009, from $359,000 for the quarter ended September 30, 2008. This decrease is primarily due to lower average debt balances than during the same period last year.

Noncontrolling Interest. Net income attributable to noncontrolling interest increased $57,000 to $218,000 for the quarter ended September 30, 2009, from $161,000 for the same period in the previous year. The increase in net income attributable to noncontrolling interest resulted from higher profits at Design Trends as a result of improved margins.

Provision for Income Taxes. The income tax benefit was $288,000 or 32.6% of loss before income taxes for the quarter ended September 30, 2009, compared to an income tax benefit of $51,000 or 28.3% of income before income taxes for the quarter ended September 30, 2008. The effective tax rate is calculated by dividing income tax expense by income after net income attributable to noncontrolling interest and before income taxes. The effective tax rates presented are weighted averages of our multiple legal entities with effective income tax rates that differ from the statutory United States federal income tax rate of 34% due to the impact of state income taxes. The resulting consolidated effective rate can be significantly different than the statutory United States federal income tax rate of 34% due to the effect of operating losses in certain legal entities of the Company being offset by gains in other entities. The resulting consolidated effective tax rate is not necessarily representative of the effective tax rate in any of the individual tax entities of the Company. See “Note 6 — Income Taxes” in the notes to the Company’s consolidated financial statements for additional detail regarding the Company’s policy for determining the provision for income taxes.

Liquidity and Capital Resources

The Company’s cash decreased $258,000 from $384,000 at June 30, 2009 to $126,000 at September 30, 2009. Net cash provided by the Company’s operating activities was $2,789,000 for the quarter ended September 30, 2009, compared to cash used by the Company’s operating activities of $1,801,000 for the same period last year. The increase in cash provided by operating activities was primarily due to reductions in average working capital over the course of the quarter.

The $268,000 of cash used in investing activities for the quarter ended September 30, 2009 was related to additional contingent consideration for the acquisition of Marketing Impressions, Inc., as well as some incremental tooling for the Owosso, Michigan production facility.

The $2,779,000 of cash used in financing activities for the quarter ended September 30, 2009 primarily resulted from net payments on the Company’s lines of credit. See “Long-Term Obligations” for further discussion of the Company’s debt facilities.

On July 10, 2009, the Company, together with certain of its direct or indirect subsidiaries (the “Borrowers”) entered into a Loan and Security Agreement (the “Revolving Loan Agreement”) with Bank of America, N.A. (“Bank of America”). The Revolving Loan Agreement provides for revolving loans in an aggregate amount up to $40,000,000 and is secured by substantially all of the Borrowers’ assets, excluding its current real estate holdings. The Revolving Loan Agreement will terminate on July 10, 2012. On July 10, 2009 Woodard—CM, LLC (“Woodard”), a wholly-owned subsidiary of Craftmade entered into a Term Loan Agreement (the “Term Loan Agreement”) with The Frost National Bank, San Antonio, Texas (“Frost”), in conjunction with executing a Term Loan Note (“the Frost Note”), in the principal amount of $3,500,000, payable to Frost, secured by Woodard’s primary manufacturing and distribution facility located in Owosso, Michigan. The Term Loan Agreement will terminate on July 10, 2012. In the aggregate, the proceeds from the Revolving Loan Agreement and the Term Loan Agreement were used to pay off amounts owed under the Frost Loan Agreement dated as of December 31, 2007. The Company’s management believes that its new line of credit, combined with cash flows from operations, will be adequate to fund the Company’s current operating needs and debt service payments over the next 12 months.

Management anticipates that future cash flows will be used primarily to retire existing debt, fund potential acquisitions or other investments that will enhance long-term stockholder value and distribute earnings to its noncontrolling interest member. The Company remains committed to its business strategy of creating long-term earnings growth, maximizing stockholder value through internal improvements, making selective acquisitions and dispositions of assets, focusing on cash flow and retaining quality personnel.

Management believes that given the current volatility in the housing and debt markets, it is in the best interest of long-term stockholder value for management to continue to evaluate selective and opportunistic acquisitions. Management believes this strategy, if successful, could enhance the Company’s product offerings and potentially enable the Company to expand into adjacent product categories and sales channels that are less reliant on the overall housing environment. There can be no assurances, however, that any agreement regarding any such acquisition will be consummated.

