Item 1. Business.
We are a public holding Company organized under the laws of the State of Florida and are a leading designer and manufacturer of specialty power failure lighting solutions and innovator of consumer products for the North American and Latin American retail markets. We develop, manufacture and sell a broad range of stylish, innovative and easy to use consumer products including portable booklights, specialty booklights, multi-task lights, e reader lights, power failure lights and night lights, wireless motion sensor lights and desk lamps that are designed to make today’s lifestyles simpler and safer. Our products are sold under our wholly-owned subsidiary Capstone Industries Inc. brand name as well as being private labeled for our retailer customers. CHDT Corporation seeks to deliver strong, consistent business results and superior shareholder returns by providing consumers on a global basis with products that make their lives simpler and safer.
We oversee the manufacturing of our products, which are all made in China by contract manufacturers, through our two wholly-owned operating subsidiaries; (a) Capstone Industries, Inc., a Florida corporation organized in 1997 and acquired on September 13, 2006 (“Capstone”) and (b) Capstone Lighting Technologies, a Florida limited liability Company (“CLTL”) formerly known as Black Box Innovations, L.L.C., a Florida limited liability Company (“BBIL”) formerly known as “Overseas Building Supply, L.C.” and formed on February 20, 2004. CLTL has no significant business operations at this time.
Strategy
Our strategy is to develop and maintain positions of innovative and technical leadership by continually introducing new ideas and concepts to our consumer product categories while maintaining low competitive prices. We plan to leverage our product successes and continually expanding channels as our brands continue to gain traction at retail levels by merchandisers, buyers and consumers. This brand recognition and expanded product placement is expected to continue to increase annual sales growth. We also plan to selectively acquire business with similar technical capabilities that could benefit from our leadership position and strategic direction.
We have extensive experience with introducing new products into retail market channels and believe that provides us a competitive edge. Typically, we seek to find niche product opportunities that may be overlooked or underexploited by competitors, and believe that we can win a profitable niche of the market share. We believe these opportunities exist with innovative, aesthetically-pleasing products that include the following characteristics:
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Designed for an everyday use or task;
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Affordable, that is we can produce with a reasonable profit within the range of manufacturer’s suggested retail price for such a product
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Represent value when compared with items produced or marketed by major consumer product companies on a national scale; and
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Generates reasonable profit and profit margin opportunity with acceptable market penetration costs.
We believe that it can be more economical and efficient to develop and manufacture certain products in China and have them shipped to the United States rather than to have such products produced in North America. While this resource is available to and used by large numbers of U.S. companies, including our competitors, we believe this Chinese manufacturing resource gives us the level of production cost and quality that allows us to be competitive with larger competitors in the United States. In Hong Kong, we also have personnel experienced in Engineering and Design, Product Development, International Logistics and Quality Control , who work with our OEM Chinese factories to develop and prototype new product concepts and to ensure products meet Consumer Product Regulations and rigorous Quality Control standards . All products are tested before and during production by company personnel.. This team also provides extensive, product development, quality control and logistics support to our factory partners to ensure on time shipments. The Company plans to expand its staff in Hong Kong and the Company’s relative presence in 2012 as product line extensions and increased number of factories utilized become factors.
Products and Customers
We are an innovative company in the design and development of a variety of lighting and other products that consumers would typically buy for functional purposes that we design for expanded use as well as aesthetics. Our current largest selling product group is the Eco-i-Lite power failure light and nightlight program, which accounted for 57.7%, of our revenues in 2011, 63.8%, of our revenues in 2010, and 61.05% and, of our revenues in 2009. Our other products include Light Ringers® Lamps, Pathway Lights® book and multi-task lights, Battery Powered Wireless Motion Sensor Lights and eBook-Lite, e reader lights. We also plan to expand our product line into other growing lighting and security segments specific to different region and market demands.
Since inception, we have focused on establishing and growing relationships with numerous leading international, national and regional retailers including but not limited to: Target, Wal-Mart, Sam’s Club, Costco, BJ’s Warehouse, Barnes & Noble, Brookstone, Meijer Stores, Office Depot, Fred Meyer-Kroger Stores, The Container Store, True Value, and Home Depot. These distribution channels may sell our products through the Internet as well as through retail storefronts and catalogs/mail order.
Our experience in management, operations, and the export business has enabled us to develop the scale, manufacturing efficiencies and design expertise that serves as the foundation for us to aggressively pursue niche product opportunities in the largest consumer markets and growing international market opportunities. While we have traditionally generated the majority of our sales in the domestic market, urbanization, rising family incomes and increased living standards have spurred demand for small consumer appliances internationally. In order to capture this market opportunity, we introduced the Capstone Industries brand of power failure lights to Central and South American markets through our master distributor Avtek. Due to the rate of natural and man-made occurrences resulting in loss of electricity worldwide, we are optimistic about the potential growth rate in fiscal years 2012 and 2013 for our power failure lighting (assuming sufficient marketing support and subject to the response of competitors and key markets).
We believe CHDT is positioned to become a leading manufacturer in the rapidly growing home emergency lighting and security lighting sector and will continue to be a potential leader of power-failure lighting solutions for consumers in our industry segment. Despite the global recession in 2008, 2009 and 2010, we believe that we were able to maintain our revenue growth because of our ability to deliver products on time, the quality reputation of our products, our business relationships with our retailers and our aggressive expansion in the North American and Latin American markets.
Sales and Marketing
CHDT’s products are marketed primarily through a direct independent sales force, distributors and wholesalers. The sales force markets our products through numerous retail locations worldwide, including mass merchandisers, warehouse clubs, food, drug and convenience stores, department stores and hardware centers. We actively promote our products to retailers and distributors at North American trade shows, but rely on the retail sales channels to advertise our products directly to the end consumer. Domestically and internationally, the sales teams market our full portfolio of product offerings. All sales activities at major account levels involved direct company executive staff participation.
Working Capital Requirements
The Company's current business model (primarily direct import) does not necessitate carrying large amounts of inventory as we build our products on a demand basis for our advanced sales orders. Parts and components for our products can be quickly developed by our contract manufacturers. However, as is the case in our direct import program , upon receipt of a large order, the Company could have at any point in time within a reporting period a large amount of work in process inventory or finished goods on hand as we complete the order for shipment. In an effort to expand distribution to such noted retailers as Home Depot, Target and Walmart for non promotional periods, the Company launched a domestic distribution program enabling retailers to stock our products daily and replenish based on rates of sale. This has not only allowed Capstone to add these retailers to its distribution for 2012 but will help to normalize the business by minimizing the spikes in activity associated with the majority of the Company's business being promotional or seasonal. The first retailers to endorse this formal domestic program translates to an estimated increase in store count of 4800 outlets. The revenues of these increased outlets will be recognized over the course of 2012 with launch dates starting as early as April 2012. The large backlog that is traditionally evident in the Company for its direct import orders, will should be impacted as the business in the domestic distribution program is more evenly spread over the course of the year and orders are generated based on point of sale activity, not in anticipation as is the case on promotions. The Company anticipates this domestic program to be incremental to it's existing direct import programs and moreover it has opened the doors to retailers including Home Depot and Walmart . This could require greater working capital requirements which will be available from existing sources. Our liquidity and cash requirements are discussed more fully in Part II, Item 6, Management’s Discussion and Analysis of Operations below.
Competitive Conditions
The consumer products and small electronics businesses are highly competitive, both in the United States and on a global basis, as large manufacturers with global operations compete for consumer acceptance and, increasingly, limited retail shelf space. Competition is based upon brand perceptions, product performance, customer service and price. Social media has a growing impact on consumer response to products and brands.
Our principal lighting competitors in the U.S. are General Electric (Jasco), Energizer, Sylvania, Zelco and Lightwedge, LLC. We believe private-label sales by large retailers has some impact on the market in some parts of the world as many national retailers such as Target, Wal-Mart, Home Depot, and Costco offer lighting as part of their private branded product lines.
With trends and technology continually changing, CHDT will continue to develop and introduce new products and color options at competitive pricing. Success in the markets we serve depends upon product innovation, pricing, retailer support, responsiveness, and cost management. We continue to invest in developing the technologies and design critical to competing in our markets.
Raw Materials
The principal raw materials used by us are sourced in China, as we manufacture our products exclusively through contract manufacturers in the region. Although prices of materials have fluctuated over time, CHDT believes that adequate supplies of raw materials required for its operations are available at the present time. CHDT, of course, cannot predict the future availability or prices of such materials. These raw materials are generally available from a number of different sources, and the prices of those raw materials are susceptible to currency fluctuations and price fluctuations due to transportation, government regulations, price controls, economic climate, or other unforeseen circumstances. In the past, CHDT has not experienced any significant interruption in availability of raw materials. We believe we have extensive experience in manufacturing and have taken positions to assure supply and to protect margins on anticipated sales volume.
Seasonality
Sales and operating profit for household products and electronics are seasonally influenced, with increased purchases by consumers during the winter holiday season, and increases in retailer inventories during autumn. In addition, natural disasters such as hurricanes and tornadoes can create conditions that drive increased needs for portable power and spike power failure light and nightlight sales. Many retailers now recognize a storm preparedness period and the Company believes that it is well positioned to participate in these sales periods.
Intellectual Property
CHDT subsidiary, Capstone owns a number of U.S. trademarks and patents, which CHDT considers of substantial importance and which are used individually or in conjunction with other CHDT trademarks and patents These include Timely Reader, Xxtreme Blinkers, Light Ringers, Pathway Lights , Timely Reader Booklights with Timer and Auto Shut Off and
Eco-i-Lite Power Failure Light.
CHDT routinely prepares patent and trademark applications for filing in the United States. CHDT will also pursue foreign patent protection in foreign countries if deemed necessary
CHDT’s ability to compete effectively in the power failure and portable lighting categories depends, in part, on its ability to maintain the proprietary nature of its technology and manufacturing processes through a combination of patent and trade secret protection, non-disclosure agreements, licensing, and cross-licensing agreements. CHDT owns a number of patents, trademarks and trademark and patent applications and other technology which CHDT believes are significant to its business. These relate primarily to lighting device improvements and manufacturing processes.
We rely on trademark, trade secret, patent and copyright laws to protect our intellectual property rights. We cannot be sure that these intellectual property rights will be effectively utilized or, if necessary, successfully asserted. There is a risk that we will not be able to obtain and perfect our own intellectual property rights, or, where appropriate, license from others intellectual property rights necessary to support new product introductions. There can be no assurance that we will not need to acquire licenses under patents belonging to others for technology potentially useful or necessary to us and there can be no assurance that such licenses will be available to us, if at all, on terms acceptable to us. Moreover, there can be no assurance that any patent issued to or licensed by us will not be infringed or circumvented by others. In particular, if we are unable to obtain issuance of a patent with broad claims with respect to our products or if we are unable to prevail in oppositions against our foreign patents with similar claim scope, a competitor may be able to design around our patent rights by employing technologies or innovations that are not covered by our subsisting patents.
Research, Product Development, and Manufacturing Activities
We are engaged in a variety of development and design activities as well as basic research activities directed to the substantial improvement or new application of our existing technologies. These costs are expensed when incurred and included in the operating expenses. Research and product development costs amounted to approximately$197,290 in 2011, $140,917 in 2010, and $198,134 in 2009.
Employees
We employed 6 employees as of December 31, 2011. We consider our relations with our employees to be good with none of our employees being subject to collective bargaining agreements.
Prior History:
Prior to the acquisition of Capstone Industries, we experienced a high turnover in management and business lines. We have sought to avoid the problems of the past and recruited an experienced management and sales team for the stated purpose to develop and expand our consumer products business. We believe that this investment in corporate infrastructure was necessary to lay the foundation for any hope of future success and effective business and product development. While we are not certain our current strategy and business lines will produce sustained future profitability or any growth, we believe that the current strategy and business line is the best approach for our current management team and available resources and, in our opinion, the most likely path to any hope of sustained future profitability or any growth. 2011 has proven to be our best performing year since 2007 and is our first profitable year. Our board of directors continues to review alternate business strategies, which may include sale of an existing business line, acquisition of new product lines, and merger and/or acquisition transaction with other companies. While no board decision has been made on any of these corporate transactions or actions, our board continues to periodically evaluate and consider such options.
Acquisition of Capstone: on September 15, 2006, we entered into a Stock Purchase Agreement with Capstone and Stewart Wallach, the sole shareholder, a director and a senior executive officer of Capstone. Under the Stock Purchase Agreement, we acquired 100% of the issued and outstanding shares of Capstone Common Stock in exchange for $750,000 in cash (funded by the previously reported credit line provided by certain directors of CHDT) and $1.25 million in Series B Preferred Stock, $0.01 par value per share, which Series B Stock is convertible into 15.625 million “restricted” shares of our Common Stock, $0.0001 par value (“Common Stock”). On July 9, 2009, the outstanding Series B Preferred Shares were converted to Series B-1 Preferred Shares. The series B-1 shares are convertible into common stock; at a rate of 66.66 of common shares for each share of series “B-1” On December 17, 2009, the outstanding Series B-1 shares were converted into common stock.
Available Information
We file our financial information and other materials as electronically required by the SEC with the SEC. These materials can be accessed electronically via the Internet at www.sec.gov. Such materials and other information about the Company are also available through our website at www.chdtcorp.com.
Government Regulation
CHDT's operations are subject to regulation by federal and state securities authorities (including FINRA) as well as various federal, state, foreign and local laws and regulations governing a consumer products company and a for-profit business. We are not subject to any U.S. federal, state or local regulation that poses, in our opinion, any special or unusual burden or obstacle to conducting our business and financial affairs. Our main concern in terms of government regulation is the changing regulatory environment in China and its impact on our ability to access our consumer product manufacturing sources and obtain our consumer products. While the general trend in China has to be conducive to trade and commerce, China is a still a single-party nation-state in which the central government has the power to dramatically and immediately change its trade and commercial policies and laws. Political or military conflict between the United States and China, who are rivals for power and influence in Asia and to an increasing extent all along the Pacific Rim as well as being diametrically opposed to one another over the status of Taiwan, could provoke a change in Chinese trade or commercial law that makes it more difficult or expensive for us to obtain consumer products. Such a development would have a serious impact on our ability to compete in the United States in the niche consumer product market.
Note Payable - Sterling National bank
On September 8, 2010, in order to fund increasing Accounts Receivables and support working capital needs, Capstone secured a Financing Agreement from Sterling Capital Funding (now called Sterling National Bank), located in New York, whereby Capstone receives funds for assigned retailer shipments. The assignments provide funding for an amount up to 85% of net invoices submitted. There will be a base management fee equal to .45% of the gross invoice amount. The interest rate of the loan advance is ¼% above Sterling National Bank Base Rate, which at time of closing was 5%. CHDT Corp and Howard Ullman, the Chairman of the Board of Directors of CHDT, has personally guaranteed Capstone’s obligations under the Financial Agreement. As part of the 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 $121,263 (plus future interest) and $81,000 (plus future interest) due to Howard Ullman to the Sterling National Bank loan. No payments will be made on the subordinated debt until the Sterling loan is paid in full. As of December 31, 2011, the balance due to Sterling was $441,607.
In July, 2011, Stewart Wallach, the Chief Executive Officer and Director of CHDT and JWTR Holdings, L.L.C. owned by a director, Jeffrey Postal entered into a Securities and Notes Payable Agreement with Howard Ullman, the previous Chairman of the Board of CHDT, whereby they would purchase equally all of Howard Ullmans notes including the notes subordinated to Sterling National Bank.
On July 12, 2011, Stewart Wallach individually and accepted by Sterling National Bank, agreed to replace Howard Ullman as the sole personal guarantor to Sterling National Bank for all of Capstone Industries, Inc loans previously guaranteed by Howard Ullman.
Effective July 12, 2011, Capstone Industries, Inc., credit line with Sterling was increased from $2,000,000 to $4,000,000 to provide additional funding for increased revenue growth.
Item 1A.
Item 1A. Risk Factors.
CHDT Corporation is subject to a number of risk factors that could negatively affect our results from business operations or cause actual results to differ materially from those projected or indicated in any forward looking statement. CHDT may amend or supplement the risk factors described below from time to time by other reports it files with the SEC in the future. Such factors include, but are not limited to, the following:
CHDT faces risks associated with global economic conditions.
In general, CHDT’s financial results can be significantly affected by negative economic conditions, inflationary or deflationary pressures, high labor or material costs, and unforeseen changes in consumer demand or buying patterns. These general risks were heightened recently as economic conditions globally deteriorated significantly and the recovery in most developed markets remains sluggish. Such economic conditions could have potentially significant impacts on employment levels and consumer demand in many countries where CHDT markets its products, with a direct impact on our sales, profitability and our ability to generate sufficient internal cash flows or access credit at reasonable rates in order to meet future operating expenses, fund capital expenditures or repay debt as it becomes due.
