CHDT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
This summary of accounting policies for CHDT Corporation, a Florida corporation (formerly, “China Direct Trading Corporation”) (“Company” or “CHDT”) and its wholly-owned subsidiaries (“Subsidiaries”) is presented to assist in understanding the Company's financial statements. The accounting
policies conform to generally accepted accounting principles and have been consistently applied in the preparation of the financial statements. CHDT changed its name to “CHDT Corporation” by amending its Articles of Incorporation, which name change was effective July 16, 2007 in respect of NASD Regulation, Inc. and OTC Bulletin Board approval of the name change, the trading symbol change from “CHDT.OB” to “CHDO.OB” and change in CUSIP Number for CHDT Common Stock
and effective May 7, 2007 in terms of approval by the State of Florida of the charter amendment.
The unaudited financial statements as of June 30, 2009 and for the three and six month periods ended June 30, 2009 and 2008 reflect, in the opinion of management, all adjustments (which include only normal recurring adjustments) necessary to fairly state the financial position and results of operations for the three and six months. Operating
results for interim periods are not necessarily indicative of the results which can be expected for full years.
Organization and Basis of Presentation
CHDT was initially incorporated September 18, 1986 under the laws of the State of Delaware under the name "Yorkshire Leveraged Group, Incorporated", and then changed its domicile situs to Colorado in 1989 by merging into a Colorado corporation, named "Freedom Funding, Inc." Freedom Funding, Inc. then changed its name to "CBQ, Inc." by amendment
of its Articles of Incorporation on November 25, 1998. In May 2004, the Company changed its name from “CBQ, Inc.” to “China Direct Trading Corporation” as part of a reincorporation from the State of Colorado to the State of Florida. Effective May 7, 2007, the Company amended its charter to change its name from “China Direct Trading Corporation” to “CHDT Corporation.” This name change was effective as of July 16, 2007 for purposes of the change
of its name on the OTC Bulletin Board.
Souvenir Direct, Inc. was incorporated on September 9, 2002 under the laws of the State of Florida. Souvenir Direct, Inc. operations were transferred to Capstone Industries, Inc. in the first quarter of fiscal year 2007 and Souvenir Direct, Inc.’s operating assets were sold on December 1, 2007 to an unaffiliated buyer.
On December 1, 2003, CHDT issued 97 million shares common stock to acquire 100% of the outstanding common stock of Souvenir Direct, Inc. in a reverse acquisition. At that time, a new reporting entity was created. Souvenir Direct, Inc. is considered the reporting entity for financial reporting purposes. Also on December 1, 2003, an additional
414,628,300 shares of common stock were issued to the previous owners of the Company.
In February 2004, the Company established a new subsidiary, initially named “China Pathfinder Fund, L.L.C.”, a Florida limited liability company. During 2005, the name was changed to “Overseas Building Supply, LLC” to reflect its shift in business lines from business development consulting services in China for North
American companies to trading Chinese-made building supplies in South Florida. This business line was ended in fiscal year 2007 and OBS’ name was changed to “Black Box Innovations, L.L.C.” (“BBI”) on March 20, 2008.
On January 27, 2006, the Company entered into a Purchase Agreement with Complete Power Solutions ("CPS") to acquire 51% of the member interests of CPS. CPS was organized by William Dato on September 20, 2004, as a Florida limited liability company to distribute power generators in Florida and adjacent states. The Company subsequently
sold its 51% membership interest in CPS, pursuant to a Purchase and Settlement Agreement dated and effective as of December 31, 2006.
CHDT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
On September 13, 2006 the Company entered into a Stock Purchase Agreement with Capstone Industries, Inc., a Florida corporation (Capstone). Capstone was incorporated in Florida on May 15, 1996 and is engaged primarily in the business of wholesaling low technology consumer products to distributors and retailers in the United States.
Nature of Business
Since the beginning of fiscal year 2007, the Company has been primarily engaged in the business of marketing and selling consumer products through national and regional retailers and distributors, in North America. Capstone currently operates in four primary business segments: Lighting Products, Power Tools, Automotive Accessories
and Computer peripherals. The Company’s products are typically manufactured in the Peoples’ Republic of China by third-party manufacturing companies.
During the period that the Company owned a 51% interest in CPS (January 27, 2006 through December 31, 2006), the Company, through CPS, engaged in the business of selling and installing standby commercial and residential power generators in South Florida and, to a lesser extent, in adjacent states.
Cash and Cash Equivalents
The Company considers all highly liquid debt instruments purchased with a maturity of three months or less to be cash equivalents, to the extent the funds are not being held for investment purposes.
Allowance for Doubtful Accounts
An allowance for doubtful accounts is established as losses are estimated to have occurred through a provision for bad debts charged to earnings. The allowance for bad debt is evaluated on a regular basis by management and is based upon management’s periodic review of the collectability of the receivables. This
evaluation is inherently subjective and requires estimates that are susceptible to significant revisions as more information becomes available.
As of June 30, 2009, management has determined that the accounts receivable are fully collectible. As such, management has not recorded an allowance for doubtful accounts.
Inventory
The Company's inventory, which is recorded at lower of cost (first-in, first-out) or market, consists of finished goods for resale by Capstone, totaling $470,898 and $387,749 at June 30, 2009 and December 31, 2008, respectively.
BBI (previously “Overseas Building Supply, L.C.”) had inventory of $40,441 at December 31, 2007. During 2008, a director and shareholder of the Company took the remaining inventory of BBI and agreed to pay the Company for the cost of the inventory, which was $40,441. As a result, the inventory was removed
from the balance sheet as an asset, and a shareholder receivable was recorded and disclosed in the equity section of the balance sheet.
Property and Equipment
Fixed assets are stated at cost. Depreciation and amortization are computed using the straight- line method over the estimated economic useful lives of the related assets as follows:
|
Computer equipment
|
3 - 7 years
|
|
Computer software
|
3 - 7 years
|
|
Machinery and equipment
|
3 - 7 years
|
|
Furniture and fixtures
|
3 - 7 years
|
CHDT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
The Company follows FASB Statement No. 144 (SFAS 144), "Accounting for the Impairment of Long-Lived Assets." SFAS 144 requires that long-lived assets to be held and used are reviewed for impairment whenever events or changes in circumstances indicate that the related carrying amount may not be recoverable. When required, impairment losses
on assets to be held and used are recognized based on the fair value of the asset. Long-lived assets to be disposed of, if any, are reported at the lower of carrying amount or fair value less cost to sell. No impairments were recognized by the Company during 2008 and the first quarter of 2009.
Upon sale or other disposition of property and equipment, the cost and related accumulated depreciation or amortization are removed from the accounts and any gain or loss is included in the determination of income or loss.
Expenditures for maintenance and repairs are charged to expense as incurred. Major overhauls and betterments are capitalized and depreciated over their estimated economic useful lives.
Depreciation expense was $66,008 and $44,315 for the six months ended June 30, 2009 and 2008, respectively.
Goodwill and Other Intangible Assets
Goodwill and other intangible assets are recorded under the provisions of the Financial Accounting Standards Board (FASB) Statement No.142 (SFAS 142), Goodwill and Other Intangible Assets. SFAS 142 requires that an intangible asset that is acquired either individually or with a group of other assets (but not those acquired
in a business combination) shall be initially recognized and measured based on its fair value. Goodwill acquired in business combinations is initially computed as the amount paid by the acquiring company in excess of the fair value of the net assets acquired.
Costs of internally developing, maintaining and restoring intangible assets (including goodwill) that are not specifically identifiable, that have indeterminate lives, or that are inherent in a continuing business and related to an entity as a whole, are recognized as an expense when incurred.
