UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended: October 31, 2007
or
o TRANSITION REPORT PURSUANT TO SECTION 13 0R 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____________ to ____________
Commission File Number: 000-51308
CHATSWORTH DATA SOLUTIONS, INC.
( (Exact name of small business issuer as specified in its charter)
Nevada | 98-0427221 |
(State or Other jurisdiction of Incorporation or organization) | (IRS Employer Identification No.) |
20710 Lassen Street Chatsworth CA | 91311 |
(Address of Principal Executive Offices) | (Zip Code) |
(818) 341-9200
(Issuer's telephone number including area code)
Check whether the issuer (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes x No o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act)
Yes o No x
State the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.
As of September 1, 2007, the issuer had 31,250,000 shares of common stock, $0.0001 par value, issued and outstanding:
Transitional Small Business Disclosure Format: Yes o No x
CHATSWORTH DATA SOLUTIONS, INC.
INDEX TO FORM 10-QSB
PAGE | ||||
PART I | FINANCIAL INFORMATION | 1 | ||
Item 1. | Condensed Consolidated Financial Statements | 1 | ||
Condensed consolidated balance sheets as of October 31, 2007 (unaudited) and January 31, 2007 | 1 | |||
Condensed consolidated statements of operations for the three and nine months ended October 31, 2007 (Successor) and for the three and nine months ended October 31, 2006 (Combined Successor and Predecessor) - unaudited | 2 | |||
Condensed consolidated statement of changes in stockholders' equity for the nine months ended October 31, 2007 - unaudited | 3 | |||
Condensed consolidated statements of cash flows for the nine months ended October 31, 2007 (Successor) and for the nine months ended October 31, 2006 (Combined Successor and Predecessor) - unaudited | 4 | |||
Notes to condensed consolidated financial statements - unaudited | 5 | |||
Item 2. | Management's Discussion and Analysis or Plan of Operations | 17 | ||
Item 3. | Controls and Procedures | 22 | ||
PART II | OTHER INFORMATION | 23 | ||
Item 1. | Legal Proceedings | 23 | ||
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds | 23 | ||
Item 3. | Defaults Upon Senior Securities | 23 | ||
Item 4. | Submission of Matters to a Vote of Security Holders | 23 | ||
Item 5. | Other Information | 23 | ||
Item 6. | Exhibits | 24 | ||
SIGNATURES | 25 |
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Part I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CHATSWORTH DATA SOLUTIONS, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
��
October 31, 2007 (unaudited) and January 31, 2007
October 31, 2007 | January 31, 2007 | ||||||
(Unaudited) | |||||||
ASSETS | |||||||
Current Assets | |||||||
Cash | $ | 178,666 | $ | 341,676 | |||
Accounts receivable, less allowance for doubtful accounts of $20,735 and $22,978 | 794,661 | 647,786 | |||||
Inventories | 1,950,343 | 1,072,208 | |||||
Deferred tax assets, current | - | 362,433 | |||||
Prepaid expenses | 74,140 | 80,585 | |||||
Total current assets | 2,997,810 | 2,504,688 | |||||
Property and equipment, net | 405,321 | 279,190 | |||||
Goodwill | 3,926,643 | 3,926,643 | |||||
Intangible assets, net | 1,888,400 | 2,634,680 | |||||
Deferred tax assets, long term | 745,210 | - | |||||
Other assets | 24,734 | 41,671 | |||||
Total assets | $ | 9,988,118 | $ | 9,386,872 | |||
LIABILITIES AND STOCKHOLDERS' EQUITY | |||||||
Current Liabilities | |||||||
Accounts payable | $ | 1,170,228 | $ | 332,890 | |||
Accrued liabilities | 357,091 | 759,514 | |||||
Accrued registration payment penalty | 720,000 | 383,000 | |||||
Borrowings under line of credit | 1,577,593 | - | |||||
Current portion of notes payable | 1,750,000 | 1,000,000 | |||||
Total current liabilities | 5,574,912 | 2,475,404 | |||||
Notes payable, long term | - | 1,000,000 | |||||
Deferred tax liability, long term | 745,210 | 913,988 | |||||
Total liabilities | 6,320,122 | 4,389,392 | |||||
Commitments and contingencies | |||||||
Stockholders' Equity: | |||||||
Preferred stock, par value $0.00001 per share, 5,000,000 shares authorized, none issued and outstanding | - | - | |||||
Common stock, par value $0.00001 per share, 100,000,000 shares authorized, 31,250,000 shares issued and outstanding | 312 | 312 | |||||
Additional paid-in capital | 6,460,739 | 6,278,564 | |||||
Accumulated deficit | (2,793,055 | ) | (1,281,396 | ) | |||
Total stockholders' equity | 3,667,996 | 4,997,480 | |||||
Total liabilities and stockholders' equity | $ | 9,988,118 | $ | 9,386,872 |
See accompanying notes to condensed consolidated financial statements.
1
CHATSWORTH DATA SOLUTIONS, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
For the three and nine months ended October 31, 2007 (Successor)
and the three and nine months ended October 31, 2006 (Combined Successor and Predecessor)
(unaudited)
Successor | Successor | Successor | Combined Successor and Predecessor | ||||||||||
For the three months ended October 31, 2007 | For the three months ended October 31, 2006 | For the nine months ended October 31, 2007 | For the nine months ended October 31, 2006 (see Note 1) | ||||||||||
Net sales | $ | 2,175,163 | $ | 2,814,620 | $ | 6,536,237 | $ | 7,455,625 | |||||
Cost of sales | 1,458,903 | 1,575,718 | 4,173,837 | 5,069,551 | |||||||||
Gross profit | 716,260 | 1,238,902 | 2,362,400 | 2,386,074 | |||||||||
Operating expenses: | |||||||||||||
General and administrative | 917,286 | 1,682,367 | 3,106,920 | 2,105,395 | |||||||||
Depreciation | 36,730 | 3,579 | 94,398 | 15,883 | |||||||||
Amortization of intangible assets | 248,760 | 248,760 | 746,280 | 248,760 | |||||||||
Income (loss) from operations | (486,516 | ) | (695,804 | ) | (1,585,198 | ) | 16,036 | ||||||
Other income (expense): | |||||||||||||
Interest expense | (61,928 | ) | (33,316 | ) | (143,859 | ) | (33,316 | ) | |||||
Interest income | 17 | 8,067 | 2,844 | 18,031 | |||||||||
Registration penalty | (227,000 | ) | (337,000 | ) | - | ||||||||
Other income (expense), net | (288,911 | ) | (25,249 | ) | (478,015 | ) | (15,285 | ) | |||||
Income (loss) before income taxes | (775,427 | ) | (721,053 | ) | (2,063,213 | ) | 751 | ||||||
Income tax (benefit) expense | (39,017 | ) | (366,754) | ) | (551,554 | ) | (347,590 | ) | |||||
Net income (loss) | $ | (736,410 | ) | $ | (354,299 | ) | $ | (1,511,659 | ) | $ | 348,341 | ||
Net loss per share - basic and diluted | $ | (0.02 | ) | $ | (0.01 | ) | $ | (0.05 | ) | ||||
Weighted average shares outstanding-basic and diluted | 31,250,000 | 31,250,000 | 31,250,000 |
See accompanying notes to condensed consolidated financial statements.