The recent economic conditions caused a number of our retailer customers to reduce their inventories and more critically analyze their inventory management and product offerings, including possibly shifting purchasing patterns to lower-cost options. Similar retailer customer activity could negatively impact CHDT’s operating results. In addition, declining financial performance by certain of our retailer customers could impact their ability to pay us on a timely basis, or at all. Increasing retailer customer concentration on a global scale could result in reduced sales outlets for our products, greater negotiating pressures on CHDT, and global pricing requirements across markets.
Future unfavorable economic conditions may impact CHDT’s earnings performance and our opportunities to reduce discretionary spending may be limited. Any reductions in discretionary spending may have a greater than anticipated negative impact on future sales or brand equity.
CHDT’s inadequate or expensive funding and financing alternatives
CHDT’s current short term debt level remains at approximately $441,600. Long Term Debt which matures after twelve months, we have $1.531 million of scheduled debt maturities. Our current debt structure consists of private placement note agreements from insiders to fund investment, operations and extraordinary transactions. Future declines in our operating cash flows or earnings performance, foreign currency movements, or other unanticipated events, could negatively impact our ability to reduce outstanding debt as planned, and could hinder our ability to remain in compliance with our current debt covenants. If we have a shortfall in revenues without a corresponding reduction to its expenses, operating results may suffer. We rely on and we may be unable to raise adequate funding or financing to survive unexpected revenue shortfalls, or to reduce operating expenses quickly enough to offset any such unexpected revenue shortfall from our lack of traditional bank financing. If we are not able to access debt capital markets at competitive rates or terms and conditions, our ability to implement our business plan and strategy will be negatively affected. Limited access to sufficient bank financing, could force us to seek expensive financing or funding, or forms of financing that require issuance of our securities (such as equity credit lines or PIPE financing). Such financing would dilute the position of existing shareholders and put negative pressure on the market price of the our Common Stock while possibly failing to provide adequate and ongoing working capital for the Company and its operations.
Other adverse consequences could include:
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a significant portion of CHDT’s cash from operations could be dedicated to the payment of interest and principal on our debt, which could reduce the funds available for operations;
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the level of our debt could leave CHDT vulnerable in a period of significant economic downturn;
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CHDT may not be financially able to withstand significant and sustained competitive pressures.
If CHDT cannot continue to develop new products in a timely manner, and at favorable margins, it may not be able to compete effectively.
The power failure and portable lighting products industries have been notable for the pace of innovations in product life, product design and applied technology. CHDT and our competitors have made, and continue to make, investments in research and development with the goal of further innovation. The successful development and introduction of new products and line extensions face the uncertainty of retail and consumer acceptance and reaction from competitors, as well as the possibility of cannibalization of sales of our existing products. In addition, our ability to create new products and line extensions and to sustain existing products is affected by whether we can:
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develop and fund research and technological innovations,
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receive and maintain necessary intellectual property protections,
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obtain governmental approvals and registrations,
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comply with governmental regulations, and
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anticipate consumer needs and preferences successfully.
The failure to develop and launch successful new products could hinder the growth of our businesses and any delay in the development or launch of a new product could also compromise our competitive position. If competitors introduce new or enhanced products that significantly outperform CHDT’s, or if they develop or apply manufacturing technology which permits them to manufacture at a significantly lower cost relative to ours, we may be unable to compete successfully in the market segments affected by these changes.
Competition in CHDT’s industries may hinder our ability to execute our business strategy, achieve profitability, or maintain relationships with existing customers.
The industries, in which CHDT operates, including portable lighting products and power failure lighting, are highly competitive, both in the United States and on a global basis, as a limited number of large manufacturers often compete for consumer acceptance and limited retail shelf space.
As product placement, facings and shelf-space are at the sole discretion of our retailer customers, and often impacted by competitive activity, the visibility and availability of our full portfolio of products can be limited. Our retailer customers have increasingly sought to obtain pricing concessions or better trade terms, and because of the highly competitive environment in which we operate as well as increasing retailer concentration, their efforts can be successful, resulting in either reduction of our margins, or our relative disadvantage to lower cost competitors. Competitors may also be able to obtain exclusive distribution at particular retailers, or favorable in-store placement, resulting in a negative impact on our sales.
Competition is based upon brand perceptions, product performance and innovation, customer service and price. CHDT’s ability to compete effectively may be affected by a number of factors:
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CHDT’s primary competitors have substantially greater financial, marketing and other resources and greater market share in certain segments than CHDT does, as well as significant scale and negotiating leverage with retailers;
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CHDT’s competitors may have lower production, sales and distribution costs, and higher profit margins, than CHDT, which may enable them to compete more aggressively in offering retail discounts and other promotional incentives;
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loss of key retailer customers to competitors may erode CHDT’s market share; and
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the level and nature of advertising and promotional spending by CHDT could impact consumer demand, retailer decisions regarding our product offerings, limit our access to shelf space, and hinder our ability to expand distribution to new retailer customers.
The success of our products can suffer if our marketing plans or new product offerings do not have the desired impact on our brand’s image or ability to attract consumers. Further our operating results could be adversely affected if one of our leading products suffers damage to its reputation due to real or perceived quality issues.
Changes in foreign, cultural, political and financial market conditions could impair CHDT’s international manufacturing operations and financial performance.
CHDT’s manufacturing is currently conducted in China. Consequently, CHDT is subject to a number of significant risks associated with manufacturing business in China, including:
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the possibility of expropriation, confiscatory taxation or price controls
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adverse changes in local investment or exchange control regulations;
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political or economic instability, government nationalization of business or industries, government corruption, and civil unrest;
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legal and regulatory constraints;
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tariffs and other trade barriers; and
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difficulty in enforcing contractual and intellectual property rights.
Currency fluctuations may significantly increase CHDT’s expenses and affect the results of operations, especially where the currency is subject to intense political and other outside pressure.
All of CHDT’s sales in fiscal 2011 were transacted in U.S. dollars, and the weakening of the U.S. dollar relative to foreign currencies can negatively impact our operating profits, through higher unit costs. However, as the company volumes continue to increase the leveraged buying power has enabled the Company to minimize the impact on costs. The recent economic crises revealed that exchange rates can be highly volatile. Changes in currency exchange rates may also affect the relative prices at which CHDT and our competitors sell products in the same market. There can be no assurance that the U.S. dollar foreign exchange rates will be stable in the future or that fluctuations in such rates will not have a material adverse effect on our business, results of operations or financial condition.
Changes in raw material costs or disruptions in the supply of raw materials could erode CHDT’s profit margins and negatively impact manufacturing output and operating results.
Pricing and availability of raw materials for use in our businesses can be volatile due to numerous factors beyond our control, including general, domestic and international economic conditions, labor costs, production levels, competition, consumer demand, import duties and tariffs and currency exchange rates. This volatility can significantly affect the availability and cost of raw materials for us, and may, therefore, have a material adverse effect on our business, results of operations and financial condition. In the past, substantial increases in the cost of a number of raw materials have been partially offset by price increases. However, there is no certainty that CHDT will be able to offset future increases in raw material prices, especially given the competitive environment. In addition, the supply of certain raw materials can be significantly disrupted by labor activity, political conflict, and disruptions to sourcing or transportation activities, which could impact our manufacturing output.
Loss of any of our principal customers could significantly decrease our sales and profitability.
Costco Wholesale, together with its subsidiaries, is our largest customer, accounting for approximately 55% of net sales in fiscal 2011. Generally, sales to Costco Wholesale and our other top retailers are made pursuant to purchase orders and we do not have supply agreements or guarantees of minimum purchases from them. As a result, these customers may cancel their purchase orders or reschedule or decrease their level of purchases from us at any time. The loss or a substantial decrease in the volume of purchases by Costco Wholesale or any of our other top customers would harm our sales and profitability.
CHDT’s businesses are subject to regulation in the U.S. and abroad.
The manufacture, packaging, labeling, storage, distribution, advertising and sale of our products are subject to extensive regulation in the U.S. and abroad. This regulation includes, but is not limited to, the following:
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in the U.S., claims and advertising with respect to our products are regulated by the Federal Trade Commission;
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our operations are subject to taxation by federal, state, local and foreign taxing authorities;
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in foreign countries where we manufacture or sell our products, we are subject to similar regulation, and in the U.S. by state and local authorities; and
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our selling practices are regulated by competition and anti-trust authorities in the U.S. and abroad.
A finding that we are in violation of, or not in compliance with, applicable laws or regulations could subject us to civil remedies, including fines, damages, injunctions or product recalls, or criminal sanctions, which could be material. Even if a claim is unsuccessful, is not merited or is not fully pursued, the negative publicity surrounding such assertions regarding our products or processes could jeopardize our reputation and brand image. Damage to our reputation or loss of consumer confidence in our products for any of these reasons could have a material adverse effect on our businesses, as well as require resources to rebuild our reputation.
While we believe we have obtained the necessary regulatory approvals to manufacture and sell our currently marketed products, new or more restrictive regulations or more restrictive interpretations of existing regulations could have an adverse impact on our businesses. Additionally, changing laws, regulations and standards relating to corporate governance and public disclosure, including the Sarbanes-Oxley Act of 2002 or "SOX" .and new SEC regulations are creating uncertainty for companies such as ours. These new or changed laws, regulations and standards are subject to varying interpretations in many cases due to their lack of specificity, and as a result, their application in practice may evolve over time as new guidance is provided by regulatory and governing bodies, which could result in continuing uncertainty regarding compliance matters and higher costs necessitated by ongoing revisions to disclosure and governance practices. We intend to invest resources to comply with evolving laws, regulations and standards and this investment may result in increased general and administrative expenses and a diversion of management time and attention from revenue-generating activities to compliance activities. If our efforts to comply with new or changed laws, regulations and standards differ from the activities intended by regulatory or governing bodies due to ambiguities related to practice, our reputation and attraction as an investment may be substantially harmed.
CHDT’s manufacturing facilities or supply channels may be subject to disruption from events beyond our control.
We currently operate a number of manufacturing and packaging facilities in China for our products. Operations at such facilities may be subject to disruption for a variety of reasons, including:
· availability of raw materials;
· work stoppages or other labor disputes;
· industrial accidents or other occupational health and safety issues;
· disruptions in logistics;
· loss or impairment of key manufacturing sites;
· raw material and product quality or safety issues;
· licensing requirements and other regulatory issues; and
· acts of war, terrorism, pandemics, fire, earthquake, flooding or other natural disasters.
There is a possibility that third party manufacturers, which produce our products, could discontinue production with little or no advance notice, or experience financial problems or problems with product quality or timeliness of product delivery, resulting in manufacturing delays or disruptions, regulatory sanctions, product liability claims or consumer complaints.
Although we have contingency plans in place, and our multiple facilities and third-party manufacturers can provide alternative sources of product supply in the event of manufacturing disruptions, if a major disruption were to occur, it could result in delays in shipments of products to customers or suspension of operations.
CHDT’s business involves the potential for product liability and other claims against us, which could affect our results of operations and financial condition.
We face exposure to product liability claims in the event that one of our products is alleged to have resulted in property damage, bodily injury or other adverse effects. Although we maintain product liability insurance in amounts that we believe are reasonable, we cannot assure you that we will be able to maintain such insurance on acceptable terms, if at all, in the future or that product liability claims will not exceed the amount of insurance coverage. Additionally, we do not maintain product recall insurance. As a result, product recalls or product liability claims could have a material adverse effect on our business, results of operations and financial condition.
In addition, we face potential exposure to unusual or significant litigation arising out of alleged defects in our products or otherwise. We spend substantial resources ensuring compliance with governmental and other applicable standards. However, compliance with these standards does not necessarily prevent individual or class action lawsuits, which can entail significant cost and risk. We do not maintain insurance against many types of claims involving alleged defects in our products that do not involve personal injury or property damage. As a result, these types of claims could have a material adverse effect on our business, results of operations and financial condition.
If CHDT fails to adequately protect its intellectual property rights, competitors may manufacture and market similar products, which could adversely affect our market share and results of operations.
CHDT relies on trademark, trade secret, patent and copyright laws to protect our intellectual property rights. In particular, our trademarks are of material importance to our business and are among our most important assets. In fiscal 2011, substantially all of our total revenues were from products bearing proprietary trademarks and brand names. Accordingly, our future success may depend, in part, upon the goodwill associated with our trademarks and brand names. In addition, CHDT owns a number of patents; patent applications and other technology which CHDT believes are significant to our business.
We cannot be sure that these intellectual property rights will be maximized or that they can be successfully asserted. There is a risk that CHDT will not be able to obtain and perfect or maintain our own intellectual property rights or, where appropriate, license intellectual property rights necessary to support new product introductions. We cannot be certain that these rights, if obtained, will not be invalidated, circumvented or challenged in the future, and CHDT could incur significant costs in connection with legal actions to defend our intellectual property rights.
In addition, even if such rights are obtained in the United States, the laws of some of the other countries in which CHDT’s products are or may be sold do not protect intellectual property rights to the same extent as the laws of the United States. If other parties infringe our intellectual property rights, they may dilute the value of our brands in the marketplace, which could diminish the value that consumers associate with our brands and harm our sales. The failure to perfect or successfully assert our intellectual property rights could make CHDT less competitive and could have a material adverse effect on our business, operating results and financial condition.
We may not be able to continue to identify and complete strategic acquisitions and effectively integrate acquired companies to achieve desired financial benefits.
We may not be able to identify and successfully negotiate suitable strategic acquisitions, obtain financing for future acquisitions on satisfactory terms or otherwise complete future acquisitions. Furthermore, our existing operations may encounter unforeseen operating difficulties and may require significant financial and managerial resources, which would otherwise be available for the ongoing development or expansion of our existing operations.
Even if we can complete future acquisitions, we face significant challenges in consolidating functions and effectively integrating procedures, personnel, product lines, and operations in a timely and efficient manner. The integration process can be complex and time consuming, may be disruptive to our existing and acquired businesses, and may cause an interruption of, or a loss of momentum in, those businesses. Even if we can successfully complete the integration of acquired businesses into our operations, there is no assurance that anticipated cost savings, synergies, or revenue enhancements will be realized within the expected time frame, or at all. CHDT is subject to a number of significant risks associated with acquisitions, including:
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the risk that our industry may develop in a different direction than anticipated and that the technologies we acquire do not prove to be those we need to be successful in the industry;
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the risk that future valuations of acquired businesses may decrease from the market price we paid for these acquisitions;
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the generation of insufficient revenues by acquired businesses to offset acquisition costs and increased operating expenses associated with these acquisitions;
·
the potential difficulties in completing in-process research and development projects and delivering high quality products to our customers;
·
the potential difficulties in integrating new products, businesses and operations in an efficient and effective manner
·
the risk that our customers or customers of the acquired businesses may defer purchase decisions as they evaluate the impact of the acquisitions on our future product strategy
·
the potential loss of key employees of the acquired businesses;
·
the risk that acquired businesses will divert the attention of our senior management from the operation of our core Capstone business; and
·
the risks of entering new markets in which we have limited experience and where competitors may have a stronger market presence.
·
Our inability to successfully operate and integrate newly-acquired businesses appropriately, effectively and in a timely manner could have a material adverse effect on our ability to take advantage of further growth in demand for products in our marketplace, as well as on our revenues, gross margins and expenses.
OUR COMMON STOCK
Our Common Stock is subject to certain "penny stock" rules promulgated by the SEC. Those rules impose certain sales practice requirements on brokers who sell "penny stock" ( that is, stock with a market price below $5 per share and more commonly below $1 per share) to persons other than established customers and accredited investors (generally institutions with assets in excess of $5,000,000 or individuals with net worth in excess of $1,000,000). Brokers must make a special suitability determination for the purchaser and receive the purchaser's written consent to the transaction prior to the sale. Furthermore, the penny stock rules generally require, among other things, that brokers engaged in secondary trading of penny stocks provide customers with written disclosure documents, monthly statements of the market value of penny stocks, disclosure of the bid and asked prices and disclosure of the compensation to the brokerage firm and disclosure of the sales person working for the brokerage firm. These rules and regulations adversely affect the ability of brokers to sell or promote our Common Stock shares and limit the liquidity and market price of our securities. Our lack of any sustained history of sustained profitability from operations also depresses the market value of our Common Stock.
We lack primary market makers and institutional support for our Common Stock traded in the public markets. As result, whenever the market price for our Common Stock experiences any significant increase in market price, in terms of percentage increase, it is difficult for our Common Stock to maintain such an increased market price due to the pressure of shareholders selling shares of Common Stock to reap any profits from such increase in market price and the lack of primary market makers and institutional investors to stabilize and support any such increase in market price of our Common Stock (by not selling their positions of such stock in response to market price increases and entering the market to purchase more shares of our Common Stock).