An intangible asset (excluding goodwill) with a definite useful life is amortized; an intangible asset with an indefinite useful life is not amortized until its useful life is determined to be no longer indefinite. The remaining useful lives of intangible assets not being amortized are evaluated at least annually to determine whether events
and circumstances continue to support an indefinite useful life. If and when an intangible asset is determined to no longer have an indefinite useful life, the asset shall then be amortized prospectively over its estimated remaining useful life and accounted for in the same manner as other intangibles that are subject to amortization.
An intangible asset (including goodwill) that is not subject to amortization shall be tested for impairment annually or more frequently if events or changes in circumstances indicate that the asset might be impaired. The impairment test consists of a comparison of the fair value of the intangible assets with its carrying amount. If the
carrying amount of an intangible asset exceeds its fair value, an impairment loss shall be recognized in an amount equal to that excess. In accordance with SFAS 142, goodwill is not amortized.
It is the Company's policy to test for impairment no less than annually, or when conditions occur that may indicate an impairment. The Company's intangible assets, which consist of goodwill of $1,936,020 recorded in connection with the Capstone acquisition, were tested for impairment and determined that no adjustment for impairment was
necessary as of December 31, 2008, whereas the fair value of the intangible asset exceeds its carrying amount.
CHDT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Net Income (Loss) Per Common Share
Basic earnings per common share were computed by dividing net loss by the weighted average number of shares of common stock outstanding during the year. In periods where losses are reported, the weighted average number of common shares outstanding excludes common stock equivalents because their inclusion would be anti-dilutive.
Diluted loss per common share for the six months ended June 30, 2009 and 2008 are not presented as it would be anti-dilutive. At June 30, 2009 and 2008, the total number of potentially dilutive common stock equivalents was 224,565,627 and 197,165,627, respectively.
Principles of Consolidation
The consolidated financial statements for the six months ended June 30, 2009 and the year ended December 31, 2008 include the accounts of the parent entity and its wholly-owned subsidiaries Souvenir Direct, Inc., Black Box Innovations, L.L.C. (formerly “Overseas Building Supply, LLC” and formerly “China Pathfinder Fund,
LLC”), and Capstone Industries, Inc.
The results of operations attributable to Capstone are included in the consolidated results of operations beginning on September 13, 2006, the date on which the Company’s interest in Capstone was acquired.
The results of operations attributable to the Company’s interest in its former subsidiary, CPS, for the period of time in which majority interest in CPS was held by the Company (January 27, 2006 through December 31, 2006) are included in the loss from discontinued operations on the consolidated statement of income (loss). All
significant intercompany balances and transactions have been eliminated.
Fair Value of Financial Instruments
The carrying value of the Company's financial instruments, including accounts receivable, accounts payable and accrued liabilities at June 30, 2009 and December 31, 2008 approximates their fair values due to the short-term nature of these financial instruments.
Reclassifications
Certain reclassifications have been made in the 2008 financial statements to conform with the 2009 presentation. There were no material changes in classifications made to previously issued financial statements.
Revenue Recognition
Product sales are recognized when an agreement of sale exists, product delivery has occurred, pricing is final or determinable, and collection is reasonably assured.
Allowances for sales returns, rebates and discounts are recorded as a component of net sales in the period the allowances are recognized. In addition, accrued liabilities contained in the accompanying balance sheet include accruals for estimated amounts of credits to be issued in future years based on potentially defective product,
other product returns and various allowances. These estimates could change significantly in the near term.
CHDT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Advertising and Promotion
Advertising and promotion costs, including advertising, public relations, and trade show expenses, are expensed as incurred and included in Sales and Marketing expenses. Advertising and promotion expense was $76,728 and $70,410 for the six months ended June 30, 2009 and 2008, respectively.
Shipping and Handling
The Company’s shipping and handling costs, incurred by Capstone amounted to $28,896 for the six months ended June 30, 2009.
Accrued Liabilities
Accrued liabilities contained in the accompanying balance sheet include accruals for estimated amounts of credits to be issued in future years based on potentially defective products, other product returns and various allowances. These estimates could change significantly in the near term.
Income Taxes
The Company accounts for income taxes under the provisions of Financial Accounting Standards Board (FASB) Statement No. 109 (SFAS 109), "Accounting for Income Taxes." SFAS 109 requires recognition of deferred income tax assets and liabilities for the expected future income tax consequences, based on enacted tax laws, of temporary differences
between the financial reporting and tax bases of assets and liabilities. The Company and its subsidiaries intend to file consolidated income tax returns
Stock-Based Compensation
On January 1, 2006, the Company adopted Statement of Financial Accounting Standards No. 123 (Revised 2004), Share-Based Payments, SFAS 123(R), which requires the measurement and recognition of compensation expense for all share-based payment awards made to employees and directors, including employee stock options, based on estimated fair
values. SFAS 123(R) supersedes the Company’s previous accounting under Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (APB 25) and related interpretations, applied for periods through December 31, 2005. In March 2005, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 107 (SAB 107) relating to SFAS 123(R). The Company has applied the provision of SAB 107 in its adoption of SFAS 123(R).
The Company adopted SFAS 123(R) using the modified prospective application transition method, which requires the application of the accounting standard as of January 1, 2006, the first date of the Company’s fiscal year. The Company’s consolidated financial statements as of and for the year ended December 31, 2006 reflect the
impact of SFAS 123(R). In accordance with the modified prospective method, the Company’s consolidated financial statements for prior periods have not been restated to reflect, and do not include, the impact of SFAS 123(R).
CHDT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
SFAS 123(R) requires companies to estimate the fair value of share-based payment awards on the date of the grant using an option-pricing model. The value of the portion of the award that is ultimately expected to vest is recognized as expenses over the requisite service periods in the Company’s consolidated statements of income (loss).
Prior to the adoption of SFAS 123(R), the Company accounted for stock-based awards to employees and directors using the intrinsic value method in accordance with APB 25, as allowed under SFAS No. 123, Accounting for Stock-Based Compensation, (SFAS 123). Under the intrinsic value method, compensation expense under fixed term option plans was recorded at the date of grant only to the extent that the market value of the underlying stock at the date of grant exceeded the exercise price. Accordingly, for those stock
options granted for which the exercise price equaled the fair market value of the underlying stock at the date of grant, no expense was recorded.
Stock-based compensation expense recognized during the period is based on the value of the portion of share-based payment awards that is ultimately expected to vest during the period. There was no stock-based compensation expense attributable to options for the years ended December 31, 2007 and 2006 for compensation expense for share-based
payment awards granted prior to, but not vested as of December 31, 2005. Such stock-based compensation is based on the grant date fair value estimated in accordance with the pro forma provisions of SFAS 123. Compensation expense for share-based payment awards granted subsequent to December 31, 2005 are based on the grant date fair value estimated in accordance with the provisions of SFAS 123(R).
In conjunction with the adoption of SFAS 123(R), the Company adopted the straight-line single option method of attributing the value of stock-based compensation expense. As stock-based compensation expense is recognized during the period is based on awards ultimately expected to vest, it is subject to reduction for estimated forfeitures.
SFAS 123(R) requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. As of and for the year ended December 31, 2008, there were no material amounts subject to forfeiture. The Company has not accelerated vesting terms of its out-of-the-money stock options, or made any other significant changes, prior to adopting FASB 123(R), Share-Based Payments.
On April 23, 2007, the Company granted 130,500,000 stock options to two officers of the Company. The options vest at twenty percent per year beginning April 23, 2007. For the year ended December 31, 2007, the Company recognized compensation expense of $503,075 related to these options. On May 1, 2008, 850,000 of the
above stock options were canceled and on May 23, 2008, 74,666,667 of the above stock options were cancelled. For year ended December 31, 2008, the Company recognized compensation expense of $405,198 related to these options. For the six months ended June 30, 2009, the Company recognized compensation expense of $78,278 related to these options.