2
CHATSWORTH DATA SOLUTIONS, INC. AND SUBSIDIARY
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
For the nine months ended October 31, 2007
(unaudited)
Common Stock | ||||||||||||||||
Number of Shares | Amount | Additional Paid-in Capital | Accumulated Deficit | Total | ||||||||||||
Successor | ||||||||||||||||
Balance, February 1, 2007 | 31,250,000 | $ | 312 | $ | 6,278,564 | $ | (1,281,396 | ) | $ | 4,997,480 | ||||||
Net loss | - | - | - | (1,511,659 | ) | (1,511,659 | ) | |||||||||
Fair value of vested options | - | - | 182,175 | - | 182,175 | |||||||||||
Balance, October 31, 2007 | 31,250,000 | $ | 312 | $ | 6,460,739 | $ | (2,753,055 | ) | $ | 3,667,996 |
See accompanying notes to condensed consolidated financial statements.
3
CHATSWORTH DATA SOLUTIONS, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the nine months ended October 31, 2007 (Successor)
and the nine months ended October 31, 2006 (Combined Successor and Predecessor)
(unaudited)
Successor | Combined Successor & Predecessor (see Note 1) | ||||||
For the nine months ended October 31, 2007 | For the nine months ended October 31, 2006 | ||||||
Cash Flows from Operating Activities | |||||||
Net income (loss) for the period | $ | (1,511,659 | ) | $ | 348,341 | ||
Adjustments to reconcile net income (loss) to net cash used in operating activities: | |||||||
Depreciation expense | 57,667 | 15,883 | |||||
Amortization of intangibles | 746,280 | 248,760 | |||||
Issuance of common stock for services | - | 480,000 | |||||
Fair value of vested options | 182,175 | 308,268 | |||||
Income tax benefit | (551,554 | ) | (366,754 | ) | |||
Changes in operating assets and liabilities: | |||||||
Accounts receivable | (146,876 | ) | (36,217 | ) | |||
Inventories | (878,135 | ) | 199,880 | ||||
Other assets | 16,937 | - | |||||
Prepaid expenses | 6,445 | 4,787 | |||||
Accounts payable | 837,338 | 29,153 | |||||
Accrued liabilities | (402,423 | ) | 301,668 | ||||
Accrued registration payment penalty | 337,000 | - | |||||
Net cash flow (used in) provided by operations | (1,306,805 | ) | 1,533,769 | ||||
Cash Flows from Investing Activities | |||||||
Purchase of property and equipment | (183,798 | ) | (85,107 | ) | |||
Acquisitions, net of acquired cash | - | (4,030,761 | ) | ||||
Net cash used in financing activities | (183,798 | ) | (3,945,654 | ) | |||
Cash Flows from Financing Activities | |||||||
Proceeds from line of credit | 1,577,593 | - | |||||
Principal payments on notes payable | (250,000 | ) | - | ||||
Distributions to shareholders | (1,300,000 | ) | |||||
Proceeds from issuance of stock | - | 4,765,172 | |||||
Net cash provided by financing activities | 1,327,593 | $ | 3,465,172 | ||||
Decrease in cash | (163,010 | ) | |||||
Cash and cash equivalents, beginning of period | 341,676 | ||||||
Cash and cash equivalents , end of period | $ | 178,666 | |||||
Supplemental cash flow information | |||||||
Cash paid for income taxes | $ | - | $ | - | |||
Cash paid for interest | - | - | |||||
Supplemental Non-Cash Investing and Financing Activities | |||||||
Common stock issued at fair value for acquisition | $ | - | $ | 60,000 | |||
Common stock issued at fair value for services related to acquisition | $ | - | $ | 480,000 | |||
Warrant issued at fair value for services related to acquisition | $ | - | $ | 37,080 | |||
Notes payable issued for acquisition | $ | - | $ | 2,000,000 |
4
CHATSWORTH DATA SOLUTIONS, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
As of October 31, 2007 and for the three and nine months ended October 31, 2007
(Successor) and the three and nine months ended October 31, 2006
(Combined Successor and Predecessor)
(unaudited)
NOTE 1 - NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
Description of business
Chatsworth Data Solutions, Inc. (the Company), through its wholly owned subsidiary Chatsworth Data Corporation (CDC), manufactures equipment for optical readers and read heads, impact recorders and indicators, and cable test equipment. The Company's fiscal year-end is January 31.
On August 7, 2006, the Company completed the acquisition of CDC for $7,246,531 including transaction costs. The acquisition was deemed effective August 1, 2006, and was accounted for as purchase in accordance with Statement of Financial Accounting Standards (SFAS) No. 141 Business Combinations. The assets acquired and liabilities assumed were recorded at their fair values at the date of acquisition.
Basis of presentation
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America for interim financial information and pursuant to the rules and regulations of the United States Securities and Exchange Commission (SEC). Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. These financial statements should be read in conjunction with the Company’s Annual Report on Form 10-KSB for the fiscal year ended January 31, 2007, filed with the SEC. The results of operations for interim periods are not necessarily indicative of the results expected for a full year or for any future period. Certain prior year’s amounts have been reclassified to conform to the current period presentation.
The following provides a description of the basis of presentation for all periods presented.
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Successor-Represents the consolidated financial position of the Company and its wholly owned subsidiary as of October 31, 2007, and the condensed consolidated results of operations and cash flows of the Company and its wholly owned subsidiary for the period February 1, 2007 through October 31, 2007. Intercompany accounts and transactions have been eliminated in consolidation.