The market price of our Common Stock is likely to be highly volatile and could fluctuate widely in price in response to various factors, many of which are beyond our control, including:
·
our lack of primary market makers for our Common Stock - we have market makers but none
·
are primary market makers who maintain an inventory of our Common Stock and actively support the Common Stock;
·
general worldwide economic conditions and the current crisis in the financial markets;
·
the lack of research analysts or news media coverage of CHDT or our Common Stock;
·
additions or departures of key personnel;
·
sales of our Common Stock by the Company or insiders;
·
our status as a “Penny Stock” Company;
·
our ability to execute our business plan;
·
operating results being below expectations;
·
loss of any strategic relationships;
·
industry or product developments;
·
sale of a substantial number of shares may cause the price of our common stock to decline;
·
economic and other external factors; and
·
period-to-period fluctuations and the uncertainty in our financial results.
We have not paid and we do not intend to pay dividends on our Common Stock in the foreseeable future. We currently intend to retain all future earnings, if any, to finance our current and proposed business activities and do not anticipate paying any cash dividends on our Common Stock in the foreseeable future. We may also incur indebtedness in the future that may prohibit or effectively restrict the payment of cash dividends on our Common Stock.
Item 1B.
Item 1B. Unresolved SEC Staff Letters.
None for fiscal year ended December 31, 2011.
Item 2.
Item 2. Properties.
Neither the Company nor its operating subsidiaries own any real properties or facilities. CHDT and Capstone share principal executive offices and operating facilities at 350 Jim Moran Blvd., Suite 120, Deerfield Beach, Florida 33442. Rent expense, included in general and administrative expenses, for the years ended December 31, 2011 and 2010 amounted to $55,870 and $56,174, respectively. The Company has no current plans to expand its facilities and believes that its current facilities will be adequate for fiscal year 2012.
Item 3.
Item 3. Legal Proceedings.
We are not a party to any material pending legal proceedings and, to the best our knowledge, no such action by or against us has been threatened. From time to time, we are subject to legal proceedings and claims that arise in the ordinary course of business. Although occasional adverse decisions or settlements may occur in such routine lawsuits, we believe that the final disposition of such routine lawsuits will not have material adverse effect on our financial position, results of operations or status as a going concern.
Other Legal Matters
To the best of our knowledge, none of our directors, officers or owner of record of more than five percent (5%) of the securities of the Company, or any associate of any such director, officer or security holder is a party adverse to us or has a material interest adverse to us in reference to pending litigation.
Item 4.
Item 4. Mine Safety Disclosures (Not Applicable).
PART II
Item 5.
Item 5. Market for Common Equity and Related Stockholder Matters.
As of December 31, 2011, there were approximately 1,273 holders of record (excluding OBO/Street Name accounts) of our Common Stock and 649,510,532 outstanding shares of the Common Stock. We have not previously declared or paid any dividends on our Common Stock and do not anticipate declaring any dividends on our Common Stock in the foreseeable future. The following table shows the high and low bid prices of the Common Stock as quoted on the OTC Bulletin Board or OTC Markets Group, Inc. QB Market, by quarter, during each of our last two fiscal years ended December 31, 2011 and 2010. These quotes reflect inter-dealer prices, without retail markup, markdown or commissions and may not represent actual transactions. The information below was obtained from information provided from the OTC Bulletin Board or The OTC Markets Group, Inc. QB Market, for the respective periods.
We changed our name and trading symbol on the OTC Bulletin Board in second fiscal quarter of 2007 from “China Direct Trading Corporation” and CHDT.OB” to “CHDT Corporation” and “CHDO.OB,” respectively. We changed our name because we believed that the old name did not accurately reflect the current business and strategy of our Company. On February 22, 2011, FINRA moved the quotation of our Common Stock from the OTC Bulletin Board to The OTC Markets Group, Inc. QB Market along with over 568 other companies’ stocks. The trading symbol remained “CHDO.” The technical reason for the action was that the stocks did not have a registered market maker for 4 consecutive business days as required under Rule 15c2-11 under the Securities Exchange Act of 1934. Many industry observers believe the mass transition of stocks was motivated by the QB being a less expensive market for FINRA members to quote stocks.
Dividend Policy
We have not declared or paid any cash or other dividends on shares of our Common Stock in the last five years, and we presently have no intention of paying any cash dividends on shares of our Common Stock. We do not currently anticipate, based on existing financial performance, to be declaring or paying dividends on any series of our preferred stock in the foreseeable future. Our current policy is to retain earnings, if any, to finance the expansion and development of our business. The future payment of dividends on shares of our Common Stock will be at the sole discretion of our board of directors, but we do not anticipate declaring or paying any dividends in the foreseeable future due to our need to fund business and product development.
Recent Sales of Unregistered Securities
Except as set forth herein or reported in our Information Statement to be filed within 120 days after the end of our fiscal year ended December 31, 2011, we have no recent sales of unregistered securities that have not been previously reported in filings with the SEC.
Item 6.
Item 6. Selected Financial Data. (Not Applicable)
Item 7.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Overview and Outlook
We are a leading designer and manufacturer in our industry segment of specialty power failure lights and an innovator of consumer lighting products for the North American and Latin American retail markets. We develop, manufacture a range of stylish, innovative and easy to use consumer lighting products including portable booklights, specialty booklights, multi-task lights, e reader lights, power failure lights and night lights, wireless motion sensor lights and desk lamps that are designed to make today’s lifestyles simpler and safer. Our products are sold under our wholly-owned subsidiary Capstone Industries Inc. “Capstone’s” brand name as well as under one store brand for retailer private label programs. CHDT seeks to deliver strong, consistent business results and superior shareholder returns by providing consumers with products that make their lives simpler and safer. Disposable income remains limited for many consumers, and because the company's products are seen as necessity for safety and security reasons, sales at retail remain strong. Consumers often give these useful products as gifts as well which is evidenced by the substantial historic holiday sales.
To this end, the Company is tightly focused on five product categories: (1) Portable booklights, specialty booklights and multi-task lights; (2) eReader lights; (3) Eco-i-Lite power failure lights and night lights; (4) Wireless motion sensor lights and (5) Light Ringers® collection of desk lamps and utility lamps. Within these segments, the Company follows a closely defined business strategy to develop and increase market leadership positions in these key product segments. These product categories are prioritized based on their capacity to maximize the use of the organization’s core competencies and to deliver sustainable long-term growth.
Our strategy is to develop and maintain positions of innovative and technical leadership in our chosen markets, and leverage those positions to grow the amount of volume of product sold to those markets and to selectively acquire business with similar technical capabilities that could benefit from our leadership position and strategic direction. Typically, we seek to find niche product opportunities that may be overlooked or underexploited by competitors, and believe that we can win a profitable niche of the market share. Each of the markets we serve is presenting opportunities for our product lines that we expect will provide growth for the Company over the long-term. We continue to look for opportunities in all of our markets to capitalize on our core competencies to expand our existing business and to grow through strategic acquisitions.
On an ongoing basis, management focuses on a variety of key indicators to monitor business health and performance. These indicators include market share, sales, organic sales growth, gross profit margin, operating profit, and net income, as well as measures used to optimize the management of working capital, capital expenditures, cash flow and return on capital. The monitoring of these indicators, and the Company’s corporate governance policies help to maintain business health and strong internal controls. To achieve its business and financial objectives, the Company focuses the organization on initiatives to drive and fund growth. The Company seeks to capture significant opportunities for growth by identifying and meeting consumer needs within its core product categories, through its focus on innovation and development of successful new products. To enhance these efforts, the Company has developed key initiatives to build strong relationships with retailers and distributors. The investments needed to fund this growth are developed through continuous, Company-wide initiatives to lower costs and increase effective asset utilization through which the Company seeks to become even more effective and efficient throughout its businesses.
Looking forward, we expect global macroeconomic and market conditions to remain highly challenging. While the global marketplace in which we operate has always been highly competitive, the Company has recently experienced heightened competitive activity in certain markets from other large multinational companies, some of which may have greater resources than we do. Such activities have included more aggressive marketing and increased promotional spending. While the Company has taken, and will continue to take, measures to address the heightened competitive activity, should these conditions persist, they could adversely affect the Company’s future results. The Company believes it is well prepared to meet the challenges ahead due to its strong financial condition, experience operating in challenging environments and continued focus on the Company’s strategic initiatives: effectiveness and efficiency; innovation; and leadership. This focus, together with the increasing strength of the Company's global brand recognition should position the Company well to increase shareholder value over the long-term.
CONSOLIDATED RESULTS OF OPERATIONS AND OUTLOOK
CONSOLIDATED OVERVIEW OF OPERATIONS
For the year ended December 31, 2011 and 2010, the Company had total net sales of approximately $10,248,800 and $5,287,200, respectively, for an increase of $4,961,600 which represents a 93.8% increase over 2010 revenue. For the 4th quarter 2011 net revenues were approximately $2,099,600 as compared to $1,317,700 in the 4th quarter 2010. This was an increase of $781,900 or 59.3% over the same period last year. These increases were driven by stronger sales in each of our markets as a result of expanded distribution into existing retailers and expansion into new retail distribution.
For the year-ended December 31, 2011, gross profit was approximately $2,478,000, an increase of approximately $865,600 or 53.7% from the 2010 gross profit of $1,612,400. Gross profit as a percentage of net sales was 24.2% for the year compared to 30.4% for 2010. Gross Profit for the 4th quarter 2011 and 2010 was approximately $524,500 and $420,600 respectively, an increase of $103,900 or 24.7% compared to same quarter in 2010.
The increase of the 2011 gross profit from the 2010 gross profit was a result of increased sales. The reduction of the gross profit as a percent to sales from 30.4% in 2010 compared to 24.2 % in 2011 was mainly the result of additional allowances provided to retailers to promote product sell through. Our larger customers are also continuing to buy on a direct import basis. The gross margin percentages are lower in this selling scenario as compared to a customer buying on a domestic basis but the Company’s expenses are also reduced as the customer is responsible for related expenses such as freight, duties and handling costs.
For the year ended December 31, 2011, the Company had a net profit from continuing operations of approximately $575,600. For the year ended December 31, 2010 the Company had a net loss from operations of approximately $738,800. That is a net improvement of $1,314,400 over 2010 results. For the 4th quarter ended December 31, 2011, the Company had a net profit from continuing operations of approximately $27,000 as compared to a net loss of $43,000 in the 4th quarter, 2010. This was an improved performance of $70,000 as compared to the same quarter in 2010.
For the year ended December 31, 2011 and 2010, cost of sales were approximately $7,770,800 and $3,674,800 respectively. This represents 75.8% and 69.5% respectively of total Net Revenue which represents an increase of 6.3% over the same quarter last year. For the 4th quarter ended December 31, 2011 and 2010, cost of sales were approximately $1,575,000 and $897,000, that’s 75.0% and 68.0% of net revenue respectively. Despite rising component and labor costs in China our overall material costs have increased slightly during the year. This has been achieved through strategic and volume materials buying and negotiations with our factories; however as a percent to sales the cost percentage has increased mainly because we have provided additional sales allowances to retailers to promote product sell through.
Operating expenses were approximately $1,606,400 in 2011 as compared to $2,091,700 in 2010, a net reduction of $485,300 or 23.2%. Operating expenses for the 4th quarter ending December 31, 2011 and 2010 were approximately $443,900 and $387,800, an increase of $56,100 or 14.4% over 2010. During 2011, an expense reduction program was in place which had a significant impact in reducing the expense levels.
For the year ending December 31, 2011, interest expenses were approximately $295,900 an increase of $36,300 as compared to $259,600 expensed in 2010. The increase in interest expense in 2011 as compared to 2010 was due primarily to additional loans required to fund the purchase of the increased volumes of product during the year. The decrease in interest expense in 2010 compared with 2009 was due primarily to the reduced sales volume in 2010 that resulted in less borrowing to purchase products overseas.
The effective tax (benefit) rate was 0% in 2011 compared with 0% in 2010.
SEGMENT RESULTS OF OPERATIONS AND OUTLOOK
Operating profit, as presented below, is sales less cost of sales and other operating expenses excluding interest expense, corporate expenses and other non-operating revenue and expenses. Cost of sales and operating expenses are directly attributable to the respective segment. Operating profit is reconciled to earnings before income taxes in Note 8 of Item 8, Financial Statements and Supplementary Data, of this report.
Sales
It is our intention to continue investing in capabilities and technologies as needed that allows us to execute our strategy to increase sales and production volume in all markets that we serve. The rate of spending on these activities, however, will continue to be driven by market opportunities.
With the current retail interest in our product offerings, expansion of distribution channels through the domestic purchase program and the launch of exciting new products this year, the Company expects its sales volumes to continue to grow and produce revenues in the range of $15 million to $20 million within the next one to two fiscal years, subject to economic conditions not deteriorating.
Off Balance Sheet Arrangements
We do not have material off-balance sheet arrangements that have or are reasonably likely to have a material future effect on our results of operations or financial condition.
Contractual Obligations
The following table represents contractual obligations as of December 31, 2011:
Notes to Contractual Obligations Table
Purchase Obligations - Purchase obligations are comprised of the Company’s commitments for goods and services in the normal course of business.
Note Payable and Long-Term Debt - See Item 8, Financial Statements and Supplementary Data, Note 4 in this report.
Operating Leases - Operating lease obligations are primarily related to facility leases for our operations.
LIQUIDITY AND CAPITAL RESOURCES
Our limited borrowing capacity and our cash flow from operations provide us with the financial resources needed to run our operations and reinvest in our business.
Operating Activities
Cash flow provided by operating activities was approximately $1.281 million in 2011 compared with approximately $(766) thousands provided by operating activities in 2010. The increase of $2.047 million was mainly a result of our leveraging increased sales and decreases in our investment in net working capital components. Cash flow provided by operating activities was $(766) thousands in 2010 compared with $(1.088) million provided by operating activities in 2009. The increased cash flow from operations of $322 thousands as compared with 2009 was primarily a result of a lower year over year increase in working capital components.
Our cash flows from operations are primarily dependent on our net income adjusted for non-cash expenses and the timing of collections of receivables, level of inventory and payments to suppliers. Sales are influenced significantly by the build rates of products, which are subject to general economic conditions. Our sales are also impacted by our ability to obtain new orders. Over time, sales will also be impacted by our success in executing our strategy to increase productivity volume.
Investing Activities
Cash used for investing activities in 2011 was approximately $59 thousand. Cash used for investing activities in 2010 and 2009 were $27 thousand and $ 55 thousand respectively. Cash flows used in investing activities for all three years were due primarily to capital expenditures to expand design and production capacity. Our expectation for 2012 is that we will invest between $250 thousand and $500 thousand. Future capital requirements depend on numerous factors, including expansion of existing product lines and introduction of new products. Management believes that our cash flow from operations and current borrowing sources will provide for these necessary capital expenditures.
Financing Activities
Our ability to maintain sufficient liquidity is highly dependent upon achieving expected operating results. Failure to achieve expected operating results could have a material adverse effect on our liquidity, our ability to obtain financing and our operations in the future. At December 31, 2011, the Company was in compliance with all of the covenants pursuant to existing credit facilities. The Company’s cash needs for working capital, debt service and capital equipment during 2012 are expected to be met by cash flows from operations and cash balances, the existing bank loan facility and if necessary additional notes payable funding from established sources.
DIVIDENDS
We have not declared or paid any cash or other dividends on shares of our Common Stock in the last five years, and we presently have no intention of paying any cash dividends on shares of our Common Stock. We do not currently anticipate, based on existing financial performance, to be declaring or paying dividends on any series of our preferred stock in the foreseeable future. Our current policy is to retain earnings, if any, to finance the expansion and development of our business. The future payment of dividends on shares of our Common Stock will be at the sole discretion of our board of directors, but we do not anticipate declaring or paying any dividends in the foreseeable future due to our need to fund business and product development.
RELATED-PARTY TRANSACTIONS
See Note 4 of the Consolidated Financial Statements at Item 8 of this report.
RECENT ACCOUNTING PRONOUNCEMENTS
See Note 1 of the Consolidated Financial Statements at Item 8 of this report.
CRITICAL ACCOUNTING POLICIES
See Note 1 of the Consolidated Financial Statements at Item 8 of this report.
Item 7A.
Item 7A. Quantitative and Qualitative Disclosures about market Risk. (Not Applicable)
Item 8.
Item 8. Financial Statements and Supplementary Data.
The financial statements and financial statement schedules of CHDT as well as supplementary data are listed in Item 13 below and included before the signature page to this report on Form 10-K.
Item 9.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
There are not and have not been any disagreements between the Company and its accountants on any matter of accounting principles, practices, financial statements disclosure or auditing scope or procedure.
Item 9A.
Item 9A. Controls and Procedures.
Management’s Evaluation of Disclosure Controls and Procedures. Since 2010 our Chief Financial Officer, assisted by the Corporate Controller, is responsible for establishing and maintaining adequate internal disclosure control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the Company. Since December 2007, our Chief Financial Officer, often assisted by the Chief Operating Officer, has been responsible for establishing and maintaining adequate internal disclosure control over financial reporting. Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.