On May 1, 2007, the Company granted 4,000,000 stock options to five employees of the Company. The options vest over two years. For the year ended December 31, 2007, the Company recognized compensation expense of $29,214 related to these options. During 2008, 1,000,000 of the above options were
cancelled prior to vesting. For the year ended December 31, 2008, the Company recognized compensation expense of $25,131 related to these options. For the six months ended June 30, 2009, the Company recognized compensation expense of $5,434 related to these options.
On October 22, 2007, the Company granted 700,000 stock options to a business associate of the Company. The options vest over two years. For the year ended December 31, 2007, the Company recognized compensation expense of $1,330 related to these options. For the year ended December 31, 2008, the Company recognized
compensation expense of $7,978 related to these options. For the six months ended June 30, 2009, the Company recognized compensation expense of $3,324 related to these options.
CHDT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
On January 10, 2008, the Company granted 1,000,000 stock options to an advisor of the Company. The options vest over one year. For the year ended December 31, 2008, the Company recognized compensation expense of $19,953 related to these options.
On February 5, 2008, the Company granted 3,650,000 stock options to four directors and one employee of the Company. The options vest over two years. For the year ended December 31, 2008, the Company recognized compensation expense of $59,619 related to these options. For the six months ended June 30, 2009,
the Company recognized compensation expense of $1,300 related to these options.
On May 1, 2008, the Company granted 850,000 stock options to an employee of the Company. The options vest over two years. For the year ended December 31, 2008, the Company recognized compensation expense of $5,242 related to these options. For the six months ended June 30, 2009, the Company recognized compensation
expense of $3,932 related to these options.
The Company recognizes compensation expense paid with common stock and other equity instruments issued for assets and services received based upon the fair value of the assets/services or the equity instruments issued, whichever is more readily determined.
As of the date of this report the Company has not adopted a method to account for the tax effects of stock-based compensation pursuant to SFAS 123(R) and related interpretations. However, whereas the Company has substantial net operating losses to offset future taxable income and its current deferred tax asset is completely reduced by the
valuation allowance, no material tax effects are anticipated.
During the year ended December 31, 2005, the Company valued stock options using the intrinsic value method prescribed by APB 25. Since the exercise price of stock options previously issued was greater than or equal to the market price on grant date, no compensation expense was recognized.
Stock-Based Compensation Expense
Stock-based compensation expense for the six months ended June 30, 2009 included $21,000 for consulting fees. Stock-based compensation expense for the six months ended June 30, 2008 included $2,500 for consulting fees.
Recent Accounting Standards
In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for Financial Assets and Financial Liabilities" ("SFAS 159"). SFAS 159 provides companies with an option to report selected financial assets and liabilities at fair value. The objective of SFAS 159 is to reduce both complexity in accounting for financial instruments
and the volatility in earnings caused by measuring related assets and liabilities differently. Generally accepted accounting principles have required different measurement attributes for different assets and liabilities that can create artificial volatility in earnings. The FASB has indicated it believes that SFAS 159 helps to mitigate this type of accounting-induced volatility by enabling companies to report related assets and liabilities at fair value, which would likely reduce the need for companies to comply
with detailed rules for hedge accounting. SFAS 159 also establishes presentation and disclosure requirements designed to facilitate comparisons between companies that choose different measurement attributes for similar types of assets and liabilities. SFAS 159 does not eliminate disclosure requirements included in other accounting standards, including requirements for disclosures about fair value measurements included in SFAS 157 and SFAS No. 107, "Disclosures about Fair Value of Financial Instruments."
SFAS 159 is effective for the Company as of the beginning of fiscal year 2008. The adoption of this pronouncement is not expected to have an impact on the Company's financial position, results of operations or cash flows.
CHDT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
In December 2007, the FASB issued No. 160, “Non-controlling Interests in Financial Statements, an amendment of ARB No. 51" (“SFAS 160"). SFAS 160 amends ARB 51 to establish accounting and reporting standards for the non-controlling interest in a subsidiary and for the deconsolidation of a subsidiary. It
clarifies that a non-controlling interest in a subsidiary is an ownership interest in the consolidated entity that should be reported as equity in the consolidated financial statements. This Statement is effective for fiscal years beginning on or after December 15, 2008. Early adoption is not permitted. Management is currently evaluating the effects of this statement, but it is not expected to have any impact on the Company’s financial statements.
In December 2007, the FASB issued No. 141(R), “Business Combinations” (“SFAS 141(R)”). SFAS 141(R) provides companies with principles and requirements on how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, liabilities assumed, and any non-controlling interest
in the acquiree as well as the recognition and measurement of goodwill acquired in a business combination. SFAS 141(R) also requires certain disclosures to enable users of the financial statements to evaluate the nature and financial effects of the business combination. Acquisition costs associated with the business combination will generally be expensed as incurred. SFAS 141(R) is effective for business combinations occurring in fiscal years beginning after December 15, 2008, which will require the Company to
adopt these provisions for business combinations occurring in fiscal 2009 and thereafter. Early adoption of SFAS 141(R) is not permitted. Management is currently evaluating the effects of this statement, but it is not expected to have any impact on the Company’s financial statements.
In March 2008, the FASB issued No. 161, “Disclosures about Derivative Instruments and Hedging Activities, an amendment of FASB Statement No. 133. (“SFAS 161"). SFAS 161 requires enhanced disclosures about an entity's derivative and hedging activities and thereby improves the transparency of financial reporting. This
Statement is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008, with early application encouraged. This Statement encourages, but does not require, comparative disclosures for earlier periods at initial adoption. Management is currently evaluating the effects of this statement, but it is not expected to have any impact on the Company’s financial statements.
Pervasiveness of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ from those estimates, and the differences could be material.
NOTE 2 – CONCENTRATIONS OF CREDIT RISK AND ECONOMIC DEPENDENCE
Financial instruments that potentially subject the Company to credit risk consist principally of cash and cash equivalents and accounts receivable.
The Company has no significant off-balance-sheet concentrations of credit risk such as foreign exchange contracts, options contracts or other foreign hedging arrangements.
Cash and Cash Equivalents
The Company at times has cash and cash equivalents with its financial institution in excess of Federal Deposit Insurance Corporation (FDIC) insurance limits. The Company places its cash and cash equivalents with high credit quality financial institutions which minimize these risks. As of June 30, 2009, the Company
had no cash in excess of FDIC limits.
CHDT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 – CONCENTRATIONS OF CREDIT RISK AND ECONOMIC DEPENDENCE (continued)
Accounts Receivable
The Company grants credit to its customers, substantially all of whom are retail establishments located throughout the United States. The Company typically does not require collateral from customers. Credit risk is limited due to the financial strength of the customers comprising the Company’s customer base and their dispersion
across different geographical regions. The Company monitors exposure of credit losses and maintains allowances for anticipated losses considered necessary under the circumstances.
