UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
10 – K
FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO
SECTIONS 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
(Mark One)
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Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
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for the fiscal year ended March 31, 2008
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Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
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for the transition period from
to
Commission file number 1-12214
CHAD Therapeutics, Inc.
(Exact name of registrant as specified in its charter)
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California
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95-3792700
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(State or other jurisdiction of
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(I.R.S. Employer
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incorporation or organization)
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Identification No.)
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21622 Plummer Street, Chatsworth, CA
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91311
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(Address of principal executive offices)
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(Zip Code)
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Registrant’s telephone number, including area code: (818) 882-0883
Securities registered pursuant to Section 12(b) of the Act:
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Name of each exchange
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Title of each class
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on which registered
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Common Shares, $.01 par value
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American Stock Exchange
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Securities registered pursuant to Section 12(g) of the Act: None.
Indicate by check mark if the registrant is a well-known seasoned issuer as defined in Rule
405 of the Securities Act. Yes
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No
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Indicate by check mark if the registrant is not required to file reports pursuant to Section
13 or Section 15(d) of the Act. Yes
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No
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Indicate by check mark whether the registrant (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
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No
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Indicate by check mark if disclosures of delinquent filers pursuant to Item 405 of Regulation
S-K (229.405 of this chapter) is not contained herein, and will not be contained, to the best of
registrant’s knowledge, in definitive proxy or information statements incorporated by reference in
Part III of this Form 10-K or any amendment to this Form 10-K.
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Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer,
a non-accelerated filer, or a smaller reporting company.
See the definitions of “large
accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
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Large accelerated filer
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Accelerated filer
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Non-accelerated filer
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(Do not check if a smaller reporting company)
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Smaller reporting company
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Act). Yes
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No
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As of September 30, 2007, the last business day of the registrant’s most recently completed
second fiscal quarter, the approximate aggregate market value of voting and non-voting common stock
held by non-affiliates of the registrant was $6,980,000 (based upon the last closing price for
shares of the registrant’s common stock as reported by the American Stock Exchange as of that
date). Shares of common stock held by each officer, director, and holder of 10% or more of the
outstanding common stock have been excluded in that such persons may be deemed to be affiliates.
This determination of affiliate status is not necessarily a conclusive determination for other
purposes.
There were approximately 10,180,000 shares of common stock outstanding as of June 26, 2008.
PART I
Item 1. Business
Chad Therapeutics, Inc., a California corporation (the “Company” or “CHAD”) was organized in August
1982 to develop, produce, and market respiratory care devices designed to improve the efficiency of
oxygen delivery systems for both home and hospital treatment of patients who require supplemental
oxygen. The Company introduced its first respiratory care device in the market in June of 1983 and
introduced additional respiratory care devices in subsequent years.
A protracted period of reductions in reimbursement for home respiratory care and continuing
uncertainty with respect to future prospects for an adequate reimbursement regime caused the
Company to make the decision to exit the oxygen business. On November 16, 2007, the Company
entered into a definitive agreement, subject to shareholder approval, to sell to Inovo, Inc. (the
“Buyer”) substantially all of the assets of the Company related to the oxygen conserver business
including accounts receivable, inventory, and certain equipment and intellectual property (the
“Asset Sale”) pursuant to an Asset Purchase Agreement (the “APA”). Pursuant to the APA, the Buyer
assumed certain liabilities and obligations related to the Company’s oxygen conserver business.
The Company’s shareholders voted to approve the sale of the Company’s oxygen conserver business on
January 31, 2008 and the Asset Sale was completed for $5,250,000 on February 15, 2008. On March 6,
2008, the Company entered into an Asset Purchase Agreement (the “Purchase Agreement”) with
Respironics, Inc., (“Respironics”). Pursuant to the Purchase Agreement, Respironics acquired the
Company’s assets related to the transfilling oxygen business, the Total O2 Delivery System,
including the OMNI-5 In-Home Filling System, OMNI-2 In-Home Filling System, Omni Fill technology
and the Company’s Post Valve patent for the purchase price of $1,825,000. Under the terms of the
Purchase Agreement, Respironics assumed certain liabilities and obligations related to the
Company’s transfilling oxygen business and the Company agreed to indemnify Respironics for expenses
arising out of any breach of its representations or warranties.
The Company is currently focused exclusively on the development and commercialization of diagnostic
and therapeutic devices for the multi-billion dollar sleep disorder market.
The universe of patients known to be suffering from sleep disordered breathing conditions, such as
obstructive sleep apnea (“OSA”) and snoring, is growing substantially. The most common and most
debilitating of sleep-related afflictions is OSA. It is estimated that in the United States alone,
this represents over 40 million people. Despite the high prevalence of OSA, there is a general
lack of awareness of OSA among both the general public and the medical community. For patients
diagnosed with the condition at one of the approximately 3,700 sleep labs in the United States,
treatment typically involves the use of a continuous positive air pressure (“CPAP”) device and
associated disposable devices. Both diagnosis and treatment are largely covered by private
insurance.
Management believes that strong growth in the market for diagnostic and therapeutic devices for the
sleep disorder market will continue to be driven by (1) increased understanding of the causes,
symptoms and effects of sleep disorders, (2) growing clinical focus on the relationships between
certain sleep disorders and certain serious diseases such as congestive heart disease, (3)
increasingly frequent and accurate diagnosis of sleep disorders and (4) continued growth in the
number of sleep diagnostic laboratories. In addition, on March 14, 2008, the Centers for Medicare
Services (“CMS”) announced that, in addition to polysomnography performed in sleep laboratories, it
will provide reimbursement for unattended home sleep testing with certain categories of devices.
Management believes that this CMS ruling will lead to home testing of a substantial number of
patients who would not otherwise have access to testing and, consequently, to a substantially
larger market for treatment devices such as the Company’s FloPAP device.
2
Sleep is a complex neurological process that includes two distinct states: rapid eye movement, or
REM, sleep and non-rapid eye movement, or non-REM, sleep. REM sleep, which is about 20% — 25% of
total sleep experienced by adults, is characterized by a high level of brain activity, bursts of
rapid eye movement, increased heart and respiration rates, and paralysis of many muscles. Non-REM
sleep is subdivided into four stages that generally parallel sleep depth; stage 1 is the lightest
and stage 3 is the deepest.
The upper airway has no rigid support and is held open by active contraction of upper airway
muscles. Normally, during REM sleep and deeper levels of non-REM sleep, upper airway muscles relax
and the airway narrows. Individuals with narrow upper airways or poor muscle tone are prone to
temporary collapses of the upper airway during sleep, called apneas, and to near closures of the
upper airway, called hypopneas. These breathing irregularities result in a lowering of blood
oxygen concentration, causing the central nervous system to react to the lack of oxygen or
increased carbon dioxide and signaling the body to respond. Typically, the individual
subconsciously arouses from sleep, causing the throat muscles to contract, opening the airway.
After a few gasping breaths, blood oxygen levels increase and the individual can resume a deeper
sleep until the cycle repeats itself. Sufferers of OSA typically experience ten or more such
cycles per hour. While these awakenings greatly impair the quality of sleep, the individual is not
normally aware of these disruptions. In addition, OSA has recently been recognized as a
contributing cause of hypertension, heart disease, stroke and diabetes.
While OSA has been diagnosed in a broad cross-section of the population, it is most commonly found
in middle-aged men and those who are obese, smoke, consume alcohol in excess or use muscle-relaxing
and pain-killing drugs.
The National Center on Sleep Disorders Research estimates that sleep disorders result in $16
billion in annual healthcare costs in the United States.
Generally, an individual seeking treatment for the symptoms of OSA or other sleep disorders is
referred by a general practitioner to a specialist for further evaluation. The diagnosis of OSA
typically requires monitoring the patient during sleep at either a sleep clinic or the patient’s
home. During overnight testing, respiratory parameters and sleep patterns may be monitored, along
with other vital signs such as heart rate and blood oxygen levels.
While surgical treatment is available to address certain cases of OSA, many patients are treated by
use of a CPAP which, is a non-invasive treatment method. CPAP systems were commercialized for
treatment of OSA in the United States in the mid 1980’s. Today, use of CPAP is generally
acknowledged as the most effective and least invasive therapy for managing OSA.
During CPAP treatment, a patient sleeps with a nasal interface connected to a small portable
airflow generator that delivers room air at a positive pressure. The patient breathes in air from
the flow generator and breathes out through an exhaust port in the interface. Continuous air
pressure applied in this manner acts as a pneumatic splint to keep the upper airway open and
unobstructed. Interfaces include nasal masks and nasal pillows. Sometimes, when a patient leaks air
through their mouth, a full-face mask may need to be used, rather than a nasal interface.
CPAP is not a cure and therefore, must be used on a nightly basis as long as treatment is required.
Patient compliance has been a major factor in the efficacy of CPAP treatment. Early generations
of CPAP units provided limited patient comfort and convenience. Patients experienced soreness from
the repeated use of nasal masks and had difficulty falling asleep with the CPAP device operating at
the prescribed pressure. In more recent years, product innovations to improve patient comfort and
compliance have been developed. These include more comfortable patient interface systems; delay
timers that gradually raise air pressure allowing the patient to fall asleep more easily; bi-level
air flow generators, including Variable Positive Airway Pressure, or VPAP systems, which provide
different air pressures for inhalation and exhalation; heated humidification systems to make the
airflow more comfortable; and auto-titration devices that reduce the average pressure delivered
during the night.
3
In the United States, the referral of patients to sleep physicians and sleep labs tends to come
primarily from pulmonologists and primary care physicians. Once a patient has been diagnosed by a
sleep lab and requires therapy, the patient will typically be served by a home medical service
provider that is independent of the sleep lab (in some instances, sleep diagnostic providers in the
United States have also begun to offer the therapy services). In contrast, in Europe and other
overseas markets, with some exceptions, referrals to sleep labs tend to be generated by
neurologists. Thereafter, diagnostic services and therapy are typically more inter-linked.
The Company believes that the market for devices treating sleep disorders will continue to grow in
the future due to a number of factors including increasing awareness of OSA, improved understanding
of the role of sleep disorders in the management of cardiac, neurologic, metabolic and related
disorders, and an increase in home-based diagnosis. As baby boomers continue to age and the
incidence of obesity and diabetes continues to grow, the need for devices treating sleep disorders
will also grow. We believe that the Company is well positioned to capitalize on this growth as the
devices it is developing based on its patented and proprietary technologies offer unique features
that can substantially improve the accuracy of diagnosis and the comfort of patient treatment.
Products Under Development
FloCHANNEL.
Management believes that the Company’s initial diagnostic device, the FloCHANNEL™,
will be the only device on the market that is capable of monitoring left and right nasal airflow
independently, while also monitoring oral airflow, constant baseline airflow, and volumetric sleep
scoring in an attended sleep lab. A patent pending quantitative tidal volume trend line output is
also a feature of this technology. The patented device is intended to be connected to standard
sleep lab systems. The FloCHANNEL has been tested and studied at Stanford University, Texas State
University, and independent sleep labs.
FloPAP.
Management also believes that the patented treatment device it has in development, the
FloPAP™ device, will be the only device able to monitor and control left and right nasal airflows
individually and independently, creating a more comfortable equalizing of airflows throughout
respiration and promoting improved patient compliance. This patented device enables lower
operating pressures, lower nasal airflow velocities, greater ventilation, which will lead to
improved patient compliance, comfort, and therapy for the treatment of OSA and potentially other
disorders. FloPAP uses an integrated humidifier.
Simple REM.
The Company plans to seek FDA marketing clearance for a third sleep device, Simple
REM™, a diagnostic device for home use, later in 2008. The Simple REM is primarily intended for
performing unattended sleep studies, including OSA screening, in the home or care facility. The
Simple REM is a patented advanced sleep study device. It uniquely identifies nasal cycle and its
correlating effects, nasal resistance effects, maintains a constant baseline of airflow
measurement, and quantifies independent nasal breathing. Simple REM incorporates an internal pulse
oximeter. The Simple REM provides greatly improved scoring accuracy, nasal cycle tracking, and
inherent self-scoring capabilities. New markets for durable medical equipment (“DME”) providers,
ear, nose and throat specialists (“ENT’s”), pulmonologists, pediatricians, and primary care
physicians open up as a result. Data are stored on a memory card and is available for the
physician to review on easy to read Excel reports. Scoring parameters may be set by the physician.
Rhinomanometer.
The Company is also in the process of developing a Rhinomanometer, which is a
nasal function study device, which measures the nasal resistance of patient’s nares individually,
allowing a physician to objectively measure and diagnose anatomical disorders such as deviated
septum, nasal polyps, large adenoids, nasal foreign bodies, and hypertrophic turbinate bones.
Non-anatomical effects that may cause nasal resistance issues can also be measured and
differentiated, such as nasal resistance
effects of chronic sinusitis, allergies, overuse of nose sprays, birth control pills, hypertension,
and thyroid abnormality. This makes the rhinomanometer potentially very useful to ENT’s.
4
Other Products.
Also in development is a Bifurcated Nasal Oral Cannula, which is a patented
nasal/oral pneumatic airflow tubing system that is applied to the nose and mouth of a patient.