Predecessor-Represents the results of operations and cash flows of Chatsworth Data Corporation for the period February 1, 2006 through July 31, 2006.
The following table represents the components of the combined Successor and Predecessor results of operations for the nine months ended October 31, 2006 (unaudited):
Successor | Predecessor | Combined Successor and Predecessor | ||||||||
For the period August 1, 2006 through October 31, 2006 | For the period February 1, 2006 through July 31, 2006 | For the nine months ended October 31, 2006 | ||||||||
Net sales | $ | 2,814,620 | $ | 4,641,005 | $ | 7,455,625 | ||||
Cost of sales | 1,575,718 | 3,493,833 | 5,069,551 | |||||||
Gross profit | 1,238,902 | 1,147,172 | 2,386,074 | |||||||
Operating expenses: | ||||||||||
General and administrative | 1,682,367 | 423,028 | 2,105,395 | |||||||
Depreciation | 3,579 | 12,304 | 15,883 | |||||||
Amortization of intangible assets | 248,760 | - | 248,760 | |||||||
Income (loss) from operations | (695,804 | ) | 711,840 | 16,036 | ||||||
Other income (expense): | ||||||||||
Interest expense | (33,316 | ) | - | (33,316 | ) | |||||
Interest income | 8,067 | 9,964 | 18,031 | |||||||
Other income (expense), net | (25,249 | ) | 9,964 | (15,285 | ) | |||||
Income (loss) before income taxes | (721,053 | ) | 721,804 | 751 | ||||||
Income tax (benefit) expense | (366,754 | ) | 19,164 | (347,590 | ) | |||||
Net income (loss) | $ | (354,299 | ) | $ | 702,640 | $ | 348,341 |
The following table represents the components of the combined Successor and Predecessor statement of cash flows for the nine months ended October 31, 2006 (unaudited):
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Successor | Predecessor | Combined Successor and Predecessor | ||||||||
For the three months ended October 31, 2006 | For the period February 1, 2006 through July 31, 2006 | For the nine months ended October 31, 2006 | ||||||||
Cash flows from Operating Activities | ||||||||||
Net income (loss) for the period | $ | (354,299 | ) | $ | 702,640 | $ | 348,341 | |||
Adjustments to reconcile net income (loss) to net cash used in operating activities: | ||||||||||
Depreciation | 3,578 | 12,304 | 15,883 | |||||||
Amortization of intangible | 248,760 | - | 248,760 | |||||||
Issuance of common stock for services | 480,000 | - | 480,000 | |||||||
Fair value of vested options | 308,268 | - | 308,268 | |||||||
Income tax benefit | (366,754 | ) | - | (366,754 | ) | |||||
Change in operating assets and liabilities, net of acquisition | ||||||||||
Accounts receivable | 585,532 | (621,749 | ) | (36,217 | ) | |||||
Inventories | 311,864 | (111,984 | ) | 199,880 | ||||||
Prepaid expenses | (19,507 | ) | 24,294 | 4,787 | ||||||
Accounts payable | (328,127 | ) | 357,281 | 29,153 | ||||||
Accrued liabilities | (287,172 | ) | 588,840 | 301,668 | ||||||
Net cash provided by (used in) operating activities | 582,143 | 951,626 | 1,533,769 | |||||||
Cash Flows from Investing Activities | ||||||||||
Purchase of property and equipment | (83,390 | ) | (1,717 | ) | (85,107 | ) | ||||
Acquisitions, net of acquired cash | (4,030,761 | ) | - | (4,030,761 | ) | |||||
Net cash provided by financing activities | (4,114,151 | ) | (1,717 | ) | (4,115,868 | ) | ||||
Cash flows from financing activities | ||||||||||
Proceeds from issuance of common stock | 4,765,172 | 4,765,172 | ||||||||
Distributions to shareholders | - | (1,300,000 | ) | (1,300,000 | ) | |||||
Net cash provided by financing activities | 4,765,172 | (1,300,000 | ) | 3,465,172 | ||||||
Increase in cash | 1,233,164 | (350,091 | ) | |||||||
Cash and cash equivalents, beginning of period | - | 788,781 | ||||||||
Cash and cash equivalents , end of period | $ | 1,233,164 | $ | 438,690 | ||||||
Supplemental cash flow information | ||||||||||
Cash paid for income taxes | $ | - | $ | - | ||||||
Cash paid for interest | - | - | ||||||||
Supplemental Non-Cash Investing and Financing Activities | ||||||||||
Common stock issued at fair value for acquisition | $ | 60,000 | $ | - | $ | 60,000 | ||||
Common stock issued at fair value for services related to acquisition | $ | 480,000 | $ | - | $ | 480,000 | ||||
Warrant issued at fair value for services related to acquisition | $ | 37,080 | $ | - | $ | 37,080 | ||||
Notes payable issued for acquisition | $ | 2,000,000 | $ | - | $ | 2,000,000 |
7
Use of estimates
The preparation of financial statements in conformity with U.S. 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.
Revenue recognition
The Company recognizes revenue when there is persuasive evidence that an arrangement exists, delivery of the product has occurred and title has passed, the selling price is both fixed and determinable, and collectibility is reasonably assured, all of which generally occurs upon shipment of the Company's product or delivery of the product to the destination specified by the customer.
Goodwill and other intangible assets
Goodwill and other intangible assets are related to the Company's acquisition of CDC in August 2006. Intangible assets with finite lives are amortized over their estimated useful lives, which are three years for customer relations and five years for propriety technology. In addition to amortization, intangible assets are tested at least annually for impairment.
Goodwill represents the excess of the cost of the acquired entity over the net of amounts assigned to assets acquired and liabilities assumed, and it is not amortized. The Company tests goodwill for impairment at least annually by using a two-step process. In the first step, the fair value of the reporting unit, estimated using a discounted cash flows approach, is compared with the carrying amount of the reporting unit, including goodwill. If the carrying amount of the reporting unit exceeds its fair value, goodwill is considered impaired and a second step is performed to measure the amount of impairment loss, if any. No impairment loss has been recognized since the CDC acquisition.