Major Customers
The Company had three customers who comprised at least ten percent (10%) of gross revenue during the fiscal years ended December 31, 2008 and 2007. The loss of these customers would adversely impact the business of the Company. The percentage of gross revenue and the accounts receivable from each of these customers
is as follows:
|
|
|
Gross Revenue %
|
|
|
Accounts Receivable
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer A
|
|
44%
|
|
30%
|
|
$
|
1,742,135
|
|
$
|
691,110
|
|
Customer B
|
|
22%
|
|
28%
|
|
|
614,384
|
|
|
485,275
|
|
Customer C
|
|
15%
|
|
21%
|
|
|
21,773
|
|
|
161,571
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
81%
|
|
79%
|
|
$
|
2,378,292
|
|
$
|
1,337,956
|
Major Vendors
The Company had two vendors from which it purchased at least ten percent (10%) of merchandise during the fiscal year ended December 31, 2007 and three vendors from which it purchased at least ten percent (10%) of merchandise during the fiscal year ended December 31, 2008. The loss of these suppliers would adversely impact the
business of the Company. The percentage of purchases, and the related accounts payable from each of these vendors is as follows:
|
|
|
Purchases %
|
|
|
Accounts Payable
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vendor A
|
|
52%
|
|
56%
|
|
$
|
169,997
|
|
$
|
131,973
|
|
Vendor B
|
|
31%
|
|
10%
|
|
|
969,741
|
|
|
45,481
|
|
Vendor C
|
|
14%
|
|
-
|
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
97%
|
|
66%
|
|
$
|
1,139,738
|
|
$
|
177,454
|
NOTE 3 – NOTES AND LOANS PAYABLE TO RELATED PARTIES
CHDT Corp - Notes Payable to Director
On May 30, 2007, the Company executed a $575,000 promissory note payable to a director of the Company. The note carries an interest rate of 10.459% per annum. All principal was payable in full, with accrued interest, on May 30, 2009. As of September 30, 2007, the total amount payable on the note was $575,000. On
November 2, 2007, the Company issued 12,074 shares of its Series B Preferred stock valued at $28,975 as payment towards this loan. At June 30, 2009 and December 31, 2008, the total amount payable on this note was $546,025. Interest payments are being made monthly to the note holder.
On July 11, 2008, the Company received a loan from a director of $250,000. The note was due on January 11, 2009 and carries an interest rate of 8% per annum. At June 30, 2009 and December 31, 2008, the total amount payable on this note was $250,000 and $254,932, respectively.
CHDT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 – NOTES AND LOANS PAYABLE TO RELATED PARTIES (continued)
As part of this note payable, the Company also issued a warrant to the loan holder to purchase 4,000,000 shares of common stock at a price of $.025 per share. At the date of issuance, the stock price was $.021 per share. The Company accounted for the debt and warrants using APB 14, whereby the proceeds of $250,000
was allocated between the debt and warrants. This resulted in the warrants being valued at $56,375 which was recorded as additional paid-in capital, and a discount on the note of $56,375 being recognized. The discount was amortized over the term of the note (6 months) to interest expense. At December 31, 2008, the discount had been fully amortized resulting in interest expense of $56,375 being recognized.
CHDT Corp - Notes Payable to Officers
During the quarter ended June 30, 2008, the Company executed three notes payable for $200,000 to an officer of the Company. The notes carry an interest rate of 8% per annum and are due within six months. At June 30, 2009, the total amount due on these notes was $200,000. At December 31, 2008, the total amount
due on these notes was $201,358, including interest of $1,358.
Capstone Industries – Loans Payable to Director
On June 15, 2007, Capstone Industries executed a $72,000 promissory note payable to a director of the Company. The note carries an interest rate of 8% per annum and was due on February 15, 2008. During the quarter ended September 30, 2007, the Company paid accrued interest of $240. At December 31, 2007,
the total amount payable on this loan was $74,904, including interest of $2,904. In January 2008, the Company repaid this note payable.
On July 16, 2007, Capstone Industries executed a $103,000 promissory note payable to a director of the Company. The note carries an interest rate of 8% per annum and is due on December 31, 2007. At December 31, 2007, the total amount payable on this loan was $106,838, including interest of $3,838. In December
2008, the Company borrowed an additional $75,000 from this director. At June 30, 2009, the total amount payable on this loan was $192,109, including interest of $14,109. At December 31, 2008, the total amount payable on this loan was $188,023, including interest of $10,023.
Capstone Industries – Loans Payable to Officer
On September 7, 2007, Capstone Industries executed a $100,000 promissory note payable to an officer of the Company. The note carries an interest rate of 8% per annum and was due on December 31, 2007. At December 31, 2007, the total amount payable on this loan was $102,521, including interest of $2,520. In
January 2008, this note was repaid.
During the quarter ended December 31, 2007, Capstone Industries executed two promissory notes payable totaling $400,000 to an officer of the Company. The notes carry an interest rate of 8% per annum and were due on January 31, 2008. At December 31, 2007, the total amount payable on this loan was $404,043, including
interest of $4,043. In January 2008, the Company paid $250,000 towards this note payable. On May 9, 2008, the Company paid principal of $150,000 and interest of $6,443 to pay off the remainder of this note.
On March 11, 2008, Capstone Industries executed a $100,000 promissory note payable to an officer of the Company. The note carries an interest rate of 8% per annum and was due on June 30, 2008. On August 5, 2008, the Company paid principal of $100,000 and interest of $3,222 to pay off this note.
On June 24, 2008, Capstone Industries executed a $25,000 promissory note payable to an officer of the Company. The note carries an interest rate of 8% per annum and was due September 24, 2008. On August 5, 2008, the Company paid principal of $25,000 and interest of $230 to pay off this note.
Based on the above, the total amount payable to officers and directors as of June 30, 2009 and December 31, 2008 was $1,188,134 and $1,185,407, respectively, including accrued interest of $20,426 and $20,861, respectively. The maturities under the notes and loan payable to related parties for the next five years are:
|
Year Ended December 31,
|
|
|
|
|
2009
|
|
$
|
1,188,134
|
|
|
2010
|
|
|
-
|
|
|
2011
|
|
|
-
|
|
|
2012
|
|
|
-
|
|
|
2013
|
|
|
-
|
|
|
Total future maturities
|
|
$
|
1,188,134
|
|
CHDT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4 – NOTE PAYABLE – STERLING BANK
On May 1, 2008, Capstone secured a conventional $2,000,000 asset based loan agreement from Sterling National Bank, located in New York City whereby Capstone received a credit line to fund working capital needs. The loan provides funding for an amount up to 85% of eligible Capstone accounts receivable and 50% of eligible Capstone
inventory. The interest rate of the loan is the Wall Street Journal prime rate plus one and one-half percent per annum. CHDT and Howard Ullman, the Chairman of the Board of Directors of CHDT, have personally guaranteed Capstone’s obligations under the Loan. At June 30, 2009 and December 31, 2008, there was $182,362 and $722,547 due on this loan, respectively.
As part of the loan agreement with Sterling National Bank, a subordination agreement was executed with Howard Ullman, a shareholder and director of the Company. These agreements subordinated the debt of $115,055 (plus future interest) and $546,025 due to Howard Ullman to the Sterling National Bank loan. No payments
will be made on the subordinated debt until the Sterling Bank is paid in full, except for scheduled payments of interest.
NOTE 5 – PURCHASE ORDER ASSIGNMENT-FUNDING AGREEMENT
On February 27, 2009, Capstone Industries, Inc. entered into a Purchase Order Assignment Funding Agreement with Examsoft Worldwide, whereby Examsoft will advance funds to Capstone to secure the purchase of materials, and in return Capstone will assign purchase orders to Examsoft in exchange for the funding. The total funding
will be up to a total of $441,100. The interest rate is 18% per annum and the total loan plus accrued interest will be due no later than July 15, 2009. As security for the performance by Examsoft of its services under the agreement, Capstone has granted a security interest in the inventory purchased by the submitted purchase orders and upon product shipment in the accounts receivable until the loan is paid in full. At June 30, 2009, the total amount due on this loan was $459,080,
including interest of $19,080
.
This loan was paid in full in July 2009.
On May 22, 2009, Capstone Industries, Inc. entered into a Purchase Order Assignment Funding Agreement with Examsoft Worldwide, whereby Examsoft will advance funds to Capstone to secure the purchase of materials, and in return Capstone will assign purchase orders to Examsoft in exchange for the funding. The total funding will
be up to a total of $843,847. The interest rate is 18% per annum and the total loan plus accrued interest will be due no later than February 28, 2010. As security for the performance by Examsoft of its services under the agreement, Capstone has granted a security interest in the inventory purchased by the submitted purchase orders and upon product shipment in the accounts receivable until the loan is paid in full. At June 30, 2009, the total amount due on this loan was $313,911,
including interest of $3,911
.