This 3-port nasal cannula is designed to be used with a proprietary airflow filter for performing
one or two night sleep studies. The cannula is used by the patient for up to two nights and then
is disposed of. The nasal cannula and filters are intended to be attached to either the FloCHANNEL
or the Simple REM products.
In addition the Company is developing a FloPAP Mask, which is a patented patient nasal mask system
for the FloPAP device. CHAD anticipates providing several designs, offering an array of options
for the patient. Also in development is a FloPAP Patient Circuit, a patent pending patient circuit
(hoses) that is designed to be the only circuit that will work with the FloPAP product. The
patient circuit incorporates patient specific pneumatic connections that are also specific to the
FloPAP Humidifier.
Research and Development
For the years ended March 31, 2008, and 2007, the Company expended approximately $1,501,000 and
$1,466,000, (with $731,000 and $1,249,000 related to discontinued operations), on research and
development and has expended approximately $13,633,000 since its inception in August of 1982. The
Company operates in an industry that is subject to rapid technological change, and its ability to
compete successfully depends upon, among other things, its ability to stay abreast or ahead of new
technological developments. Accordingly, the Company expects to expend significant amounts for the
development or acquisition of new products or the improvement of existing products. In the next
fiscal year the Company expects to spend approximately $950,000 on development of its sleep product
projects. The Company conducts research and development internally and also utilizes the services
of outside firms and consultants for its research and development activities.
Licensing and Related Agreements
The Company has entered into license agreements (the “Inventor’s License Agreements”) agreements
with AirMatrix Technologies and ACOBA, LLC (the “Inventors”), with respect to unique diagnostic and
therapeutic products for the sleep disorder market.
Pursuant to the Inventor’s License Agreements, the Inventors granted to the Company an exclusive
license (with the right to grant sublicenses) to manufacture, use, and sell devices using the
licensed technologies for the sleep disorder market. The Inventor’s License Agreements provide
that the Company pay royalties to the Inventors on the net proceeds of sales of each device covered
by the agreement at rates ranging from four percent (4%) to eight percent (8%). The Company is
obligated to prosecute and defend, at its own expense, any infringement suits related to the
manufacture or sale of each device covered by any such agreement. Each Inventor’s License Agreement
continues until the expiration of the last to expire of any patent covering the related device or,
if no patent is issued, for 10 years.
Marketing
The Company’s marketing efforts will initially focus on sleep labs and will entail promotion of
products that sleep labs can utilize to provide improved diagnostics with no increase in cost. The
Company has also developed an “opinion leader” marketing strategy that takes advantage of the
Company’s relationships with leading university sleep research centers in Texas and California.
The FloCHANNEL has been under testing at Stanford University for approximately one year. The
FloCHANNEL device was introduced at the Associated Professional Sleep Societies (APSS) show in
Baltimore, Maryland in June 2008. The head of the Stanford University Sleep Clinic delivered a
lecture at the APSS show on the FloCHANNEL technology.
5
The Company will market its products directly to sleep labs throughout the United States. The
Company plans to introduce the sleep products with a sales force initially comprised of
manufacturers reps that will call on sleep labs and sleep physicians. An initial group of
manufacturers reps has been identified to launch the FloCHANNEL device in 2008. The Company plans
to hire up to three direct sales reps to augment the manufacturers sales reps as the business
expands. Sales support will be provided by technical service reps who will be involved in the
setup of the diagnostic devices in sleep labs. The Company will also utilize direct mail, trade
show attendance, trade advertising, and a web site to promote the benefits of its products to sleep
labs.
Manufacturing and Sources of Supply
Product development, which has been a joint effort of CHAD’s product development team and the
inventors based in St. Louis, will all be transferred to St. Louis. These employees will be housed
in facilities that the inventors are currently using and which the Company is already funding. The
Company’s current VP of Engineering will continue to supervise this team.
Contract manufacturers will be used to manufacture all products for the sleep market; no internal
manufacturing is presently planned. Device manufacturing will be performed by a supplier in the
upper Midwest that has extensive experience in manufacturing medical devices. The Company has
already qualified this supplier and orders for the first product, the FloCHANNEL device, have
already been placed. Tubing and masks will be made by a supplier in Hong Kong that has
successfully manufactured oxygen products for the Company for a number of years. The Company
believes alternative manufacturing arrangements would be available if necessary.
The Company is not aware of any shortages of materials necessary for the manufacture of its
products.
The Company has received ISO 13485 certification for its facility based on criterion developed by
the International Organization for Standardization, a quality standards organization headquartered
in Geneva, Switzerland. The primary component of the certification process is an audit of the
facility’s quality systems, which are conducted by an independent agency authorized to perform
conformity assessments under ISO guidelines and the Medical Devices Directive.
Customers, Backlog and Orders
The Company has not yet sold any of its products in development for the sleep disorder market.
Commercialization will begin after 510k clearance has been received from the Food and Drug
Administration for the FloCHANNEL diagnostic device. The Company will provide customers for the
sleep disorder products with a right to return merchandise for credit and require payment within a
time frame consistent with industry standards. The Company will provide warranties for certain of
its products based on industry standards and will accrue for the estimated expenses associated with
those warranties based on the best information available, primarily historical claims experiences.
The information below relates to sales of the Company’s oxygen products. The Company
completely exited the oxygen business as of March 2008, and there will be no further sales of
oxygen products.
Financial Information Relating to Foreign and
Domestic Operations and Export Sales
(in 000’s)
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2008
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2007
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2006
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Sales
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United States
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$
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10,166
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$
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15,795
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$
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17,996
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Canada
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144
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174
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193
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Japan
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241
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346
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506
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Europe
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702
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2,054
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3,337
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Indonesia
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175
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271
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42
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All other countries
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363
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341
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280
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Total
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$
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11,791
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$
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18,981
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$
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22,354
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All identifiable assets are located in the United States.
At March 31, 2008, the Company had no backlog of orders for any of its products.
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Competition
The Company’s primary competitors will be sleep industry leaders ResMed and Respironics Inc. (now a
wholly-owned subsidiary of Royal Philips Electronics), as well as many other suppliers of sleep
diagnostic and therapeutic equipment and supplies, some of which are substantially larger than the
Company. Many of these competitors have substantially greater financial, research and marketing
resources than the Company. Moreover, their products are often well established in the market and
have a track record of performance, which we lack. Nonetheless, we believe that the Company’s
unique technologies, which enable it to produce a therapeutic product with the ability to sense and
respond independently to airflow in both nostrils and the mouth, represents a significant
achievement which we believe will become a competitive advantage. Management believes that the
combination of a large, under-served and rapidly growing sleep market, and the FloCHANNEL’s
demonstrable advantages in therapeutic technology and patient comfort, should allow the Company to
achieve meaningful market penetration, provided that it can attract sufficient financial resources
to pursue its marketing plan.
Patents and Trademarks
The Company regards the products that it develops or licenses and its manufacturing processes as
proprietary and relies on a combination of patents, trademarks, trade secret laws, and
confidentiality agreements to protect its rights in its products. United States’ patents have been
issued covering eight of the technologies the Company is currently developing and applications have
been filed on thirteen additional technologies.
The Company pursues a policy of obtaining patents for appropriate inventions related to products
marketed or manufactured by the Company. The Company considers the patentability of products
developed for it to be significant to the success of the Company. To the extent that the products
to be marketed by the Company do not receive patent protection, competitors may be able to
manufacture and market substantially similar products. Such competition could have an adverse
impact upon the Company’s business.
There can be no assurance that patents, domestic or foreign, will be obtained with respect to the
Company’s products, or that, if issued, they will provide substantial protection or be of
commercial benefit to the Company. In addition, the patent laws of foreign countries may differ
from those of the United States as to the patentability of the Company’s products and processes
and, accordingly, the degree of protection afforded by foreign patents may be more or less than in
the United States.
In the United States, although a patent has a statutory presumption of validity, the issuance of a
patent is not conclusive as to such validity or as to the enforceable scope of its claims therein.
The validity and enforceability of a patent can be attacked by litigation after its issuance by the
U.S. Patent and Trademark Office. If the outcome of such litigation is adverse to the owner of the
patent in that the patent is held to be invalid, other parties may then use the invention covered
by the patent. Accordingly, there can be no assurance that patents with respect to the Company’s
products, if issued, will afford protection against competitors with similar products, nor can
there be any assurance that the patents will not be infringed upon or designed around by others.
Through patent searches, contacts in the industry, and representations and indemnities received
from licensors and development partners, the Company seeks to ensure that its products do not
infringe on the intellectual property rights claimed by others. However, interpretation of the
scope and validity of existing patent rights may differ, and no assurance can be given that the
Company products will in all cases not infringe on the rights of others. Moreover, any dispute
regarding potential infringement may require substantial management and financial resources to
defend.
7
The Company has obtained U.S. registration for the trademark “FloCHANNEL” and “FLOPAP
.
”
A series of foreign applications to register the trademark “FLOPAP” in a number of countries of
commercial interest to the Company have been filed.
Governmental Regulation
The commercialization of the sleep diagnostic and therapy devices is subject to the Federal Food,
Drug and Cosmetic Act (the “Food and Drug Act”) and to regulations issued thereunder. The Company
anticipates that commercialization of other devices that it intends to market will also be subject
to the Food and Drug Act. The Food and Drug Act is administered by the Food and Drug Administration
(“FDA”), which has authority to regulate the marketing, manufacturing, labeling, packaging, and
distribution of products subject to the Food and Drug Act. In addition, there are requirements
under other federal laws and under state, local, and foreign statutes that may apply to the
manufacture and marketing of the Company’s products. The Medical Device Amendments of 1976 to the
Food and Drug Act (the “Amendments”) and the Safe Medical Device Act of 1990 significantly extended
the authority of the FDA to regulate the commercialization of medical devices. The Amendments
established three (3) classifications of medical devices: Class I, Class II, and Class III. With
respect to all three (3) classes, the general provisions of the Food and Drug Act prohibit
adulteration and misbranding. A medical device may be adulterated if the device is or could be
adversely affected by its methods of manufacture, storage, or packaging. A medical device may be
misbranded if its labeling is false or misleading or if its labeling does not contain specific
information required by law applicable to such type of device. In addition, failure to register a
medical device covered under the Food and Drug Act will render it misbranded under the Food and
Drug Act.
All manufacturers of medical devices must register with the FDA and list all medical devices
produced by them. This listing must be updated annually. In addition, prior to commercial
distribution of additional devices, the manufacturer must file with the FDA and receive approval
prior to the commencement of such commercial distribution, a notice setting forth certain
information about the device, including the classification into which the manufacturer believes it
falls.
Class I devices are subject only to the general controls concerning adulteration, misbranding, good
manufacturing practices, record keeping, and reporting requirements. Class II devices must, in
addition, comply with performance standards as promulgated by the FDA.
The Company has registered with the Bureau of Medical Devices of the FDA as a Medical Device
Establishment and with the Department of Health Services of the State of California as a Medical
Device Manufacturer. In addition, the Company has developed procedures to comply with FDA
standards concerning good manufacturing practices, record keeping, and reporting and is ISO 13485
certified.
Employees
As of June 23, 2008, CHAD had 4 full-time employees. None of the Company’s employees are
represented by unions, and the Company believes its employee relations are satisfactory.
Item 1A.
Risk Factors
Forward-looking statements in this report reflect the Company’s current views and expectations.
However, such forward looking statements are subject to the risks and uncertainties described
herein which may cause future operating results to differ materially from currently anticipated
results.
We depend upon our unproven products for the sleep disorder market for our future success.
Our future results will depend upon our ability to successfully complete the development of
our sleep disorder products and our ability to commercially introduce such products. These products
are electro-mechanical devices designed to be used by physicians and sleep clinics to diagnose and
treat sleep
8
disorders such as apnea. All of our historical revenues have been generated from the sale of oxygen
therapy products. None of our sleep disorder products are currently available on a commercial
basis. Several remain in the development stage. We currently expect to begin marketing the first of
our sleep disorder products in the third calendar quarter of 2008.
We face significant challenges in executing our plan to enter the sleep disorder market. None of
our sleep disorder products have been commercially proven and we do not have an established
presence in this sector of the health care market. We will face competition from several well
established manufacturers of products for the sleep disorder market, all of whom have substantially
greater financial and marketing resources than we have. Our ability to enter this market will
depend upon proving the efficacy of our products, persuading physicians, sleep clinics and others
of the efficacy and technical advantages which we believe our sleep disorder products will offer,
developing a strategy for marketing our sleep disorder products and obtaining the financial
resources to support these efforts. As with any business which has not established its commercial
viability, there is a high risk that we will fail in our efforts to implement this strategy.
Most of our sleep disorder products remain in the development stage and we do not know when,
if ever, we will generate any revenues from such products.
Most of our products for the sleep disorder market remain in the development stage. Before we can
commercially introduce such products, we must complete the development process, undertake clinical
tests to demonstrate the efficacy and safety of such products, modify the products to the extent
that clinical testing indicates further improvements are necessary and obtain marketing approval
from the Food & Drug Administration. Each of these steps is subject to multiple risks which could
prevent or delay the commercial introduction of such products. As a result, it is not possible for
us to predict when, if ever, we will generate revenues from the sale of such products.
We will require additional financial resources to implement our strategy with respect to the
sleep disorder market. Failure to obtain such resources will diminish our prospects for success.