Recent Accounting Pronouncements

In June 2009, the FASB issued guidance on the accounting standards codification and the hierarchy of generally accepted accounting principles. The accounting standards codification is intended to be the source of authoritative US GAAP and reporting standards as issued by the Financial Accounting Standards Board (“FASB”). Its primary purpose is to improve clarity and use of existing standards by grouping authoritative literature under common topics. This Statement is effective for financial statements issued for interim and annual periods ending after September 15, 2009. Effective July 1, 2009, the Company will describe the authoritative guidance used within the footnotes but will cease using numerical references. The accounting standards codification does not change or alter existing US GAAP, and there is no expected impact on the Company’s financial position, results of operations or cash flows.

In May 2009, FASB issued a statement covering disclosure of subsequent events. This statement provides general standards for the accounting and reporting of subsequent events that occur between the balance sheet date and issuance of financial statements. This statement requires the issuer to recognize the effects, if material, of subsequent events in the financial statements if the subsequent event provides additional evidence about conditions that existed as of the balance sheet date. The issuer must also disclose the date through which subsequent events have been evaluated and the nature of any nonrecognized subsequent events. Nonrecognized subsequent events include events that provide evidence about conditions that did not exist as of the balance sheet date, but which are of such a nature that they must be disclosed to keep the financial statements from being misleading. The statement is effective for financial reporting periods ending after June 15, 2009. The Company adopted this statement effective June 30, 2009 and has made the appropriate additional disclosures in its consolidated financial statements. In the preparation of its consolidated financial statements for the current quarter, the Company considered subsequent events through November 16, 2009, which was the date the Company’s consolidated financial statements were issued.

In June 2009, FASB issued a statement intended to improve financial reporting by enterprises involved with variable interest entities. This statement addresses (1) the effects on certain provisions of a previous FASB statement covering consolidation of variable interest entities, as a result of the elimination of the qualifying special-purpose entity concept, and (2) concern about the application of certain key provisions of that same statement, including those in which the accounting and disclosures under the interpretation do not always provide timely and useful information about an enterprise’s involvement in a variable interest entity. This statement is effective as of the beginning of each reporting entity’s first annual reporting period that begins after November 15, 2009, for interim periods within that first annual reporting period, and for interim and annual reporting periods thereafter. Earlier application is prohibited. The Company is in the process of evaluating the impact this statement will have on its consolidated financial statements.

In December 2007, FASB issued a statement covering noncontrolling interests in consolidated financial statements. This statement establishes accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. This statement also establishes disclosure requirements that clearly identify and distinguish between the controlling and noncontrolling interests and requires the separate disclosure of income attributable to controlling and noncontrolling interests. Noncontrolling interest was previously referred to as minority interest in the Company’s financial statements. This statement was effective for the Company as of July 1, 2009 and is appropriately reflected in the Company’s consolidated financial statements for the three months ended September 30, 2009.

In September 2006, FASB issued a statement covering fair value measurements. 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. This statement was effective for the Company as of July 1, 2009 but currently has no impact on the Company’s consolidated financial statements.

Long-Term Obligations

The Company’s long-term obligations are summarized in the following table:

Summary of Long Term Obligations
(Dollars in thousands)


			Outstanding
			Balance			Current
	Commitment		Sept. 30, 2009			Interest Rate			Maturity
Revolving line of credit	$	40,000	$	13,759			4.25	%⁽¹⁾	July 10, 2012
Note payable — facility, Coppell, TX		n/a		10,196			6.5	%	December 10, 2017
Note payable — facility, Owasso, MI		n/a		3,452			5.25	%⁽²⁾	July 10, 2012
Capital lease obligation		n/a		57			7.6	%	November 5, 2010

Sub-total				27,464
Less: current amounts due				(826	)

Long-term obligations			$	26,638


(1)		Based on 30 day LIBOR plus applicable margin of 4%

(2)		Based on Prime Rate plus applicable margin of 2%

As of June 30, 2009, the Company’s primary revolving line of credit was held by a banking group led by The Frost National Bank (“Frost”) and including Whitney National Bank and Commerce Bank, N.A., under, a Third Amended and Restated Loan Agreement (the “Frost Loan Agreement”) signed December 31, 2007 and maturing on December 31, 2009. The Company satisfied all obligations under the Frost Loan Agreement by repaying all outstanding amounts on July 10, 2009, and no other fees or payments are due or expected in relation to this agreement, or the related notes.