Major customers
For the three and nine months ended October 31, 2007 the Company had two customers which accounted for approximately 17% and 11%, respectively, of total sales. There were no other customers that accounted for over 10% of total sales. At October 31, 2007, 3 customers accounted for 28%, 21%, and 16%%, respectively, of total accounts receivable. For the three and nine months ended October 31, 2006, CDC had one customer which accounted for approximately 36% of its total sales.
For the three and nine months ended October 31, 2007, the Company had foreign revenue, comprised mostly of sales from Asia (15%) and Europe (9%), which accounted for approximately 24% of total sales. For the three and nine months ended October 31, 2006, CDC had foreign revenue, comprised mostly of sales from Asia, which accounted for approximately 12% of total sales.
8
Basic and diluted net income (loss) per share
Basic earnings (loss) per share are computed by dividing net income (loss) available to common shareholders (numerator) by the weighted average number of shares outstanding (denominator) during the period. Diluted earnings per share reflects the potential dilution that could occur if options or other securities or contracts entitling the holder to acquire shares of common stock were exercised or converted, resulting in the issuance of additional shares of common stock that would then share in earnings. However, diluted loss per share does not consider such dilution as its effect would be anti-dilutive.
At October 31, 2007, potentially dilutive securities entitling the holder thereof to acquire shares of common stock are summarized as follows:
2007 | ||||
Options to purchase common stock | 6,200,000 | |||
Warrants to purchase common stock | 12,103,000 |
For the three and nine months ended October 31, 2007, these options and warrants were not included in the computation of diluted loss per share as their effects are anti-dilutive. There were no options or warrants outstanding during the three and nine months ended October 31 2006. Earnings per share information of the Predecessor are not presented since it was privately owned and its capital structure is not relevant to current Company stockholders.
Stock-based compensation
The Company estimates the fair value of stock options using a Black-Scholes option pricing model, consistent with the provisions of SFAS No. 123 (revised 2004), Share-Based Payment (SFAS 123(R). SFAS 123(R) requires all share-based payments to employees, including stock option grants, to be recognized in the income statement based on their fair values. The standard applies to newly granted awards and previously granted awards that are not fully vested on the date of adoption. Effective February 1, 2006, the Company adopted SFAS 123(R) using the modified prospective method, which requires that compensation expense for the portion of awards for which the requisite service has not yet been rendered and that are outstanding as of the adoption date be recorded over the remaining service period. Prior to the adoption of SFAS No. 123(R), the Company had no share-based payments.
The Company accounts for options and warrants granted to non-employees under SFAS No. 123(R) and Emerging Issues Task Force Issue No. 96-18, Accounting for Equity Instruments that are issued to other than Employees for Acquiring or in Conjunction with Selling Goods or Services. The Company measures the fair value of such options using the Black-Scholes option pricing model at each financial reporting date.
Registration payment arrangements
The Company accounts for registration payment arrangements under Financial Accounting Standards board (FASB) Staff Position EITF 00-19-2, Accounting for Registration Payment Arrangements (FSP EITF 00-19-2). FSP EITF 00-19-2 specifies that the contingent obligation to make future payments under a registration payment arrangement should be separately recognized and measured in accordance with SFAS No. 5, Accounting for Contingencies. FSP EITF 00-19-2 was issued in December, 2006. Early adoption of FSP EITF 00-19-2 is permitted and the Company adopted FSP EITF 00-19-2 effective November 1, 2006. At January 31, 2007 and October 31, 2007, the Company has accrued an estimated penalty (see Note 6).
9
Recent accounting pronouncements
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements. SFAS No. 157 defines fair value, establishes a framework for measuring fair value in U.S. generally accepted accounting principles and expands disclosures about fair value measurements. SFAS No. 157 is effective for fiscal years beginning after November 15, 2007 and interim periods within those fiscal years. The Company is currently evaluating the effect that the adoption of SFAS No. 157 will have on its financial position and results of operations.
In February 2007, the FASB issued SFAS 159 The Fair Value Option for Financial Assets and Financial Liabilities. SFAS 159 permits the measurement of certain financial instruments at fair value. Entities may choose to measure eligible items at fair value at specified election dates, reporting unrealized gains and losses on such items at each subsequent reporting period. SFAS 159 is effective for fiscal years beginning after November 15, 2007. The Company has not evaluated the potential impact of the fair value option.
NOTE 2 - INVENTORIES
Inventories consist of the following:
October 31, 2007 | January 31, 2007 | ||||||
(unaudited) | |||||||
Raw materials | $ | 1,512,213 | $ | 604,470 | |||
Work in process | 210,919 | 273,303 | |||||
Finished goods | 242,211 | 194,435 | |||||
Reserve for obsolescence | (15,000 | ) | - | ||||
$ | 1,950,343 | $ | 1,072,208 |
Notes payable consist of seven unsecured notes that are payable to the predecessor shareholders of CDC in connection with the acquisition of CDC. Interest is at LIBOR plus 1% per annum (6.54% at October 31, 2007); $1,000,000 was originally due August 6, 2007, and $1,000,000 was originally due August 6, 2008. On July 31, 2007, the notes were amended with respect to the timing and amounts of principal payments to be made. Under the terms of the notes as amended, an aggregate of $250,000 of principal was paid August 6, 2007, $250,000 of principal is due December 31, 2007, $500,000 of principal is due March 31, 2008, and the remaining $1,000,000 of principal is due and payable on August 6, 2008.
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Included in the notes payable is a promissory note of $615,384 issued to an individual who serves as a director of the Company of which $76,923 was paid August 6, 2007, $76,923 is due December 31, 2007, $153,846 is due March 31, 2008, and $307,692 is due on August 6, 2008. The classification of notes payable are as follows:
October 31, | January 31, | ||||||
2007 | 2007 | ||||||
(unaudited) | |||||||
Total notes payable | $ | 1,750,000 | $ | 2,000,000 | |||
Less current portion | (1,750,000 | ) | (1,000,000 | ) | |||
Long-term portion | $ | - | $ | 1,000,000 |
NOTE 4 - LINE OF CREDIT
On December 1, 2006, CDC entered into a revolving credit agreement with a financial institution. The credit agreement provides for borrowings of up to $3 million or the maximum available based on specific percentages of accounts receivable and inventory, as determined by the financial institution, whichever is less. At October 31, 2007, $1,577,593 had been advanced and $75,063, was available to CDC under the credit agreement. The outstanding advances under the credit agreement bear interest at an annual rate equal to the prime rate (8.25 % at October 31, 2007) plus a margin initially set at 0.50%. The credit agreement is secured by all the personal property of CDC, including its equipment, accounts receivable and inventory. There are certain covenants and restrictions placed on CDC under the credit agreement, including, but not limited to, quarterly financial covenants specifying a funded debt to EBITDA (as defined) ratio, a minimum fixed-charge (as defined) coverage ratio, and restrictions or limitations on issuance of additional debt, mergers, leases, guaranties, transactions with affiliates, or change in control. CDC determined it was not in compliance with all covenants as of October 31, 2007. Effective November 30, 2007, the line of credit agreement was amended. The amended line of credit matures February 28, 2008, and the covenants and calculation of borrowing base was modified and CDC expects to be in compliance with the modified covenants in the future. The Company has guaranteed the obligations of CDC under the credit agreement.