In order to have adequate funding to expedite the development and commercialization of our sleep
disorder products, we will require additional funding. Although several potential investors and
strategic partners have expressed a preliminary interest in our sleep disorder products, we do not
currently have in place any commitments for funding to support our strategy for the sleep disorder
market. If such funding is not obtained, then we will be dependent upon the net proceeds generated
by the Asset Sale and the sale of our transfilling assets. The net proceeds from the sale of our
oxygen conserver assets and the transfilling assets, after payment of all of our secured
obligations, termination expenses and transaction fees, are not sufficient to enable us to continue
our operations for the next 12 months.
If we do raise additional funding through the sale of securities to support our sleep disorder
strategy, the terms of any such financing may significantly dilute the equity interests of our
current shareholders. Moreover, such funding may be in the form of senior equity with liquidation
and other preferences over our common stock. The funding could also be in the form of convertible
or non-convertible debt which could place significant restrictions upon our business operations.
If we are unable to raise sufficient funds to implement our strategy for the sleep disorder market,
then our prospects for success will be materially diminished as we will lack the ability to
aggressively market our sleep disorder products.
Our future results will depend upon our ability to continue to successfully introduce new
products. Difficulties encountered in introducing new products will harm our future operating
results.
The sleep disorder market is subject to continuing technological change. Our products may become
obsolete if we do not stay abreast of such changes and introduce new and improved products.
9
There are a number of significant risks involved with new product introductions. Problems
encountered in the design and development of new products or in obtaining regulatory clearances to
market the products may impair our ability to introduce any new product in a timely manner.
Competitors may leapfrog our development efforts, particularly if our development efforts are
delayed.
The commercial success of any new products we do introduce will depend upon the health care
community’s perception of such products’ capabilities, clinical efficacy and benefit to patients.
In addition, prospective sales will be impacted by the degree of acceptance achieved among patients
suffering from sleep disorders. Our prospective customers may be reluctant to try unproven products
which we introduce. Our ability to successfully introduce new products in a new market sector such
as the sleep disorder market will also be complicated by our lack of experience and our lack of an
established reputation in this market. Thus, the success of any new products we may introduce is
unpredictable and our future results may suffer if we are unable to successfully introduce new
products.
Failure to protect our intellectual property rights could hurt our ability to compete in the
sleep disorder market.
The success of our strategy for the sleep disorder market is dependent to a significant
extent upon our ability to develop products that have what we believe will be certain technical
advantages over currently available sleep disorder products. Such technical advantages are derived
from proprietary technologies and rights to patented inventions. Our ability to adequately protect
such intellectual property rights is therefore crucial to our potential success in the sleep
disorder market. We pursue a policy of protecting our intellectual property rights through a
combination of patents, trademarks, license agreements, confidentiality agreements and protection
of trade secrets. To the extent that our products do not receive patent protection, competitors may
be able to market substantially similar products, thereby eroding our potential market share.
Moreover, claims that our products infringe upon the intellectual property rights of any third
party could impair our ability to sell certain products or could require us to pay license fees,
thereby increasing our costs.
If we are unable to stay abreast of continuing technological change, our products may become
obsolete, resulting in a decline in sales and profitability.
The health care industry is characterized by rapid technological change. We have limited internal
research and development capabilities. Historically, we have contracted with outside parties to
develop new products. Many of our competitors have substantially greater funds and facilities to
pursue development of new products and technologies. If we are unable to maintain our technological
edge, our product sales will suffer and we may not achieve profitability.
Our operating results would be adversely affected if we incur uninsured losses due to product
liability claims.
The nature of our business subjects us to potential legal actions asserting that we are liable for
personal injury or property loss due to alleged defects in our products. Although we maintain
product liability insurance in an amount which we believe to be customary for our size, there can
be no assurance that the insurance will prove sufficient to cover the costs of defense and/or
adverse judgments entered against the Company. To date, we have not experienced any significant
losses due to product liability claims. However, given the use of our products by infirm patients,
there is a continuing risk that such claims will be asserted against us.
10
Item 1B.
Unresolved Staff Comments.
None.
Item 2.
Properties
.
The Company’s offices and manufacturing facilities are situated in premises located in Chatsworth,
California, and consist of approximately 55,500 square feet, at a monthly rental fee of $36,000
pursuant to a lease expiring in June 2008. Subsequent to the completion of its manufacturing
transition agreements, the Company will relocate its offices to an approximately 1,200 square foot
office/warehouse facility also located in Chatsworth, California, in June 2008 at a monthly fee of
$1,200 plus taxes and utilities. The Company does not own any real property and does not
anticipate acquiring any in the foreseeable future.
Item 3.
Legal Proceedings
.
The Company becomes involved in legal proceedings in the ordinary course of business. The Company
maintains product liability insurance in an amount it deems customary in the industry for
protection of the Company against potential product liability claims. Although the Company
believes its product liability insurance is sufficient and no pending legal proceeding poses a
material threat, no assurance can be given that pending or future proceedings will not have a
material impact on the Company’s financial condition or results of operations.
Item 4.
Submission of Matters to a Vote of Security Holders
.
On January 31, 2008 the Company held a Special Meeting of shareholders wherein the shareholders
considered and voted upon a proposal to approve the sale of the Company’s oxygen conserver business
in accordance with the terms and conditions of an Asset Purchase Agreement, dated as of November
16, 2007, between Inovo, Inc., a Florida corporation and the Company (the “Asset Sale”). The
shareholders also voted upon a proposal to adjourn the special meeting for the purpose of
soliciting additional proxies, if necessary, with respect to the Asset Sale. The transaction was
approved by more than 70% of the outstanding shares as of the record date of the Company. More
than 99% of the shares represented at the Special Meeting were voted in favor of each proposal.
More specifically, the Company’s shareholders approved both proposals by the votes indicated below:
|
|
|
|
|
|
|
|
|
Shares
|
|
For
|
|
|
7,183,378
|
|
|
Against
|
|
|
49,300
|
|
|
Abstain
|
|
|
8,087
|
|
11
PART II
Item 5.
Market for Registrant’s Common Equity, R elated Stockholder Matters, and Issuer
Purchases of Equity Securities
.
Market Information
The Company’s common stock is quoted on the American Stock Exchange under the symbol “CTU.” The
following table sets forth the high and low closing sale prices for the common stock for the
calendar quarters indicated:
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Quarter Ended
|
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High
|
|
Low
|
|
June 30, 2006
|
|
|
3.05
|
|
|
|
2.41
|
|
|
September 30, 2006
|
|
|
2.85
|
|
|
|
1.46
|
|
|
December 31, 2006
|
|
|
3.06
|
|
|
|
1.86
|
|
|
March 31, 2007
|
|
|
2.42
|
|
|
|
1.42
|
|
|
June 30, 2007
|
|
|
2.19
|
|
|
|
1.39
|
|
|
September 30, 2007
|
|
|
1.41
|
|
|
|
.68
|
|
|
December 31, 2007
|
|
|
.96
|
|
|
|
.26
|
|
|
March 31, 2008
|
|
|
.54
|
|
|
|
.26
|
|
As of June 17, 2008, there were approximately 216 shareholders of record and approximately 2,000
beneficial owners of the Company’s common stock.
Dividend Policy
The Company has historically retained all earnings to provide funds for the operation and expansion
of the business. Any determination to pay cash dividends on the common stock in the future will be
that the sole discretion of our Board of Directors.
Securities Authorized for Issuance Under Equity Compensation Plans
The following table provides information as of March 31, 2008, with respect to the shares of our
common stock that may be issued under our existing equity compensation plans.
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of securities
|
|
|
|
Number of securities
|
|
|
|
|
|
remaining available for future
|
|
|
|
to be issued upon
|
|
Weighted-average
|
|
issuance under equity
|
|
|
|
exercise of
|
|
exercise price of
|
|
compensation plans
|
|
|
|
outstanding options,
|
|
outstanding options,
|
|
[excluding securities reflected
|
|
|
|
warrants and rights
|
|
warrants and rights
|
|
in column (a)]
|
|
Plan Category
|
|
(a)
|
|
(b)
|
|
(c)
|
|
|
|
Plan Approved by Security Holders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1994 Stock Option Plan
|
|
|
829,000
|
|
|
$
|
1.95
|
|
|
|
-0-
|
|
|
2004 Equity Compensation Plan
|
|
|
15,000
|
|
|
$
|
3.45
|
|
|
|
735,000
|
|
|
Plans Not Approved by Security
Holders
|
|
|
-0-
|
|
|
|
-0-
|
|
|
|
-0-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
844,000
|
|
|
|
|
|
|
|
735,000
|
|
12
Stock Performance Graph
The following graph compares or cumulative shareholder return on the common stock (no dividends
have been paid thereon) with the cumulative total return of the Hemscott Index and the Surgical and
Medical Instruments Index, from April 1, 2002 through March 31, 2008. The comparison assumes an
investment of $100 on April 1, 2003 in the Company’s common stock and in each of the foregoing
indices.
The historical stock market performance of the common stock shown below is not necessarily
indicative of future stock performance.
This performance graph shall not be deemed “filed” with the SEC or subject to Section 18 of the
Exchange Act, nor shall it be deemed incorporated by reference in any of our filings under the
Securities Act of 1933, as amended.
13
Item 6. Selected Financial Data.
None.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Overview
Chad Therapeutics, Inc., a California corporation (the “Company”) was organized in August 1982 to
develop, produce, and market respiratory care devices designed to improve the efficiency of oxygen
delivery systems for both home and hospital treatment of patients who require supplemental oxygen.
The Company introduced its first respiratory care device in the market in June of 1983 and
introduced additional respiratory care devices in subsequent years. During the quarter ended March
31, 2008, the Company sold all of its assets related to the oxygen business.
The Company is currently focused exclusively on the development and commercialization of diagnostic
and therapeutic devices for the multi-billion dollar sleep disorder market. Management believes
that strong growth in the market for diagnostic and therapeutic devices for the sleep disorder
market will continue to be driven by (1) increased understanding of the causes, symptoms and
effects of sleep disorders, (2) growing clinical focus on the relationships between certain sleep
disorders and certain serious diseases such as congestive heart disease, (3) increasingly frequent
and accurate diagnosis of sleep disorders and (4) continued growth in the number of sleep
diagnostic laboratories. In addition, on March 14, 2008, the Centers for Medicare Services (“CMS”)
announced that, in addition to polysomnography performed in sleep laboratories, it will provide
reimbursement for unattended home sleep testing with certain categories of devices. Management
believes that this CMS ruling will lead to home testing of a substantial number of patients who
would not otherwise have access to testing and, consequently, to a substantially larger market for
treatment devices such as the Company’s FloPAP device.
On November 16, 2007, the Company entered into a definitive agreement, subject to shareholder
approval, to sell to Inovo, Inc. (the “Buyer”) substantially all of the assets of the Company
related to the oxygen conserver business including accounts receivable, inventory, and certain
equipment and intellectual property (the “Asset Sale”) pursuant to an Asset Purchase Agreement (the
“APA”). Pursuant to the APA, the Buyer assumed certain liabilities and obligations related to the
Company’s oxygen conserver business. The Company’s shareholders voted to approve the sale of the
Company’s oxygen conserver business on January 31, 2008 and the Asset Sale was completed for
$5,250,000 on February 15, 2008. On March 6, 2008, the Company entered into an Asset Purchase
Agreement (the “Purchase Agreement”) with Respironics, Inc., (“Respironics”). Pursuant to the
Purchase Agreement, Respironics acquired the Company’s assets related to the transfilling oxygen
business, the Total O2 Delivery System, including the OMNI-5 In-Home Filling System, OMNI-2 In-Home
Filling System, Omni Fill technology and the Company’s Post Valve patent for the purchase price of
$1,825,000. Under the terms of the Purchase Agreement, Respironics assumed certain liabilities and
obligations related to the Company’s transfilling oxygen business and the Company agreed to
indemnify Respironics for expenses arising out of any breach of its representations or warranties.
As a result of the discontinued operations presentation, the net earnings (loss) related to the
discontinued operations of $(3,942,000) and $283,000 for the fiscal years 2008 and 2007
respectively has been presented in the Statements of Operations as a component of earnings (loss)
from discontinued operations.
During the next twelve months, the Company intends to seek outside financing arrangements in order
to facilitate its ability to fund anticipated capital expenditures, support its development of the
sleep products, and enhance its working capital resources. Financing may be obtained through the
sale of equity or debt securities, through the establishment of credit arrangements or through some
combination of the foregoing. The Company has no established lines of credit or other arrangements
in place to obtain working capital, and no assurance can be given regarding if and when other
sources of working capital would be available. Moreover, the Company does not have in place any
arrangements to raise additional funds through the sale of securities and it is not possible at
this time to predict the terms upon which securities might be sold, or if the Company can raise any
funds from prospective investors.
14
The operating results discussed below relate primarily to discontinued operations. Accordingly,
the Company’s future operating results will likely be materially different form the historical
results discussed below.
Results of Operations
The Company’s operating results deteriorated significantly during the year ended March 31, 2008.
Net sales for fiscal 2008, which result entirely from discontinued operations, decreased by
$7,190,000 (37.9%) as compared to the prior year. The primary reasons for the decrease in sales
were (i) a decline of 35.2% in unit sales of conservers, (ii) price reductions on domestic
conservers, (iii) decreases in TOTAL O2 sales and (iv) a decline in sales to foreign distributors.