As of the date of this Report on Form 10-K, Stewart Wallach is our Chief Executive Officer and James Gerald (“Gerry’) McClinton are our Chief Financial Officer and Chief Operating Officer. Mr. Laurie Holtz, our previous Chief Financial Officer, retired in 2009. Laurie Holtz was appointed as our Chief Financial Officer in December 2007. Mr. McClinton handled the chief financial duties prior to Mr. Holtz’s appointment.
Our Chief Financial Officer has reviewed the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) and internal control over financial reporting (as defined in Securities Exchange Act of 1934, as amended, Rules 13a-15(f) and 15d-15(f)) as of the fiscal year end of this Form 10-K.
Management’s Annual Report on Internal Control over Financial Reporting. No matter how well conceived and operated, an internal control system can provide only a certain level of confidence in the ability of the internal controls to identify errors. In light of the inherent limitations in all internal control systems and procedures, and the limitations of the Company's resources, no evaluation of internal controls can provide absolute assurance that all defects or errors in the operation of our internal control systems will be immediately identified. These inherent limitations include the realities that subjective judgments in decision-making in this area can be faulty and that a breakdown in internal processes can occur because of simple, good faith error or mistake. No design, can, in all instances, immediately accommodate changes in regulatory requirements or changes in the business and financial environment of a Company. Such inherent limitations in a control system means that inadvertent misstatements due to error or fraud may occur and not be immediately or in a timely manner detected. Nonetheless, we recognize our ongoing obligation to use our best efforts to design and apply internal controls and procedures that are as effective as possible in identifying errors or breakdowns in the internal controls system and procedures.
The framework for our evaluation of the adequacy of our internal disclosure controls and procedures comes from our use of CCH, Inc.’s 2007 SOX for Small, Publicly Held Companies and applicable accounting standards and guidelines as supplemented by guidance from outside legal and accountant advice.
We believe our internal disclosure controls and procedures are effective as the end of the period covered by this report in providing reasonable assurances that information required to be disclosed in the reports that we file or submit under the Exchange Act, is recorded, processed, summarized and reported, within the time periods specified in the Commission’s rules and forms.
This annual report does not include an attestation report of CHDT’s registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by CHDT’s registered public accounting firm pursuant to rules of the Commission that permit CHDT to provide only management’s report in this annual report on Form 10-K.
Item 9B.
Item 9B. Other Information
None
Part III
Item 10.
Item 10. Directors, Executive Officers and Corporate Governance.
CURRENT BOARD OF DIRECTORS
The background information on the directors is set forth below under "Item 1. Proposal Two: Election of Directors." Each Director's term is for one year. The incumbent and current members of the Board of Directors are:
1.
Stewart Wallach. Mr. Wallach has been a director since April 2007.
2.
Gerry McClinton. Mr. McClinton has been a director since February 2008.
3.
Laurie Holtz. Mr. Holtz has been a director since January 2004.
4.
Jeffrey Postal. Mr. Postal has been a director since January 2004.
5.
Jeffrey Guzy. Mr. Guzy was appointed as a director on May 3, 2007. Mr. Guzy is deemed an "independent director."
6.
Larry Sloven. Mr. Sloven was appointed as a director on May 3, 2007. Mr. Sloven is an outside director.
The Company typically elects directors by written consent because a majority of the voting securities are held by members of the Company’s management and a former director and officer and his wife. The Company has been unable to date to obtain sufficient written consents to date to elect the proposed management slate of director nominees without conducting a general solicitation subject to Regulation 14A or Regulation 14C reporting requirements. Further, the Company may propose resolutions requiring shareholder approval at a shareholder meeting requiring a general solicitation under Regulation 14A, but such proposals are not ready for presentation for shareholder approval. For these and other reasons, the Company may be unable to file an information statement or proxy statement within the required 120 days after the end of its fiscal year and, as such, the Company is completing this Part III of the Report on Form 10K for the fiscal year ending December 31, 2011.
POLICY REGARDING BOARD ATTENDANCE
Company directors are expected to attend all annual and special board meetings per Company policy. An attendance rate of less than 75% over any 12-month period is grounds for removal from the Board of Directors. In fiscal year 2011, all directors attended at least 75% of all board meetings.
ROLE OF THE BOARD OF DIRECTORS IN CORPORATE GOVERNANCE
The Board of Directors is responsible for overseeing the Chief Executive Officer and other senior management in order to assure that such officers are competent and ethical in running the Company on a day-to-day basis and to assure that the long-term interests of the shareholders are being served by such management. The directors must take a pro-active focus and approach to their obligation in order to set and enforce standards to ensure that the Company is committed to business success through maintenance of the highest standards of responsibility and ethics.
The Company has adopted a Code of Ethics, which is posted on the Company's Website. The contents of the Company Website are not incorporated herein by reference and that Website provided in this Information Statement is intended to be an inactive textual reference only.
AUDIT COMMITTEE
The Audit Committee was established in accordance with Section 3(a)(58)(A) of the Exchange Act. It is primarily responsible for overseeing the services performed by the Company's independent public auditors, evaluating the Company's accounting policies and its system of internal controls and reviewing significant financial transactions. The members of the Audit Committee in fiscal year 2011 were Jeffrey Guzy and Jeffrey Postal. The Company believes that Mr. Guzy is an independent director under applicable NASDAQ standards.
REPORT OF THE AUDIT COMMITTEE
The material in this section is not deemed filed with the SEC and is not incorporated by reference in any of our filings under the Securities Act of 1933 or the Securities Exchange Act of 1934, whether made before or after the date of this Information Statement and irrespective of any general incorporation language in those filings.
The Audit Committee is responsible for providing oversight to Company’s accounting and financial reporting processes and the audit of the Company’s financial statements. The Audit Committee monitors the Company’s external audit process, including auditor independence matters, the scope and fees related to audits, and the extent to which the independent registered public accounting firm may be retained to perform non-audit services. The Audit Committee also reviews the results of the external audit with regard to the adequacy and appropriateness of our financial, accounting and internal controls over financial reporting. It also generally oversees Company’s internal compliance programs. The function of the Audit Committee is not intended to duplicate or to certify the activities of management and the independent registered public accounting firm, nor can the Audit Committee certify that the independent registered public accounting firm is “independent” under applicable rules. The Audit Committee members are not professional accountants or auditors. Under its Charter, the Audit Committee has authority to retain outside legal, accounting or other advisors as it deems necessary to carry out its duties and to require the Company to pay for such expenditures.
The Audit Committee provides counsel, advice and direction to management and the independent registered public accounting firm on matters for which it is responsible, based on the information it receives from management and the independent registered public accounting firm and the experience of its members in business, financial and accounting matters.
Company’s management is responsible for the preparation and integrity of its financial statements, accounting and financial reporting principles, and internal controls and procedures designed to ensure compliance with accounting standards, applicable laws and regulations.
In this context, the Audit Committee hereby reports as follows:
(1) Company’s management has represented to the Audit Committee that the 2011 audited financial statements were prepared in accordance with accounting principles generally accepted in the United States of America. The Audit Committee has reviewed and discussed the audited financial statements for fiscal year 2011 with Company’s management and the independent registered public accounting firm.
(2) The Audit Committee has received written disclosures and a letter from the independent registered public accounting firm, Robison Hill & Company, required by Independence Standards Board Standard No. 1 (“Independence Discussions with Audit Committee”) and has discussed with Robison Hill & Company their independence.
(3) Based on the review and discussion referred to above, the Audit Committee recommended to the board, and the board has approved, that the audited financial statements be included in Company’s Annual Report on Form 10K for the fiscal year ended December 31, 2011, as filed with the Commission on March 12, 2012.
The foregoing report is provided by the undersigned members of the Audit Committee.
/s/Jeffrey Guzy
Jeffrey Guzy, Chairman
March 12, 2012
REPORT OF THE COMPENSATION AND NOMINATING COMMITTEE OF THE BOARD OF DIRECTORS ON EXECUTIVE COMPENSATION
THE FOLLOWING REPORT OF THE COMPENSATION AND NOMINATING COMMITTEE OF THE BOARD OF DIRECTORS SHALL NOT BE DEEMED "SOLICITING MATERIAL" OR TO BE "FILED" WITH THE COMMISSION, NOR SHALL SUCH INFORMATION BE INCORPORATED BY REFERENCE INTO ANY FUTURE FILING UNDER THE SECURITIES ACT OF 1933 OR EXCHANGE ACT, EXCEPT TO THE EXTENT THAT THE COMPANY SPECIFICALLY INCORPORATES IT BY REFERENCE INTO SUCH FILING.
OBJECTIVES
The Compensation Committee is primarily responsible for reviewing the compensation arrangements for the Company's executive officers, including the Chief Executive Officer and Chairman of the Board, and for administering the Company's stock-based compensation plans. The Compensation Committee was established in January 2005. The Compensation Committee held one meeting in fiscal year 2011. Larry Sloven, Jeffrey Guzy and Jeff Postal are committee members for 2011. The Company believes that Mr. Guzy is an independent director under applicable NASDAQ standards. Mr. Sloven is not deemed to meet those standards because of his company's product development and outsourcing contract with the Company.
On February 5, 2008, the Board of Directors changed the Compensation Committee to be the “Compensation and Nominating Committee” with the same membership as stated above. The charter of the new committee is on the Company’s Web Site. The Company is looking for independent directors to fill the Compensation Committee and, until such candidates are found, Mr. Sloven is being asked to sit as a member of the Compensation and Nominating Committee.
It is the Company's objective to pursue compensation structures with the public shareholders' interests and the Company's business objectives, reward outstanding performance, be externally competitive and internally equitable, and attract and retain best available executive talent. We seek to achieve this goal through a straightforward compensation package that relies on equity compensation and limits cash compensation and perquisites.
The Company seeks to foster a performance-oriented culture, where individual performance is aligned with organizational objectives. Company performance is the primary measure of success upon which we structure our compensation.
The Compensation and Nominating Committee evaluates and rewards our executive officers and directors based on their contribution to the achievement of short and longer-term goals. Individual and departmental performance is factored into salary increase decisions and stock option (long - term incentive) awards.
The Compensation and Nominating Committee, together with our board, establishes compensation for our Chief Executive Officer and our other executive officers and administers the 2005 Equity Plan. The Compensation Committee has a written charter, which is available on the Company Web Site (located at http://www.chdtcorp.com).
The purpose of our Compensation Committee is to:
·
discharge the board’s responsibilities relating to compensation of our executive officers;
·
administer our stock option plans, stock purchase plans, restricted stock plans and any other equity incentive plans adopted; and
·
provide disinterested administration of any employee benefit plans in which our executive officers are eligible to participate.
The Compensation and Nominating Committee did not use outside consultants in fiscal year 2010. It used compensation arrangements by other microcap companies to judge the appropriateness of the Company compensation arrangements.
The Company compensates people with:
Cash Compensation. Cash compensation consists of base salary and annual bonus potential. Our compensation consultant assists us in analyzing similar or “peer” companies to guide our determination of appropriate cash compensation. Our cash compensation goals for our executive officers are based upon the following principles: (1) compensation levels are comparable to industry levels as adjusted for experience and skills of individual officers; and (2) pay should retain key personnel.
Discretionary Bonus Program. In addition to base salary compensation, the Company has a bonus plan covering the executive officers pursuant to which cash bonus payments and equity awards may be made. Bonuses are calculated based upon actual achievement of pre-established goals.
Incentive Program. The Company believes that performance is achieved through an ownership culture that encourages ongoing performance by the executive officers. This is best achieved through the use of stock-based option awards. All employees are eligible to participate in our sole plan, the 2005 Equity Plan. We also issue non-qualified stock options. Our equity compensation goals for the executive officers are based upon the following principals: (1) incentive compensation should retain key personnel and reward loyal and productive employees, regardless of rank, and (2) individual awards of stock-based compensation should reflect individual performance as well as the importance of retaining such employee to our goal of achieving the Company’s then current strategic goals.
Our sole incentive plan is the 2005 Equity Plan, which allows us to grant stock options, stock appreciation rights, restricted shares, restricted stock units, performance shares, and other stock-based awards. Under our 2005 Equity Plan, the Company can issue options to our officers, directors and employees to purchase shares of our Common Stock at an exercise price equal to the fair market value of such stock on the date of grant. The date of grant for the executives is typically the date of a regularly scheduled board meeting, of which we have at least six (6) per year, but can be made at the time of job performance reviews.
Our Company does not have a program, plan or practice to select option grant dates (or set board meeting dates) to correspond with the release of material non-public information.
The Company does not have an Employee Stock Purchase Plan that provides employees with the opportunity to purchase shares of the Common Stock. Our practice was to make periodic annual equity grants to our executives. In determining 2010 equity grants for executives, we considered the importance of each employee to accomplishing our strategic goals.
Benefits. The Company provides the following benefits to our senior executives generally on the same basis as the benefits provided to all employees: (1) health care and dental insurance; and (2) paid personal and vacation leave.
The Compensation and Nominating Committee believes that these benefits are consistent with those offered by other companies and specifically with those companies with which we compete for employees.
CODE OF ETHICS
The Company has a code of ethics that applies to all of the Company's employees, including its principal executive officer, principal financial officer and principal accounting officer, and its Board. A copy of this code is available on the Company's website. The Company intends to disclose any changes in or waivers from its code of ethics by posting such information on its website or by filing a Form 8K.
DIRECTOR MEETINGS IN FISCAL YEAR 2011
The Board of Directors had three official meetings in fiscal year 2011. During fiscal year 2011, all of the directors attended 75% or more of all meetings of the Board, which were held during the period of time that such person served on the Board or such committee.
Board Leadership Structure and Board’s Role in Risk Oversight
The Company’s Board of Directors endorses the view that one of its primary functions is to protect stockholders’ interests by providing independent oversight of management, including the Chief Executive Officer and Chief Operating Officer (who also holds the Chief Financial Officer position). The Chief Financial Officer is allowed and encouraged to address the Board of Directors on any issues affecting the Company or its public shareholders. The Company also allows outside counsel to participate in some of the board meetings in order to provide legal counsel and an outside perspective on corporate governance and risk issues.
Board Structure. The Board of Directors believes that having different people serve as Chairman of the Board of Directors and Chief Executive Officer is an important structural safeguard to proper risk assessment. Further, the Chief Financial Officer is allowed and encouraged to address the Board of Directors on any risk issues facing the Company.
The Chief Executive Officer or “CEO” is responsible for setting the strategic direction for the Company and the day to day leadership and performance of the Company, while the Chairman of the Board of Directors provides guidance to senior management and sets the agenda for Board of Directors meetings and presides over meetings of the full Board of Directors.
Our CEO serves on our Board of Directors, which we believe helps the CEO serve as a bridge between management and the Board of Directors, ensuring that both groups act with a common purpose. We believe that the CEO’s presence on the Board of Directors enhances his ability to provide insight and direction on important strategic initiatives to both management and the independent directors and, at the same time, ensures that the appropriate level of independent oversight is applied to all decisions by the Board of Directors.
The Chairman of the Board has no greater nor lesser vote on matters considered by the Board than any other director, and neither the Chairman nor any other director votes on any related party transaction. All directors of the Company, including the Chairman, are bound by fiduciary obligations, imposed by law, to serve the best interests of the stockholders. Accordingly, separating the offices of Chairman and Chief Executive Officer would not serve to enhance or diminish the fiduciary duties of any director of the Company. The Board does not currently have a lead director.
Independent Directors. The Board of the Company is currently comprised of seven directors, one of whom is an independent director under the listing standards of quotation systems like The NASDAQ Stock Market. The Company has sought unsuccessfully to recruit qualified independent directors. Although we have D&O insurance, we believe that our chronic losses and chronically low public stock market price discourages qualified candidates from serving as independent directors. This is a problem commonly faced by micro-cap, “penny stock” companies like our company.
Risk is inherent with every business, and how well a business manages risk can ultimately determine its success or survival.
The Company faces a number of risks, including, without limit: (1) persistent net losses in consecutive fiscal quarters and years, which losses require outside funding or financing through the sale of our securities or insider loans to the Company (all of which usually dilute our existing shareholders and discourage public investors in investing in our Common Stock); (2) chronically low public stock market price, which hinders our ability to fund and grow our business; (3) reliance on regional and national distributors and retailers to sell our products in a highly competitive market filled with competitors who possess significantly greater resources and market share than our company; (4) negative impact of the ongoing worldwide recession on consumer demand for the kind of discretionary products that we sell; (5) customary operational risks; (6) lack of a strong brand name for our products; (7) reliance on key personnel and the lack of key man insurance that pays for replacements; (8) lack of primary markets and lack of institutional support for our publicly traded Common Stock; (9) low market price of our Common Stock hindering our ability to consummate or attract merger and acquisition candidates; (10) lack of assets (other than accounts receivable) to attain commercially reasonable financing for operations; and (11) the risks faced by any product company in today’s challenging environment.
We rely on China for the manufacture of our products. Any conflict between the U.S. and China could disrupt our product supply and force us to find alternative manufacturers. From time to time, we access the appeal of non-Chinese manufacturing sources.