Under the amended borrowing base agreement with the Bank of Oklahoma the Company anticipates that it will be able meet its obligations as they become due, including the note principal payment of $250,000 plus interest due to the selling shareholders on December 31, 2007. The line of credit matures on February 28, 2008, and the Company anticipates that it will be able to renew the line of credit. If CDC and the Company are unable to renew the line of credit when it matures CDC may be forced to significantly reduce, restructure or cease its operations and/or liquidate inventory at amounts below current carrying value to generate the necessary working capital to fund its operations. The accompanying financial statements do not include any adjustments that might result from the outcome of this uncertainty.
11
NOTE 5 - CAPITAL STOCK
Common Stock
In August 2006, the Company completed a private placement financing consisting of 22,000,000 units at a price of $0.25 per unit for total cash proceeds of $5,500,000 ($4,790,172 net of financing costs). Each unit consisted of one share of common stock valued at $0.24 per share and one-half of one share purchase warrant valued at $0.01. A total of 22,000,000 shares of common stock and 11,000,000 warrants were issued. Each full warrant is exercisable into one share of common stock at a purchase price of $0.30 per share on or before July 31, 2011 (see Note 7). The Company entered into an investor rights agreement with the investors in the private placement which provides for penalties if the Company fails to file a registration statement with respect to the shares of common stock sold and the shares of common stock underlying the warrants as soon as possible following the closing of the private placement. In addition, the registration statement must be declared effective by the SEC within a specified period of time after the filing and must be kept effective thereafter for a specified period of time. The registration rights agreement requires the payment of liquidated damages to the investors of approximately $1,833 per day (which represents approximately 1% per month of the total proceeds of $5,500,000) until the Registration Statement is declared effective, payable at the option of the Company in either cash or the Company's common stock. The Company failed to meet these requirements. Accordingly, the Company had accrued an estimate of $720,000, for these potential penalties until the expected effectiveness of the registration statement.
NOTE 6 - STOCK OPTIONS AND WARRANTS
Stock Options
During February 2007 and March 2007, the Company granted options to purchase a total of 150,000 shares of common stock at $0.40 per share to various employees. The options vest one year from the date of grant with respect to 50% of the shares of common stock and the remaining options vest over the following three years and expire in 2012. The options were valued at $48,898, the fair value of the stock options on the date granted determined using a Black-Scholes pricing model. The Company recognized $14,926 of compensation expense from the date the options were granted through October 31, 2007 related to the fair value of the vested options.
During May 2007 and June 2007, the Company granted options to purchase a total of 200,000 shares of common stock at $0.35 per share to various employees. The options vest one year from the date of grant with respect to 50% of the shares of common stock and the remaining options vest over the following three years and expire May 24, 2012. The options were valued at $46,312, the fair value of the stock on the date granted determined using a Black-Scholes pricing model. The Company recognized $8,212 of compensation expense from the date the options were granted through October 31, 2007 related to the fair value of the vested options.
On February 21, 2007, the Company agreed with an individual to provide consulting services. As part of the agreement the Company granted the individual options to purchase 250,000 shares of common stock at $0.50 per share. The options vest equally over a twelve month period and expire on February 20, 2012. The fair value of these option grants is estimated on the date of grant using the Black-Scholes option-pricing model and is remeasured at each reporting date based on market price until vested. For the nine months ended October 31, 2007 the Company recorded $26,065 of compensation expense related to non-employee stock options.
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The fair value of grants issued in the three and nine months ended October 31, 2007 were determined using a Black-Scholes option pricing model with the following assumptions: 4.65% to 5.02% average risk-free interest rate; 50% expected volatility; five year expected term, and 0% dividend yield.
At October 31, 2007, options outstanding are as follows:
Shares | Average Exercise Price | ||||||
Balance at February 1, 2007 | 5,600,000 | $ | .39 | ||||
Granted | 600,000 | .43 | |||||
Exercised | - | - | |||||
Cancelled | - | - | |||||
Balance at October 31, 2007 | 6,200,000 | $ | .39 |
Additional information regarding options outstanding as of October 31, 2007 is as follows:
Options Outstanding | Options Exercisable | |||||||||||||||
Weighted | ||||||||||||||||
Average | ||||||||||||||||
Number of | Remaining | Weighted | ||||||||||||||
Range of | Shares Under | Contractual | Average | Shares Under | Weighted | |||||||||||
Exercise Price | Options | life (years) | Exercise Price | Options | Exercise Price | |||||||||||
$.30-$.65 | 6,200,000 | 6.13 | $ | 0.39 | 4,446,667 | $ | 0.30 |
The aggregate intrinsic value of the 6,200,000 options outstanding and 4,446,667 options exercisable as of October 31, 2007 was $1,852,000 and $1,307,113, respectively. The aggregate intrinsic value for the options is calculated as the difference between the price of the underlying awards and quoted price of the Company's common shares for the options that were in-the-money as of October 31, 2007.
A summary of the status of nonvested shares as of October 31, 2007 are as follows:
Shares | ||||
Nonvested at February 1, 2007 | 2,245,833 | |||
Granted | 600,000 | |||
Vested | (1,092,500 | ) | ||
Nonvested at October 31, 2007 | 1,753,333 |
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The total value of options issued and vesting over the three and nine months ended October 31, 2007, was $55,523 and $187,175, respectively, and has been reflected as compensation cost in the accompanying statement of operations.
The total unamortized compensation expense for the outstanding value of unvested stock options was $371,279 as of October 31, 2007, which will be recognized over a weighted average period of 33 months.