Revenues from conserver and therapeutic device sales decreased by 41.2% as compared to prior year.
Conserver sales to the Company’s largest customer declined by approximately 42.4% as compared to
the prior year’s period as the Company has encountered increased competition in the sale of
pneumatic conservers to such customer.
Revenues from TOTAL O2 sales decreased 59.1% as compared to the same period in the prior year.
Ongoing concerns regarding potential additional changes to reimbursement procedures continued to
negatively impact sales of the TOTAL O2 System.
Sales to foreign distributors represented 13.8% and 16.8% for the years ended March 31, 2008 and
2007, respectively. Foreign sales declined by 49.0% as compared to the same period in the previous
year. This decrease was driven by a 66.9% decrease in conserver sales as compared to the same
period in the prior year.
Cost of sales, all of which relates to discontinued operations, as a percent of net sales increased
from 72.1% to 75.7% as compared to the same period in the prior year. The increase in cost of
sales as a percentage of sales was primarily due to the decrease in sales as compared to consistent
fixed manufacturing costs, as well as continued downward price pressures in the marketplace and an
increase in sales as a percentage of total sales to high volume purchasers that receive discounted
rates.
Selling, general, and administrative expenditures, including costs from discontinued operations,
increased from 33.3% to 50.4% as a percentage of net sales as compared to the same period in the
prior year. While the Company’s ongoing cost reduction efforts have decreased actual selling,
general, and administration expenditures, decreases in sales revenues have resulted in selling,
general, and administrative costs increasing as a percentage of net sales. Research and development
expenses, including costs from discontinued operations, increased by $35,000 as compared to the
same periods in the prior year. Currently management expects research and development expenditures
to total approximately $950,000 in the fiscal year ending March 31, 2009, on projects to enhance
and expand the Company’s sleep product line. During fiscal year 2008, the Company spent $770,000 on
research and development related to development of its sleep product line and $731,000 on its
oxygen products which were sold in the fourth quarter of fiscal 2008. The Company wrote down a
$48,000 license fee during the second quarter of fiscal year 2008 when the Company determined to
stop development of the product lines related to that license fee, and another $245,000 in patent
expenses and fees when the Company sold its rights to the oxygen business in the fourth quarter.
The Company has Federal net operating loss carryforwards of $12,000,000 of which $1,459,000 expires
in 2027 and the balance in 2028 and California net operating loss carryforwards of $11,255,000 of
which $3,442,000 expires in 2013 and the balance expiring in 2014. In assessing the realizability
of deferred tax assets, management considers whether it is more likely than not that some portion
or all of the deferred tax asset will not be realized. At March 31, 2008 and 2007, the Company’s
deferred tax assets are fully offset by a valuation allowance. The Company will continue to assess
the valuation allowance and to the extent it is determined that such allowance is no longer
required, the tax benefit of the remaining net deferred tax assets may be recognized in the future.
15
Financial Condition
Liquidity
We do not have adequate capital resources to meet our obligations for the next 12 months. At March
31, 2008, the Company had cash totaling $2,068,000 or 58.4% of total assets, as compared to
$375,000 (3.2% of total assets) at March 31, 2007. Net working capital decreased from $7,266,000
at March 31, 2007, to $352,000 at March 31, 2008. Net accounts receivable decreased $1,850,000
during the twelve months ended March 31, 2008, due to the sale of the Company’s oxygen product line
as well as certain related accounts receivable. During the same period, the Company sold all of
its inventory due to the sale of its oxygen product line.
Through June 30, 2008, the Company provided services under transition agreements with Inovo, Inc.
and Respironics, Inc. Upon termination of those services, the Company has no further source of
income until it is able to generate revenues from the sale of its products for the sleep disorder
market. The Company hopes to receive permission from the FDA to begin marketing the first of its
sleep products in the enar future; however, no assurance can be given with respect to when the
Company will begin to generate revenues fro, the sale of such products.
The Company’s current operating plan contemplates monthly cash requirements of approximately
$190,000 to pay for the development and commercialization of our products for the sleep disorder
market. In addition, we have outstanding certain severance obligations as a result of the
termination of certain employees following the sale of our oxygen assets.
As of June 30, 2008, the aggregate amount of such severance obligation is approximately $790,000
with$529,000 payable in August 2008, and $261,000 to be paid in December 2008.
In order to have adequate funding to expedite the development and commercialization of our sleep
disorder products and meet our outstanding obligations, we will require additional funding.
Although several potential investors and strategic partners have expressed a preliminary interest
in our sleep disorder products, we do not currently have in place any commitments for funding.
If we do raise additional funding through the sale of securities to support our sleep disorder
strategy, the terms of any such financing may significantly dilute the equity interests of our
current shareholders. Moreover, such funding may be in the form of senior equity with liquidation
and other preferences over our common stock. The funding could also be in the form of convertible
or non-convertible debt which could place significant restrictions upon our business operations.
If we are unable to raise sufficient funds to implement our strategy for the sleep disorder market,
then our prospects for success will be materially diminished as we will lack the ability to
aggressively market our sleep disorder products. Moreover, we may lack sufficient funds to meet
all of our severance and other obligations as they mature.
Capital Resources
Historically, the Company had depended primarily upon its cash flow from operations to finance its
inventory and operating expenses and to meet its capital requirements. However, recent operating
trends have required the Company to seek outside financing in order to enhance its cash resources.
The Company’s cash flow for the year ended March 31, 2008, was negative and the Company cannot
predict when it will generate a positive cash flow from operations.
In March 2007, the Company entered into a one-year factoring arrangement that provided for the sale
of up to $1,500,000 of the Company’s accounts receivable. Assignments under the agreement incurred
interest at the bank’s prime rate plus two percent (2%) to three percent (3%) depending on the
total accounts receivable balance. The Company had a minimum monthly interest payment of $6,000
16
beginning April 2007. The Company voluntarily terminated the factoring agreement on July 30, 2007
and paid all amounts due thereunder with proceeds from their financing arrangement with Calliope
Capital discussed below.
On July 30, 2007, the Company entered into a financing transaction with Calliope Capital
Corporation , a Delaware corporation (the “Investor”) pursuant to which the Company issued to the
Investor a $750,000 convertible term note (“Convertible Note”) and a $2,750,000 revolving credit
line (“Credit Line”), all secured by the Company’s assets. The Convertible Note is payable in equal
installments over 36 months and bears interest at prime plus 2%, and the Credit Line bears interest
at prime plus 1.5%. A portion of the financing was used to pay all outstanding obligations on the
Company’s factoring arrangement. The Company voluntarily terminated the Credit Line and
Convertible Note on February 15, 2008 and paid all amounts due thereunder with proceeds from the
sale of the oxygen conserver assets to Inovo.
In order to address the Company’s limited ability to draw against its Credit Line at the end of the
second fiscal quarter, on January 2, 2008, the Company entered a Subordinated Secured Note and
Warrant Purchase Agreement (the “Credit Facility”) with Mr. Earl Yager and Mr. Thomas Jones, our
Chief Executive Officer and our Chairman of the Board, respectively. The Company entered into the
financing arrangement after it was unsuccessful in obtaining financing on acceptable terms from a
third party. The terms of the financing arrangement were negotiated and approved by the Company’s
independent directors who concluded that the terms were more favorable to the Company than those
available from third party lenders. Pursuant to the terms of the Credit Facility, the Company may
draw an aggregate of $1,000,000, subject to certain conditions. As of February 12, 2008, the
Company had borrowed $550,000 under this facility. The Company voluntarily terminated the Credit
Facility on February 15, 2008 and paid all amounts due thereunder with proceeds from the sale of
the oxygen conserver assets to Inovo.
In connection with the Credit Facility, Mr. Yager and Mr. Jones each received 321,428 warrants to
purchase our common stock at a price per share equal to $.28 (the average closing price of our
common stock on the American Stock Exchange for the five days immediately preceding the initial
funding under the Credit Facility). The warrants have a term of five years.
Employee obligations consist of an employment agreement (the “Employment Agreement”) with Thomas E.
Jones, Chairman of the Board of Directors. The Employment Agreement does not have a specific term
and provides for a base salary of $160,000 per year, which is subject to annual review of the Board
of Directors. The Employment Agreement may be terminated at any time by the Company, with or
without cause, and may be terminated by Mr. Jones upon 90-days’ notice. If Mr. Jones resigns or is
terminated for cause (as defined in the Employment Agreement), he is entitled to receive only his
base salary and accrued vacation through the effective date of his resignation or termination. If
Mr. Jones is terminated without cause, he is entitled to receive a severance benefit in accordance
with the Company’s Severance and Change of Control Plan, or if not applicable, a severance benefit
equal to 200% of his salary and incentive bonus for the prior fiscal year. In estimating its
contractual obligation, the Company has assumed that Mr. Jones will voluntarily retire at the end
of the year he turns 65 and that no severance benefit will be payable. This date may not represent
the actual date the Company’s payment obligations under the Employment Agreement are extinguished.
In addition to the severance agreement with Mr. Jones, the Company is also a party to a severance
agreement with its CEO. Under the agreement, the CEO is entitled to a severance pay equal to 200%
of his annual salary upon a change of duties, as defined in the agreement. The company has not
recorded the obligation under the severance agreement for these two individuals because 100% of
their salaries are still being accrued, and management believes a change in duties has not
occurred. However, only a small fraction of their salary has been paid to them. Should the
Company not pay their salary in full, or a change of duties occur, the Company will be obligated to
pay them $800,000 in severance pay.
The Company has not adopted any programs that provide for post-employment retirement benefits;
however, it has on occasion provided such benefits to individual employees. The Company does not
enter into any transactions in derivatives, and has no material transactions with any related
parties.
17
Off-Balance Sheet Arrangements
The Company does not have any off-balance sheet arrangements with any special purpose entities or
any other parties.
Critical Accounting Policies
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 disclosures 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 significantly from those estimates under different assumptions and
conditions. Management believes that the following discussion addresses the accounting policies
and estimates that are most important in the portrayal of the Company’s financial condition and
results.
Allowance for doubtful accounts — the Company provides a reserve against receivables for estimated
losses that may result from our customers’ inability to pay. The amount of the reserve is based on
an analysis of known uncollectible accounts, aged receivables, historical losses, and
credit-worthiness. Amounts later determined and specifically identified to be uncollectible are
charged or written off against this reserve. The likelihood of material losses is dependent on
general economic conditions and numerous factors that affect individual accounts.
Inventories — the Company provides a reserve against inventories for excess and slow moving items.
The amount of the reserve is based on an analysis of the inventory turnover for individual items in
inventory. The likelihood of material write-downs is dependent on customer demand and competitor
product offerings.
Intangible and long-lived assets — The Company’s intangible assets consist of license fees and the
costs associated with obtaining patents including legal and filing fees. At March 31, 2008, all of
these intangible assets relate to products under development for the sleep disorder market. The
Company uses actual costs when recording the fair value of these intangible assets. If there is a
triggering event, the Company assesses whether or not there has been an impairment of intangible
and long-lived assets in evaluating the carrying value of these assets. Assets are considered
impaired if the carrying value is not recoverable over the useful life of the asset. If an asset
is considered impaired, the amount by which the carrying value exceeds the fair value of the asset
is written off. In assessing the carrying amounts of the assets related to the sleep disorder
market, the Company has considered the size of the market and potential future cash flows for these
products based on statistics available through the National Institute of Health and Medicare, as
well as data from other professional sources. In August 2007, the Company discontinued development
of a product line resulting in the write-off of $48,000 in license fees relating to the product
line no longer in development. The Company bases the useful life of its intangible assets on the
assets patent life, currently 17 years. The Company utilizes patent life as its useful life due to
its product history. The Company’s experience has been that technology supported by the patents
the Company has established is utilized for the entire life of the patent. The likelihood of a
material change in the Company’s reported results is dependent on each asset’s ability to continue
to generate income, loss of legal ownership or title to an asset, and the impact of significant
negative industry or economic trends.
Deferred income taxes — the Company provides a valuation allowance to reduce deferred tax assets to
the amount expected to be realized. The likelihood of a material change in the expected
realization of these assets depends on the Company’s ability to generate future taxable income.
Revenue recognition — The Company recognizes revenue when title and risk of loss transfers to the
customer and the earnings process is complete. Under a sales-type lease agreement, revenue is
recognized at the time of shipment with interest income recognized over the life of the lease. The
Company records all shipping fees billed to customers as revenue, and related costs as cost of
goods sold, when incurred.
18
Recently Issued Accounting Standards
Accounting standards promulgated by the Financial Accounting Standards Board change periodically.
Changes in such standards may have an impact on the Company’s future financial position.
In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option of Financial Assets and
Financial Liabilities.” SFAS No. 159 permits companies to choose to measure certain financial
instruments and certain other items at fair value. The standard requires that unrealized gains and
losses on items for which the fair value option has been elected by reported in earnings. SFAS No.
159 is effective as of the beginning of the entity’s first fiscal year that begins after November
15, 2007. The Company is currently evaluating the impact that SFAS No. 159 will have on its
financial statements.