Our senior officers are responsible for the day-to-day management of risks the Company faces, while the Board, as a whole and through its committees, has responsibility for the oversight of risk management. In its risk oversight role, the Board of Directors has the responsibility to satisfy itself that the risk management processes designed and implemented by management are adequate and functioning as designed. To do this, the Chairman of the Board and other non-officer directors met quarterly on average with management to discuss strategy and the risks facing the Company. Senior management, each member being also a director, attends the Board meetings and is available to address any questions or concerns raised by the Board on risk management and any other matters. The Chairman of the Board and members of the Board work together to provide strong, independent oversight of the Company’s management and affairs through its standing committees and, when necessary, special meetings of directors. Since most of the directors are located in the same area, informal meetings between directors and officers also occur to discuss business risk and appropriate responses.
Director - Minimum Qualifications. The Nominating and Compensation Committee has adopted a set of criteria that it considers when it selects individuals not currently on the Board of Directors to be nominated for election to the Board of Directors. A candidate must meet the eligibility requirements set forth in the Company’s Bylaws. A candidate must also meet any qualification requirements set forth in any Board or committee governing documents.
If the candidate is deemed eligible for election to the Board of Directors, the Nominating and Compensation Committee will then evaluate the prospective nominee to determine if he or she possesses the following qualifications, qualities or skills:
contributions to the range of talent, skill and expertise appropriate for the Board;
financial, regulatory and business experience, knowledge of the operations of public companies and ability to read and understand financial statements;
familiarity with the Company’s market;
personal and professional integrity, honesty and reputation;
the ability to represent the best interests of the shareholders of the Company and the best interests of the institution;
the ability to devote sufficient time and energy to the performance of his or her duties; and
independence under applicable Commission and listing definitions.
The Nominating and Compensation Committee will also consider any other factors it deems relevant. With respect to nominating an existing director for re-election to the Board of Directors, the Nominating and Compensation Committee will consider and review an existing director’s Board and committee attendance and performance; length of Board service; experience, skills and contributions that the existing director brings to the Board; and independence.
Director Nomination Process. The process that the Nominating and Compensation Committee follows when it identifies and evaluates individuals to be nominated for election to the Board of Directors is as follows:
For purposes of identifying nominees for the Board of Directors, the Nominating and Compensation Committee relies on personal contacts of the committee members and other members of the Board of Directors, and will consider director candidates recommended by stockholders in accordance with the policy and procedures set forth above. The Nominating and Compensation Committee has not used an independent search firm to identify nominees.
In evaluating potential nominees, the Nominating and Compensation Committee determines whether the candidate is eligible and qualified for service on the Board of Directors by evaluating the candidate under the selection criteria, which are discussed in more detail below. If such individual fulfills these criteria, the Nominating and Compensation Committee will conduct a check of the individual’s background and interview the candidate to further assess the qualities of the prospective nominee and the contributions he or she would make to the Board of Directors.
Consideration of Recommendation by Stockholders. It is the policy of the Nominating and Compensation Committee of the Board of Directors of the Company to consider director candidates recommended by stockholders who appear to be qualified to serve on the Company’s Board of Directors. The Nominating and Compensation Committee may choose not to consider an unsolicited recommendation if no vacancy exists n the Board of Directors and the Nominating and Compensation Committee does not perceive a need to increase the size of the Board of Directors. To avoid the unnecessary use of the Nominating and Compensation Committee’s resources, the Nominating and Compensation Committee will consider only those director candidates recommended in accordance with the procedures set forth below.
Shareholder Proposal Procedures. To submit a recommendation of a director candidate to the Nominating and Compensation Committee, a stockholder should submit the following information in writing, addressed to the Chairperson of the Nominating and Compensation Committee, care of the Corporate Secretary, at the main office of the Company:
1.
The name of the person recommended as a director candidate;
2.
All information relating to such person that is required to be disclosed in solicitations of proxies for election of directors pursuant to Regulation 14A under the Securities Exchange Act of 1934;
3.
The written consent of the person being recommended as a director candidate to being named in the proxy statement as a nominee and to serving as a director if elected;
4.
The name and address of the stockholder making the recommendation, as they appear on the Company’s books; provided, however, that if the stockholder is not a registered holder of the Company’s common stock, the stockholder should submit his or her name and address along with a current written statement from the record holder of the shares that reflects ownership of the Company’s common stock; and
5.
A statement disclosing whether such stockholder is acting with or on behalf of any other person and, if applicable, the identity of such person.
In order for a director candidate to be considered for nomination at the Company’s annual meeting of stockholders, when and if one is held, or to be considered prior to a written consent vote on director nominees, the recommendation must be received by the Nominating and Compensation Committee at least 30 days before the date of the annual meeting or, in the case of an information statement and no shareholder meeting being held, prior to April 1st.
MANAGEMENT OF THE COMPANY
CURRENT OFFICERS. The current officers of the Company are:
1.
Stewart Wallach, age 60, was appointed as Chief Executive Officer and President of the Company on April 23, 2007. Mr. Wallach is also the senior executive officer and director of Capstone.
2.
Gerry McClinton, age 56, is the Interim Chief Financial Officer and Chief Operating Officer and a director (appointed as a director on February 5, 2008) of the Company. Mr. McClinton is also a senior executive of Capstone.
3.
Jill Mohler, age 48, Secretary since February 5, 2008. Ms. Mohler served in the Ohio Air National Guard from 1982 to 1989. Ms. Mohler graduated with honors from DeVry University with a Bachelors Degree in Business Administration in October 2006. She began working as Executive Assistant under Stewart Wallach at CHDT Corporation in January 2008.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Exchange Act requires the Company's executive officers and directors, and persons who own more than ten percent of a registered class of the Company's equity securities, to file reports of securities ownership and changes in such ownership with the SEC. Executive officers, directors and greater than ten percent shareholders also are required by rules promulgated by the SEC to furnish the Company with copies of all Section 16(a) forms they file.
Based solely upon a review of the copies of such forms furnished to the Company or other written representations, the Company believes that all of Section 16(a) filing requirements were met during fiscal year 2011 by the Company’s directors and officers.
Item 11.
Item 11. Executive Compensation.
Executive Compensation Philosophy, Strategy and Objectives
The principal objectives of our senior officer compensation are to attract, motivate and retain the services of qualified officers who can lead the Company to achieve its business goals and enhance public shareholder value. The Company’s business goals are to achieve consistent profitability in operations and attain long-term profitability. Our approach is based on the following compensation philosophies:
1.
Align Shareholder and Officer Interests: Besides a base salary sufficient to attract qualified personnel, we provide non-qualified, long term stock options to tie the interests of our officers with the interests of the shareholders in long term profitability of the Company.
2.
Performance Based Compensation. Our grant of options and stock are designed to reward and encourage officers to achieve Company goals in financial and business performance.
Competitive Market
We have one independent director and also professional advisors who check the compensation level of other microcap companies in consumer goods from time to time to ensure that our compensation levels are reasonable. In 2011, we did not benchmark compensation. Compensation was last benchmarked in 2008, when independent director and outside legal counsel reviewed compensation of executives at several peer companies holding equivalent positions or having similar responsibilities as our senior officers. The peer companies utilized in the 2008 analysis were engaged in some segment of consumer goods and were microcap companies (some having less or greater resources and operating income than our company). The companies reviewed were:
1)
Acuity Brands, Inc.
2)
AZZ Inc.
3)
Hubbell, Inc.
4)
Lightening Science Group Corp.
5)
LSI Industries, Inc.
6)
Plasmatech, Inc.
7)
Thomas & Betts Corp.
An independent director of the Company also reviewed an unpublished consulting firm’s review of executive compensation for micro-cap companies during the last benchmarking of salaries.
We use peer group and available survey data to analyze our executive compensation (overall, base salary, annual bonus and long-term incentives) relative to the 50th percentile, or median, of the benchmark data. While we use the data to ensure competitiveness and reasonableness, we do not rely solely or primarily on benchmarking in establishing executive compensation levels. Variations in the actual compensation we set may be based on achievement of short-term and long-term goals, the competitive environment, talent and level or responsibility of each senior officer.
Role of the Compensation Committee
The Company Nominating and Compensation Committee operates independently of management and currently consists of the sole independent director, Jeffrey Guzy, who is independent under applicable SEC standards and is an “Outside Director” for purposes of Section 162(m) of the Internal Revenue Code of 1986 (the “Code”). The Nominating and Compensation Committee receives recommendations from our Chief Executive Officer regarding the compensation of the senior officers (other than the Chief Executive Officer).
The Nominating and Compensation Committee is responsible for establishing and implementing our executive compensation plans as well as continually monitoring adherence to and effectiveness of those plans, including:
reviewing the structure and competitiveness of our executive compensation programs to attract and retain superior executive officers, motivate officers to achieve business goals and objectives, and align the interests of executive officers with the long-term interests of our shareholders;
reviewing and evaluating annually the performance of officers in light of company goals and objectives and approving their compensation packages, including base salaries (if at issue or in consideration), long-term incentive and stock based compensation and perquisites;
monitoring the effectiveness of the Company’s sole incentive stock option plan and approving annual financial targets for officers; and
determining whether to award incentive bonuses that qualify as “performance-based compensation” for executive officers whose compensation is covered by Code Section 162(m), the elements of such compensation, whether performance goals have been attained and, if appropriate, certifying in writing prior to payment of such compensation that the performance goals have been met.
Role of Management
The Company believes that it is important to have our Chief Executive Officer’s input in the design of compensation programs for his direct reports. The Chief Executive Officer reviews his direct reports’ compensation programs annually with the Committee, evaluating the adequacy relative to the marketplace, inflation, internal equity, external competitiveness, business and motivational challenges and opportunities facing the Company and its executives. In particular, he considers base salary a critical component of compensation to remain competitive and retain his executives, especially when market factors, such as freight demand, lag behind supply of industry-wide capacity and meeting pre-established goals for an annual incentive bonus have not been attainable for several years. All final decisions regarding compensation for the Chief Executive Officer’s direct reports listed in the Summary Compensation Table are made by the Compensation Committee. The Chief Executive Officer does not make recommendations with regard to his own compensation.
Role of the Compensation Consultant
While we may consult industry sources on compensation for executives, we have not engaged a consultant to analyze our compensation levels.
Executive Compensation Components
For 2011, the principal components of compensation for each officer were:
base salary;
annual incentive;
long-term incentive compensation (restricted stock awards); and
perquisites and other benefits.
Our company endeavors to strike an appropriate balance between long-term and current cash compensation. The current executives are key to the ability of the Company to conduct its business because of their individual experience and relationships in our current business line. Their compensation reflects their individual value to the ability of the Company to conduct its current business.
EXECUTIVE COMPENSATION
Set forth below is the approved compensation of each officer for fiscal years 2011, 2010, 2009. Each of the officers served as a director of the Company in fiscal year 2011 but they were not compensated for such service.
Footnotes:
(1)
Each Employment Agreement provides for an annual minimum salary increase of 5%.
(2)
Although approved for a salary of $260,463, Stewart Wallach took a voluntary salary reduction and earned $180,000 in 2011.
(3)
Although approved for a salary of $248,060, Stewart Wallach took a voluntary salary reduction and earned $186,923 in 2010.
(4)
Although approved for a salary of $173,643, Gerry McClinton took a voluntary salary reduction and earned $146,250 in 2011.
(5)
Although approved for a salary of $165,375, Gerry McClinton took a voluntary salary reduction and earned $124,615. In 2010.
(6)
The Company has no non-equity incentive plans.
(7)
The Company has no established bonus plan. Any bonus payments are made ad hoc upon recommendation of Nominating and Compensation Committee and approval by Board of Directors. Bonuses are only paid on a performance basis.
EMPLOYMENT AGREEMENTS
On February 1, 2011, the Company amended the terms of the employment agreements for Stewart Wallach and Gerry McClinton, extending the agreement term to February 5, 2013. These amended agreements supersede any existing employment agreements and are the only employment agreements with Company officers:
(1) Stewart Wallach, Chief Executive Officer and President. The employment agreement provides for an annual salary of $225,000 with minimum annual increase in base salary of 5%. Mr. Wallach may, at his option, elect to receive restricted shares of Common Stock in lieu of cash compensation, which shares are subject to piggyback registration rights. Mr. Wallach was entitled to a base salary of $260,463 for fiscal year 2011, however, his actual base salary in fiscal year 2011 was $180,000 because of a voluntary salary reduction for 2011. Mr. Wallach was entitled to a base salary of $248,062 for fiscal year 2010, however, his actual base salary in fiscal year 2010 was $186,923 because of a voluntary salary reduction for 2010.
(2) Gerry McClinton, Chief Operating Officer and Interim Chief Financial Officer. The employment agreement provides for an annual salary of $150,000 with minimum annual increase in base salary of 5%. Mr. McClinton may, at his option, elect to receive restricted shares of Common Stock in lieu of cash compensation, which shares are subject to piggyback registration rights. Mr. McClinton was entitled to a base salary of $173,643 in fiscal year 2011, however, his actual base salary in fiscal year 2011 was $146,250 because of a voluntary salary reduction for 2011. Mr. McClinton was entitled to a base salary of $165,375 in fiscal year 2010, however, his actual base salary in fiscal year 2010 was $124,615 because of a voluntary salary reduction for 2010.
Common Provisions in both Employment Agreements: The following provisions are contained in each of the above employment agreements:
If the officer’s employment is terminated by death or disability, the Company is obligated to pay to the officer’s estate or the officer, as the case may be, a lump sum payment equal to (a) the officer’s base salary through the termination date, plus a pro rata portion of the officer bonus for the fiscal year in which the termination occurred and (b) a lump sum payment equivalent to the sum of (i) one-year’s salary at the annual base salary rate officer was earning as of the date of termination; (ii) the bonus payment(s) officer received in the preceding fiscal year; and (iii) the cost of officer’s health and dental insurance premiums for the preceding fiscal year.
If the employment is terminated without cause by the Company or for “good reason” (as defined in the employment agreement) by the officer, then the Company must pay to the officer’s estate or the officer, a lump-sum payment equal to the greater of: (aa) the sum of (i) one-year’s salary at the annual base salary rate that the officer was earning as of the date of termination and (ii) the bonus payment(s) officer received in the preceding fiscal year; and (bb) the sum of (i) the base salary that the officer would have earned had he remained employed through the remainder of the employment period and (ii) the bonus payment(s) officer received in the preceding fiscal year multiplied by the number of years remaining in the employment period (and adjusted on a pro rata basis for any partial year remaining in the employment period.
The employment agreements have a three-year term, but have been amended to extend the term for an additional 2 years (from February 5, 2011 until February 5, 2013). These employment agreements can be extended by mutual consent of the parties for up to three (3) additional years. On February 1, 2011, the employment agreements for Stewart Wallach and Gerry McClinton were extended to February 5, 2013, unanimously approved by the Board of Directors on February 1, 2011. The employment agreements have an anti-competition provision for 18 months after the end of employment.
The above summary of the employment agreements is qualified by reference to the actual employment agreements, which are filed as exhibits to the Form 10K by the Company for fiscal year ended December 31, 2011 (as filed by the Company with the SEC on March 12, 2012).
SUMMARY TABLE OF OPTION GRANTS TO OFFICERS OF COMPANY
OTHER COMPENSATION (1)
FOOTNOTES: (1) There were no 401(k) match by the Company and no medical supplemental payments by the Company in any of the years specified.
Outstanding Equity Awards as Fiscal Year Ended 2011 Table
OPTIONS(1)
Footnotes: (1) The Company does not have any stock awards for the years specified.
2011 OPTION EXERCISES AND VESTED OPTIONS
POTENTIAL PAYMENTS UPON TERMINATION OF EMPLOYMENT
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
VOTING RIGHTS AND SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT:
The sole class of voting Common Stock of the Company as of March 12, 2012, that are issued and outstanding is the Common Stock, $0.0001 par value per share, or "Common Stock". The table below sets forth, as of March 12, 2012, (“Record Date”), certain information with respect to the Common Stock beneficially owned by (i) each Director, nominee and executive officer of the Company; (i) each person who owns beneficially more than 5% of the common stock; and (iii) all Directors, nominees and executive officers as a group. The table below also shows ownership as of the Record Date of shares of Series B Convertible Redeemable Preferred Stock, $0.10 par value, or the "Preferred Stock," which shares have no voting rights and shows ownership as of the Record Date. The table also shows ownership as of the Record Date of shares of Series C Convertible Redeemable Preferred Stock, $1.00 par value, or the Preferred Stock which shares have no voting rights. There were 649,510,532 shares of Common Stock outstanding on the Record Date and 1,000 shares of Preferred C Stock were outstanding as of March 12, 2012.
Notes to Table
(1) Unless otherwise indicated, the persons named in the table have sole voting and investment power with respect to all shares of common stock shown as beneficially owned by them.
