Summary of CHDT CORP - Yahoo! Finance

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

General - CHDT Corporation, a Florida corporation, ("CHDT," "Company," "we," or "our") is a public holding company with its Common Stock, $0.0001 par value per share, ("Common Stock") quoted on the Over-The-Counter Bulletin Board under the trading symbol "CHDO.OB." This discussion should be read in conjunction with Management's Discussion and Analysis of Financial Condition and Results of Operations in the Company's annual report on Form 10-KSB for the year ended December 31, 2007.

Forward Looking Statements

Management's Discussion and Analysis contains "forward-looking" statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, as well as historical information. Although we believe that the expectations reflected in these forward-looking statements are reasonable, we can give no assurance that the expectations reflected in these forward-looking statements will prove to be correct. Our actual results could differ materially from those anticipated in forward-looking statements as a result of certain factors - many of those factors being beyond our control or ability to predict. Forward-looking statements include those that use forward-looking terminology, such as the words "anticipate," "believe," "estimate," "expect," "intend," "may," "project," "plan," "will," "shall," "should," and similar expressions, including when used in the negative. Although we believe that the expectations reflected in these forward-looking statements are reasonable and achievable at the time made, these statements involve risks and uncertainties and no assurance can be given that actual results will be consistent with these forward-looking statements. Actual results may differ significantly from anticipated business and financial results.

All forward-looking statements attributable to us are expressly qualified in their entirety by these and other factors. We undertake no obligation to update or revise these forward-looking statements, whether to reflect events or circumstances after the date initially filed or published, to reflect the occurrence of unanticipated events or otherwise.

Introduction

The following discussion and analysis summarizes the significant factors affecting: (i) our consolidated results of operations for the three months ended September 30, 2008 compared to the three months ended September 30, 2007; and
(ii) financial liquidity and capital resources.

We are a developer and manufacturer of niche consumer products selling to distributors and retailers in the United States. We conduct our business through wholly owned operating subsidiaries. Our current, sole wholly-owned operating subsidiary is Capstone Industries, Inc., a Florida corporation, ("Capstone") and Capstone currently operates in four primary consumer product business segments:
Automotive Accessories, Comfort Products, Lighting and Power Tools and Consumer Electronics will be added to our product listing in 2009. We acquired Capstone in a cash and stock transaction on September 13, 2006.

Our growth strategy has four main strategies:

1. Introduce our new product lines to more departments or stores at existing retail distribution channels; and

2. Continue to expand retail distribution and move into new distribution channels; and

3. Release new innovative products in order to expand existing product lines or categories; and

4. Possibly supplement such efforts through acquiring one or more businesses that have innovative products that would compliment our existing marketing strategies.

Capstone Lighting products consists of innovative portable lighting products that we believe can win a profitable niche in market share without high market penetration costs (especially marketing and advertising costs). Capstone sells book lights, task lights, flashlights and lighted magnifiers and also offers "Private Label" programs to major retailers. "Private Label" is the manufacture of products by a company whereby those products are sold under the name or trade name of the manufacturer's retailers, distributors or bulk buyers. In addition to its new consumer electronics products marketed under tâke Capstone will be introducing several new book lights and eco-friendly lights in fiscal year ended December 31, 2008, that have been developed in association with the engineers from the STPŽ tools business unit.

Simply Comfort products are a collection of uniquely designed MP3 speaker comfort products made with various foams including memory foam.

STPŽ- tools were launched in October 2007. As used herein, "v" means volts and "w" means watts. This product line includes the new technology lithium batteries for the 3.6v, 4.0v , 8.0v screwdrivers and 12v and 20v drill driver lines. The 20v system incorporates the Capstone designed Power Axis Universal Battery System which allows the same battery to be interchangeable with other 20v STPŽ-branded power tools such as reciprocating saw, jig saw, circular saw, impact wrench, work light, detail sander and other products. The line also includes the 19.2v Ni-cad drill driver system, which also uses a Universal Battery System.