On July 10, 2009, Craftmade together with the Borrowers, entered into the Revolving Loan Agreement with Bank of America. The Revolving Loan Agreement provides for revolving loans in an aggregate amount up to $40,000,000 and is secured by substantially all of the Borrowers’ assets, excluding its current real estate holdings. On July 10, 2009 Woodard entered into the Term Loan Agreement with Frost, in conjunction with executing the Frost Note, in the principal amount of $3,500,000, payable to Frost, secured by the Michigan Facility. In the aggregate the proceeds from the Revolving Loan Agreement and the Term Loan Agreement (together the “Loan Agreements”), were used to pay off amounts owed under the Frost Loan Agreement dated as of December 31, 2007.

Loans under the Revolving Loan Agreement may be deemed to be either “Base Rate Loans” or “LIBOR Rate Loans.” Base Rate Loans will bear interest at a per annum rate equal to the greater of (a) the Prime Rate (as published by Bank of America); (b) the Federal Funds Rate, plus 0.50%; or (c) 30 day London Interbank Offered Rate (“LIBOR”), plus 1.0%, plus an applicable margin ranging from 0.75% to 1.25% based on Craftmade’s cash flow performance as measured by the Fixed Charge Coverage Ratio (as defined in the Revolving Loan Agreement) for the most recent month. LIBOR Rate Loans will bear interest at LIBOR for the applicable interest period (30, 60 or 90 days), plus an applicable margin ranging from 3.00% to 4.00% based on Craftmade’s cash flow performance as measured by the Fixed Charge Coverage Ratio (as defined in the Revolving Loan Agreement) for the most recent month. The maximum amount of loans under the Revolving Loan Agreement will be determined by a formula (the “Borrowing Base”) taking into consideration the receivables and inventory of the Borrowers, net of any reserves put into place by Bank of America. The Revolving Loan Agreement will terminate on July 10, 2012.

Pursuant to the Revolving Loan Agreement, the financial covenants required Craftmade to maintain a Fixed Charge Coverage Ratio of not less than 0.85 for the initial periods, and building to not less than 1.0 by August, 2009 and thereafter. All wholly-owned domestic subsidiaries of Craftmade, and Design Trends have agreed to be guarantors of the Revolving Loan Agreement (the “Guarantors”). Should Craftmade achieve and maintain a minimum of $6,000,000 of availability (calculated as the Borrowing Base minus the principal balance of all loans) for 60 days, the Fixed Charge Coverage Ratio shall not be tested until such time as availability drops below $6,000,000. At September 30, 2009 the Company had $4,466,000 of borrowing availability as determined by the Borrowing Base formula, and is in compliance with its covenants.

The Frost Note bears a floating interest rate based on Prime Rate (as published in the Wall Street Journal) plus 2.0% per annum. Pursuant to the Frost Note, Woodard has agreed to pay equal monthly payments of principal and interest based on a 10-year amortization schedule, with the unpaid principal and interest payable on July 10, 2012. As security for the payment and performance of the Frost Note, Woodard granted a mortgage lien to Frost in the Michigan Facility located at 210 S. Delaney Road, Owosso, Michigan, which Woodard acquired as part of the acquisition of substantially all of the net assets of Woodard, LLC. On the Closing Date, Craftmade and certain of its direct and indirect subsidiaries entered into guaranty agreements with Frost pursuant to which such entities agreed to guarantee payment and performance of the Note by Woodard.

Further information regarding the Revolving Loan Agreement and the Frost Note is detailed in the Company’s Current Report on Form 8-K filed with the SEC on July 16, 2009.