On June 18, 2009, Capstone Industries, Inc. entered into a Purchase Order Assignment Funding Agreement with Examsoft Worldwide, whereby Examsoft will advance funds to Capstone to secure the purchase of materials, and in return Capstone will assign purchase orders to Examsoft in exchange for
the funding. The total funding will be up to a total of $548,615. The interest rate is 18% per annum and the total loan plus accrued interest will be due no later than February 28, 2010. As security for the performance by Examsoft of its services under the agreement, Capstone has granted a security interest in the inventory purchased by the submitted purchase orders and upon product shipment in the accounts receivable until the loan is paid in full. At June 30, 2009,
the total amount due on this loan was $160,631, including interest of $631
.
On June 16, 2009, Capstone Industries, Inc. received a $100,000 loan from Examsoft Worldwide. The loan is due July 16, 2009 and carries an interest rate of 1.5% simple interest per month. At June 30, 2009, the total amount due on this loan was $100,690, including accrued interest of $690. This loan was paid
in full in July 2009.
NOTE 6 – LEASES
On June 29, 2007, the Company relocated its principal executive offices and sole operations facility to 350 Jim Moran Blvd., Suite 120, Deerfield Beach, Florida 33442, which is located in Broward County. This space consists of 4,000 square rentable feet and is leased on a month to month basis. Monthly payments are
approximately $4,250 per month.
Rental expense under these leases was approximately $31,112 and $32,777 for the six months ended June 30, 2009 and 2008, respectively.
CHDT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7 - COMMITMENTS
Employment Agreements
On February 5, 2008, the Company entered into an Employment Agreement with Stewart Wallach, the Company’s Chief Executive Officer and President, whereby Mr. Wallach will be paid $225,000 per annum. The term of the contract begins February 5, 2008 and ends on February 5, 2011.
On February 5, 2008, the Company entered into an Employment Agreement with Gerry McClinton, the Company’s Chief Operating Officer, whereby Mr. McClinton will be paid $150,000 per annum. The term of the contract begins February 5, 2008 and ends on February 5, 2011.
On February 5, 2008, the Company entered into an Employment Agreement with Howard Ullman, the Chairman of Board of Directors of the Company, whereby Mr. Ullman will be paid $100,000 per annum. The term of the contract begins February 5, 2008 and ends on February 5, 2011.
License Agreement
On April 12, 2007, the Company entered into a trademark and licensing agreement with The Armor All/STP Products Company (“AASTP”). As part of the agreement, the Company is required to pay AASTP royalties either at fixed periodic amounts or 7% of product sales. The Company is required to make guaranteed
minimum royalty payments during 2009 and 2010 as follows: $85,000 payable in 2009; $165,000 payable in 2010. Future guaranteed minimum royalty payments are as follows:
|
|
|
Guaranteed Minimum
|
|
|
Year
|
|
Royalty Payments
|
|
|
2009
|
|
$
|
85,000
|
|
|
2010
|
|
$
|
165,000
|
|
|
|
|
$
|
250,000
|
|
NOTE 8 - STOCK TRANSACTIONS
Common Stock
In February 2008, the Company issued 1,584,000 shares of common stock for accrued directors fees of $40,000.
In March 2008, the Company issued 112,000 shares of common stock for consulting expenses of $2,500.
In February 2009, the Company issued 2,100,000 shares of common stock for consulting expenses of $21,000.
For issuances of shares of common stock during the periods described above, the Company issued restricted shares (Rule 144). The shares issued were valued by the Company based upon the closing price of the shares on the date of issuance. The value of these shares issued for services was charged to expense, unless they were in consideration
for future services, in which case they were recorded as deferred consulting fees. Shares retired / cancelled were recorded at par value.
Series “A” Preferred Stock
A total of 8,100 shares of series “A” preferred stock were issued in 2004, and, in May 2005, 100 shares were returned to the treasury and cancelled.
In January 2006 the Company issued 600,000 shares of series “A” convertible preferred stock, convertible into 50,738,958 shares of the Company’s common stock, in connection with the acquisition of a 51% majority interest in CPS. The shares were valued at $1,200,000.
In January 2007 (effective December 31, 2006), the 600,000 shares of series “A” convertible preferred issued to CPS were returned to the treasury and cancelled, in connection with the Company’s sale of its interest in CPS. The shares were valued at $1,775,864. None of the preferred shares were converted
to common shares. At December 31, 2006, the shares had not been returned, and a related party receivable of $1,775,864 was recorded. During the three months ended March 31, 2007, these shares were returned to the treasury and cancelled.
CHDT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8 - STOCK TRANSACTIONS (continued)
In June, 2006, 1,000 shares of the Company’s series “A” convertible preferred stock, beneficially owned by the Company’s CEO, were exchanged for 1,000,000 shares of the Company’s common stock. In February 2007, 74 shares of the Company’s series “A” preferred stock were exchanged
for 73,400 shares of the Company’s common stock. In May 2007, 367 shares of the Company’s series “A” preferred stock were exchanged for 367,000 shares of the Company’s common stock.
In February 2008, 6,500 shares of the Company’s series “A” convertible preferred stock were exchanged for 6,500,000 shares of the Company’s common stock.
As of December 31, 2008, a total of 60 shares of series “A” convertible preferred stock were issued and outstanding, and are convertible into CHDT common shares, at a rate of 1,000 shares of common stock for each share of series “A” convertible preferred stock and are redeemable at the option of the Company. During
the three months ended March 31, 2009, the remaining 60 shares were cancelled.
Series “B” Preferred Stock
In January 2006 the Company sold 657,000 shares of its series “B” convertible preferred stock for cash of $637,000, including 387,000 shares to the Company’s former CEO and the remaining shares to other directors of the Company. During the three months ended March 31, 2007, 15,000 shares of the Company’s
series “B” preferred shares issued to a director were exchanged for 990,000 shares of the Company’s common stock.
In September 2006 the Company issued 300,030 shares of its series “B” convertible preferred stock to the Company’s former CEO in exchange for 20,000,000 shares of its common stock held by the former CEO.
In September, 2006 the Company issued an additional 236,739 shares of its series “B” convertible preferred stock in connection with the acquisition of 100% of the voting interest of Capstone Industries, Inc. The shares were valued at $1,250,000. During the three months ended March 31, 2007, 236,739 shares
of the Company’s series “B” convertible preferred stock was converted into 15,624,774 shares of the Company’s common stock.
In November 2007, the Company issued 416,708 shares of its series “B” convertible preferred stock to a director for notes payable of $1,000,000.
In January 2008, the Company’s chairman exchanged 50,000,000 shares of the Company’s common stock for 750,075 shares of the Company’s series B” convertible preferred stock.
The series “B” convertible preferred shares are convertible into common shares, at a rate of 66.66 shares of common stock for each share of series “B” convertible preferred stock.
Warrants
The Company has outstanding stock warrants that were issued in prior years to its officers and directors for a total of 5,975,000 shares of the Company's common stock. The warrants expire between November 11, 2011 and July 20, 2014. The warrants have an exercise price of $.03 to $.05.
The Company issued a stock warrant to each of two former officers of the Company in December 2003 for a total of 35,000 shares of the Company's common stock. Each of the stock warrants expires on July 20, 2014, and entitles each former officer to purchase 10,000 and 25,000 shares, respectively, of the Company's common stock at an exercise
price of $0.05.
During September and October 2007, the Company issued 31,823,529 shares of common stock for cash at $.017 per share, or $541,000 total as part of a Private Placement under Rule 506 of Regulation D. Along with the stock, each investor also received a warrant to purchase 30% of the shares purchased in the Private Placement.