In June 2006, the FASB issued interpretation no. 48,
Accounting for Uncertainty in Income Taxes- an
interpretation of FASB Statement No. 109
(FIN 48). FIN 48 clarifies the accounting for uncertainty
in income taxes recognized in an enterprise’s financial statements in accordance with FASB
Statement No. 109,
Accounting for Income Taxes
(SFAS 109). This Interpretation prescribes a
recognition threshold and measurement attribute for the financial statement recognition and
measurement of a tax position taken or expected to be taken in a tax return. This Interpretation
also provides guidance on derecognition, classification, interest and penalties, accounting in
interim periods, disclosure, and transition. FIN 48 is effective for fiscal years beginning after
December 15, 2006. FIN 48 did not have any significant impact on the Company’s financial
statements.
Item 7a. Quantitative and Qualitative Disclosures About Market Risk.
The Company has no significant exposure to market risk sensitive instruments or contracts.
19
Item 8. Financial Statements and Supplementary Data.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders
CHAD Therapeutics, Inc.
We have audited the accompanying balance sheets of CHAD Therapeutics, Inc. as of March 31, 2008 and
2007, and the related statements of operations, stockholders’ equity, and cash flows for the years
then ended. These financial statements are the responsibility of the Company’s management. Our
responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material misstatement. The
Company is not required to have, nor were we engaged to perform, an audit of its internal control
over financial reporting. Our audit included consideration of internal control over financial
reporting as a basis for designing audit procedures that are appropriate in the circumstances, but
not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control
over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material
respects, the financial position of CHAD Therapeutics, Inc. as of March 31, 2008 and 2007, and the
results of their operations and their cash flows for the years then ended, in conformity with
accounting principles generally accepted in the United States of America.
The accompanying financial statements have been prepared assuming that the Company will continue as
a going concern. As discussed in Note 1 to the financial statements, the Company has disposed of
all of its assets related to its oxygen business, from which it generated all of its revenue, and
has sustained recurring operating losses from operations. These factors, among others, raise
substantial doubt about the Company’s ability to continue as a going concern. Management’s plans
in regards to these matters are also described in Note 1. The financial statements do not include
any adjustments that might result from the outcome of this uncertainty.
/s/ Rose, Snyder & Jacobs
A Corporation of Certified Public Accountants
Encino, California
June 18, 2008
20
CHAD THERAPEUTICS, INC.
Balance Sheets
March 31, 2008 and 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
2,068,000
|
|
|
$
|
375,000
|
|
|
Accounts receivable, less allowance for
doubtful accounts of $166,000 at
March 31, 2008, and $38,000 at
March 31, 2007
|
|
|
526,000
|
|
|
|
2,376,000
|
|
|
Income taxes refundable
|
|
|
1,000
|
|
|
|
291,000
|
|
|
Inventories (Note 2)
|
|
|
—
|
|
|
|
6,557,000
|
|
|
Prepaid expenses and other assets
|
|
|
126,000
|
|
|
|
321,000
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
2,721,000
|
|
|
|
9,920,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, at cost
|
|
|
65,000
|
|
|
|
6,186,000
|
|
|
Less accumulated depreciation
|
|
|
30,000
|
|
|
|
5,501,000
|
|
|
|
|
|
|
|
|
|
|
Net property and equipment
|
|
|
35,000
|
|
|
|
685,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangible assets, net
|
|
|
761,000
|
|
|
|
1,107,000
|
|
|
Other assets
|
|
|
25,000
|
|
|
|
36,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
3,542,000
|
|
|
$
|
11,748,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
95,000
|
|
|
$
|
1,282,000
|
|
|
Accrued expenses
|
|
|
2,274,000
|
|
|
|
1,372,000
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
2,369,000
|
|
|
|
2,654,000
|
|
|
Commitments and contingencies (Note 10)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders’ equity:
|
|
|
|
|
|
|
|
|
|
Common shares, $.01 par value, authorized
40,000,000 shares; 10,180,000 and 10,180,000
shares issued and outstanding
|
|
|
14,208,000
|
|
|
|
13,526,000
|
|
|
Accumulated deficit
|
|
|
(13,035,000
|
)
|
|
|
(4,432,000
|
)
|
|
|
|
|
|
|
|
|
|
Total shareholders’ equity
|
|
|
1,173,000
|
|
|
|
9,094,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders’ equity
|
|
$
|
3,542,000
|
|
|
$
|
11,748,000
|
|
|
|
|
|
|
|
|
|
See accompanying notes to financial statements.
21
CHAD THERAPEUTICS, INC.
Statements of Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended
|
|
|
|
|
March 31,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
Costs and expenses:
|
|
|
|
|
|
|
|
|
|
Selling, general, and administrative
|
|
$
|
2,293,000
|
|
|
$
|
2,545,000
|
|
|
Research and development
|
|
|
770,000
|
|
|
|
217,000
|
|
|
|
|
|
|
|
|
|
|
Costs and expenses from continuing operations
|
|
|
3,063,000
|
|
|
|
2,762,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Income
|
|
|
27,000
|
|
|
|
62,000
|
|
|
Interest Expense
|
|
|
1,480,000
|
|
|
|
5,000
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations before
income tax expense
|
|
|
(4,516,000
|
)
|
|
|
(2,705,000
|
)
|
|
Income tax expense
|
|
|
4,000
|
|
|
|
992,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
from continuing operations
|
|
|
(4,520,000
|
)
|
|
|
(3,697,000
|
)
|
|
Discontinued operations (Note 3)
|
|
|
|
|
|
|
|
|
|
Gain (Loss) from discontinued operations
|
|
|
(3,642,000
|
)
|
|
|
283,000
|
|
|
Loss on sale
|
|
|
(441,000
|
)
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(8,603,000
|
)
|
|
$
|
(3,414,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted loss per share,
continuing operations
|
|
$
|
(0.45
|
)
|
|
$
|
(0.36
|
)
|
|
|
|
|
|
|
|
|
|
Basic and diluted loss per share,
disconintued operations
|
|
$
|
(0.40
|
)
|
|
$
|
0.02
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total basic and diluted loss per share
|
|
$
|
(0.85
|
)
|
|
$
|
(0.34
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted shares outstanding:
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
10,180,000
|
|
|
|
10,170,000
|
|
|
Diluted
|
|
|
10,180,000
|
|
|
|
10,170,000
|
|
See accompanying notes to condensed financial statements.
22
CHAD THERAPEUTICS, INC.
Statements of Shareholders’ Equity
For the years ended March 31, 2008 and 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Shares
|
|
|
Accumulated
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Deficit
|
|
|
Balance as of March 31, 2006
|
|
|
10,158,000
|
|
|
|
13,413,000
|
|
|
$
|
(1,018,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based
compensation - options
|
|
|
—
|
|
|
|
33,000
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation -
restricted stock
|
|
|
22,000
|
|
|
|
80,000
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
—
|
|
|
|
—
|
|
|
|
(3,414,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of March 31, 2007
|
|
|
10,180,000
|
|
|
|
13,526,000
|
|
|
|
(4,432,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation -
options
|
|
|
—
|
|
|
|
8,000
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants
|
|
|
|
|
|
|
674,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
—
|
|
|
|
—
|
|
|
|
(8,603,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at March 31, 2008
|
|
|
10,180,000
|
|
|
|
14,208,000
|
|
|
$
|
(13,035,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to financial statements.
23
CHAD Therapeutics, Inc.
Condensed Statement of Cash Flows
For the twelve months ended March 31, 2008 and 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
Twelve Months Ended
|
|
|
|
|
March 31,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(8,603,000
|
)
|
|
$
|
(3,414,000
|
)
|
|
Adjustments to reconcile net loss to net cash (used in) provided by operating activities:
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization of property and equipment
|
|
|
271,000
|
|
|
|
350,000
|
|
|
Amortization of intangibles
|
|
|
38,000
|
|
|
|
42,000
|
|
|
Loss on asset disposition due to discontinued operations
|
|
|
443,000
|
|
|
|
—
|
|
|
Loss on impairment of tangible and intangible assets
|
|
|
308,000
|
|
|
|
—
|
|
|
Amortization of deferred financing fees
|
|
|
431,000
|
|
|
|
—
|
|
|
Provision for losses on receivables
|
|
|
128,000
|
|
|
|
(14,000
|
)
|
|
Decrease (increase) in deferred income taxes
|
|
|
—
|
|
|
|
1,266,000
|
|
|
Stock-based compensation
|
|
|
8,000
|
|
|
|
113,000
|
|
|
Warrant costs
|
|
|
674,000
|
|
|
|
—
|
|
|
Changes in assets and liabilities:
|
|
|
|
|
|
|
|
|
|
Decrease (increase) in accounts receivable
|
|
|
760,000
|
|
|
|
858,000
|
|
|
Decrease (increase) in inventories
|
|
|
982,000
|
|
|
|
(176,000
|
)
|
|
Decrease (increase) in income taxes refundable
|
|
|
290,000
|
|
|
|
92,000
|
|
|
Decrease (increase) in prepaid expenses and other assets
|
|
|
(258,000
|
)
|
|
|
(108,000
|
)
|
|
Increase (decrease) in accounts payable
|
|
|
(820,000
|
)
|
|
|
767,000
|
|
|
Increase (decrease) in accrued expenses
|
|
|
1,091,000
|
|
|
|
(63,000
|
)
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by operating activities
|
|
|
(4,257,000
|
)
|
|
|
(287,000
|
)
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
|
Additions to other assets
|
|
|
(355,000
|
)
|
|
|
(177,000
|
)
|
|
Proceeds from asset sales due to discontinued operations
|
|
|
4,193,000
|
|
|
|
—
|
|
|
Capital expenditures
|
|
|
(161,000
|
)
|
|
|
(85,000
|
)
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by investing activities
|
|
|
3,677,000
|
|
|
|
(262,000
|
)
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
Proceeds from borrowings from revolving line of credit
|
|
|
2,750,000
|
|
|
|
—
|
|
|
Payments on borrowings from revolving line of credit
|
|
|
(1,159,000
|
)
|
|
|
—
|
|
|
Borrowings under long term debt
|
|
|
750,000
|
|
|
|
—
|
|
|
Payments on long term debt
|
|
|
(68,000
|
)
|
|
|
(11,000
|
)
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by financing activities
|
|
|
2,273,000
|
|
|
|
(11,000
|
)
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash
|
|
|
1,693,000
|
|
|
|
(560,000
|
)
|
|
Cash beginning of period
|
|
|
375,000
|
|
|
|
935,000
|
|
|
|
|
|
|
|
|
|
|
Cash end of period
|
|
$
|
2,068,000
|
|
|
$
|
375,000
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information:
|
|
|
|
|
|
|
|
|
|
Cash paid during the year for interest
|
|
$
|
806,000
|
|
|
$
|
—
|
|
|
Non-Cash Financing Activities
|
|
|
|
|
|
|
|
|
|
During the year payments were made on the revolving line of credit and the term note in the amount of $1,591,000
and $682,000 respectively directly from escrow funds received from the sale to Inovo.
|
|
|
|
|
|
|
|
|
See accompanying notes to condensed financial statements.
24
CHAD THERAPEUTICS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
|
1.
|
|
Basis of Presentation and Going Concern
|
|
|
|
|
|
The Company
|
|
|
|
|
|
CHAD Therapeutics, Inc. (the “Company”) is now working exclusively on the development and
commercialization of diagnostic and therapeutic devices for the sleep disorder market. In
February and March 2008, the Company sold all of its oxygen product assets and exited the oxygen
market entirely. The Company closed its production facilities located in Chatsworth, California
in June 2008, and there will be no further costs or revenues associated with its former oxygen
product line. The Company is developing diagnostic and therapeutic products for the sleep
disorder market. It expects to receive 510k clearance for its first product in July 2008.
Currently, the Company is not generating revenues from the sleep products it has in development.
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|
|
The Company’s financial statements have been prepared and presented on a basis assuming it will
continue as a going concern. However, the Company’s prospects must be considered in light of
substantial risks. The Company has experienced net losses since its fiscal year ended March 31,
2006 and as of March 31, 2008, it had an accumulated deficit of approximately $13,035,000. For
the year ended March 31, 2008, the Company had a net loss of $8,603,000 and utilized
approximately $4,257,000 of cash in operating activities. The Company expects operating losses
to continue through its foreseeable future as the sleep products do not yet generate revenue.
The Company is in need of additional financing or a strategic arrangement in order to continue
operations. These factors, amongst others, raise substantial doubts about the Company’s ability
to continue as a going concern.
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|
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|
|
|
On November 16, 2007, the Company entered into a definitive agreement, subject to shareholder
approval, to sell to Inovo, Inc. (the “Buyer”) substantially all of the assets of the Company
related to the oxygen conserver business including accounts receivable, inventory, and certain
equipment and intellectual property (the “Asset Sale”) pursuant to an Asset Purchase Agreement
(the “APA”). Pursuant to the APA, the Buyer assumed certain liabilities and obligations related
to the Company’s oxygen conserver business. The Company’s shareholders voted to approve the
sale of the Company’s oxygen conserver business on January 31, 2008 and the Asset Sale was
completed for $5,250,000 on February 15, 2008. On March 6, 2008, the Company entered into an
Asset Purchase Agreement (the “Purchase Agreement”) with Respironics, Inc., (“Respironics”).