(2) Total shares includes 22,733,333 million shares that Mr. Wallach has the current right to acquire under a non-qualified stock option and 1,764,706 shares of Common Stock issuable under the warrants issued to Mr. Wallach as part of his $100,000 investment in Company’s 2007 private placement under Rule 506 of restricted shares of Common Stock. Mr. Wallach was appointed Chief Executive Officer and President of the Company on April 23, 2007.
(3) Total shares include 32,250,000 shares of Common Stock currently available for purchase under a non-qualified stock option agreement dated April 27, 2007.
(4) Total shares include 1,000,000 shares of Common Stock currently available for purchase under a non-qualified stock option agreement, dated June 9, 2010 and 1,000,000 shares of Common Stock available for purchase under a non-qualified stock option agreement, dated July 19, 2011. Mr. Holtz was appointed as Chief Financial Officer in December 2007 and resigned from his position on June 1, 2009. Mr. Holtz is still serving as a Director of the Board.
(5) Total shares include 4,000,000 shares of Common Stock for purchase under a Warrant Agreement dated July 11, 2008, 1,000,000 shares of Common Stock available for purchase under a non-qualified stock option agreement dated June 9, 2010 and 1,000,000 shares of Common Stock available for purchase on, under a non-qualified stock option agreement, dated July 19, 2011.
(6) Ms. Mohler was appointed as Secretary on February 5, 2008, and replaced Gerry McClinton, who reigned on that same date to focus on his duties as Chief Operating Officer. Ms. Mohler was granted a non-qualified stock option for 150,000 shares of Common Stock in 2008 as part of her compensation arrangement. On June 15, 2010, an additional 300,000 shares were granted under a non-qualified stock option agreement. On July 19, 2011, Ms. Mohler was granted another 150,000 shares of Common Stock under a non-qualified stock option agreement.
(7) Total shares include 1,500,000 shares of Common Stock currently available for purchase under a non-qualified stock option agreement dated June 9, 2010 and 1,500,000 shares of Common Stock, available for purchase under a non-qualified stock option agreement dated July 19, 2011.
(8) Total shares include 1,000,000 shares of Common Stock currently available for purchase under a non-qualified stock option agreement dated June 9, 2010 and 1,000,000 shares of Common Stock available for purchase under a non-qualified stock option agreement, dated July 19, 2011.
(9)(10) Bart Fisher is the spouse of Margaret Fisher. Bart Fisher was an officer and director of the Company in 2002. If the ownership of Bart Fisher is combined with his spouse’s holdings, then Bart Fisher may be deemed to be an “affiliate” of the Company under the rules of the Securities Exchange Act of 1934, as amended, and on the basis of owning more than 10% of the Company’s outstanding shares of Common Stock.
The following table sets forth beneficial ownership of Series C Convertible Preferred Stock of members of Company management as of March 12, 2012.
Item 13.
Item 13. Certain Relationships and Related Transactions, and Director Independence.
INDEPENDENT DIRECTORS
The Company is a "controlled company" under typical stock exchange corporate governance rules, that is a company where 50% or more of the voting power is owned by a person or a group, and does not currently have to meet requirements for a board of directors with a majority of "independent directors." Currently, only Jeffrey Guzy qualifies as an "independent director" under the listing standards of most stock exchanges or quotation systems. No other director qualifies as an "independent director" under those rules because they are officers of the Company or have business relationships with the Company.
The CHDT Board adopted a written policy for approval of transactions between the Company and its directors, director nominees, executive officers, greater than 5% beneficial owners and their respective immediate family members. The policy governs transaction in which the value exceeds or is expected to exceed $120,000 in a single calendar year. A copy of this policy is available on the Company’s website at www.chdtcorp.com.
The policy provides that the Audit Committee reviews transactions subject to the policy and determines whether or not to approve or ratify those transactions. The Audit Committee takes into account, among other factors it deems appropriate, the following factors:
·
Benefits derived by the related person from the transaction versus the benefits derived by the Company;
·
Total value of the transaction;
·
Whether the transaction was undertaken in the ordinary course of business of the Company; and
·
Were the terms and conditions of the transaction usual and customary and commercially reasonable.
The Audit Committee does not have any policies on expedited or pre-approval of certain routine related person transactions.
From time to time, the Company borrows money on a short term basis, usually with maturity dates of less than a year, from Company directors and officers. The Company believes that these loans are commercially reasonable, especially in light of the inability of the Company to obtain such short term financing from traditional funding sources. A summary of the current loans from Company officers and directors is set forth below. While these loans are not typically reviewed by the Audit Committee, the Company has decided to have all loans from Company directors or officers to the Company reviewed by the Audit Committee under the Company related person transaction policy, effective March 1, 2012. The loans from Company directors or officers are usually convertible into shares of Company stock or are converted into shares of Company stock in order to preserve the cash reserves or cash flow from operations of the Company for payment of expenses that are necessary to maintain the Company operations. Such conversions are usually approved by the disinterested directors of the Company’s board of directors. Effective March 1, 2012, the Company has decided to have all conversions of loans from Company directors or officers reviewed under the Company’s related person transaction policy.
Item 14.
Item 14. Principal Accountant Fees & Services
The following is a summary of the fees billed to us by Robison, Hill & Company for professional services rendered for the years ended December 31, 2011 and 2010:
Audit Fees. Consists of fees billed for professional services rendered for the audits of our consolidated financial statements, reviews of our interim consolidated financial statements included in quarterly reports, services performed in connection with filings with the Securities & Exchange Commission and related comfort letters and other services that are normally provided by Robison, Hill & Company in connection with statutory and regulatory filings or Engagements.
Tax Fees. Consists of fees billed for professional services for tax compliance, tax advice and tax planning. These services include assistance regarding federal, state and local tax compliance and consultation in connection with various transactions and acquisitions.
AUDIT COMMITTEE PRE-APPROVAL OF AUDIT AND PERMISSIBLE NON-AUDIT SERVICES OF INDEPENDENT AUDITORS
The Audit Committee is to pre-approve all audit and non-audit services provided by the independent auditors. These services may include audit services, audit-related services, tax services and other services as allowed by law or regulation. Pre-approval is generally provided for up to one year and any pre-approval is detailed as to the particular service or category of services and is generally subject to a specifically approved amount. The independent auditors and management are required to periodically report to the Audit Committee regarding the extent of services provided by the independent auditors in accordance with this pre-approval and the fees incurred to date. The Audit Committee may also pre-approve particular services on a case-by-case basis.
The Audit Committee pre-approved 100% of the Company's 2011 audit fees, audit-related fees, tax fees, and all other fees to the extent the services occurred after the effective date of the Securities and Exchange Commission’s final pre-approval rules.
Part IV
Item 15.
Item 15. Exhibits, and Reports on Form 8-K
(a) The following documents are filed as part of this report.
1. FINANCIAL STATEMENTS
Report of Independent Registered Public Accountants
Consolidated Balance Sheets as of December 31, 2011, and 2010
Consolidated Statements of Operations for the years ended December 31, 2011 and 2010
Consolidated Statement of Stockholders' Equity For the Years Ended December 31, 2011 and 2010
Consolidated Statements of Cash Flows for the years ended December 31, 2011 and 2010
Notes to Consolidated Financial Statements
2. FINANCIAL STATEMENT SCHEDULES
The following financial statement schedules required by Regulation S-X are included herein. All schedules are omitted because they are not applicable or the required information is shown in the financial statements or notes thereto.
3. EXHIBITS
Exhibits Required by Item 601 of Regulation S-K. Pursuant to the Instructions to Exhibits, certain instruments defining the rights of holders of long-term debt securities of the Company and its consolidated subsidiaries are not filed because the total amount of securities authorized under any such instrument does not exceed 10 percent of the total assets of the Company and its subsidiaries on a consolidated basis. A copy of such instrument will be furnished to the Securities and Exchange Commission upon request.
(b) Reports on Form 8-K filed.
The following reports were filed during the last quarter of the 2011 fiscal year: January 6, 2011;
March 18, 2011; March, 28, 2011; March 30, 2011; May 12, 2011; August 5, 2011; August 16, 2011; October 18, 2011; October 27, 2011 and December 5, 2011.
CHDT CORPORATION
AND SUBSIDIARIES
-:-
INDEPENDENT REGISTERED PUBLIC ACCOUNTANTS’ REPORT
DECEMBER 31, 2011 AND 2010
CONTENTS
ROBISON, HILL & CO.
Certified Public Accountants
A PROFESSIONAL CORPORATION
DAVID O. SEAL, CPA
W. DALE WESTENSKOW, CPA
BARRY D. LOVELESS, CPA
STEPHEN M. HALLEY, CPA
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders
CHDT Corporation and Subsidiaries
We have audited the accompanying consolidated balance sheets of CHDT Corporation and Subsidiaries as of December 31, 2011 and 2010 and the related consolidated statements of operations, stockholders’ equity and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of CHDT Corporation and Subsidiaries as of December 31, 2011 and 2010 and the results of its operations and its cash flows for the years ended December 31, 2011 and 2010 in conformity with accounting principles generally accepted in the United States of America.
/s/ Robison, Hill & Co.
________________________
Certified Public Accountants
Salt Lake City, Utah
March 12, 2012
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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.
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 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. 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. was 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. 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.
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 31, 2012 “BBI” name was changed to “Capstone Lighting Technologies, L.L.C” (“CLT”).
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.
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. Under the Stock Purchase Agreement the Company acquired 100% of the issued and outstanding shares of Capstone Common Stock, and recorded goodwill of $1,936,020.
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CHDT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Nature of Business
Since the beginning of fiscal year 2007, the Company has been primarily engaged in the business of developing, marketing and selling consumer products through national and regional retailers and distributors, in North America. Capstone currently operates in four primary business segments: Induction Charged Power Failure Lights, Motion Sensor Lights, Portable Book and Task Lights and Desk Lamps. The Company’s products are typically manufactured in the Peoples’ Republic of China by third-party manufacturing companies.
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 December 31, 2011, 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 $58,717 and $387,990 at December 31, 2011 and December 31, 2010, respectively.
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CHDT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
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
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 2011.
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 $59,218 and $133,120 for the period ended December 31, 2011 and 2010, respectively.
Goodwill and Other Intangible Assets
Intangible assets acquired, either individually or with a group of other assets (but not those acquired in a business combination), are initially recognized and measured based on 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.
The cost 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.
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CHDT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
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. 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 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, 2011, whereas the fair value of the intangible asset exceeds its carrying amount.
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. At December 31, 2011 and 2010, the total number of potentially dilutive common stock equivalents was155,446,577 and 145,729,910 respectively.
Principles of Consolidation
The consolidated financial statements for the year ended December 31, 2011 and 2010 include the accounts of the parent entity and its wholly-owned subsidiaries Capstone Lighting Technologies, L.L.C (formerly Black Box Innovations, L.L.C.), and Capstone Industries, Inc.
The results of operations attributable to subsidiaries are included in the consolidated results of operations beginning on the date on which the Company’s interest in a subsidiary was acquired.
Fair Value of Financial Instruments
The carrying value of the Company's financial instruments, including cash, prepaid expenses, accounts receivable, accounts payable and accrued liabilities at December 31, 2011 and 2010 approximates their fair values due to the short-term nature of these financial instruments. The fair value hierarchy under GAAP distinguishes between assumptions based on market data (observable inputs) and an entity’s own assumptions (unobservable inputs). The hierarchy consists of three levels:
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CHDT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Determining which category an asset or liability falls within the hierarchy requires significant judgment. We evaluate our hierarchy disclosures each quarter.
Reclassifications
Certain reclassifications have been made in the 2010 financial statements to conform to the 2011 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.
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 $40,677 and $128,214 for the year ended December 31, 2011 and 2010, respectively. As of December 31, 2011 the company has $275,019 in capitalized advertising costs included in prepaid expenses on the balance sheet.
Shipping and Handling
The Company’s shipping and handling costs, incurred by Capstone amounted to $95,926 and $84,846 for the year ended December 31, 2011 and 2010, respectively.
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 (now ASC 740) 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.
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CHDT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
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), (now ASC 718) 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. ASC 718 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 ASC 718. The Company has applied the provision of SAB 107 in its adoption of ASC 718.
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 day of the Company’s fiscal year. The Company’s consolidated financial statements as of and for the years ended December 31, 2006 and later, 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).
SFAS 123(R)ASC 718 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 ASC 718, 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 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 ASC 718.
In conjunction with the adoption of ASC 718, 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. ASC 718 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, 2011, 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 ASC 718, Share-Based Payments.
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CHDT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
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 year ended December 31, 2009, the Company recognized compensation expense of $156,557 related to these options. For the year ended December 31, 2010, the Company recognized a compensation expense of $156,558 related to these options. For the year ended December 31, 2011, the Company recognized compensation expense of $52,186 related to these options. No further compensation expense will be recognized for 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 and 2009, 1,500,000 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 year ended December 31, 2009, the Company recognized compensation expense of $10,869 related to these options. As of December 31, 2009 these options were fully vested and compensation expense fully recognized. No further compensation expense will be recognized for 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 year ended December 31, 2009, the Company recognized compensation expense of $6,648 related to these options. As of December 31, 2009 these options were fully vested and compensation expense fully recognized. No further compensation expense will be recognized for these 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. For the year ended December 31, 2008, the Company recognized compensation expense of $19,953 related to these options. As of December 31, 2008 these options were fully vested and compensation expense fully recognized. No further compensation expense will be recognized for 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 year ended December 31, 2009, the Company recognized compensation expense of $2,603 related to these options. As of December 31, 2009 these options were fully vested and compensation expense fully recognized. During 2010, 3,500,000 of the above options expired. No further compensation expense will be recognized for 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 year ended December 31, 2009, the Company recognized compensation expense of $7,862 related to these options. For the year ended December 31, 2010, the Company recognized compensation expense of $2,620 related to these options. No further expense will be recognized for these options.
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CHDT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
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 year ended December 31, 2009, the Company recognized compensation expense of $42,663 related to these options. For the year ended December 31, 2010, the Company recognized compensation expense of $33,837 related to these options. No further expense will be recognized for these options. These options expired on June 8, 2011.
On April 23, 2010, the Company granted 4,800,000 stock options to four directors of the Company and the Company Secretary. The options vest in one year. For the year ended December 31, 2010, the Company recognized compensation expense of $27,000 related to these options. For the year ended December 31, 2011 the Company recognized compensation expense of $12,000. No further expense will be recognized for these options.
On July 1, 2011, the Company granted 4,650,000 stock options to four directors of the Company and the Company Secretary. The options vest in one year. For the year ended December 31, 2011 the Company recognized compensation expense of $16,500. Another $16,500 of expense will be incurred in 2012 relating 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 ASC 718 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 for the year ended December 31, 2011 was $80,686. Stock-based compensation expense for the year ended December 31, 2010 was $220,015.
Recent Accounting Standards
In October 2009, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update 2009-13 (ASU 2009-13), which provided an update to ASC 605. ASU 2009-13 addresses how to separate deliverables and how to measure and allocate arrangement consideration to one or more units of accounting in multiple-deliverable arrangements. The amendments in this update will be effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010. The Company’s adoption of the provisions of ASU 2009-13 did not have a material effect on its financial position, results of operations or cash flows
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CHDT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
In March 2010, the FASB issued Accounting Standards Update 2010-11 (ASU 2010-11), Derivatives and Hedging (Topic 815): Scope Exception Related to Embedded Credit Derivatives. The amendments in this Update are effective for each reporting entity at the beginning of its first fiscal quarter beginning after June 15, 2010. Early adoption is permitted at the beginning of each entity’s first fiscal quarter beginning after issuance of this Update. The Company’s adoption of the provisions of ASU 2010-11 did not have a material effect on its financial position, results of operations or cash flows.
In April 2010, the FASB issued Accounting Standards Update 2010-17 (ASU 2010-17), Revenue Recognition - Milestone Method (Topic 605). ASU 2010-17 provides guidance on applying the milestone method of revenue recognition in arrangements with research and development activities. The amendments in this Update are effective on a prospective basis for milestones achieved in fiscal years, and interim periods within those years, beginning on or after June 15, 2010. The Company’s adoption of the provisions of ASU 2010-17 did not have a material impact on its revenue recognition.
In July 2010, the FASB issued Accounting Standards Update 2010-20 (ASU 2010-20), Receivables (Topic 310): Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses. The amendments in this Update are to provide financial statement users with greater transparency about an entity’s allowance for credit losses and the credit quality of its financing receivables. The disclosures about activity that occurs during the reporting period are effective for interim and annual reporting periods beginning on or after December 15, 2010. The Company’s adoption of the provisions of ASU 2010-20 did not have a material effect on its financial position, results of operations or cash flows.