A total of 9,548,819 warrants were issued. The warrants are ten year warrants and have an exercise price of $.025 per share.
CHDT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8 - STOCK TRANSACTIONS (continued)
Options
In 2005, the Company authorized the 2005 Equity Plan that made available 10,000,000 shares of common stock for issuance through awards of options, restricted stock, stock bonuses, stock appreciation rights and restricted stock units. On May 20, 2005 the Company granted non-qualified stock options under the company’s 2005
Equity Plan for a maximum of 250,000 shares of the Company’s common stock for $0.02 per share. The options expire May 25, 2015 and may be exercised any time after May 25, 2005.
On May 1, 2007, the Company granted 4,000,000 stock options to five employees of the Company under the 2005 Plan. The options vest over two years. During 2008, 1,000,000 of these options were cancelled prior to vesting.
The Binomial Lattice (Suboptimal) option pricing model was used to calculate the fair value of the options granted. During the years ended December 31, 2008 and 2007, the Company recognized compensation expense of $25,131 and $29,214 related to these stock options. The following assumptions were used in the fair value calculations:
Risk free rate – 4.64%
Expected term – 11 years
Expected volatility of stock – 131.13%
Expected dividend yield – 0%
Suboptimal Exercise Behavior Multiple – 2.0
Number of Steps – 100
The Company will recognize compensation expense of $10,869 in 2009 related to these stock options.
On April 23, 2007, the Company granted a ten-year non-qualified, non-statutory stock option for 102,400,000 “restricted” shares of the Company’s common stock to Stewart Wallach, the Company’s CEO, as incentive compensation. The exercise price of the options is $.029 per share, which was the fair market
value of the stock on the date of grant. Twenty percent of the options vested on the date of issuance, and twenty percent per year will vest on the anniversary date through April 23, 2011. On May 23, 2008, 74,666,667 of these options were cancelled. Compensation expense was recognized through the date of the cancellation of the options.
On April 23, 2007, the Company granted a ten-year non-qualified, non-statutory stock option for 28,100,000 “restricted” shares of the Company’s common stock to Gerry McClinton, the Company’s COO and Secretary, as incentive compensation. The exercise price of the options is $.029 per share, which was the
fair market value of the stock on the date of grant. Twenty percent of the options vested on the date of issuance, and twenty percent per year will vest on the anniversary date through April 23, 2011. On May 1, 2008, 850,000 of these options were cancelled.
The Binomial Lattice (Suboptimal) option pricing model was used to calculate the fair value of the options granted. During the years ended December 31, 2008 and 2007, the Company recognized compensation expense of $405,198and $503,075 related to these stock options. The following assumptions were used in the fair value calculations:
Risk free rate – 4.66%
Expected term – 10 years
Expected volatility of stock – 133.59%
Expected dividend yield – 0%
Suboptimal Exercise Behavior Multiple – 2.0
Number of Steps - 100
The Company will recognize compensation expense of $156,557 in 2009, $156,557 in 2010, and $52,186 in 2011 related to these stock options.
On October 22, 2007, the Company granted 700,000 stock options to a business associate of the Company. The options vest over two years.
CHDT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8 - STOCK TRANSACTIONS (continued)
The Binomial Lattice (Suboptimal) option pricing model was used to calculate the fair value of the options granted. During the years ended December 31, 2008 and 2007, the Company recognized compensation expense of $7,978 and $1,330 related to these stock options. The following assumptions were used in the fair value calculations:
Risk free rate – 4.42%
Expected term – 11 and 12 years
Expected volatility of stock – 134.33%
Expected dividend yield – 0%
Suboptimal Exercise Behavior Multiple – 2.0
Number of Steps – 100
The Company will recognize compensation expense of $6,648 in 2009 related to these stock options.
On January 10, 2008, the Company granted 1,000,000 stock options to an advisor of the Company. The options vest over one year.
The Binomial Lattice (Suboptimal) option pricing model was used to calculate the fair value of the options granted. During the year ended December 31, 2008, the Company recognized compensation expense of $19,953 related to these options. The following assumptions were used in the fair value calculations:
Risk free rate – 3.91%
Expected term – 10 years
Expected volatility of stock – 133.83%
Expected dividend yield – 0%
Suboptimal Exercise Behavior Multiple – 2.0
Number of Steps – 100
On February 5, 2008, the Company granted 3,650,000 stock options to four directors and one employee of the Company. The options vest over two years.
The Binomial Lattice (Suboptimal) option pricing model was used to calculate the fair value of the options granted. For the year ended December 31, 2008, the Company recognized compensation expense of $59,619 related to these options. The following assumptions were used in the fair value calculations:
Risk free rate – 1.93% to 3.61%
Expected term – 2 to 10 years
Expected volatility of stock – 133.83%
Expected dividend yield – 0%
Suboptimal Exercise Behavior Multiple – 2.0
Number of Steps – 100
The Company will recognize compensation expense of $2,603 in 2009 related to these stock options.
On May 1, 2008, the Company granted 850,000 stock options to an employee of the Company. The options vest over two years.
The Binomial Lattice (Suboptimal) option pricing model was used to calculate the fair value of the options granted. For the year ended December 31, 2008, the Company recognized compensation expense of $5,242 related to these options. The following assumptions were used in the fair value calculations:
Risk free rate – 3.78%
Expected term – 11 years
Expected volatility of stock – 133.59%
Expected dividend yield – 0%
Suboptimal Exercise Behavior Multiple – 2.0
Number of Steps – 100
The Company will recognize compensation expense of $7,862 in 2009 and $2,620 in 2010 related to these stock options.
CHDT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8 - STOCK TRANSACTIONS (continued)
The following table sets forth the Company’s stock options outstanding as of December 31, 2008 and 2007 and activity for the years then ended:
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Remaining
|
|
|
Aggregate
|
|
|
|
|
Shares
|
|
|
Exercise
Price
|
|
|
Contractual
Term (Years)
|
|
|
Intrinsic Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, December 31, 2007
|
|
|
135,450,000
|
|
|
$
|
0.028
|
|
|
|
|
|
|
|
|
Granted
|
|
|
5,500,000
|
|
|
|
0.028
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
Forfeited/expired
|
|
|
76,516,667
|
|
|
|
0.028
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, December 31, 2008
|
|
|
64,433,333
|
|
|
|
0.028
|
|
|
|
|
|
|
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Forfeited/expired
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, June 30, 2009
|
|
|
64,433,333
|
|
|
$
|
0.028
|
|
|
|
8.64
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested/exercisable at December 31, 2008
|
|
|
43,102,777
|
|
|
$
|
0.028
|
|
|
|
8.68
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested/exercisable at June 30, 2009
|
|
|
47,927,777
|
|
|
$
|
0.028
|
|
|
|
8.68
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table summarizes the information with respect to options granted, outstanding and exercisable under the 2005 plan:
|
Exercise Price
|
Options Outstanding
|
Remaining Contractual Life in Years
|
Average Exercise Price
|
Number of Options Currently Exercisable
|
|
$.02
|
250,000
|
6
|
$.020
|
250,000
|
|
$.029
|
54,983,333
|
9
|
$.029
|
41,499,999
|
|
$.029
|
3,000,000
|
10
|
$.029
|
3,000,000
|
|
$.029
|
700,000
|
11
|
$.029
|
350,000
|
|
$.029
|
1,000,000
|
9
|
$.029
|
1,000,000
|
|
$.029
|
150,000
|
9
|
$.029
|
150,000
|
|
$.029
|
2,000,000
|
1
|
$.029
|
2,000,000
|
|
$.027
|
1,500,000
|
1
|
$.027
|
1,500,000
|
|
$.029
|
850,000
|
10
|
$.029
|
425,000
|
CHDT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9 – BUSINESS ACQUISITIONS AND DISPOSALS
Complete Power Solutions
On January 27, 2006, the Company entered into a Purchase Agreement (the "Purchase Agreement") with William Dato and Complete Power Solutions ("CPS") pursuant to which the Company acquired 51% of the member interests of CPS owned by Mr. Dato for a purchase price consisting of the payment of $637,000 in cash and the delivery of 600,000 shares
of Company's Series A Convertible Preferred Stock (the "Series A Preferred Stock") having a stated value of $1,200,000, which Series A Preferred Stock are convertible into 50,739,958 shares of the Company's Common Stock at the demand of Mr. Dato. The cash paid in the transaction was obtained from capital provided to the Company for use in connection with acquisitions by Howard Ullman, our Chief Executive Officer and President, and certain of our directors and principal shareholders.