On November 14, 2007, the Company entered into a term loan to refinance its home office and warehouse with an original principal balance of $11,000,000. The loan is payable in equal monthly installments of principal and interest of $95,822. The loan bears an interest rate of 6.5% per year. The loan is collateralized by the building and land. The loan is scheduled to mature on December 10, 2017. Further information regarding this loan is detailed in the Company’s Current Report on Form 8-K filed with the SEC on November 20, 2007.


Item 3.		Quantitative and Qualitative Disclosures About Market Risk

Market risks at September 30, 2009 have not changed significantly from those discussed in Item 7A of the Company’s Annual Report on Form 10-K for the year ended June 30, 2009, as filed with the SEC on September 28, 2009.


Item 4.		Controls and Procedures

Disclosure Controls and Procedures

As of the end of the period covered by this report, the Company conducted an evaluation, under the supervision and with the participation of the principal executive officer and principal financial officer, of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)). Based on this evaluation, the principal executive officer and principal financial officer concluded that, as of the end of the period covered by this report, the Company’s disclosure controls and procedures are effective. Notwithstanding the foregoing, a control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that it will detect or uncover failures within the Company to disclose material information otherwise required to be set forth in the Company’s periodic reports.

Changes in Internal Controls

There was no change in the Company’s internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the Company’s most recently completed fiscal quarter 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

There have been no material changes in the Company’s risk factors since those published in the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2009, as filed with the SEC on September 28, 2009.


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

Not Applicable


Item 3.		Defaults Upon Senior Securities

Not Applicable


Item 4.		Submission of Matters to a Vote of Security Holders

Not Applicable


Item 5.		Other Information

On November 9, 2009, the Board of Directors of the Company, unanimously voted to voluntarily delist the Company’s Common Stock, from Nasdaq and subsequently to voluntarily terminate the registration of the Common Stock under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). In connection therewith, the Company notified Nasdaq on November 9, 2009, of the Company’s intention to file a Form 25 with the SEC on or about November 19, 2009. The Company anticipates that the Form 25 will become effective 10 days following its filing, or approximately November 29, 2009.

Following delisting from Nasdaq, it is anticipated that the Common Stock will be quoted on OTCQX a centralized electronic quotation service for over-the-counter securities, operated by Pink OTC Markets, Inc. The Company does not anticipate any difficulties in meeting all requirements to list its common stock on OTCQX, although there can be no assurances that it will be able to do so. Upon listing on OTCQX the Company intends to immediately begin reporting under OTCQX alternate reporting standards, including annual audited financial statements, unaudited quarterly financial statements and current information. The Company expects that the Common Stock will continue to trade on OTCQX so long as market makers demonstrate an interest in trading in the Common Stock.


Item 6.		Exhibits


Exhibit
Number		Description

	2.1	Asset Purchase Agreement dated as of December 18, 2007, by and among Woodard, LLC, Henry Crown and Company d/b/a CC Industries, Inc. and Craftmade International, Inc., previously filed as Exhibit 2.1 to Form 8-K on January 4, 2008, and incorporated by reference herein.

		Pursuant to Item 601(b)(2) of Regulation S-K, the Company has not filed herewith the schedules and exhibits to the foregoing exhibit and agrees to furnish supplementally to the Securities and Exchange Commission, upon request, any omitted schedules or similar attachments to the foregoing exhibit.

	2.2	Stock Purchase Agreement between Craftmade International, Inc., Trade Source International, Inc., and Robert W. Lackey, dated September 15, 2006, previously filed as Exhibit 10.1 to the Company’s Form 8-K on September 18, 2006, and incorporated by reference herein.

		Pursuant to Item 601(b)(2) of Regulation S-K, the Company has not filed herewith the schedules and exhibits to the foregoing exhibit and agrees to furnish supplementally to the Securities and Exchange Commission, upon request, any omitted schedules or similar attachments to the foregoing exhibit.

	2.3	Agreement for the Purchase and Sale of Personal Goodwill between Trade Source International, Inc. and Robert Lackey, dated September 15, 2006, previously filed as Exhibit 10.2 to the Company’s Form 8-K on September 18, 2006, and incorporated by reference herein.

	2.4	Agreement for the Purchase and Sale of Personal Goodwill between Trade Source International, Inc. and Robert Lackey, Jr., dated September 15, 2006, previously filed as Exhibit 10.3 to the Company’s Form 8-K on September 18, 2006, and incorporated by reference herein.