STPŽ-branded Automotive Accessories were also launched in October 2007. The current product line includes 200w, 400w, 800w and 1000w inverters, rechargeable Spotlights from 1 million candle power, up to 10 million candle power, 12v air compressor, garage clocks and weather center.

As a small business issuer with limited resources, we do not have the resources to effectively compete head-to-head with larger, more established competitors for any of the products. While we face fewer competitors in our booklight and specialty light product line, we face many national or regional brand-named competitors in the power tool and automotive accessories product line. In general, we attempt to compete by leveraging the engineering and manufacturing capabilities of our Chinese contract manufacturers in order to provide quality products with more or at least competitive functions at what we deem to be a value price and supported by responsive customer service. We also seek to license established trade names to assist in competing with larger competitors. STPŽ is an example of this strategy. We believe that the use of a trade name like STPŽ combined with the competitive (in terms of functions, quality and features) products offered through our Chinese contract manufacturers will reduce the cost of market penetration, which is essential because we do not have the money or funding to compete head-to-head, market-to-market with large competitors like Black & Decker, Panasonic, Ryobi, Porter-Cable, Mikita, or Dewalt. We believe that licensing an established trade name like STPŽ was important to compete in the home use power tool market because that industry has many very large competitors with established market shares and years of consumer loyalty to their product lines. Black & Decker is one example of a large, established competitor in the North American home use power tool market.

Since the start of the 1990's, the history of CHDT has been a series of failed operating subsidiaries engaged in various business lines. With each failed business, we usually experienced a change in management and business focus. We believe that these past failures were due to a combination of one or more of the following: (1) inadequate financing of operations; (2) absence of a readily available sources of affordable funding for operations and product and business development; (3) absence of any or enough experienced managers or executives;
(4) lack of adequate strategic and financial planning and accurate budgeting projections; (5) general economic conditions and downturns in industries that undermined many small businesses, especially in the value-added reseller of computer hardware and custom software developer and systems developer industries; (6) inability to raise money in the public markets due to poor financial track record of CHDT, resulting low stock market price and lack of sufficient institutional investor and market maker support for CHDT Common Stock; (7) selection of business lines that CHDT was ill suited to compete in or acquire; (8) operating losses severely limiting the business and financial options and resources of CHDT; (9) frequent changes in management and business lines; (10) concurrently operating incompatible business lines that were ill-suited for a small reporting company; and (11) acquisitions that diverted resources from existing operations and ultimately failed and, as such, hindered CHDT's efforts to attain profitability on a sustained basis.

Starting in 2007, we have sought to avoid the problems of the past by recruiting an experienced management and sales team for the stated purpose to develop and expand a consumer products business and we have endeavored to raise funds for planned business development efforts. These steps have resulted in losses on a quarter-by-quarter basis for fiscal year 2007 and the second quarter of 2008, but we believe that this investment in corporate infrastructure is necessary to lay the foundation for future success and business and product development. While we are not certain that our current strategy and business line 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.

For the nine months ended September 30, 2008 and 2007, the Company's revenues were derived from 3 sources: (i) the sale of our booklight, tasklight, STP tools and Eco-i-Lite products (Capstone and its booklight/tasklight product line was acquired by CHDT in September 2006); (ii) sale of promotional, gift and souvenir items by our recently sold SDI subsidiary under a December 1, 2007 purchase agreement; and (iii) revenues, if any, from our 51% membership interest in CPS, which interest we divested as of December 31, 2006.

The failure of CHDT to achieve sustained profitability in its operations continues to hamper our efforts to establish and sustain a profitable, growing business. In fiscal year 2007, we had to continue our historical reliance on raising working capital for operations and business and product development by selling securities to investors and/or receiving loans or investment from members of management or their affiliates. While we have secured bank financing for operations in the second quarter of fiscal year 2008 for Capstone operations, we may have to continue to raise working capital for business and product development (as well as mergers and acquisitions of other companies or their products) by selling our securities in private placements to investors and/or loans or investments by our management and their affiliates. This reliance on private placements of securities and insider loans or investments adds to the already huge number of outstanding shares of our Common Stock, dilutes our shareholders and further weakens our ability to attract primary market makers and institutional investor support for our Common Stock as a publicly traded security and also adversely impacts on our ability to do mergers and acquisitions, attract traditional bank funding or raise working capital by public offerings of our securities.