Pursuant to the Purchase Agreement, Respironics acquired the Company’s assets related to the
transfilling oxygen business, the Total O2 Delivery System, including the OMNI-5 In-Home Filling
System, OMNI-2 In-Home Filling System, Omni Fill technology and the Company’s Post Valve patent
for the purchase price of $1.825 million. Under the terms of the Purchase Agreement, Respironics
assumed certain liabilities and obligations related to the Company’s transfilling oxygen
business and the Company agreed to indemnify Respironics for expenses arising out of any breach
of its representations or warranties. As a result of the discontinued operations presentation,
the net earnings (loss) related to the discontinued operations of $(3,942,000) and $283,000 for
the fiscal years 2008 and 2007 respectively has been presented in the Statements of Operations
as a component of earnings (loss) from discontinued operations.
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During the next twelve months, the Company intends to seek outside financing arrangements in
order to facilitate its ability to fund anticipated capital expenditures, support its
development of the sleep products, and enhance its working capital resources. Financing may be
obtained through the sale of equity or debt securities, through the establishment of credit
arrangements or through some combination of the foregoing. The Company has no established lines
of credit or other arrangements in place to obtain working capital, and no assurance can be
given regarding if and when other sources of working capital would be available. Moreover, the
Company does not currently have in place any arrangements to raise additional funds through the
sale of securities and it is not possible at this time to predict the terms upon which
securities might be sold, or if the Company can raise any funds from prospective investors.
|
25
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Fair Value of Financial Instruments
|
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|
|
The carrying amounts of financial instruments approximate fair value as of March 31, 2008, and
2007. The carrying amounts related to cash, accounts receivable, other current assets, and
accounts payable approximate fair value due to the relatively short maturity of such
instruments.
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Inventories
|
|
|
|
|
|
Inventories are valued at the lower of cost or market. Cost is determined based on standard
cost which approximates first-in, first-out method.
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Property and Equipment
|
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|
|
Property and equipment are stated at cost. Depreciation of property and equipment is provided
using the straight-line method based on the estimated useful lives of the related assets as
follows:
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Office Equipment and Furniture
|
|
5 – 10 years
|
|
Machinery and Equipment
|
|
3 – 10 years
|
|
Tooling
|
|
4 years
|
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|
|
Amortization of leasehold improvements is over the life of the related lease or asset, whichever
is shorter.
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Depreciation expense was $271,000 and $350,000 for the years ended March 31, 2008 and 2007,
respectively.
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Use of Estimates
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Management of the Company has made a number of estimates and assumptions relating to the
reporting of assets and liabilities, and the disclosure of contingent assets and liabilities, at
the balance sheet date, and the reporting of revenues and expenses during the periods, to
prepare these financial statements in conformity with accounting principles generally accepted
in the United States. Actual results could differ from those estimates.
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Significant estimates include the allowance for doubtful accounts, inventory valuation, deferred
income tax asset valuation allowances, and the estimated future operating cash flows form the
Company’s long-lived assets, including its intangible assets. Considerable management judgment
is necessary to estimate future operating cash flows as future cash flows are impacted by
competitive and other factors that are generally out of management’s control. Accordingly,
actual results could vary significantly from management’s estimates.
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Valuation of Accounts Receivable
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The Company makes judgements as to the collectibility of accounts receivable based on historical
trends and future expectations. Management estimates an allowance of doubtful accounts, which
represents the collectibility of accounts receivable. This allowance adjusts gross accounts
receivable downward to its estimated net realizable value. To determine the allowance for
doubtful accounts, management reviews specific customer risk and the Company’s accounts
receivable aging.
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Impairment of Long-Lived Assets
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|
The company reviews its long-lived assets for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be recoverable.
Recoverability of assets to be held and used is measured by a comparison of the carrying amount
of an asset to its estimated fair value. If such assets are considered to be impaired, the
impairment to be recognized is measured by the amount by which the carrying amount of the assets
exceeds the fair value of the assets.
|
26
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Revenue Recognition
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|
Revenue from product sales is recognized upon shipment of merchandise when title and risk of
loss
transfers to the customer and the earnings process is complete. Products are shipped FOB
shipping point and title to the products transfers to the purchaser upon shipment. Under a
sales-type lease agreement, revenue is recognized at the time of the shipment with interest
income recognized over the life of the lease. Shipping charges billed to customers are included
in net sales. Allowance for customer returns have not been established, as historically
customer return experience has been minor. Costs paid to shipping companies are recorded as a
cost of sales.
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Comprehensive Income (Loss)
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|
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The Company did not have components of other comprehensive income other than its net earnings
(loss) during the periods ended March 31, 2008, and 2007. As a result, comprehensive income
(loss) is the same as net earnings (loss) for the periods ended March 31, 2008 and 2007.
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Royalty Expense
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|
|
The Company charges royalties incurred on product licenses to costs of sales.
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|
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|
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Earnings per Share
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|
|
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|
|
Options to purchase 844,000 shares of common stock at prices ranging from $.50 to $5.00 per
share and 904,000 shares of common stock at prices ranging from $.50 to $11.50 were not included
in the computation of diluted earnings per share for the years ended March 31, 2008 and 2007,
respectively, because their effect would have been anti-dilutive.
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|
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Income Taxes
|
|
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|
|
Income taxes are accounted for under the asset and liability method. Deferred tax assets and
liabilities are recognized for the future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and liabilities and their respective
tax basis and net operating loss and tax credit carryforwards. In assessing whether there is a
need for a valuation allowance on deferred tax assets, we determine whether it is more likely
than not that we will recognize tax benefits associated with deferred tax assets. In making
this determination, we consider future taxable income and tax planning strategies that are both
prudent and feasible. Deferred tax assets and liabilities are measured using enacted tax rates
expected to be recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the enactment date.
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Major Customers
|
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|
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Twelve Months Ended
|
|
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|
|
March 31,
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|
|
|
|
2008
|
|
|
2007
|
|
|
Customer A**
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|
|
38.3
|
%
|
|
|
41.3
|
%
|
|
|
|
|
|
**
|
|
Indicates national chain customer
|
|
|
|
The Company’s customers are affected by Medicare reimbursement policy as approximately 80% of
home oxygen patients are covered by Medicare and other government programs.
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|
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Concentration of Credit Risk
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At times the Company maintains balances of cash that exceed $100,000 per financial institution,
the maximum insured by the Federal Deposit Insurance Corporation. Further, the Company
maintains a portion of its cash funds in an interest bearing, uninsured account. The Company’s
right to the cash is subject to the risk that the financial institution will not pay when cash
is requested. The potential loss is the amount in any one financial institution over $100,000
and/or all funds in the interest bearing account. At March 31, 2008, the amount at risk was
approximately $1,468,000.
|
27
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|
|
The significant outstanding accounts receivable balances at March 31, 2008 and 2007 were as
follows:
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|
|
|
|
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|
|
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|
Twelve Months Ended
|
|
|
|
March 31,
|
|
|
|
2008
|
|
2007
|
|
Customer A**
|
|
|
|
*
|
|
|
41.0
|
%
|
|
Customer B
|
|
|
47.1
|
%
|
|
|
|
*
|
|
Customer C**
|
|
|
|
*
|
|
|
12.6
|
%
|
|
Customer D
|
|
|
20.8
|
%
|
|
|
|
|
|
|
|
|
|
*
|
|
Indicates receivables balance less than 10% of the Company’s net accounts receibable balance.
|
|
|
|
**
|
|
Indicates national chain customer
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|
|
|
Stock Option Plan
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|
On April 1, 2006, the Company adopted Statement of Financial Accounting Standards 123R,
“Share-Based Payment,” which revised SFAS 123, “Accounting for Stock-Based Compensation.” The
Company adopted FAS 123R using the modified prospective transition method. Previously, the
Company had followed APB 25, accounting for employee stock options at intrinsic value.
Accordingly, during the years ended March 31, 2008 and 2007, the Company recorded stock-based
compensation expense for awards granted prior to, but not yet vested, as of April 1, 2006, as if
the fair value method required for pro forma disclosure under FAS 123 were in effect for expense
recognition purposes, adjusted for estimated forfeitures. For stock-based awards granted after
April 1, 2006, the Company would recognize compensation expense based on the estimated grant
date fair value method using the Black-Scholes valuation model. For these awards, the Company
would recognize compensation expense using a straight-line method. As FAS 123R requires that
stock based compensation expense be based on awards that are ultimately expected to vest,
stock-based compensation for the years ended March 31, 2008 and 2007, has been reduced for
estimated forfeitures. For the twelve-month period ended March 31, 2008, stock-based
compensation expense of $8,000 was recorded to selling, general, and administrative expenses,
all of which was due to FAS 123R option expense. For the year ended march 31, 2007, stock-based
compensation expense of $113,000 was recorded to selling, general, and administrative expenses.
Of the $113,000 in stock-based compensation recorded for the year ended March 31, 2007, $33,000
related to FAS 123R option expense with the remaining $80,000 related to restricted stock issued
to directors that vested March 31, 2007. Due to the prospective adoption of SFAS No. 123R,
results for prior period have not been restated.
|
|
|
|
|
|
The Company has an equity incentive plan (the “Plan”) for key employees as defined under Section
422(A) of the Internal Revenue Code. The Plan provides that 750,000 common shares be reserved
for issuance under the Plan, which expires on September 8, 2014, of which approximately 735,000
were available for future grant at March 31, 2008. In addition, the Plan provides that
non-qualified options can be granted to directors and independent contractors of the Company.
Stock options are granted with an exercise price equal to the market value of a share of the
Company’s stock on the date of the grant. Historically, grants to non-employee directors have
vested over two years, while the majority of grants to employees have vested over two to five
years of continuous service.
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|
|
|
|
|
The fair value of each stock option award is estimated on the date of the grant using the
Black-Scholes option valuation model. Expected volatility is based on the historical volatility
of the Company’s stock. No expected dividend yield is used since the Company has not
historically declared or paid dividends and no dividends are expected in the foreseeable future.
The risk-free interest rate is based on the U.S. treasury yield curve on the grant date for the
expected term of the
option. The Company did not grant any stock options during the years ended March 31, 2008 and
|
28
|
|
|
2007, respectively. A summary of stock option activity as of and for the twelve-months ended
March 31, 2008, is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Remaining
|
|
|
|
|
|
|
|
Exercise
|
|
Contractual
|
|
|
|
|
|
|
|
Price Per
|
|
Term
|
|
|
|
Shares
|
|
Share
|
|
(in years)
|
|
|
|
|
|
Outstanding at March 31, 2007
|
|
|
904,000
|
|
|
$
|
2.09
|
|
|
|
|
|
|
Granted
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
Exercised
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
Forfeited or expired
|
|
|
60,000
|
|
|
|
3.91
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at March 31, 2008
|
|
|
844,000
|
|
|
$
|
2.01
|
|
|
|
3.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of March 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable
|
|
|
844,000
|
|
|
$
|
2.01
|
|
|
|
3.0
|
|
|
Vested and expected to vest
|
|
|
844,000
|
|
|
$
|
2.01
|
|
|
|
3.0
|
|
|
|
|
|
|
|
|
No options were granted or exercised during the years ended March 31, 2008 and 2007.
|
|
|
|
|
|
The aggregate intrinsic value is calculated as the difference between the exercise price of the
underlying awards and the quoted price of the Company’s common stock at March 31, 2008 for the
options that were in-the-money at March 31, 2008. The intrinsic value at March 31, 2008 was $0.