	2.5	Intellectual Property Assignment by and between Trade Source International, Inc., Robert W. Lackey, Robert W. Lackey, Jr., RWL Incorporated f/k/a Robert W. Lackey Corporation and R.L. Products Corporation, dated September 15, 2006, previously filed as Exhibit 10.4 to the Company’s Form 8-K on September 18, 2006, and incorporated by reference herein.

	2.6	Non-Competition Agreement between Trade Source International, Inc. and Robert W. Lackey, dated September 15, 2006, previously filed as Exhibit 10.5 to the Company’s Form 8-K on September 18, 2006, and incorporated by reference herein.

	2.7	Non-Competition Agreement between Trade Source International and Robert W. Lackey, Jr., dated September 15, 2006, previously filed as Exhibit 10.6 to the Company’s Form 8-K on September 18, 2006, and incorporated by reference herein.

	2.8	Consulting Agreement by and between Craftmade International, Inc., Trade Source International, Inc. and Imagine One Resources, LLC, dated September 15, 2006, previously filed as Exhibit 10.7 to the Company’s Form 8-K on September 18, 2006, and incorporated by reference herein.


Exhibit
Number		Description

	2.9	Partially Subordinate Security Agreement among Trade Source International, Inc., Marketing Impressions, Inc., Prime Home Impressions, LLC, and Robert Lackey, (“Lackey”), as collateral agent for Lackey, Robert W. Lackey, Jr., Imagine One Resources, LLC, RWL Corporation and R.L. Products Corporation, dated September 15, 2006, previously filed as Exhibit 10.8 to the Company’s Form 8-K on September 18, 2006, and incorporated by reference herein.

	2.10	Subordination Agreement by and among Robert W. Lackey (“Lackey”), as collateral agent for Lackey, Robert W. Lackey, Jr., Imagine One Resources, LLC, RWL Corporation, R.L. Products Corporation, and The Frost National Bank, Trade Source International, Inc., Marketing Impressions, Inc., Prime/Home Impressions, LLC and Craftmade International, Inc., dated September 15, 2006, previously filed as Exhibit 10.9 to the Company’s Form 8-K on September 18, 2006, and incorporated by reference herein.

	2.11	Agreement and Plan of Merger by and among Craftmade International, Inc., Bill Teiber Co., Inc., Teiber Lighting Products, Inc., Todd Teiber and Edward Oberstein dated March 1, 2005, previously filed as Exhibit 10.1 to the Company’s Form 8-K on March 7, 2005, and incorporated by reference herein.

	2.12	Agreement and Plan of Merger, dated as of July 1, 1998, by and among Craftmade International, Inc., Trade Source International, Inc. a Delaware corporation, Neall and Leslie Humphrey, John DeBlois, the Wiley Family Trust, James Bezzerides, the Bezzco Inc. Employee Retirement Trust and Trade Source International, Inc, a California corporation, filed as Exhibit 2.1 to the Company’s Form 8-K on July 15, 1998 (File No. 33-33594-FW) and incorporated by reference herein.

	3.1	Certificate of Incorporation of the Company, filed as Exhibit 3(a)(2) to the Company’s Post Effective Amendment No. 1 to Form S-8 (File No. 33-33594-FW), and incorporated by reference herein.

	3.2	Certificate of Amendment of Certificate of Incorporation of the Company, dated March 24, 1992, and filed as Exhibit 4.2 to the Company’s Form S-8 (File No. 333-44337), and incorporated by reference herein.

	3.3	Amended and Restated Bylaws of the Company, previously filed as Exhibit 3.1 to the Company’s Form 8-K on June 15, 2009, and incorporated by reference herein.

	4.1	Specimen Common Stock Certificate, filed as Exhibit 4.4 to the Company’s registration statement on Form S-3 (File No. 333-70823), and incorporated by reference herein.

	4.2	Rights Agreement, dated as of June 23, 1999, between Craftmade International, Inc. and Harris Trust and Savings Bank, as Rights Agent, previously filed as Exhibit 99.1 to the Company’s Form 8-K on July 9, 1999, and incorporated by reference herein.