In December 2010, the FASB (Financial Accounting Standards Board) issued Accounting Standards Update 2010-28 (ASU 2010-28), Intangibles - Goodwill and Other (Topic 350) - When to Perform Step 2 of the Goodwill Impairment Test for Reporting Units with Zero of Negative Carrying Amounts. This Accounting Standards Update modifies Step 1 of the goodwill impairment test for reporting units with zero or negative carrying amounts. For those reporting units, an entity is required to perform Step 2 of the goodwill impairment test if it is more likely than not that a goodwill impairment exists. In determining whether it is more likely than not that a goodwill impairment exists, an entity should consider whether there are any adverse qualitative factors indicating that an impairment may exist. The qualitative factors are consistent with the existing guidance and examples in paragraph 350-20-35-30, which requires that goodwill of a reporting unit be tested for impairment between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. The amendments in this Update affect all entities that have recognized goodwill and have one or more reporting units whose carrying amount for purposes of performing Step 1 of the goodwill impairment test is zero or negative. The amendments in this Update are effective for fiscal years, and interim periods within those years, beginning after December 15, 2010. Early adoption is not permitted. The Company’s adoption of the provisions of ASU 2010-28 did not have a material effect on its financial position, results of operations or cash flows.
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CHDT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
In December 2010, the FASB (Financial Accounting Standards Board) issued Accounting Standards Update 2010-29 (ASU 2010-29), Business Combinations (Topic 805) - Disclosure of Supplementary Pro Forma Information for Business Combinations. This Accounting Standards Update requires a public entity to disclose pro forma information for business combinations that occurred in the current reporting period. The disclosures include pro forma revenue and earnings of the combined entity for the current reporting period as though the acquisition date for all business combinations that occurred during the year had been as of the beginning of the annual reporting period. If comparative financial statements are presented, the pro forma revenue and earnings of the combined entity for the comparable prior reporting period should be reported as though the acquisition date for all business combinations that occurred during the current year had been as of the beginning of the comparable prior annual reporting period. The amendments in this Update affect any public entity as defined by Topic 805 that enters into business combinations that are material on an individual or aggregate basis. The amendments in this Update are effective prospectively for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2010. Early adoption is permitted. The Company’s adoption of the provisions of ASU 2010-29 did not have a material effect on its financial position, results of operations or cash flows.
In May 2011, FASB issued ASU 2011-04 “Fair Value Measurement (Topic 820).” The amendments in ASU 2011-04 change the wording used to describe the requirements in U.S. GAAP for measuring fair value and for disclosing information about fair value measurements. The amendments include (1) those that clarify the Board's intent about the application of existing fair value measurement and disclosure requirements and (2) those that change a particular principle or requirement for measuring fair value or for disclosing information about fair value measurements. In addition, to improve consistency in application across jurisdictions some changes in wording are necessary to ensure that U.S. GAAP and IFRS fair value measurement and disclosure requirements are described in the same way (for example, using the word shall rather than should to describe the requirements in U.S. GAAP). The amendments that clarify the Board's intent about the application of existing fair value measurement and disclosure requirements include (a) the application of the highest and best use and valuation premise concepts, (b) measuring the fair value of an instrument classified in a reporting entity's shareholders' equity, and (c) disclosures about fair value measurements that clarify that a reporting entity should disclose quantitative information about the unobservable inputs used in a fair value measurement that is categorized within Level 3 of the fair value hierarchy. The amendments in this Update that change a particular principle or requirement for measuring fair value or disclosing information about fair value measurements include (a) measuring the fair value of financial instruments that are managed within a portfolio, (b) application of premiums and discounts in a fair value measurement, and (c) additional disclosures about fair value measurements that expand the disclosures about fair value measurements. The amendments in ASU 2011-04 are to be applied prospectively. For public entities, the amendments are effective during interim and annual periods beginning after December 15, 2011. Early application by public entities is not permitted. Management does not expect the adoption of ASU 2011-04 to have a material effect on the Company’s financial position, results of operations or cash flows.
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CHDT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
In June 2011, FASB issued ASU 2011-05 “Comprehensive Income (Topic 220).” Under the amendments in this Update, an entity has the option to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In both choices, an entity is required to present each component of net income along with total net income, each component of other comprehensive income along with a total for other comprehensive income, and a total amount for comprehensive income. In a single continuous statement, the entity is required to present the components of net income and total net income, the components of other comprehensive income and a total for other comprehensive income, along with the total of comprehensive income in that statement. In the two-statement approach, an entity is required to present components of net income and total net income in the statement of net income. The statement of other comprehensive income should immediately follow the statement of net income and include the components of other comprehensive income and a total for other comprehensive income, along with a total for comprehensive income. The amendments in this Update should be applied retrospectively. For public entities, the amendments are effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. Early adoption is permitted. The amendments do not require any transition disclosures. Management does not expect the adoption of ASU 2011-05 to have a material effect on the Company’s financial position, results of operations or cash flows.
In December 2011, FASB issued ASU 2011-12 “Comprehensive Income (Topic 220).” In order to defer only those changes in Update 2011-05 that relate to the presentation of reclassification adjustments, the paragraphs in this Update supersede certain pending paragraphs in Update 2011-05. The amendments are being made to allow the Board time to re-deliberate whether to present on the face of the financial statements the effects of reclassifications out of accumulated other comprehensive income on the components of net income and other comprehensive income for all periods presented. While the Board is considering the operational concerns about the presentation requirements for reclassification adjustments and the needs of financial statement users for additional information about reclassification adjustments, entities should continue to report reclassifications out of accumulated other comprehensive income consistent with the presentation requirements in effect before Update 2011-05.All other requirements in Update 2011-05 are not affected by this Update, including the requirement to report comprehensive income either in a single continuous financial statement or in two separate but consecutive financial statements. Public entities should apply these requirements for fiscal years, and interim periods within those years, beginning after December 15, 2011. Management does not expect the adoption of ASU 2011-11 to have a material effect on the Company’s financial position, results of operations or cash flows.
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.
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CHDT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 December 31, 2011, the Company had no cash in excess of FDIC limits.
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, 2011 and 2010. 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:
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CHDT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 - CONCENTRATIONS OF CREDIT RISK AND ECONOMIC DEPENDENCE (continued)
Major Vendors
The Company had three vendors from which it purchased at least ten percent (10%) of merchandise during the fiscal year ended December 31, 2011 and four vendors from which it purchased at least ten percent (10%) of merchandise during the fiscal year ended December 31, 2010. 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:
NOTE 3 - NOTES PAYABLE
Sterling National Bank
On September 8, 2010, in order to fund increasing Accounts Receivables and support working capital needs, Capstone secured a Financing Agreement from Sterling Capital Funding,(now called Sterling National Bank) , located in New York, whereby Capstone receives funds for assigned retailer shipments. The assignments provide funding for an amount up to 85% of net invoices submitted. There will be a base management fee equal to .45% of the gross invoice amount. The interest rate of the loan advance is ¼% above Sterling National Bank Base Rate which at time of closing was 5%. The amounts borrowed under this agreement are secured by a right to set-off on or against any of the following (collectively as “Collateral”): all accounts including those at risk, all reserves, instruments, documents, notes, bills and chattel paper, letter of credit rights, commercial tort claims, proceeds of insurance, other forms of obligations owing to Sterling, bank and other deposit accounts whether or not reposed with affiliates, general intangibles (including without limitation all tax refunds, contract rights, trade names, trademarks, trade secrets, customer lists, software and all other licenses, rights, privileges and franchises), all balances, sums and other property at any time to our credit or in Sterling’s possession or in the possession of any Sterling Affiliates, together with all merchandise, the sale of which resulted in the creation of accounts receivable and in all such merchandise that may be returned by customers and all books and records relating to any of the foregoing, including the cash and non-cash proceeds of all of the foregoing. CHDT Corp and Howard Ullman, the previous Chairman of the Board of Directors of CHDT, had personally guaranteed Capstone’s obligations under the Financial Agreement. As part of the 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 $121,263 (plus future interest) and $81,000 (plus future interest) due to Howard Ullman (or his assigns), to the Sterling National Bank loan. No payments will be made on the subordinated debt until the Sterling loan is paid in full. As of December 31, 2011, the balance due to Sterling was $441,607.
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CHDT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 - NOTES PAYABLE (continued)
On July 21,2011 Stewart Wallach, the Chief Executive Officer and Director of CHDT and JWTR Holdings, LLC owned by a Director, Jeffrey Postal entered into a Securities and Notes Purchase Agreement with Howard Ullman, the previous Chairman of the Board of CHDT, whereby they would purchase equally all of Howard Ullmans notes including the notes subordinated to Sterling National Bank.
On July 15, 2011, Stewart Wallach individually and accepted by Sterling National Bank, agreed to replace Howard Ullman as the sole personal guarantor to Sterling National Bank for all of Capstone Industries, Inc. loans previously guaranteed by Howard Ullman.
Effective July 12, 2011, Capstone Industries, Inc., credit line with Sterling National Bank was increased from $2,000,000 up to $4,000,000 to provide additional funding for increased revenue growth.
Effective October 1st, 2011 Sterling Capital Funding will be conducting business as the Factoring and Trade Division of Sterling National Bank. All obligations under our agreements have been assigned to Sterling National Bank.
NOTE 4 - NOTES AND LOANS PAYABLE TO RELATED PARTIES
CHDT Corp - Notes Payable to Officers and Directors
On May 30, 2007, the Company executed a $575,000 promissory note payable to a director of the Company. This note was amended on July 1, 2009 and again on January 2, 2010. As amended, the note carries an interest rate of 8% per annum. All principal is payable in full, with accrued interest, on January 2, 2011. 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. The loan grants to the holder a security interest in the accounts receivable of the Company up to the amount of the unpaid Principal.
On July 12, 2011 Stewart Wallach, the Chief Executive Officer and Director of CHDT and JWTR Holdings, LLC owned by a Director, Jeffrey Postal entered into a Securities and Notes Purchase Agreement with Howard Ullman, the previous Chairman of the Board of CHDT, whereby they would purchase equally all of Howard Ullmans notes including the subordinated notes net of any offsets, monies due by Howard Ullman to the Company. The original terms of all notes would remain the same. On July 12, 2011 this note payable was reassigned by Howard Ullman, equally split between Stewart Wallach Director and JWTR Holdings LLC. The note balance of $466,886 was reduced by $47,940 for offsets due by Howard Ullman. The revised loan balance of $418,946 was reassigned equally $209,473 to Stewart Wallach and $209,473 to JWTR Holdings LLC. At December 31, 2011, the total amount payable on the reassigned notes to Stewart Wallach was $216,498 which includes accrued interest of $7025 and JWTR Holdings, LLC was $216,498 which includes accrued interest of $7,025. For the revised notes the interest payments are being accrued monthly to the note holders.
On July 11, 2008, the Company received a loan from a director of $250,000. As amended, the note is due on of before January 2, 2013 and carries an interest rate of 8% per annum. At December 31, 2011, the total amount payable on this note was $290,000 including interest of $40,000
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CHDT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4 - 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 were 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.
On March 11, 2010, the Company received a loan from a director of $100,000. As amended, the note is due on or before January 2, 2013 and carries an interest rate of 8% per annum. At December 31, 2011 the total amount payable on this note was $114,466 including interest of $14,466.
On May 11, 2010, the Company received a loan from a director of $75,000. As amended, the note is due on or before January 2, 2013 and carries an interest rate of 8% per annum. The loan grants to the holder a security interest in the accounts receivable of the Company up to the amount of the unpaid Principal. At December 31, 2011 the total amount payable on this note was $84,847, including interest of $9,847..
On June 11, 2010, the Company received a loan from a director of $150,000. As amended, the note is due on or before January 2, 2013and carries an interest rate of 8% per annum. The loan grants to the holder a security interest in the accounts receivable of the Company up to the amount of the unpaid Principal. At December 31, 2011 the total amount payable on this note was $168,674 including interest of $18,674.
During the quarter ended June 30, 2008, the Company executed three notes payable for a combined total of $200,000 to an officer of the Company. As amended, the notes are due on or before January 2, 2013 and carry an interest rate of 8% per annum. These loans grant to the holder a security interest in the accounts receivable of the Company up to the amount of the unpaid Principal. At December 31, 2011 the total amount due on these notes was $232,000, including interest of $32,000.
Capstone Industries - Notes Payable to Officers and Directors
On July 16, 2007, Capstone Industries executed a $103,000 promissory note payable to a director of the Company. As amended, the note carries an interest rate of 8% per annum and is due on or before January 2, 2013. In December 2008, the Company borrowed an additional $75,000 from this director. As amended, this note is due on or before January 2, 2013. These loans grant to the holder a security interest in the accounts receivable of the Company up to the amount of the unpaid Principal.
On July 12, 2011 Stewart Wallach, the Chief Executive Officer and Director of CHDT and JWTR Holdings, LLC owned by a Director, Jeffrey Postal entered into a Securities and Notes Purchase Agreement with Howard Ullman, the previous Chairman of the Board of CHDT, whereby they would purchase all of Howard Ullmans notes including the subordinated notes. The original terms of all notes would remain the same. On July 12, 2011 the subordinated note payable was reassigned by Howard Ullman, to Stewart Wallach director and JWTR Holding LLC. The original note balance of $178,000 was reassigned to Stewart Wallach and to JWTR Holdings LLC.
At December 31, 2011 the total amount due on these notes was $208,232, including interest of $30,232. For the year 2011 the interest payments were paid monthly to the note holder as of July 31, 2011.
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CHDT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Purchase Order Assignment-Funding Agreements
During the First Quarter 2010, Capstone Industries, Inc. received a $92,000 loan from Systematic Development Group, LLC. The loan was due on or before Dec 15, 2010 and carried an interest rate of 1.5% simple interest per month (18% annual). This loan was paid in full as of December, 31, 2010.
During Second Quarter 2010, Capstone Industries, Inc. received an additional $445,000 loan from Systematic Development Group, LLC. The loan was due on or before Dec 15, 2010 and carried an interest rate of 1.5% simple interest per month (18% annual). This loan was paid in full as of December, 31, 2010
During Third Quarter 2010, Capstone Industries, Inc. received an additional $714,000 loan from Systematic Development Group, LLC. The loan was due on or before January 14, 2011 and carried an interest rate of 1.5% simple interest per month (18% annual). The loan granted to the holder a security interest in the inventory purchased pursuant to this agreement until sold, with payment due immediately on advancement of funds from Sterling Factors Corp. At December 31, 2010, the total amount due on this note was $78,625 including accrued interest of $3,625. This loan was paid in full as of March 31, 2011.
On October 4th 2010, Capstone Industries, Inc. received an additional $114,000 loan from Systematic Development Group, LLC and carried an interest rate of 1.5% simple interest per month (18% annual). This loan was paid in full at December 31, 2010.
Stewart Wallach, the Company’s Chief Executive Officer and President, was a 65% owner of Systematic Development Group, LLC. at the time the loans were executed.
On June 24, 2010, Capstone Industries, entered into a Purchase Order Funding agreement with a director. The agreement provides for loans from the director up to $682,730, with a due date of December 31, 2010, carried a simple interest rate of 1.5%% per month (18% annual), and is secured by the product purchased and accounts receivable from the sale thereof (second position to Sterling Capital Funding). As amended, the note was due on or before March 31, 2011. On June 25, 2010, the Company received $265,000 pursuant to the agreement. During the third quarter 2010, the Company received additional funding of $415,000. During 2010, this note was partially repaid in the amount of $604,605 including $24,605 interest. At December 31, 2010 the total amount payable on this note was $104,882 including accrued interest of $4,882. This loan was paid in full as of March 31, 2011.
On July 21, 2010, the Company entered into a Purchase Order Funding agreement with Everett Fleisig. Mr. Fleisig is the father in law of an officer of the company. The agreement provided for loans up to $356,000, with a due date of December 31, 2010, carried a simple interest rate of 1.5% per month (18% annual), and was secured by the product purchased and accounts receivable from the sale of thereof (second position to Sterling Capital Funding). As of December 31, 2010 the total note amount of $217,513 was repaid in full including interest of $8,513.
On November 29, 2010, the Company entered into a Purchase Order Funding agreement with Rossion Holding LLC (RHL). The agreement provides for loans up to $140,000, with a due date of April 30 2011, carries a simple interest rate of 1.5% per month (18% annual), and is secured by the product purchased and accounts receivable from the sale of thereof (second position to Sterling Capital Funding). On December 1st, 2010, Company received $47,000 pursuant to the agreement. As of June 30, 2011 this note was paid in full.
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CHDT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4 - NOTES AND LOANS PAYABLE TO RELATED PARTIES (continued)
On December 9, 2010, the Company entered into a Purchase Order Funding agreement with Rossion Holding LLC (RHL). The agreement provides for loans up to $600,000, with a due date of June 30 2011, carries a simple interest rate of 1.5% per month (18% annual), and is secured by the product purchased and accounts receivable from the sale of thereof (second position to Sterling Capital Funding). As December 31, 2010 the note payable was $101,134 includes accrued interest of $1,134, which was paid off as of March 31, 2011. During the First Quarter 2011, an additional loan of $409,000 was received. As of June 30, 2011 this note was paid in full.