On January 26, 2007, the Company entered into a Purchase and Settlement Agreement (the "Settlement Agreement"), dated and effective as of December 31, 2006, with William Dato and CPS whereby: (a) CPS repurchased the 51% membership interest owned by China Direct in return for the transfer of the 600,000 shares of the Company’s "Series
A Preferred Stock”, which are convertible into 50,739,958 shares of the Company's common stock, and (b) the issuance of a promissory note by CPS to CHDT for 225,560, bearing annual interest at 7% with interest-only payments commencing on July 1, 2007 and thereafter being paid quarterly on April 1st, July 1st, October 1st, and January 1st until the principal and all unpaid interest thereon shall become due and payable on the maturity date, being January 6, 2010 (the “2007 Promissory Note”). The
2007 Promissory Note also provides that the principal amount may be automatically increased by an amount of up to $7,500 if the amount of a customer claim is settled for less than $7,500. As of the date of this report the principal amount has not been increased by an amount up to $7,500, as described above. The shares were valued at $1,775,864 based on the market value of the common stock the shares are convertible into.
As of December 31, 2006, the balance due on the $225,560 was classified on the Company’s balance sheet as an amount due from former subsidiary. This item was classified as long-term as of December 31, 2006, in anticipation of its conversion to a note receivable, the maturity of which is more than one year from the balance
sheet date. Subsequently, upon execution of the 2007 Promissory Note on January 26, 2007, the Company reclassified the balance as a long-term note receivable from former subsidiary.
CPS is also indebted to CHDT under a promissory note in the original principal amount of $250,000, executed by William Dato on June 27, 2006 and payable to CHDT, bearing interest at 7% per annum and maturing on June 30, 2007, subject to extension (the “2006 Promissory Note”) and subject to offset by (i) $41,600 owed by an affiliate
of CHDT to the CPS funds advanced by CPS for portable generators that were never delivered and (ii) $15,000 as an agreed amount paid to compensate CPS for certain refunds required to be made by CPS (which amounts have been first applied to accrued and unpaid interest due September 30, 2006 and December 31, 2006 and then applied to quarterly interest payable on the principal of the 2006 Promissory Note to maturity (June 30, 2007) and then to reduce the principal amount of the 2006 Promissory Note to $210,900.
On March 10, 2008, the Company was granted a Final Summary judgment against CPS for $501,740 related to the two notes due from CPS to the Company as part of the disposal agreement entered into in January 2007. As of December 31, 2007, the Company determined these two notes to be uncollectible and wrote-off $427,710 to expense. The
Company has pursued legal action to collect this judgment, but it is now considered uncollectible.
The Company disposed of its interest in CPS to further its goal of focusing on its Capstone Industries consumer product business line in an effort to achieve sustained profitability from low-coast, low inventory consumer products that are direct shipped from Chinese and other low cost contract manufacturing sources to the Company’s
customers.
CHDT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9 – BUSINESS ACQUISITIONS AND DISPOSALS (continued)
Capstone Industries
On September 13, 2006 the Company entered into a Stock Purchase Agreement (the Purchase Agreement) with Capstone Industries, Inc., a Florida corporation (Capstone), engaged in the business of producing and selling portable book lights and related consumer goods, and Stewart Wallach, the sole shareholder of Capstone. Under the Stock Purchase
Agreement the Company acquired 100% of the issued and outstanding shares of Capstone Common Stock in exchange for $750,000 in cash (funded by a note payable to the Company’s CEO and $1.25 million of the Company’s Series B Preferred Stock, $0.01 par value per share, which Series “B” stock is convertible into 15.625 million “restricted” shares of CHDT Common Stock, $0.0001 par value (common stock). CHDT has agreed to register shares of Common Stock under the Securities Act of
1933, as amended, to cover conversion of the Series “B” Stock issued to Mr. Wallach in the acquisition of Capstone. Such registration has not been filed as of the date of this Report. CHDT will operate Capstone as a wholly-owned subsidiary. As of the date of this report these share have not been registered. The Capstone acquisition was recorded as follows:
|
Cash
|
|
$
|
33,676
|
|
|
Accounts receivable
|
|
|
208,851
|
|
|
Inventory
|
|
|
340,109
|
|
|
Prepaid expenses
|
|
|
7,500
|
|
|
Property and equipment
|
|
|
16,127
|
|
|
Goodwill
|
|
|
1,936,020
|
|
|
Accounts payable and accrued expenses
|
|
|
(417,283
|
)
|
|
Loan payable to China Direct
|
|
|
(125,000
|
)
|
|
Total purchase price
|
|
$
|
2,000,000
|
|
Capstone was acquired to expand the Company’s customer base and sources of supply, the value of which contributed to the recording of goodwill.
For tax purposes, the goodwill is expected to be amortized as an IRC Sec. 197 intangible over a period of fifteen years from date of acquisition.
NOTE 10 - INCOME TAXES
As of December 31, 2008, the Company had a net operating loss carryforward for income tax reporting purposes of approximately $2,900,000 that may be offset against future taxable income through 2028. Current tax laws limit the amount of loss available to be offset against future taxable income when a substantial change in ownership occurs.
Therefore, the amount available to offset future taxable income may be limited. No tax benefit has been reported in the financial statements, because the Company believes there is a 50% or greater chance the carryforwards will expire unused. Accordingly, the potential tax benefits of the loss carryforwards are offset by a valuation allowance of the same amount.
|
|
|
2008
|
|
|
2007
|
|
|
Net Operating Losses
|
|
$
|
594,500
|
|
|
$
|
454,690
|
|
|
Valuation Allowance
|
|
|
(594,500
|
)
|
|
|
(454,690
|
)
|
|
|
|
$
|
-
|
|
|
$
|
-
|
|
The provision for income taxes differ from the amount computed using the federal US statutory income tax rate as follows:
|
|
|
2008
|
|
|
2007
|
|
|
Provision (Benefit) at US Statutory Rate
|
|
$
|
(139,810
|
)
|
|
$
|
(161,745
|
)
|
|
Increase (Decrease) in Valuation Allowance
|
|
|
139,810
|
|
|
|
161,745
|
|
|
|
|
$
|
-
|
|
|
$
|
-
|
|
The Company evaluates its valuation allowance requirements based on projected future operations. When circumstances change and cause a change in management’s judgment about the recoverability of deferred tax assets, the impact of the change on the valuation is reflected in current income.
CHDT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10 - INCOME TAXES
Effective January 1, 2007, the Company adopted the provisions of FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes – an interpretation of FASB Statement No. 109” (“FIN 48”). FIN 48 prescribes a recognition threshold and a measurement attribute for the financial statement recognition and
measurement of tax positions taken or expected to be taken in a tax return. For those benefits to be recognized, a tax position must be more-likely-than-not to be sustained upon examination by taxing authorities. The adoption of the provisions of FIN 48 did not have a material impact on the company’s condensed consolidated financial position and results of operations. At January 1, 2008, the company had no liability for unrecognized tax benefits and no accrual for the payment of related interest.