	4.3	Amendment No. 1 to Rights Agreement, dated as of June 9, 2009, between Craftmade International, Inc. and ComputerShare Trust Company, N.A., as Rights Agent, previously filed as Exhibit 1(A) to Form 8-A/A on June 15, 2009, and incorporated by reference herein.

	10.1	Promissory Note dated November 14, 2007, in the original principal amount of $11,000,000 payable to the order of Allianz Life Insurance Company of North America and executed by CM Real Estate, LLC., previously filed as Exhibit 10.1 to the Company’s Form 8-K on November 20, 2007, and incorporated by reference herein.


Exhibit
Number			Description

	10.2		Deed of Trust, Mortgage and Security Agreement by CM Real Estate, LLC, effective November 14, 2007, previously filed as Exhibit 10.2 to the Company’s Form 8-K on November 20, 2007, and incorporated by reference herein.

	10.3		Guaranty Agreement dated November 14, 2007, by Craftmade International, Inc. in favor of Allianz Life Insurance Company of North America, previously filed as Exhibit 10.3 to the Company’s Form 8-K on November 20, 2007, and incorporated by reference herein.

	10.4		Lease Agreement dated as of November 14, 2007, between CM Real Estate, LLC and Craftmade International, Inc., previously filed as Exhibit 10.4 to the Company’s Form 8-K on November 20, 2007, and incorporated by reference herein.

	10.5		Loan and Security Agreement dated as of July 8, 2009, among Craftmade International, Inc. and Bank of America, N.A., previously filed as Exhibit 10.1 to the Company’s Form 8-K on July 16, 2009, and incorporated by reference herein.

	10.6		Term Loan Agreement dated as of July 8, 2009, among Craftmade International, Inc., Woodard—CM, LLC and The Frost National Bank, previously filed as Exhibit 10.2 to the Company’s Form 8-K on July 16, 2009, and incorporated by reference herein.

	10.7		Term Loan Note dated July 8, 2009 with the Frost National Bank, previously filed as Exhibit 10.3 to the Company’s Form 8-K on July 16, 2009, and incorporated by reference herein.

	10.8		Mortgage dated as of July 8, 2009 by Woodard—CM, LLC for the benefit of the Frost National Bank, previously filed as Exhibit 10.4 to the Company’s Form 8-K on July 16, 2009, and incorporated by reference herein.

	10.9		Craftmade International, Inc. 2006 Long-Term Incentive Plan, previously filed as Exhibit 10.1 to the Company’s Form 8-K on December 4, 2006, and incorporated by reference herein.

	10.10		Incentive Stock Option Agreement, previously filed as Exhibit 10.2 to the Company’s Form 8-K on December 4, 2006, and incorporated by reference herein.

	10.11		Non-qualified Stock Option Agreement, previously filed as Exhibit 10.3 to the Company’s Form 8-K on December 4, 2006, and incorporated by reference herein.

	10.12		Stock Appreciation Rights Agreement, previously filed as Exhibit 10.4 to the Company’s Form 8-K on December 4, 2006, and incorporated by reference herein.

	10.13		Restricted Stock Award Agreement, previously filed as Exhibit 10.5 to the Company’s Form 8-K on December 4, 2006, and incorporated by reference herein.

	31.1	*	Certification of J. Marcus Scrudder, Chief Executive Officer of the Company, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

	31.2	*	Certification of C. Brett Burford, Chief Financial Officer of the Company, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

	32.1	*	Certification of J. Marcus Scrudder, Chief Executive Officer of the Company, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

	32.2	*	Certification of C. Brett Burford, Chief Financial Officer of the Company, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.


*		Each document marked with an asterisk is filed or furnished herewith.

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.


	CRAFTMADE INTERNATIONAL, INC.
	(Registrant)
Date: November 16, 2009	/s/ J. Marcus Scrudder
	J. MARCUS SCRUDDER
	Chief Executive Officer

Date: November 16, 2009	/s/ C. Brett Burford
	C. BRETT BURFORD
	Chief Financial Officer

Three Months Ended

September 30,

September 30,

Effective tax rate