On December 9, 2010, Capstone Industries, entered into a Purchase Order Funding agreement with a director. This agreement provides for loans from the director up to $350,000, with a due date of June 30, 2011, carried a simple interest rate of 1.5% per month (18% annual), and is secured by the product purchased and accounts receivable from the sale thereof (second position to Sterling Capital Funding), On December 9, 2010, the Company received $350,000 pursuant to the agreement. At December 31, 2010 the total amount payable on this note was $353,797 including accrued interest of $3,797. This loan was paid in full as of March 31, 2011
On March 17, 2011, Capstone Industries, entered into a Purchase Order Funding agreement with a director. This agreement provides for loans from the director up to $800,000, with a due date of December 31, 2011, carries a simple interest rate of 1.5% per month (18% annual), and is secured by the product purchased and accounts receivable from the sale thereof (second position to Sterling Capital Funding). As of June 30, 2011, the Company received $450,000 pursuant to the agreement. At September 30, 2011 this note was paid in full.
On March 18, 2011, Capstone Industries, entered into a Purchase Order Funding agreement with Phyllis Postal. Mrs. Postal is a mother of a director of the company. This agreement provides for loans from the director up to $300,000, with a due date of December 31, 2011, carries a simple interest rate of 1.5% per month (18% annual), and is secured by the product purchased and accounts receivable from the sale thereof (second position to Sterling Capital Funding). As of September 30, 2011 the Company received $300,000 pursuant to the agreement. As of September 30, 2011 this loan was paid in full
On March 23, 2011, the Company entered into a Purchase Order Funding agreement with Rossion Holding LLC (RHL). The agreement provides for loans up to $65,000, with a due date of Aug 23, 2011, carries a simple interest rate of 1.5% per month (18% annual), and is secured by the product purchased and accounts receivable from the sale of thereof (second position to Sterling Capital Funding). As of June 30, 2011 this note was paid in full.
On May 27, 2011, the Company entered into a Purchase Order Funding agreement with Everett Fleisig. The agreement provided for loans up to $315,000, with a due date of December 31, 2011, carried a simple interest rate of 1.5% per month (18% annual), and is secured by the product purchased and accounts receivable from the sale of thereof (second position to Sterling Capital Funding). As of December 31, 2011 the note was paid in full.
On June 17, 2011, Capstone Industries, entered into a Purchase Order Funding agreement with a director. This agreement provides for loans from the director up to $316,000, with a due date of December 31, 2011, carries a simple interest rate of 1.5% per month (18% annual), and is secured by the product purchased and accounts receivable from the sale thereof (second position to Sterling Capital Funding). As of September 30, 2011 the note was paid in full.
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CHDT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4 - NOTES AND LOANS PAYABLE TO RELATED PARTIES (continued)
On May 17, 2011, the Company entered into a Purchase Order Funding agreement with Rossion Holding LLC (RHL). The agreement provides for loans up to $831,000, with a due date of October 31st, 2011, carries a simple interest rate of 1.5% per month (18% annual), and is secured by the product purchased and accounts receivable from the sale of thereof (second position to Sterling Capital Funding ). As of September 30, 2011 the note was paid in full.
On June 22, 2011, the Company entered into a Purchase Order Funding agreement with Rossion Holding LLC (RHL). The agreement provides for loans up to $585,000, with a due date of October 31st, 2011, carries a simple interest rate of 1.5% per month (18% annual), and is secured by the product purchased and accounts receivable from the sale of thereof (second position to Sterling Capital Funding). At September 30, 2011, no funding was required, and the note was closed.
Stewart Wallach, the Company’s Chief Executive Officer and President, is a 65% owner of Rossion Holding LLC.
On December 17, 2010, the Company entered into a Purchase Order Funding agreement with George Wolf. Mr. Wolf is a business partner of the CEO and an officer of the company. The agreement provides for loans up to $392,000, with a due date of June 30, 2011, carries a simple interest rate of 1.5% per month (18% annual), and is secured by the product purchased and accounts receivable from the sale of thereof (second position to Sterling Capital Funding ). At December 31, 2010 the note payable was $38,187 includes accrued interest of $187 which was paid in full as of March 31, 2011. During the first quarter additional $156,000 advance was received on this note. During the second quarter additional $100,000 advance was received on this note. As of June 30, 2011 this note was paid in full.
On February 11, 2011, the Company entered into a Purchase Order Funding agreement with George Wolf. The agreement provides for loans up to $106,000, with a due date of Aug 30, 2011, carries a simple interest rate of 1.5% per month (18% annual), and is secured by the product purchased and accounts receivable from the sale of thereof (second position to Sterling Capital Funding). As of December 31, 2011 the note payable was zero and the note is closed.
Notes and Loans Payable to Related Parties - Maturities
Based on the above, the total amount payable to officers, directors and related parties as of December 31 , 2011 and December 31, 2010 was $1,531,215 and $2,221,457, respectively, including accrued interest of $82.019 and $57.927, respectively. The maturities under the notes and loan payable to related parties for the next five years are:
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CHDT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5 - 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 $4,650 per month.
Rental expense under these leases was approximately $55,870 and $56,174 for the periods ended December 31, 2011 and 2010, respectively.
NOTE 6 - 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. As part of the agreement, Mr. Wallach will receive a minimum increase of 5% per year. For 2009, Mr. Wallach was paid $236,250, for 2010, Mr. Wallach was paid $175,412 and for 2011 was paid $180,000. The difference between the $180,000 that was paid in 2011 and the amount due per the agreement has been accrued and is included on the balance sheet as part of accounts payable and accrued expenses. The term of the contract begins February 5, 2008 and ends on February 5, 2011, but the term of the contract has been extended for a further two years.
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. As part of the agreement, Mr. McClinton will receive a minimum increase of 5% per year. For 2009, Mr. McClinton was paid $157,500 for 2010 Mr. McClinton was paid $113,546 and for 2011 was paid $146,250. The difference between the $180,000 that was paid in 2011 and the amount due per the agreement has been accrued and is included on the balance sheet as part of accounts payable and accrued expenses. The term of the contract begins February 5, 2008 and ends on February 5, 2011 but the term of the contract has been extended for a further two years.
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. For 2010 Mr. Ullman was paid $73,444. The term of the contract began February 5, 2008 and ended on February 5, 2011 and was been extended until June 30, 2011. As of July 1st 2011 Mr. Ullman is no longer an employee of the Company.
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 until September 1, 2010 either at fixed periodic amounts or 7% of product sales. Under this agreement, an expense of $187,500 was incurred during 2010. As of December 31, 2010, the STP License agreement has been terminated.
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CHDT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7 - STOCK TRANSACTIONS
Common Stock
In February 2009, the Company issued 2,100,000 shares of common stock for consulting expenses of $21,000.
In September 2010, the Company issued 725,000 shares of common stock for consulting expenses of $6,525.
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.
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.
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CHDT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7 - STOCK TRANSACTIONS (continued)
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 were 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.
In December 2009, the remaining 1,329,000 shares of the new Series B-1 Preferred Shares were converted into 88,591,140 shares of common stock.
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 are convertible into 67,979,725 common shares. The par value of the Series C Preferred shares is $1.00.
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. 1,975,000 of these warrants had an exercise price of $.05 and expired on November 11, 2011. The remaining 4,000,000 warrants expire July 20, 2014. The warrants have an exercise price of $.03 .
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CHDT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7 - STOCK TRANSACTIONS (continued)
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.
On July 11, 2008, the Company received a loan from a director of $250,000. 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 were 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.
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, 2009 and 2008, the Company recognized compensation expense of $10,869 and $25,131 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
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CHDT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7 - STOCK TRANSACTIONS (continued)
As of December 31, 2010 these options were fully vested and compensation expense fully recognized. No further compensation expense will be recognized for these 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 July 31st, 2009, 5,000,000 of the fully vested options and fully expensed options were amended and transferred to G. McClinton.
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. On July 31st, 2009, 5,000,000 of S. Wallach fully vested and fully expensed options were amended and transferred to G. McClinton.
The Binomial Lattice (Suboptimal) option pricing model was used to calculate the fair value of the options granted. During the years ended December 31, 2010 and 2009, the Company recognized compensation expense of $156,558 and $156,557 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 has recognized compensation expense of $52,186 for the year ended December 31, 2011. . As of December 31, 2011 these options were fully vested and compensation expense fully recognized. No further compensation expense will be recognized for these options. No further compensation expense will be recognized for these options after 2011.
On October 22, 2007, the Company granted 700,000 stock options to a business associate of the Company. The options vest over two years.
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CHDT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7 - 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, 2009 and 2008, the Company recognized compensation expense of $6,648 and $7,978 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
As of December 31, 2010 these options were fully vested and compensation expense fully recognized. No further compensation expense will be recognized for these 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
As of December 31, 2010 these options were fully vested and compensation expense fully recognized. No further compensation expense will be recognized for 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.
The Binomial Lattice (Suboptimal) option pricing model was used to calculate the fair value of the options granted. For the years ended December 31, 2009 and 2008, the Company recognized compensation expense of $2,603 and $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
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CHDT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7 - STOCK TRANSACTIONS (continued)
As of December 31, 2010 these options were fully vested and compensation expense fully recognized. No further compensation expense will be recognized for 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.
The Binomial Lattice (Suboptimal) option pricing model was used to calculate the fair value of the options granted. For the years ended December 31, 2010 and 2009, the Company recognized compensation expense of $2,620 and $7,862 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 recognized compensation expense of $2,620 in 2010 related to these stock options. As of December 31, 2010 these options were fully vested and compensation expense fully recognized. No further compensation expense will be recognized for these options.
On June 8, 2009, the Company granted 4,500,000 stock options to four directors 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. For the years ended December 31, 2010, the Company recognized compensation expense of $33,837 related to these options. The following assumptions were used in the fair value calculations:
Risk free rate - 1.42%
Expected term - 2 years
Expected volatility of stock - 500.5%
Expected dividend yield - 0%
Suboptimal Exercise Behavior Multiple - 2.0
Number of Steps - 100
As of December 31, 2010 these options were fully vested and compensation expense fully recognized. As of June 8, 2011 these options had expired. No further compensation expense will be recognized for these options.
On April 23rd, 2010, the Company granted 4,500,000 stock options to four directors of the Company and 300,000 stock options to the Company Secretary. The options vest over one year.
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CHDT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7 - STOCK TRANSACTIONS (continued)
The Binomial Lattice (Suboptimal) option pricing model was used to calculate the fair value of the options granted. For the years ended December 31, 2010, the Company recognized compensation expense of $27,000 related to these options. The following assumptions were used in the fair value calculations:
Risk free rate - 2.61%
Expected term - 5 to 10 years
Expected volatility of stock - 500.5%
Expected dividend yield - 0%
Suboptimal Exercise Behavior Multiple - 2.0
Number of Steps - 100
For the year ended December 31, 2011, the Company recognized compensation expense of $12,000 related to these stock options. As of December 31, 2011 these options were fully vested and compensation expense fully recognized. No further compensation expense will be recognized for these options.
On July 1, 2011, the Company granted 4,500,000 stock options to four directors of the Company and 150,000 stock options to the Company Secretary. The options vest over one year.
The Binomial Lattice (Suboptimal) option pricing model was used to calculate the fair value of the options granted. The following assumptions were used in the fair value calculations:
Risk free rate - 1.80 - 3.22%
Expected term - 5 to 10 years
Expected volatility of stock - 500%
Expected dividend yield - 0%
Suboptimal Exercise Behavior Multiple - 2.0
Number of Steps - 150
For the year ended December 31, 2011, the Company recognized compensation expense of $16,500 related to these stock options. A further $16,500 will be recognized in 2012 related to these options..
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CHDT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7 - STOCK TRANSACTIONS (continued)
The following table sets forth the Company’s stock options outstanding as of December 31, 2011 and December 31, 2010 and activity for the years then ended:
The following table summarizes the information with respect to options granted, outstanding and exercisable under the 2005 plan:
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CHDT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8 - INCOME TAXES
As of December 31, 2011, the Company had a net operating loss carryforward for income tax reporting purposes of approximately $3,900,000 that may be offset against future taxable income through 2031. 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.
The provision for income taxes differ from the amount computed using the federal US statutory income tax rate as follows:
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.
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, 2011 and 2010. 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 2008. The following describes the open tax years, by major tax jurisdiction, as of December 31, 2011:
United States (a)
2008 - Present
(a) Includes federal as well as state or similar local jurisdictions, as applicable.
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CHDT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9 - 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”). The parties settled this case on February 18, 2010. A summary of the settlement is below. A stipulation withdrawing the plaintiff's appeal in the Celeste case was filed with and accepted by the court on February 8, 2010, which filing effectively ended the litigation in the Celeste case.
The settlement and release provides a mutual, general release of all claims that plaintiffs and Company may have against each other as the date of the release, including any causes of action or claims under the Celeste case and any related proceedings. The settlement provides, in part, that: (1) the parties will seek a court order dismissing the Celeste case; (2) the parties will release each other from any and all claims and causes of action in or related to the Celeste case or the pending appeal to the U.S. Circuit Court for the Second Circuit; (3) the plaintiffs will pay $100,000 towards the Company’s legal fees incurred in the Celeste case; (4) the Company will support the release of shares of Company Common Stock, $0.0001 par value per share, (“Common Stock”) owned of record by Networkland, Inc., a Virginia corporation, (“NET”) and Technet Computer Services, Inc., a Virginia corporation, (“TECH”) to the plaintiffs or their designees (each such block of Common Stock was sought by the plaintiffs in the Celeste case as part of their claims against the Company (collectively, said shares of Common Stock held of record by NET and TECH being referred to as the “N&T Shares”)); (5) the issuance of 350,000 shares of Common Stock owned by Howard Ullman, a director of the Company, to the plaintiffs or their designees; and (6) the granting by Mr. Ullman of a five year option to purchase 20 million shares of Common Stock owned by Mr. Ullman to the plaintiffs or their designees, which option has an exercise price of $0.029 per share.
Under the proposed settlement agreement and release, the Company will grant piggy-back registration rights to the option and underlying shares of Common Stock referenced in (6) above, which rights will be effective after June 1, 2010. The Company will pay all registration fees and legal costs associated with any such registration, which are currently estimated to be approximately $3,000 to $5,000.
The settlement and release, which consists of a settlement agreement and release and option agreement by Mr. Ullman, was negotiated by Mr. Ullman on behalf of the Company with the plaintiffs. Mr. Ullman has provided case administration of the Celeste case for the Company.
The Company believes that the settlement and release is in the best interests of the Company and its public shareholders because (1) it will, when effective, eliminate the possibility of an adverse ruling by the U.S. Court of Appeals for the Second Circuit on the plaintiffs’ appeal, which adverse ruling could potentially impose a significant liability on the Company; and (2) the continuation of the Celeste case may discourage potential investors and funding sources from assisting the Company in financing operations and business development as well as make it more difficult to pursue any possible future merger and acquisition transactions.
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CHDT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9 - CONTINGENCIES (continued)
The Company’s board of directors approved the general terms of the settlement and release on February 1, 2010, but approval and execution of all documents necessary to reaching a settlement and release was not achieved until the February 18, 2010 signing of the option granted by Mr. Ullman. A copy of the settlement agreement and release and the option granted by Mr. Ullman are attached as Exhibit 99.1 and Exhibit 99.2, respectively, to the Form 8-K, dated February 19, 2010 and filed by the Company with the Commission on February 22, 2010). The above summary of the settlement agreement and release and option are qualified in its entirety by reference to the proposed settlement agreement and release as attached as Exhibit 99.1 and the option attached as Exhibit 99.2 to the aforesaid Form 8-K report.
NOTE 10 - INTANGIBLE ASSETS
The Company capitalized $16,755 and $18,675 at December 31, 2011 and December 31, 2010 respectively, related to packaging artwork and design costs., The Company recognized amortization expense of $22,027 and $44,535 at December 31, 2011 and December 31, 2010 respectively, related to these assets. At December 31, 2011 and December 31, 2010, the net amount of the intangible asset was $13,624 and $18,895, respectively.
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SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934, CHDT Corporation has caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in Broward County, Florida on this 12th day of March 2012.
CHDT CORPORATION
Dated: March 12, 2012
By
/S/ Stewart Wallach
Chief Executive Officer and Director
In accordance with the Exchange Act, this report has been signed below by the following persons on behalf of CHDT Corporation and in the capacities and on the dates indicated.
/s/ Stewart Wallach
Stewart Wallach
Principal Executive Officer
Director and Chief Executive Officer
March 12, 2012
/s/ Laurie Holtz
Laurie Holtz Director
March 12, 2012
/s/ Gerry McClinton
Gerry McClinton
Chief Financial Officer
Chief Operating Officer and Director
March 12, 2012
/s/ Jeffrey Guzy
Jeffrey Guzy
Director
March 12, 2012
/s/ Jeffrey Postal
Jeffrey Postal
Director
March 12, 2012
/s/ Larry Sloven
Larry Sloven
Director
March 12, 2012