Warrants
Number of Shares under Warrants | Weighted Average Exercise Price | ||||||
Warrants outstanding at February 1, 2007 | 12,103,000 | $ | 0.30 | ||||
Warrants granted | - | - | |||||
Warrants expired | - | - | |||||
Warrants outstanding at October 31, 2007 | 12,103,000 | $ | 0.30 |
The following table summarizes information about warrants outstanding at October 31, 2007: Warrants Outstanding and Exercisable
Number of Shares Under Warrants | Exercise Price | Expiration Date | Weighted Average Exercise Price | |||||||
11,000,000 | $ | 0.30 | July 31, 2011 | $ | 0.30 | |||||
1,000,000 | $ | 0.30 | July 31, 2011 | $ | 0.30 | |||||
103,000 | $ | 0.01 | July 31, 2011 | $ | 0.01 | |||||
12,103,000 | $ | 0.01-$0.30 | $ | 0.30 |
NOTE 7 - RELATED PARTY TRANSACTIONS
On August 1, 2006, the Company entered into consulting agreements with two individuals to serve as chairman of the board of directors and the Company's chief financial officer. During the three and nine months ended October 31, 2007, the Company paid each individual $24,000 and $72,000, respectively. In addition, during the three and nine months ended October 31, 2007, the Company paid a firm in which one of the consultants is a partner $1,005 and $8,673 for services.
Four individuals were the shareholders and executive managers of the CDC before they sold their stock to the Company. During the three months and nine months ended September 30, 2006, CDC paid salaries of $147,240 and $294,480 to the four individuals. Effective August 1, 2006, one of the individuals was appointed to the Company's board of directors. On August 7, 2006, the Company issued notes payable totaling $2,000,000 to these individuals or their heirs in conjunction with the acquisition of CDC, including $615,384 to the current board member. During the three and nine months ended October 31, 2007, the Company accrued $32,610 and $64,862, respectively, of interest on these notes, including $10,034 and $19,958, respectively, to the current board member.
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NOTE 8 - SUBSEQUENT EVENT
Effective November 30, 2007 J. Stewart Asbury III resigned as President and Chief Executive Officer of the Company and CDC, its wholly owned subsidiary. Sid L. Anderson, the Company’s Chairman and Executive Director, will replace Mr. Asbury as President and Chief Executive Officer of the Company and Louis W. Dedier III will replace Mr. Asbury as President and Chief Executive Officer of CDC. Mr. Asbury will remain with CDC as its Executive Vice President and Chief Operating Officer. Mr. Dedier has entered into an employment agreement as the President and Chief Executive Officer of CDC for a three year term. CDC has provided Mr. Dedier with an incentive compensation plan that will provide compensation based on a percentage of earnings. In addition, the employment agreement grants an option to purchase 1,000,000 shares of our common stock at an exercise price of $0.14 per share which vest equally over the 36 month term. The options shall have a five year term. If Mr. Dedier is terminated without cause, he will receive the lesser of twelve months salary or the balance of his salary for the remainder of the term and all unvested options will vest immediately.
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ITEM 2. Management’s Discussion and Analysis or Plan of Operation
This section of this report includes a number of forward- looking statements that reflect our current views with respect to future events and financial performance. Forward-looking statements are often identified by words like: believe, expect, estimate, anticipate, intend, project and similar expressions, or words which, by their nature, refer to future events. You should not place undue certainty on these forward-looking statements, which apply only as of the date of this report. These forward-looking states are subject to certain risks and uncertainties that could cause actual results to differ materially from historical results or out predictions.
Company Overview
Chatsworth Data Solutions was incorporated in the State of Nevada on December 30, 2003 and until August 2006 was an exploration stage corporation. An exploration stage corporation is one engaged in the search for mineral deposits (reserves) which are not in either the development or production stage. In August 2006, we purchased all of the outstanding shares of an operating data transfer business, Chatsworth Data Corporation (CDC).
Prior to August 2006, CDC was privately owned. It was acquired from Republic Corporation in 1971 by five Republic managers, four of whom managed the Company until the sale. CDC's corporate headquarters are in Chatsworth, California, thirty miles northwest of downtown Los Angeles. Its primary business has been the development and manufacture of optical mark readers. Over one hundred thousand readers and one hundred ten thousand optic head assemblies have been sold worldwide by CDC. The optical mark readers have been traditionally sold into four vertical market sectors: education, gaming and lottery, health care, and vote tabulation. The corporation also manufactures impact recording devices and cable testers. CDC prides itself on customer service; its engineering and design staff is able to understand client's technical problems and offer ready solutions to those problems. A customer hotline was installed over fifteen years ago to enable field problems to be handled quickly, efficiently and effectively. New products are designed and brought to market quickly in response to customer demand.
Acquisition
On August 7, 2006, the Company acquired 100 percent of the common stock of Chatsworth Data Corporation (CDC). The acquisition was effective August 1, 2006. CDC manufactures equipment for optical readers and read heads, impact recorders and indicators, and cable test equipment. The acquisition was accounted for as a purchase in accordance with Statement of Financial Accounting Standards No. 141 Business Combinations. As such, the results of CDC’s operations have been included in the consolidated financial statements since August 1, 2006.
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The components of the purchase price and the allocation of the purchase price are as follows:
Purchase price | ||||
Cash consideration | $ | 4,000,000 | ||
Notes payable issued | 2,000,000 | |||
Value of 250,000 shares issued at close | 60,000 | |||
Obligation for tax reimbursement | 200,000 | |||
Cash paid for services related to acquisition | 469,451 | |||
Fair value of 2,000,000 shares issued for services related to acquisition | 480,000 | |||
Fair value of 103,000 warrants issued for services related to acquisition | 37,080 | |||
Total | $ | 7,246,531 |
Purchase price allocation | ||||
Current assets, including cash of $438,690 | $ | 2,748,534 | ||
Property and equipment | 74,694 | |||
Intangible assets | 3,132,200 | |||
Goodwill | 3,926,643 | |||
Current liabilities | (1,387,985 | ) | ||
Deferred tax liability | (1,247,555 | ) | ||
Total purchase price | $ | 7,246,531 |
Of the $3,132,200 of acquired intangible assets, $2,764,500 was assigned to customer relations with an estimated life of 3 years and $367,700 was assigned to proprietary technology with an estimated life of 5 years. Allocation to goodwill may change slightly based on final valuation analysis.