As of March 31, 2008, there was no unrecognized compensation cost related to unvested
stock-based compensation arrangements granted under the Plan.
|
|
|
|
2.
|
|
Inventories
|
|
|
|
|
|
Due to the sales of its oxygen assets in February and March of 2008, the Company did not have
any inventory at March 31, 2008. At March 31, 2007, inventories consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
Finished goods
|
|
$
|
—
|
|
|
$
|
1,841,000
|
|
|
Work-in-process
|
|
|
—
|
|
|
|
2,240,000
|
|
|
Raw materials
|
|
|
—
|
|
|
|
2,476,000
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
—
|
|
|
$
|
6,557,000
|
|
|
|
|
|
|
|
|
|
|
3.
|
|
Discontinued Operations
|
|
|
|
|
|
A protracted period of reductions in reimbursement for home respiratory care and continuing
uncertainty with respect to future prospects for an adequate reimbursement regime caused the
Company to make the decision to exit the oxygen business. In February and March 2008, the
Company exited the oxygen therapy business by selling all of its oxygen assets in two separate
transactions. On November 16, 2007, the Company entered into a definitive agreement, subject to
shareholder approval, to sell to Inovo, Inc. (the “Buyer”) substantially all of the assets of
the Company related to the oxygen conserver business including accounts receivable, inventory,
and certain equipment and intellectual property (the “Asset Sale”) pursuant to an Asset Purchase
Agreement (the “APA”). Pursuant to the APA, the Buyer would assume certain liabilities and
obligations related to the Company’s oxygen conserver business. The Company’s shareholders
voted to approve the sale of the Company’s oxygen conserver business on January 31, 2008 and the
Asset Sale was completed for $5,250,000 on February 15, 2008. On March 6, 2008, the Company
entered into an Asset Purchase Agreement (the “Purchase Agreement”) with Respironics, Inc.,
|
29
|
|
|
(“Respironics”). Pursuant to the Purchase Agreement, Respironics acquired the Company’s assets
related to the transfilling oxygen business, the Total O2 Delivery System, including the OMNI-5
In-Home Filling System, OMNI-2 In-Home Filling System, Omni Fill technology and the Company’s
Post Valve patent for the purchase price of $1,825,000. Under the terms of the Purchase
Agreement, Respironics assumed certain liabilities and obligations related to the Company’s
transfilling oxygen business and the Company agreed to indemnify Respironics for expenses
arising out of any breach of its representations or warranties. As a result of the discontinued
operations presentation, the net earnings (loss) related to the discontinued operations have
been presented in the Statements of Operations as a component of earnings (loss) from
discontinued operations.
|
|
|
|
|
|
In accordance with provisions of SFAS No. 144, “Accounting for the Impairment or Disposal of
Long-Lived Assets, “ it was determined that the oxygen therapy business should be presented as a
discontinued operation in the financial statements. In fiscal 2008, the Company recorded a loss
of $3,642,000 related to the operations of the oxygen business and recorded a loss on the sales
of assets of $441,000.
|
|
|
|
|
|
The assets sold to the buyer and liabilities of the oxygen business assumed by the buyer at the
time of sale were as follows:
|
|
|
|
|
|
|
|
Accounts receivable, net
|
|
$
|
1,272,000
|
|
|
Inventory
|
|
|
5,575,000
|
|
|
Other current assets
|
|
|
33,000
|
|
|
Property, Plant and Equipment
|
|
|
440,000
|
|
|
Other non-current assets
|
|
|
455,000
|
|
|
|
|
|
|
|
Assets of discontinued operations
|
|
$
|
7,775,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
368,000
|
|
|
Other current liabilities
|
|
|
233,000
|
|
|
|
|
|
|
|
Liabilities of discontinuted operations
|
|
$
|
601,000
|
|
|
|
|
|
|
The following results of the oxygen business have been presented as earnings (loss) from
discontinued operations in the accompanying statements of operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
Net sales
|
|
$
|
11,791,000
|
|
|
$
|
18,981,000
|
|
|
Cost of sales
|
|
|
8,926,000
|
|
|
|
13,677,000
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
2,865,000
|
|
|
|
5,304,000
|
|
|
Operating expenses
|
|
|
4,058,000
|
|
|
|
5,021,000
|
|
|
Other expenses
|
|
|
2,449,000
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) from discontinued operations
|
|
$
|
(3,642,000
|
)
|
|
$
|
283,000
|
|
|
4.
|
|
Long-Term Debt and Revolving Line of Credit
|
|
|
|
|
|
In March 2007, the Company entered into a one-year factoring arrangement that provided for the
sale
of up to $1,500,000 of the Company’s accounts receivable. Assignments under the agreement
incurred interest at the bank’s prime rate plus two percent (2%) to three percent (3%) depending
on the total accounts receivable balance. The Company had a minimum monthly interest payment of
$6,000 beginning April 2007. The Company voluntarily terminated the factoring agreement on July
30, 2007.
|
30
|
|
|
On July 30, 2007, the Company entered into a financing transaction with Calliope Capital
Corporation , a Delaware corporation (the “Investor”) pursuant to which the Company issued to
the Investor a $750,000 convertible term note (“Convertible Note”) and a $2,750,000 revolving
credit line (“Credit Line”), all secured by the Company’s assets. The Convertible Note is
payable in equal installments over 36 months beginning in November 2007 and maturing in July
2010 and bears interest at prime plus 2%, and the Credit Line bears interest at prime plus 1.5%.
A portion of the financing was used to pay all outstanding obligations on the Company’s
factoring arrangement. At the Investor’s option, the Convertible Note may be converted into
shares of the Company’s common stock any time during the term of the note at a conversion price
of $1.18. The closing price of the Company’s common stock on the issue date of the Convertible
Note was $1.00 per share. In addition, warrants to purchase up to 976,744 shares of the
Company’s common stock were issued to the Investor with an exercise price of $1.24 per share.
The Investor was granted registration rights with respect to the shares underlying the warrants.
The warrants include a lock-up feature for a period of 12 months after any warrants are
exercised. On February 13, 2008, the Company voluntarily terminated both the Convertible Note
and the revolving Credit Line. The warrants issued to Calliope Capital Corporation remain
outstanding but unexercised at March 31, 2008.
|
|
|
|
|
|
In order to address the Company’s limited ability to draw against its Credit Line at the end of
the second fiscal quarter, on January 2, 2008, the Company entered a Subordinated Secured Note
and Warrant Purchase Agreement (the “Credit Facility”) with Mr. Earl Yager and Mr. Thomas Jones,
our Chief Executive Officer and our Chairman of the Board, respectively. The Company entered into
the financing arrangement after it was unsuccessful in obtaining financing on acceptable terms
from a third party. The terms of the financing arrangement were negotiated and approved by the
Company’s independent directors who concluded that the terms were more favorable to the Company
than those available from third party lenders. Pursuant to the terms of the Credit Facility, the
Company may draw an aggregate of $1,000,000, subject to certain conditions. As of February 12,
2008, the Company had borrowed $550,000 under this facility. The Company voluntarily terminated
the Credit Facility on February 15, 2008.
|
|
|
|
|
|
In connection with the Credit Facility, Mr. Yager and Mr. Jones each received 321,428 warrants
to purchase our common stock at a price per share equal to $.28 (the average closing price of
our common stock on the American Stock Exchange for the five days immediately preceding the
initial funding under the Credit Facility). The number of shares issuable for each warrant will
be equal to (a) the principal amount of the Note issued at the initial closing multiplied by
0.30, divided by (b) the exercise price. The warrants have a term of five years. No additional
warrants are issuable in connection with any additional borrowings the Company may make under
the Credit Facility.
|
|
|
|
|
|
Upon the repayment of its loans the Company recognized all of its deferred financing fees of
$443,000.
|
|
|
|
5.
|
|
Income Taxes
|
|
|
|
|
|
Income tax expense (benefit) for fiscal 2008 and 2007 consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
2007
|
|
|
|
|
|
Current:
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
—
|
|
|
$
|
(282,000
|
)
|
|
State
|
|
|
4,000
|
|
|
|
8000
|
|
|
|
|
|
|
|
|
|
4,000
|
|
|
|
(274,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
—
|
|
|
|
837,000
|
|
|
State
|
|
|
—
|
|
|
|
429,000
|
|
|
|
|
|
|
|
|
|
—
|
|
|
|
1,266,000
|
|
|
|
|
|
|
Total
|
|
$
|
4,000
|
|
|
$
|
992,000
|
|
|
|
|
|
31
|
|
|
A reconciliation of the difference between the Company’s income tax expense (benefit) and the
statutory income tax for the years ended March 31, 2008 and 2007 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
2007
|
|
|
|
|
|
Statutory tax expense (benefit)
|
|
$
|
(2,930,000
|
)
|
|
$
|
(825,000
|
)
|
|
State income tax, net
|
|
|
(293,000
|
)
|
|
|
(57,000
|
)
|
|
Valuation allowance
|
|
|
3,555,000
|
|
|
|
1,858,000
|
|
|
Warranty and other
|
|
|
(328,000
|
)
|
|
|
16,000
|
|
|
|
|
|
|
|
|
$
|
4,000
|
|
|
$
|
992,000
|
|
|
|
|
|
|
|
|
The tax effects of temporary differences that give rise to significant portions of the deferred
tax assets at March 31, 2008 and 2007 are mainly related to net operating loss carryforwards.
The Company has Federal net operating loss carryforwards of approximately $12,000,000 of which
$1,459,000 expires in 2027 and the balance in 2028 and California net operating loss
carryforwards of approximately $11,000,000 of which $3,442,000 expires in 2013 and the balance
expiring in 2014. In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred tax asset will not be
realized. At March 31, 2008 and 2007, the Company’s deferred tax assets are fully offset by a
valuation allowance.
|
|
|
|
6.
|
|
Intangible Assets
|
|
|
|
|
|
Intangible assets include amounts paid for licenses on new and existing products. License fees
are being amortized using the straight-line method over the life of the related patents.
Accumulated amortization on the license fees amounted to $107,000 and $138,000 at March 31, 2008
and 2007, respectively. Annual amortization on intangible assets currently in service will be
approximately $28,000 for each of the next five years. Intangible assets were $761,000 and
$1,107,000, and amortization expense was $38,000 and $42,000 at March 31, 2008 and 2007,
respectively.
|
|
|
|
7.
|
|
Shareholders’ Equity
|
|
|
|
|
|
The Company has an equity incentive plan (the “Plan”) for key employees as defined under Section
422(A) of the Internal Revenue Code. The Plan provides that 750,000 common shares be reserved
for issuance under the Plan, which expires on September 8, 2014. In addition, the Plan provides
that non-qualified options can be granted to directors and independent contractors of the
Company. Transaction involving the equity plan and the 1994 stock option plan, which expired in
2004, are summarized as follows:
|
32
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
Option
|
|
|
Price Per
|
|
|
|
|
Shares
|
|
|
Share
|
|
|
Incentive options:
|
|
|
|
|
|
|
|
|
|
Outstanding March 31, 2006
|
|
|
675,000
|
|
|
$
|
2.10
|
|
|
Cancelled
|
|
|
(28,000
|
)
|
|
|
3.42
|
|
|
|
|
|
|
|
|
|
|
Outstanding March 31, 2007
|
|
|
647,000
|
|
|
|
2.02
|
|
|
Cancelled
|
|
|
(52,000
|
)
|
|
|
3.35
|
|
|
Outstanding March 31, 2008
|
|
|
595,000
|
|
|
$
|
1.91
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable March 31, 2008
|
|
|
595,000
|
|
|
$
|
1.91
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-qualified optioins:
|
|
|
|
|
|
|
|
|
|
Outstanding March 31, 2006
|
|
|
270,000
|
|
|
$
|
9.56
|
|
|
Cancelled
|
|
|
(5,000
|
)
|
|
|
3.90
|
|
|
Expired
|
|
|
(8,000
|
)
|
|
|
11.50
|
|
|
|
|
|
|
|
|
|
|
Outstanding March 31, 2007
|
|
|
257,000
|
|
|
|
2.26
|
|
|
Expired
|
|
|
(8,000
|
)
|
|
|
7.62
|
|
|
Outstanding March 31, 2008
|
|
|
249,000
|
|
|
$
|
2.09
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable March 31, 2008
|
|
|
249,000
|
|
|
$
|
2.09
|
|
|
|
|
|
|
|
|
|
|
|
|
At March 31, 2008, information regarding outstanding options is summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Range of Exercise Price
|
|
|
|
|
$.50
– $1.88
|
|
|
$2.00
– $5.00
|
|
|
Number outstanding
|
|
|
438,000
|
|
|
|
406,000
|
|
|
Weighted average remaining life (years)
|
|
|
1.9
|
|
|
|
4.2
|
|
|
Weighted average exercise price
|
|
$
|
1.09
|
|
|
$
|
3.01
|
|
|
Number exercisable
|
|
|
438,000
|
|
|
|
406,000
|
|
|
Weighted average exercise price
|
|
$
|
1.09
|
|
|
$
|
3.01
|
|
|
|
|
Incentive and non-qualified options were granted at prices not less than 100% of market value at
dates of grant. Options under the Plan become exercisable on the anniversary of the grant date
on a pro rata basis over a defined period and expire ten (10) years after the date of grant. To
the extent the Company derives a tax benefit from options exercised by employees, such benefit
is credited to Common Shares.
|
|
|
|
8.
|
|
Employee Benefit Plan
|
|
|
|
|
|
In December 1992, the Company adopted a defined contribution profit sharing plan, including
features under Section 401(k) of the Internal Revenue Code. The purpose of the plan is to
provide an
incentive for employees to make regular savings for their retirement. Company contributions to
the profit sharing plan are discretionary and are determined by the Board of Directors. There
have been no contributions since 2002.
|
33
|
9.
|
|
Accrued Expenses
|
|
|
|
|
|
At March 31, 2008 and 2007, accrued expenses consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
2007
|
|
|
|
|
|
Accrued Severance
|
|
$
|
1,845,000
|
|
|
$
|
—
|
|
|
Accrued royalties
|
|
|
2,000
|
|
|
|
301,000
|
|
|
Accrued vacation
|
|
|
142,000
|
|
|
|
216,000
|
|
|
Warranty reserve
|
|
|
—
|
|
|
|
163,000
|
|
|
Payroll and incentive compensation
|
|
|
108,000
|
|
|
|
102,000
|
|
|
Accrued inventory in transit
|
|
|
—
|
|
|
|
200,000
|
|
|
Customer deposits
|
|
|
—
|
|
|
|
103,000
|
|
|
Accrued extended warranty
|
|
|
—
|
|
|
|
91,000
|
|
|
Other
|
|
|
177,000
|
|
|
|
196,000
|
|
|
|
|
|
|
|
|
$
|
2,274,000
|
|
|
$
|
1,372,000
|
|
|
|
|
|
|
10.
|
|
Commitments and Contingencies
|
|
|
|
|
|
The Company is currently leasing its administrative and plant facilities and certain office
equipment under noncancelable operating leases that expire in June 2008. The Company will
vacate those premises in June 2008 upon expiration of the lease. The Company has entered into a
new lease for an administrative and warehouse facility of approximately 1,200 square feet which
will expire in December 2008 and has a monthly obligation of $1,200. Rent expense amounted to
$617,000 and $571,000 for the years ended March 31, 2008 and 2007, respectively. The Company is
also responsible for common area maintenance costs, including taxes, insurance and other
maintenance costs.
|
|
|
|
|
|
Employee obligations consist of an employment agreement (the “Employment Agreement”) with Thomas
E. Jones, Chairman of the Board of Directors. The Employment Agreement does not have a specific
term and provides for a base salary of $160,000 per year, which is subject to annual review by
the Board of Directors. The Employment Agreement may be terminated at any time by the Company,
with or without cause, and may be terminated by Mr. Jones upon 90 days’ notice. If Mr. Jones
resigns or is terminated for cause (as defined in the Employment Agreement), he is entitled to
receive only his base salary and accrued vacation through the effective date of his resignation
or termination. If Mr. Jones is terminated without cause, he is entitled to receive a severance
benefit in accordance with the Company’s Severance and Change of Control Plan, or if not
applicable, a severance benefit equal to 200% of his salary and incentive bonus for the prior
fiscal year. In estimating its contractual obligation, the Company has assumed that Mr. Jones
will voluntarily retire at the end of the year he turns 65 and that no severance benefit will be
payable. This date may not represent the actual date the Company’s payment obligations under
the Employment Agreement are extinguished.
|
|
|
|
|
|
In addition to the severance agreement with Mr. Jones, the Company is also a party to a
severance agreement with its CEO. Under the agreement, the CEO is entitled to a severance pay
equal to 200% of his annual salary upon a change of duties, as defined in the agreement. The
company has not recorded the obligation under the severance agreement for these two individuals
because 100% of their salaries are still being accrued, and management believes a change in
duties has not occurred. However, only a small fraction of their salary has been paid to them.