On May 1, 2008, Capstone Industries secured a conventional $2,000,000 asset based line of credit from Sterling National Bank, located in New York City. This credit line provides funding for an amount up to 85% of eligible Capstone U.S. accounts receivable and 50% of eligible Capstone inventory. The interest rate of the Loan shall be the Wall Street Journal Prime Rate plus one and one-half percent (1.5%) per annum (adjusted automatically with changes in the Wall Street Journal Prime Rate). Capstone management believes that this credit line and available cash flow will be adequate to fund most of Capstone's ongoing working capital needs in fiscal year 2008.

Our lack of primary market makers and institutional investor support of our Common Stock also contributes to our burden in achieving sustained, profitable business lines. These problems stem from the manner in which CHDT was taken public in the late 1980's and developed a public market for the Common Stock in 1998. CHDT did not, and perhaps could not under then current circumstances, do an underwritten initial public offering of its Common Stock and produce by such an offering a national network of broker-dealers and institutional investors interested in long-term investment in CHDT and stability in the market price for the Common Stock. As a result, we have had difficulty in sustaining any increases in the market price of the Common Stock. When the market price of the Common Stock enjoys any significant percentage increase, shareholders tend to sell the Common Stock to reap any gains (no matter how small) from the market price increase and the selling causes the market price of the Common Stock to fall back to prior levels. Since there are no primary market makers or institutional investors supporting the Common Stock, there are no investors effectively countering the impact of the selling pressure on the market price for the Common Stock. The low market price and lack of support for our Common Stock means that we are hampered in our ability to resort to the public markets to raise working capital because of the low stock market price. As such, we do not readily enjoy one of the principal benefits of being a public company: ready access to the public securities markets for working capital.

We intend to address the above problems in public and market maker support for our Common Stock by: (1) establishing profitability in consecutive fiscal quarters in our current consumer product business line in order to demonstrate that current management has a sound business line and business strategy; (2) upon establishing a record of profitability, members of management and agents will solicit support from institutional investors, asset managers, market makers and others to provide long-term investors in the Common Stock and stability in the public market for the Common Stock; (3) seek investment banker assistance in developing a strategic plan, including an acquisition plan, to dramatically grow CHDT in our core business line, the consumer product line. We can make no assurances that we shall succeed in this effort.

We intend to remain focused on niche consumer products that we believe can attain a profitable market niche with minimal market penetration costs and is attractive to our existing distribution channel of regional and national retailers and distributors. We intend to develop new products by internal efforts as well as acquire new products by mergers and acquisitions.

Results of Operations: For the three months ended September 30, 2008, the Company had net income from continuing operations of approximately $64,000. For the three months ended September 30, 2007 the Company had a net loss from operations of approximately $268,000. That is a net income increase of $332,000 over 2007 results. The third quarter 2008 net income increased approximately $616,000 over the second quarter 2008 net income results. The major reason for this higher net income was increased revenues in the quarter.

Total Revenues: For the three months ended September 30, 2008 and 2007, the Company had total sales of approximately $3,022,000 and $815,000 respectively, for an increase of $2,207,000, which represents a 270.8% increase over 2007. For the nine months ended September 30th and 2007, the Company had total sales of approximately $4,290,000 and $1,415,000 respectively, for an increase of $2,875,000, which represents a 203.2% increase over 2007. The third quarter 2008 revenue of approximately $3,022,000 increased $2,327,000 or 334.8% over the second quarter 2008 revenue of $695,000. All the revenue was generated by CHDT's Capstone subsidiary. In 2007, the $815,000 revenue was comprised primarily of domestic book light shipments meaning shipments to retailers made from our warehouse located in the U.S. In the quarter ended September 30, 2008, approximately 77% ($2,315,000) of the $3,022,000 revenue was shipped on a Direct Import basis (EX China) and only 23% was shipped from our U.S. warehouse. This higher percentage of Direct Import Sales reflects the change of product mix sold, as Capstone's other product categories namely STPŽ branded tools and accessories and Eco-i-Lite started to ship to retailers. In general, depending on the product category, U.S. national retailers are moving more towards Direct Import programs. This allows retailers to have control over the cargo/containers, provides better inventory utilization and reduces their overall costs.