Results of operations - For the three and nine months ended October 31, 2007 (Successor) compared to the three and nine months ended October 31, 2006
The Company's year end is January 31. The Predecessor's year end was December 31. This Form 10-QSB includes comparative financial statements for the combined Successor and Predecessor for the three and nine month periods ended October 31, 2006.
The following table represents the components of the combined Successor and Predecessor results of operations for the nine months ended October 31, 2006 (unaudited):
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Sales revenue totaled $2,175,163 and $6,536,237 for the three and nine months ended October 31, 2007, compared to $2,814,620 and $7,455,624 for the three and nine months ended October 31 2006. Sales in 2006 included a large order for supplying components of voting systems sold to the County of Los Angeles for its November 2006 municipal election. There was no sales in 2007. Following is a table indicating the sales for the respective periods.
Successor | Successor | ||||||
Sales-three months ended | October 31, 2007 | October 31 2006 | |||||
Gaming | $ | 322,929 | $ | 491,434 | |||
Education | 989,670 | 5,930 | |||||
Voting | 637 | 1,576,258 | |||||
Medical | 52,791 | 48,564 | |||||
Others | 72,193 | 25,617 | |||||
Total Optical Mark Readers | 1,438,220 | 2,147,803 | |||||
Impact recorders/indicators | 736,943 | 666,817 | |||||
Cable Testing | - | - | |||||
Total | $ | 2,175,163 | $ | 2,814,620 |
Cost of sales totaled $1,458,903 and $4,173,837 for the three and nine months ended October 31, 2007, compared to $1,575,718 and $5,069,551 for the three and nine months ended October 31 2006. Gross margin percentage was 33% and 36% for the three and nine months ended October 31, 2007, compared to 44% and 32% for the three and nine months ended October 31 2006. The decreased gross margin percentage in 2007 was in part due to the necessity to spread fixed manufacturing costs over smaller sales.
General and administrative (G&A) expenses totaled $917,286 and $3,106,920 for the three and nine months ended October 31, 2007, as compared to $1,682,367 and $2,105,395 for the three and nine months ended October 31 2006. Included in G&A for this quarter were accounting and legal fees totaling $191,388 incurred in connection with the audit of the Company and the registration of our common stock with the Securities and Exchange Commission. During this quarter, we also spent increased amounts on advertising and public relations, increased amounts for insurance, and increased amounts for travel expense. Finally, in accordance with FASB 123(R), the Company recorded compensation expense of $182,175 related to stock options.
The Company recorded a deferred tax benefit of $39,017 and $551,554 for the three and nine months ended October 31, 2007, respectively.
The net loss for the three and nine months ended October 31, 2007 was $(736,410) and $(1,511,659) compared to net loss of $(354,299) and net income of $348,341 for the three and nine months ended October 31, 2006 attributable to the Successor and Predecessor.
As shown in the financial statements as of October 31, 2007, the Company had cash on hand of $178,666 compared to $341,676 as of January 31, 2007. The Company used $1,306,805 of cash in operating activities for the nine months ended October 31, 2007 compared to $1,293,645 of cash provided by operating activities for the nine months ended October 31 2006. We expect to fund our operations and capital expenditures from internally generated funds and from the use of our revolving credit line. Under the amended borrowing base agreement with the Bank of Oklahoma the Company anticipates that it will be able meet its obligations as they become due, including the note principal payment of $250,000 plus interest due to the selling shareholders on December 31, 2007. The line of credit matures on February 28, 2008, and the Company anticipates that it will be able to renew the line of credit. If CDC and the Company are unable to renew the line of credit when it matures CDC may be forced to significantly reduce, restructure or cease its operations and/or liquidate inventory at amounts below current carrying value to generate the necessary working capital to fund its operations. The accompanying financial statements do not include any adjustments that might result from the outcome of this uncertainty. We believe that our existing cash balances and available credit line will be sufficient to meet our working capital, capital expenditure and investment requirements for at least the next 12 months. We may require additional funds for other purposes, such as acquisitions of complementary businesses, and may seek to raise such additional funds through public and private equity financings or from other sources. However, we cannot assure you that additional financing will be available at all or that, if available, such financing will be obtainable on terms favorable to us or that any additional financing will not be dilutive.
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We owe $1,750,000 to the CDC sellers; $1,000,000 was originally payable August 6, 2007 (one year from the closing of the CDC purchase) and $1,000,000 was originally payable August 6, 2008 (two years from the closing). On July 31, 2007 the terms of the notes were amended with respect to the timing and amounts of principal payments to be made. Under the terms of the notes as amended, an aggregate of $250,000 of principal was paid August 6, 2007, $250,000 of principal is due and payable on December 31, 2007, $500,000 of principal is due and payable on March 31, 2008 and the remaining $1,000,000 of principal is due and payable on August 6, 2008. Interest is payable quarterly. Interest accrued for this quarter was $11,109. We believe cash flow from operations will be sufficient to repay the note.
We also owe $1,577,593 under a credit agreement with a financial institution. Under this agreement, the Company may borrow the lesser of $3 million or the Company's borrowing base, based on specific percentages of accounts receivable and inventory, as determined by the financial institution. The outstanding advances under the credit agreement bear interest of an annual rate equal to the prime rate plus a margin initially set at 0.50%. The credit agreement expires on November 30, 2007, and is secured by all the personal property of CDC, including its equipment, accounts receivable and inventory. There are certain covenants and restrictions placed on CDC under the credit agreement, including, but not limited to, quarterly financial covenants specifying a funded debt to EBITDA (as defined) ratio, a minimum fixed-charge (as defined) coverage ratio, and restrictions or limitations on issuance of additional debt, mergers, leases, guaranties, transactions with affiliates, or change in control. CDC determined it was not in compliance with all covenants as of October 31, 2007. Effective November 30, 2007, the line of credit agreement was amended. The amended line of credit matures February 28, 2008, and the covenants and calculation of borrowing base was modified and CDC expects to be in compliance with the modified covenants in the future. The Company has guaranteed the obligations of CDC under the credit agreement. If CDC is unable to meet the covenants as amended, and CDC and Company are unable to negotiate a waiver, CDC would be in default under the revolving credit agreement and the lender could demand immediate payment of the outstanding balance of the line of credit. In such event, the Company may be forced to significantly reduce, restructure or cease its operations and/or liquidate inventory at amounts below current carrying value to generate the necessary working capital to fund its operations.