Interest costs related to unrecognized tax benefits are classified as “Interest expense, net” in the accompanying consolidated statements of operations. Penalties, if any, would be recognized as a component of “Selling, general and administrative expenses”. The Company recognized $0 of interest expense related to
unrecognized tax benefits for the year ended December 31, 2008 and 2007. In many cases the company’s uncertain tax positions are related to tax years that remain subject to examination by relevant tax authorities. With few exceptions, the company is generally no longer subject to U.S. federal, state, local or non-U.S. income tax examinations by tax authorities for years before 2004. The following describes the open tax years, by major tax jurisdiction, as of December 31, 2008:
|
United States (a)
|
|
2005 – Present
|
|
(a) Includes federal as well as state or similar local jurisdictions, as applicable.
|
NOTE 11 – CONTINGENCIES
CELESTE TRUST REG., ESQUIRE TRADE, ET AL. V. CBQ, INC
.
(Second Circuit Court of Appeals, Case #07-1701-CV, April 2007; Lower Court Case# 03 Civ. 9650 RMB; US District Court, SDNY, 12/4/2003): Both the initial
and amended complaint of the plaintiffs in this case against us were dismissed by the trial court upon our motion to dismiss. The plaintiffs perfected their appeal of the dismissal of the amended complaint and the appeal was briefed in November 2007. The appeal is currently pending before the Second Circuit Court of Appeals in New York City. CHDT is uncertain when or how the Second Circuit will rule on the plaintiffs’ appeal. CHDT has moved that the Second Circuit to make
a ruling on the briefs without oral arguments, but CHDT believes that the plaintiffs have requested oral arguments. There has been no ruling to date on the overall appeal or CHDT’s motion for a ruling based solely on the written appeal briefs submitted to date. While CHDT intends to appeal any adverse ruling in this case by the Second Circuit, and CHDT is confident of prevailing in this matter, if the plaintiffs ultimately prevailed in this case and received their requested relief
with no further right of appeal by CHDT, the Company lacks the available funds or financing to pay such relief and if a settlement was not possible, in the event of such an adverse outcome, such an adverse judgment could not be paid from available Company resources. The New York City office of Dorsey & Whitney currently represents CHDT in this case.
This case concerns a lawsuit that was filed against the Company by three Plaintiffs on or about December 4, 2003, but which the Company did not receive notice of until the week of February 18, 2004 or thereabouts. The Plaintiffs purchased debentures issued by Socrates Technologies Corporation (STC), a public Delaware corporation in 2000.
When the Company purchased the assets of two STC subsidiaries in March 2001, the Plaintiffs allege that the Company promised to issue to the Plaintiffs and others the consideration that was to be paid to STC for the acquired assets and to so do in order to compensate the plaintiffs for their investment in the STC debentures, which were apparently in default at that time. The total consideration paid for the STC subsidiaries' assets were 7.65 million shares of company Common Stock and a Promissory Note made by
the Company for $700,000 principal amount. The Company has defended against the Plaintiffs' claims to date. If the Plaintiffs win a judgment on their claims, the judgment, if collected, would prove potentially ruinous the Company, unless a settlement involving no cash was arranged between the parties to the lawsuit. The Plaintiff's claims include a claim for receipt of the money due under the Promissory Note with a principal amount of $700,000. The Company lacks the cash flow or cash reserves or funding resources
to pay such a claim, either in a lump sum or over time. If the Plaintiffs are awarded the claimed damages against the Company in this lawsuit and the Company did not or could not appeal such an award, then under such circumstances the Company would be unable to pay such damages, either in a lump sum or under any short-term schedule, and would be insolvent without an emergency infusion of capital from investors
.
CHDT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11 – CONTINGENCIES (continued)
Sun Trust Bank Dispute. Sun Trust Bank line of credit and term note
Prior to being acquired by CHDT, Quantum Technology Group had a $4 million line of credit with Crestar Bank, which was subsequently acquired by Sun Trust. This line of credit was guaranteed by Quantum and five individual guarantors, including Ray Kostkowski, Anne Sigman, Skip Lewis, and Anthony Saunders. This line of credit was opened during
April, 2000. On August 8, 2000, the Company acquired all of the shares of Quantum. Sun Trust asserted that $1.3 million of the line of credit had been used, and was owing to Sun Trust, as well as line of credit, a $200,000 term loan from Sun Trust to Quantum, approximately $200,000 in accrued interest and $100,000 in attorney fees -- all of which SunTrust had sought to collect from the individual guarantors. Sun Trust had not sued the Company and has not raised its prior threat to sue since 2005.
RAS Investment, Inc., a company affiliated with Anne Sigman, a former employee of the Company, has advised the Company that RAS has acquired the Sun Trust note and has demanded payment in cash or stock. As of the date of this Report, the Company's position remains as before, that is, that the Company is not obligated to pay the Sun Trust
debts and any claims made to collect that debt could be defeated by several potential defenses and counterclaims. CHDT has not received any communication in this matter from RAS Investment, Inc. since 2006. The Company will aggressively defend against any effort to assert any claim against CHDT based on the above credit line.
Potential Litigation
Cyberquest, Inc.
As reported previously, the Company has received two claims from certain former shareholders of Cyberquest, Inc. that they hold or own approximately 70,000 shares of a class of the Company's redeemable preferred stock that was issued in the Company's 1998 acquisition of Cyberquest. Cyberquest ceased operations during the 2000-2001 period.
The Company has investigated these claims and has not been able to date to fully substantiate any of the claims to date and the claimants have not pursued their claims beyond an initial communication asserting ownership of these shares of serial preferred stock.
The Company has not received any further claims or communications since mid-2006.
NOTE 12 - SALE OF ASSETS
The assets and liabilities of Souvenir Direct were transferred into Capstone January 1, 2007. The assets consisted of cash of $13,816, accounts receivable of $20,967, deposits of $1,775, net fixed assets of $3,329, and intercompany receivables of $160,263. The liabilities consisted of accrued expenses of $38,387 and loans payable
of $10,000.
On December 1, 2007, the Company sold the remaining assets of Souvenir Direct for $206,284. For the year ended December 31, 2007, a gain on disposal of assets of $206,284 was recognized in the financial statements of the Company.
NOTE 13 - INTANGIBLE ASSETS
At December 31, 2008, the Company had capitalized $168,890 related to packaging artwork and design costs related to the Company’s AASTP products and Lighting products as intangible assets. These costs are being amortized over their useful life, which the Company has determined to be two years. During 2008, the Company recorded
$65,199 of amortization expense related to these assets. For the six months ended June 30, 2009, the Company capitalized an additional $16,137 related to packaging artwork and design costs and recognized amortization expense of $45,483 during the six months. At June 30, 2009 and December 31, 2008, the net amount of the intangible asset was $74,351 and $103,700, respectively.
NOTE 14 – SUBSEQUENT EVENTS
On July 9, 2009, the Company authorized and issued 1,000 shares of Series C Preferred Stock in exchange for $700,000. The 1,000 shares of Series C Stock is convertible into 67,979,725 common shares. The par value of the Series C Preferred shares is $1.00. As part of the sale of the Series C Preferred Shares,
the Company also authorized new Series B-1 Preferred Stock. The 2,108,813 outstanding Series B Preferred Shares were converted to Series B-1 Preferred Shares, while cancelling 779,813 of the outstanding Series B Preferred Shares, leaving 1,329,000 shares of the new Series B-1 Preferred Shares outstanding. The Series B-1 Preferred shares are convertible into common shares, at a rate of 66.66 shares of common stock for each share of series “B-1” convertible preferred stock. The
par value of the new Series B-1 Preferred shares is $0.0001.