Cost of Sales: For the three months ended September 30, 2008 and 2007, Cost of Sales was approximately $2,069,000 and $457,000, respectively. This cost represents 68.5% and 56.1% respectively of total revenue. As a percentage of total revenue costs have increased from the same period last year by 12.4%. This higher percent of sales is a direct result of the expanded mix of products now being sold and impact of the new Direct Import program. In third quarter 2007 Cost of Sales were approximately $457,000 (56.1% of revenue) and were primarily related to higher margin book lights shipped out of our U.S. warehouse (domestic). In the third quarter 2008, Cost of Sales (68.4% of revenue) is a blend of Direct Import Sales of power tools, automotive accessories and Eco-i-Lites and book lights sales from our U.S. warehouse. In a direct import program as the title of the merchandise is transferred overseas then the wholesale price charged to the retailer is lower, as the retailer is responsible for ocean freight, US customs duties, warehousing and financial costs. In the third quarter approximately 77% of revenue was on a Direct Import basis, resulting in a higher blended cost of 68.4% of revenue.

Gross Profit: For the three months ended September 30, 2008, gross profit was approximately $953,000, an increase of approximately $595,000 or 166.2% over $358,000 in 2007. For the nine months ended September 30, 2008, gross profit was approximately $1,406,000, an increase of approximately $795,000 over $611,000 in 2007. In the third quarter 2008, gross profit increased by approximately $754,000 or 378.8% over the second quarter 2008 results of approximately $199,000.
For the three months ended September 30, 2008, gross profit as a percent of sales was 31.5% as compared to 43.9% in 2007. This Gross Profit decrease is a direct impact of our larger customers buying on a direct import basis. The gross margins are lower in this selling scenario as indicated previously but the company's expenses are also reduced as the customer is responsible for related expenses. (Freight, duties and handling costs).

Operating Expenses: For the three months ended September 30, 2008 and 2007, operating expenses were $806,000 and $674,000 respectively. This is an increase of approximately $132,000 from 2007. For the nine months ended September 30, 2008 and 2007, operating expenses were approximately $2,335,000 and $1,416,000. This is an increase of $919,000 from 2007. Explanations for the major expense increases and reductions for the year are noted below.
For the nine months ended September 2008 and 2007, employee compensation was approximately $1,200,000 and $680,000 respectively, an increase of approximately $520,000. Beginning in mid-2007 CHDT started to build up its management structure and hired experienced marketing and sales executives to manage the growth of Capstone's new product lines. CHDT also recognized in the compensation expenses for 9 months ending 2008 approximately $434,000 for stock options to its executives.
Professional Fees for the nine months ended September 30, 2008 and 2007 were approximately $117,000 and $162,000 respectively, a reduction of $45,000. This expense reduction is the result of hiring qualified in house accounting personnel and reducing the need for outside accounting services.

Depreciation Expense for the nine months ended September 30, 2008 and 2007 were approximately $76,000 and $21,000 respectively, an increase of $55,000. This is the result of the depreciation of moulds and equipment required to develop the STPŽ product line.
Quality Control Fees for the nine months ended September 30, 2008 and 2007 were approximately $131,000 and $0 respectively. This expense relates to the quality control and product testing services that we engage to ensure the products we offer are of the highest quality.
Packaging Cost Design for the nine months ended September 30, 2008 and 2007 were approximately $48,000 and $11,000 respectively. The $37,000 increase is the result of new package design and artwork for the new product lines. Marketing Allowances for the nine months ended September 30, 2008 and 2007 were approximately $118,000 and $28,000 respectively. The $90,000 increase relates to promotional and marketing allowances provided to retailers in order to support our sales programs.

