Summary of CHDT CORP - Yahoo! Finance

Item 6. Management's Discussion and Analysis of Operation

Management's discussion and analysis provides supplemental information, which sets forth the major factors that have affected our financial condition and results of operations and should be read in conjunction with the Consolidated Financial Statements and related notes. Management's discussion and analysis is divided into subsections entitled "Forward Looking Statements," "Introduction," "Results of Operations," "Liquidity and Capital Resources," "Critical Accounting Policies," and "Risk Factors." Information therein should facilitate a better understanding of the major factors and trends that affect our earnings performance and financial condition, and how our performance during 2008 compares with prior years.

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, 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.

With the current worldwide economic recession and financial crisis, it is impossible to predict or give any assurances about future performance. While the Company has not seen any decline in sales as of the date of this Report, a continuation of the current worldwide economic recession and financial crisis for any prolonged period could adversely affect or undermine our business lines or a business line. We do not produce "essential" products for basic living requirements and the purchase of our products by consumers are entirely discretionary and capable for deferral.

Introduction

The following discussion and analysis summarizes the significant factors affecting: (i) our consolidated results of operations for 2008 compared to 2007; and (ii) financial liquidity and capital resources. This discussion and analysis should be read in conjunction with our consolidated financial statements and notes included in this Form 10-K.

We are a developer and manufacturer of niche consumer products selling to distributors and retailers in the United States. Our Capstone subsidiary currently operates in five primary business segments: Lighting, Power Failure Lighting, Power Tools, Automotive Accessories and Computer Peripherals.

Our growth strategy has four main elements:

1. Introduce our new product lines to more departments 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 categories; and
4. Through acquiring businesses that have innovative products that would compliment our existing marketing strategies.

Capstone Lighting products specialize in low cost, 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 booklights, multi-task lights, flashlights and also offers "Private Label" programs to major retailers. "Private Label" is the manufacture of products by a company and those products are sold under the name or trade name of the manufacturer's retailers, distributors or bulk buyers. In March 2009 at the International Hardware Show, Capstone will be launching a new and expanded line of booklights and multi-tasklights under the name PATHWAY LIGHTS.

In 2008 Capstone also launched the Eco-i-Lite ™ Power Failure Lights. In March 2009 the company will launch additional Eco-i -Lite™ products and many new trendy colors. The Eco-i-Lite products have been developed in association with the engineers from the STP® tools business unit.

STP®-branded tools were launched in October 2007. 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 STP®-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 system also uses a Universal Battery System.

STP®-branded Automotive Accessories were also launched in October 2007. This 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 centers.

As of the date of this Report, we do not believe that we have a long enough history in promoting the STP®-branded products to determine if this product line will be successful or sustainable.

As a small business issuer with limited resources, we do not have the resources to 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 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 functions at what we deem to be a value price and supported.

We also seek to license established trade names to assist in competing with larger competitors. STP® is the first instance of trying this strategy. We believe that the use of a trade name like STP® combined with the competitive (in terms of functions, quality and features) products offered 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, Mikita, Bosch or Ryobi. We believe that licensing an established trade name like STP® 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 exception; (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 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 business issuer; 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 2008, except the 3rd quarter in which we had a profit, 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 years ended December 31, 2008 and 2007, the Company's revenues were derived from 5 sources: (i) the sale of our booklight products (Capstone and its booklight product line was acquired by CHDT in September 2006); (ii) sale of Eco-i-Lite ™ Power Failure Lights, (iii) sale of our STP® tools power drills and automotive accessories; (iv) for fiscal year 2007, the sale of promotional, gift and souvenir items by our sold SDI subsidiary; and (v) revenues, if any, from our 51% membership interest in CPS, which interest we divested in 2007.

Despite the recent efforts to make CHDT and its operations a focused and professionally run organization, we continue to be hampered in our efforts to achieve sustained profitability by problems that stem from the past and our history of failed businesses.

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 2008, 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. We were able to obtain a conventional asset based bank loan to help support Capstone operations and working capital needs ,however we may have to continue to raise working capital for CHDT working capital and for Capstone 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 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.

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 and produce 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 revenue growth 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 year ended December 31, 2008, the Company had a net loss from continuing operations of approximately $1,338,000. For the year ended December 31, 2007 the Company had a net loss from operations of $1,213,000. That is a net loss increase of $125,000 over 2007 results.

Total Net Revenues: For the year ended December 31, 2008 and 2007, the Company had total sales of approximately $6,616,000 and $2,826,000 respectively, for an increase of $3,790,000 which represents an 134% increase over 2007 results. All of the revenue was generated by Capstone. This increase was due to placement of STP® branded products shipped to automotive retailers, online retailers, and warehouse clubs, placement of the Eco-i-Lite, the Company's new multi functional light which we expect will be a strong revenue producer in 2009 and continued sales of our Booklight program. The 2007 revenues did not include any revenues from the new STP-branded tools..

Cost of Sales: For the year ended December 31, 2008 and 2007, we had cost of sales of approximately $4,589,000 and $1,623,000, respectively. This cost represents 69.4% and 57.4% respectively of total Revenue. As a percentage of Total Revenue costs have increased. This is a direct result of the expanded mix of products now being sold. In 2007 Revenues were primarily comprised of book lights sales.

Gross Profit: For 2008, gross profit was $2,026,000, an increase by approximately $823,000 or 68% from 2007. For 2007, gross profit was $1,203,000. Gross profit as a percentage of sales was 30.6% for the year as compared to 42.6% for 2007. This gross profit decrease is a direct result of two factors.

1. With our expanded product lines the Gross Profit is now a blended percentage. Each product category provides a different Gross Profit percentage

2. Our larger customers are now buying on a direct import basis. The gross margin percentages are lower in this selling scenario but the Company's expenses are also reduced as the customer is responsible for related expenses such as freight, duties and handling costs.

Even though the blended gross profit % to sales has decreased, the overall gross profit increased by $823,000 or 68% from 2007. This increase is attributed directly to the increase in product sales volume.

Operating expenses were $3,075,000 in 2008 as compared to $2,454,000 an increase approximately by $621,000. This increase can be attributed to various factors.

Employee compensation for 2008 was $1,593,000 an increase of $173,000 from $1,420,000 in 2007. This was the result of hiring executives to build up the management structure for CHDT and the hiring of experienced sales executives to assist in launching Capstone's new product lines and STP-branded tools . Note the 2007 expense only reflected part of the payroll expense of the new management team. CHDT also recognized in the compensation expense approximately $523,123 for stock options granted in 2008.

For 2008 the Sales and Marketing Expenses were $557,000 an increase of $390,000 or 233% over the $167,000 expensed in 2007. This reflects the increased sales and marketing efforts being made to promote our new product lines and investment for future continued revenue growth.

Depreciation and Amortization Expenses were $177,000 an increase of $139,000 or 365% over the $38,000 expensed in 2007. This represents the depreciation and amortization of the cost of investing in the new moulds for the power tools and Eco-i-Lite programs and investment in new packaging design and molds. This represents another investment for possible future revenue growth.

Other Income (Expense): Interest Expenses for 2008 was $291,000 an increase of $166,000 or 133% over $125,000 expensed in 2007. This expense increase was the direct result of the new bank line of credit and additional funding required to finance the increased order activity overseas.

Net Income (Loss):

The Loss for 2008 was $1,338,000 against a Loss of $1,213,000 for 2007, an increased loss of $125,000. Despite the increased revenue our loss increased. However we have incurred substantial expense in 2008 that will help us to continue the revenue growth in the future.