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Critical Accounting Policies
Revenue recognition
The Company recognizes revenue when there is persuasive evidence that an arrangement exists, delivery of the product has occurred and title has passed, the selling price is both fixed and determinable, and collectibility is reasonably assured, all of which generally occurs upon shipment of the Company’s product or delivery of the product to the destination specified by the customer.
Intangible assets
Intangible assets and goodwill are related to the Company's acquisition of CDC in August 2007. Intangible assets with finite lives are amortized over their estimated useful lives, which are three years for customer relations and five years for propriety technology. In addition to amortization, intangible assets are tested at least annually for impairment.
Goodwill represents the excess of the cost of the acquired entity over the net of amounts assigned to assets acquired and liabilities assumed, and is not amortized. The Company tests goodwill for impairment at least annually by using a two-step process. In the first step, the fair value of the reporting unit, estimated using a discounted cash flows approach, is compared with the carrying amount of the reporting unit, including goodwill. If the carrying amount of the reporting unit exceeds its fair value, goodwill is considered impaired and a second step is performed to measure the amount of impairment loss, if any. There was no impairment loss recognized in 2006 and 2007 to date.
Stock-based compensation
The Company estimates the fair value of stock options using a Black-Scholes option pricing model, consistent with the provisions of SFAS No. 123 (revised 2004), Share-Based Payment (SFAS 123(R). SFAS 123(R) requires all share-based payments to employees, including stock option grants, to be recognized in the income statement based on their fair values. The standard applies to newly granted awards and previously granted awards that are not fully vested on the date of adoption. The Company adopted SFAS 123(R) using the modified prospective method, which requires that compensation expense for the portion of awards for which the requisite service has not yet been rendered and that are outstanding as of the adoption date be recorded over the remaining service period. Prior to the adoption of SFAS No. 123(R) on February 1, 2006, the Company had no share-based payments. Accordingly, no prior periods have been restated, the impact of SFAS 123(R) is not presented, and no pro forma amounts are presented for 2005 had the Company recognized stock-based compensation in accordance with SFAS No. 123.
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The Company accounts for options and warrants granted to non-employees under SFAS No. 123(R) and Emerging Issues Task Force Issue No. 96-18, Accounting for Equity Instruments that are issued to other than Employees for Acquiring or in Conjunction with Selling Goods or Services. The Company measures the fair value of such options using the Black-Scholes option pricing model at each financial reporting date.
Recent accounting pronouncements
In September 2006, the Financial Accounting Standard Board (FASB) issued SFAS No. 157, Fair Value Measurements. SFAS No. 157 defines fair value, establishes a framework for measuring fair value in U.S. generally accepted accounting principles and expands disclosures about fair value measurements. SFAS No. 157 is effective for fiscal years beginning after November 15, 2007 and interim periods within those fiscal years. The Company is currently evaluating the effect that the adoption of SFAS No. 157 will have on its financial position and results of operations.
In February 2007, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 159, The Fair Value Option for Financial Assets and Financial Liabilities (SFAS 159). SFAS 159 permits entities to choose to measure many financial instruments and certain other items at fair value, and establishes presentation and disclosure requirements designed to facilitate comparisons between entities that choose different measurement attributes for similar types of assets and liabilities. SFAS 159 is effective for fiscal years beginning after November 15, 2007. The Company does not expect the adoption of SFAS 159 to have a material effect on its financial statements and related disclosures.
ITEM 3. CONTROLS AND PROCEDURES
(a) Evaluation of disclosure controls and procedures. As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation 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. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms.
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(b) Changes in internal controls over financial reporting. There was no change in our internal control over financial reporting during our most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
ITEM 1. LEGAL PROCEEDINGS
Not applicable.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Not applicable.
On December 1, 2006, CDC entered into a revolving credit agreement with a financial institution. The credit agreement provides for borrowings of up to $3 million or the maximum available based on specific percentages of accounts receivable and inventory, as determined by the financial institution, whichever is less. At October 31, 2007, $1,577,593 had been advanced and $75,063, was available to CDC under the credit agreement. The outstanding advances under the credit agreement bear interest at an annual rate equal to the prime rate (8.25 % at October 31, 2007) plus a margin initially set at 0.50%. The credit agreement is secured by all the personal property of CDC, including its equipment, accounts receivable and inventory. There are certain covenants and restrictions placed on CDC under the credit agreement, including, but not limited to, quarterly financial covenants specifying a funded debt to EBITDA (as defined) ratio, a minimum fixed-charge (as defined) coverage ratio, and restrictions or limitations on issuance of additional debt, mergers, leases, guaranties, transactions with affiliates, or change in control. CDC determined it was not in compliance with all covenants as of October 31, 2007. Effective November 30, 2007, the line of credit agreement was amended. The amended line of credit matures February 28, 2008, and the covenants and calculation of borrowing base was modified and CDC expects to be in compliance with the modified covenants in the future. The Company has guaranteed the obligations of CDC under the credit agreement. Under the amended borrowing base agreement with the Bank of Oklahoma the Company anticipates that it will be able meet its obligations as they become due, including the note principal payment of $250,000 plus interest due to the selling shareholders on December 31, 2007. The line of credit matures on February 28, 2008, and the Company anticipates that it will be able to renew the line of credit. If CDC and the Company are unable to renew the line of credit when it matures CDC may be forced to significantly reduce, restructure or cease its operations and/or liquidate inventory at amounts below current carrying value to generate the necessary working capital to fund its operations. The accompanying financial statements do not include any adjustments that might result from the outcome of this uncertainty.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable
ITEM 5. OTHER INFORMATION
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(a) Exhibits
The exhibits listed in the Exhibit Index are filed as a part of this report.
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SIGNATURES
In accordance with the requirements of the Exchange Act, the Registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
CHATSWORTH DATA SOLUTIONS, INC. | ||
Date: September 19, 2007 | /s/ Sidney L. Anderson | |
Sidney L. Anderson | ||
Chief Executive Officer, President |
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Exhibit Number | Description | |
31.1 | Rule 13a-14(a)/15d-14(a) Certification by the Chief Executive Officer. | |
31.2 | Rule 13a-14(a)/15d-14(a) Certification by the Chief Financial Officer. | |
32.1 | Certification by the Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
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