Other Income (Expense): Interest Expense increased for the three months ended September 30, 2008 by approximately $43,000 from $41,000 in the three months ended September 30, 2007 to $84,000 in the three months ended September 30, 2008. For the nine months ended September 30, 2008 and 2007 interest expense were approximately $149,000 and $94,000 respectively, an increase of $55,000. This increased expense is the result of new loans being executed by the Company.

Net Income: For the three months ended September 30, 2008 and 2007, Net Income was approximately $64,000
and $(268,000) loss respectively. This quarter showed an improvement of net income by $332,000 as compared to the same quarter last year. As compared against the second quarter ended 06-30-08 which incurred a net loss of approximately $ (552,000), the third quarter net income improved by $616,000. For the nine months ended September 30, 2008 and 2007 Net Loss was approximately $(1,076,000) and $(791,726) respectively.

Directors & Officers Insurance: We currently operate with directors' and officers' insurance and we believe our coverage is adequate to cover likely liabilities under such a policy.

Impact of Inflation: Our major expenses have been the cost of selling and marketing product lines to customers in North America. That effort involves mostly sales staff traveling to make direct marketing and sales pitches to customers and potential customers trade shows around North America and visiting China to maintain and seek to expand distribution and manufacturing relationships and channels. As a result of world economic conditions and the current price of world oil and resulting increased material costs, there are now pressures from Chinese Manufacturers to gradually increase costs. We generally have been able to reduce cost increases by strong negotiating or re-engineering products, but we may have to increase the price of our products in fiscal year 2008 in response to such inflationary pressures. Since we operate in industries where the consumers tend to be price sensitive, any such increase in the prices of our products may adversely impact our sales and financial results in fiscal year 2008.

Country Risks. Almost all of our contract manufacturing operations and sources of products are located in Peoples' Republic of China or "China." We are dependent on China for almost all of the design and production of our consumer products. As such, we are subject to significant risks not typically faced by companies operating in or obtaining products from North America and Western Europe manufacturing sources. Political, economic and trade conflicts between the United States and China, including possible conflict over North Korea's nuclear weapons program or the independence of Taiwan, could severely hinder the ability of CHDT to obtain products and fill customer orders from our current Chinese manufacturing sources. Further, Chinese commercial law is still evolving to accommodate increasing capitalism in Chinese society, especially in terms of commercial relationships and dealings with foreign companies, and can be unpredictable in application or principal. The same unpredictability exists with respect to the central Chinese government, which can unilaterally and without prior warning impose new legal, economic and commercial laws, policies and procedures. This element of unpredictability heightens the risk of doing business in China. While dramatic anti-trade shift in Chinese policy or laws would seem to be clearly against the best interests of China and its current economic trends, China has a central government with the authority to make such changes and an incentive to take actions designed to reaffirm the control of the central government over the economy and society.

China has been under ongoing international pressure to value its currency in a manner that would increase the value of Chinese currency in respect of other world currencies and thereby increase the cost of Chinese goods in the world market. Such a revaluation of Chinese currency could adversely impact business by increasing costs to consumers, but this cost impact would also affect our competitors with products produced in China. China adopted a 2% revaluation of its currency in 2005 and the U.S. Dollar declined slightly in response to this revaluation. While under international pressure to value the Chinese currency in a manner that more realistically reflects the strength and value of the Chinese currency, China may continue to keep Chinese currency at a level that some regard as below its perceived, true value.

Currency. The U.S. dollar is the currency used in all of our commercial transactions and our property and business is conducted in North America. As a result, the effect of the fluctuations of exchange rates is considered minimal to our business operations.

Interest Rate Risk. We do not have significant interest rate risk during the fiscal quarter ending September 30, 2008.

Credit Risk. We have not experienced significant credit risk, as most of our customers are long-term customers with superior payment records. Our managers monitor our receivables regularly and our Direct Import Programs are typically supported by a customers Letter of Credit which is a guaranteed form of payment.

Off-Balance Sheet Arrangements. We have no off-balance sheet arrangements.