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 September 30, 2009 and for the three and
nine month periods ended September 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 nine 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
September 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 $518,953 and
$387,749 at September 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 $102,088 and $76,004 for the nine months ended September 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
nine months ended September 30, 2009 and 2008 are not presented as it would be
anti-dilutive. At September 30, 2009 and 2008, the total number of
potentially dilutive common stock equivalents was 246,562,717 and 197,165,627,
respectively.
Principles
of Consolidation
The
consolidated financial statements for the nine months ended September 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 September 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 $113,284 and $79,743 for the nine months
ended September 30, 2009 and 2008, respectively.
Shipping
and Handling
The
Company’s shipping and handling costs, incurred by Capstone amounted to $48,884
for the nine months ended September 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 nine months ended September 30,
2009, the Company recognized compensation expense of $117,418 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 nine months ended September 30,
2009, the Company recognized compensation expense of $8,151 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 nine months ended September 30,
2009, the Company recognized compensation expense of $4,986 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
nine months ended September 30, 2009, the Company recognized compensation
expense of $1,952 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 nine months ended September 30,
2009, the Company recognized compensation expense of $5,898 related to these
options.
On June
8, 2009, the Company granted 4,500,000 stock options to four directors of the
Company. The options vest in one year. For the nine months
ended September 30, 2009, the Company recognized compensation expense of $29,955
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 nine months ended September 30, 2009 included
$21,000 for consulting fees. Stock-based compensation expense for the
nine months ended September 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 September 30, 2009, the Company had cash in excess of FDIC limits of $250,099
with Bank of America and $45,743 with Sterling National Bank.
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 September 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 September 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 September 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 September 30, 2009, the total amount payable
on this loan was $198,674, including interest of $20,674. 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 September
30, 2009 and December 31, 2008 was $1,194,698 and $1,185,407, respectively,
including accrued interest of $20,674 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
|
|
$
|
1,194,698
|
|
|
2010
|
|
|
-
|
|
|
2011
|
|
|
-
|
|
|
2012
|
|
|
-
|
|
|
2013
|
|
|
-
|
|
|
Total
future maturities
|
|
$
|
1,194,698
|
|
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
September 30, 2009 and December 31, 2008, there was $1,744,066 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
September 30, 2009, the total amount due on this loan was $551,885, including
interest of $9,885
.
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 September 30,
2009, the total amount due on this loan was $269,320, including interest of
$9,320
.
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 $45,668 and $49,415 for the nine
months ended September 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.
On July
9, 2009, the 2,108,813 outstanding Series B Preferred Shares were converted to
Series B-1 Preferred Shares, while canceling 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.
Series
“C” Preferred Stock
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.
CHDT
CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
NOTE
8 - STOCK TRANSACTIONS (continued)
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.
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.
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 $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.
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.
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. 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.
The
following table sets forth the Company’s stock options outstanding as of
September 30, 2009, 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,
September 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 September 30, 2009
|
|
|
56,916,667
|
|
|
$
|
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
|
48,241,667
|
|
$.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
|
|
$.029
|
4,500,000
|
2
|
$.029
|
-
|
|
|
|
|
|
|
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
ESQUIRE TRADE
& FINANCE INC. & INVESTOR, LLC v.
(Case Number 03 CIV. 9650 (SC),
decided November 5, 2009) (formerly styled “
CELESTE TRUST
REG., ESQUIRE TRADE, ET AL. V. CBQ, INC
., Case Number 03 CIV. 9650 RMB)
(“Celeste case”).
On November 5, 2009, the U.S. District
Court for the Southern District of New York (“Court”) issued a Memorandum
Decision denying all of the Plaintiffs’ claims and denying recovery by the
Plaintiffs under their amended complaint. The Company learned of this
decision on November 6, 2009. The Plaintiffs have 30 days from the
date of this decision to appeal. The Company does not know if the
Plaintiffs intend to appeal. The Company believes that the November
5, 2009 decision by the Court is well reasoned in terms of stating the legal
basis for denial of all Plaintiffs’ claims. The Company intends to
contest any appeal by the Plaintiffs, if any. The Memorandum Decision
of the Court is filed as Exhibit 99.1 to the Form 8-K, dated November 6, 2009,
as filed with the Commission on November 9, 2009.
Howard
Ullman, a current director and former officer of the Company, signed an
indemnification agreement with the Company on June 3, 2009, whereby Mr. Ullman
would indemnify, subject to certain conditions, the Company, its subsidiaries,
and their respective successors,
officers,
directors, other members of management, employees, shareholders, agents and
attorneys for all claims that may arise from the
Celeste
case. The
indemnification agreement is attached as Exhibit 2.1.1.3 to the Company’s Form
10-Q for the quarter ending June 30, 2009 and filed with the Commission on 14
August 2009, File # 000-28831.
The
Celeste
case concerns events
that occurred prior to the start of service of the current executive management
with the Company. The current management has sought the payment of
legal fees and indemnification from certain former officers of the
Company. To date, legal fees in the
Celeste
case have been mostly
paid by one or more of those former officers. The payment of such
legal fees or any indemnification arrangement by former officers of the Company
does not contain or constitute an admission of liability or an admission of the
validity of any adverse claims in the
Celeste
case.
Should
the Plaintiffs win on appeal from the November 5, 2009 memorandum decision and
then obtain a judgment on their claims in a subsequent trial or otherwise, the
Company would enforce its rights under the aforesaid indemnification agreement.
If such judgment, if any, is not paid or substantially paid by Mr. Ullman and
the Company did not or could not appeal such a judgment, then under such
circumstances the Company would be unable to pay the cash portion of the damages
and would be absent a suitable settlement of the cash claims, possibly insolvent
without an emergency infusion of capital from investors. As of the date of this
Report, the Company does not know if the Plaintiffs intend to appeal to the
denial of their claims under the amended complaint and denial of any recovery
thereunder.
CHDT
CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
NOTE
11 – CONTINGENCIES (continued)
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 in
2000-2001 period. The Company has investigated these claims and has not been
able to date to fully substantiate any of the ownership claims to date to the
preferred stock in question and the claimants have not pursued their claims
beyond an initial communication asserting ownership of these shares of serial
preferred stock. The Company did not maintain preferred stock ownership records
with a stock transfer agent at the time in question and has to rely on available
internal records in this matter. The Company has not received any further claims
or communications since mid-2006. Since the Company has no
record of the claimants as preferred stock shareholders, the Company is taking
the position that they are no shareholders of record and the alleged redeemable
preferred stock is not issued and outstanding.
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 nine months ended September 30, 2009, the Company
capitalized an additional $30,302 related to packaging artwork and design costs
and recognized amortization expense of $70,785 during the nine
months. At September 30, 2009 and December 31, 2008, the net amount
of the intangible asset was $63,208 and $103,700, respectively.