Should the Company not pay
their salary in full, or a change of duties occur, the Company will be obligated to pay them
$800,000 in severance pay.
|
34
|
|
|
From time to time, the Company becomes involved in certain legal actions in the ordinary course
of business. The Company is not currently a party to any pending legal actions.
|
|
11.
|
|
Geographic Information
|
|
|
|
|
|
The Company has one reportable operating segment. Geographic information regarding the
Company’s net sales is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
United States
|
|
$
|
10,166,000
|
|
|
$
|
15,795,000
|
|
|
Canada
|
|
|
144,000
|
|
|
|
174,000
|
|
|
Japan
|
|
|
241,000
|
|
|
|
346,000
|
|
|
Europe
|
|
|
702,000
|
|
|
|
2,054,000
|
|
|
Indonesia
|
|
|
175,000
|
|
|
|
271,000
|
|
|
All other countries
|
|
|
362,000
|
|
|
|
341,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
11,790,000
|
|
|
$
|
18,981,000
|
|
|
|
|
|
|
|
|
|
|
|
|
The above sales are solely of the Company’s oxygen related products. Due to the sale of all of
the Company’s oxygen assets, there will be no further sales of oxygen related products. The
Company has not yet brought any of its sleep products to market.
|
|
|
|
|
|
All long-lived assets are located in the United States.
|
|
|
|
|
|
Sales of OXYMATIC®, LOTUS and CYPRESS OXYPneumatic® conservers and SAGE Therapeutic devices
accounted for 65% and 69% of the Company’s net sales for the years ended March 31, 2008 and
2007, respectively.
|
|
|
|
12.
|
|
Valuation and Qualifying Accounts and Reserves
|
|
|
|
|
|
The following is the Company’s schedule of activity an qualifying accounts and reserves for the
years ended March 31, 2008 and 2007, respectively:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at
|
|
Charged to
|
|
|
|
|
|
|
|
|
|
Beginning of
|
|
Costs and
|
|
|
|
|
|
Balance at
|
|
|
|
Year
|
|
Expenses
|
|
Deductions
|
|
End of Year
|
|
Allowance for doubtful accounts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
$
|
52,000
|
|
|
|
27,000
|
|
|
|
41,000
|
|
|
$
|
38,000
|
|
|
2008
|
|
$
|
38,000
|
|
|
|
171,000
|
|
|
|
43,000
|
|
|
$
|
166,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warranty reserve:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
$
|
139,000
|
|
|
|
46,000
|
|
|
|
22,000
|
|
|
$
|
163,000
|
|
|
2008
|
|
$
|
163,000
|
|
|
|
—
|
|
|
|
163,000
|
|
|
$
|
—
|
|
|
13.
|
|
Warrants
|
|
|
|
|
|
In connection with the Convertible Note financing transaction that the Company entered into in
July 2007, the Company issued warrants to purchase up to 997,702 shares of the Company’s common
stock at an exercise price of $1.24 per share. The closing price of the Company’s common stock
on the issue date of the warrants was $1.00 per share. The fair value of the warrants was
approximately $601,000 and was determined using a Black Scholes pricing model using the
following assumptions;
|
35
|
|
|
volatility – 67%, interest rate – 4.8%, projected term – seven (7) years,
dividend yield – zero. These warrants expire ten years from the date of issue and have a
lock-up period of 12 months after any
warrants are exercised. The Company recognized $601,000 of expense related to the issuance of
the warrants as of March 31, 2008 upon repayment of the financing.
|
|
|
|
In connection with the Credit Facility that the Company entered into in January 2008, the
Company issued Mr. Yager and Mr. Jones each 321,428 warrants to purchase the Company’s common
stock at a price per share equal to $.28 (the average closing price of our common stock on the
American Stock Exchange for the five days immediately preceding the initial funding under the
Credit Facility). The number of shares issuable for each warrant will be equal to (a) the
principal amount of the Note issued at the initial closing multiplied by 0.30, divided by (b)
the exercise price. The warrants have a term of five years. The company fully recognized
warrant expense of $73,000 upon repayment of the Credit Facility in February 2008. The value
was calculated using the Black Scholes pricing model with the following assumptions: volatility
– 67%, interest rate – 4.8%, projected term – five (5) years, dividend yield – zero.
|
|
14.
|
|
Quarterly Financial Data (Unaudited)
|
|
|
|
|
|
The Company’s quarterly results including amounts from discontinued operations was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic & Diluted
|
|
|
|
Revenue
|
|
Gross Profit
|
|
Net Loss
|
|
Loss Per Share
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First quarter
|
|
$
|
3,973,000
|
|
|
$
|
795,000
|
|
|
$
|
(1,290,000
|
)
|
|
$
|
(0.13
|
)
|
|
Second quarter
|
|
|
3,206,000
|
|
|
|
599,000
|
|
|
|
(1,353,000
|
)
|
|
|
(0.13
|
)
|
|
Third quarter
|
|
|
2,929,000
|
|
|
|
1,159,000
|
|
|
|
(868,000
|
)
|
|
|
(0.09
|
)
|
|
Fourth quarter
|
|
|
1,683,000
|
|
|
|
312,000
|
|
|
|
(5,092,000
|
)
|
|
|
(0.50
|
)
|
|
|
|
|
|
Year
|
|
$
|
11,791,000
|
|
|
$
|
2,865,000
|
|
|
$
|
(8,603,000
|
)
|
|
$
|
(0.85
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First quarter
|
|
$
|
5,476,000
|
|
|
$
|
1,814,000
|
|
|
$
|
(116,000
|
)
|
|
$
|
(0.01
|
)
|
|
Second quarter
|
|
|
4,983,000
|
|
|
|
1,617,000
|
|
|
|
(307,000
|
)
|
|
|
(0.03
|
)
|
|
Third quarter
|
|
|
4,307,000
|
|
|
|
1,059,000
|
|
|
|
(435,000
|
)
|
|
|
(0.04
|
)
|
|
Fourth quarter
|
|
|
4,215,000
|
|
|
|
814,000
|
|
|
|
(2,556,000
|
)
|
|
|
(0.26
|
)
|
|
|
|
|
|
Year
|
|
$
|
18,981,000
|
|
|
$
|
5,304,000
|
|
|
$
|
(3,414,000
|
)
|
|
$
|
(0.34
|
)
|
|
|
|
|
|
15.
|
|
Accounting Standards
|
|
|
|
|
|
In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option of Financial Assets and
Financial Liabilities.” SFAS No. 159 permits companies to choose to measure certain financial
instruments and certain other items at fair value. The standard requires that unrealized gains
and losses on items for which the fair value option has been elected by reported in earnings.
SFAS No. 159 is effective as of the beginning of the entity’s first fiscal year that begins
after November 15, 2007. SFAS No. 159 did not have any significant impact on the Company’s
financial statements.
|
|
|
|
|
|
In June 2006, the FASB issued interpretation no. 48,
Accounting for Uncertainty in Income Taxes-
an interpretation of FASB Statement No. 109
(FIN 48). FIN 48 clarifies the accounting for
uncertainty in income taxes recognized in an enterprise’s financial statements in accordance
with FASB Statement No. 109,
Accounting for Income Taxes
(SFAS 109). This Interpretation
prescribes a recognition threshold and measurement attribute for the financial statement
recognition and measurement of a tax position taken or expected to be taken in a tax return.
This Interpretation also provides guidance on derecognition, classification, interest and
penalties, accounting in interim periods, disclosure, and transition. FIN 48 is effective for
fiscal years beginning after December 15, 2006. FIN 48 did not have any significant impact on
the Company’s financial statements.
|
36
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
None.
Item 9A. Controls and Procedures.
Disclosure Controls and Procedures
An evaluation as of the end of the period covered by this report was carried out under the
supervision and with the participation of our management, including our principal executive officer
and principal financial officer, of the effectiveness of our disclosure controls and procedures, as
such term is defined under Rule 13a-15(e) and Rule 15d –15(e) promulgated under the Securities
Exchange Act of 1934, as amended (the “Exchange Act”). Based on their evaluation, our principal
executive officer and principal financial officer concluded that our disclosure controls and
procedures are effective to ensure that we record, process, summarize, and report information
required to be disclosed by us in our reports filed under the Securities Exchange Act within the
time periods specified by the Securities and Exchange Commission’s rules and forms.
Internal Controls
Our management is responsible for establishing and maintaining adequate internal control over
financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Internal
control over financial reporting is a process designed to provide reasonable assurance regarding
the reliability of financial reporting and the preparation of financial statements for external
purposes in accordance with accounting principles generally accepted in the United States. Internal
control over financial reporting includes those policies and procedures that: (1) pertain to the
maintenance of records that accurately and fairly reflect, in reasonable detail, the transactions
and dispositions of the assets of the Company, (2) provide reasonable assurance that transactions
are recorded as necessary to permit the preparation of financial statements in accordance with
accounting principles generally accepted in the United States, and that our receipts and
expenditures are being made only in accordance with the authorizations of our management and, as
applicable, our Board of Directors, and (3) provide reasonable assurance regarding prevention or
timely detection of unauthorized acquisition, use or disposition of our assets that could have a
material effect upon our financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or
detect misstatements. A control system, no matter how well conceived or operated, can provide only
reasonable, not absolute assurance, that its objectives will be met. In addition, projections of
any evaluation of effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance with the policies and
procedures may deteriorate.
Our management has conducted an assessment, including testing, of the effectiveness of our internal
control over financial reporting as of March 31, 2008. In undertaking this assessment, management
used the criteria in
Internal Control—Integrated Framework
issued by the Committee of Sponsoring
Organizations of the Treadway Commission (“COSO”). Based on its assessment, management, with the
participation of our Chief Executive and Chief Financial Officers, believes that, as of March 31,
2008, the Company’s internal control over financial reporting is effective.
This annual report on Form 10-K does not include an attestation report of the Company’s registered
public accounting firm regarding internal control over financial reporting. Management’s report was
not subject to attestation by the Company’s registered public accounting firm pursuant to temporary
rules of the Securities and Exchange Commission that permit the Company to provide only
management’s report in this annual report.
During the quarter ended March 31, 2008, there were no changes in our internal control over
financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that have
materially affected, or are reasonably likely to materially affect, our internal control over
financial reporting.
Item 9B. Other Information.
None
37
PART III
Item 10.
Directors, Executive Officers and Corporate Governance
.
The Directors in Class I and Class II have supplied the following information pertaining to their
age and principal occupation or employment during the past five (5) years:
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Name
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Age
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Position
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Director Since
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Class I
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Philip T. Wolfstein (1) (2) (3)
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57
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Director
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1994
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James M. Brophy (1) (2) (3)
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58
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Director
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2000
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Kathleen M. Griggs (1) (3) (4)
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53
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Director
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2003
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Class II
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Thomas E. Jones
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64
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Chairman of the Board and Director
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1997
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John C. Boyd (2) (3)
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75
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Director
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1986
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Earl L. Yager
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62
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Chief Executive Officer,
President and Director
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1988
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(1)
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Member of Audit Committee
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(2)
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Member of Compensation Committee
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(3)
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Member of Corporate Governance Committee
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(4)
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Audit Committee Expert
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Class I Directors
http://www.ctuholdingsusa.com.
Compensation Committee
The Compensation Committee is responsible for developing and implementing compensation arrangements
for the Company’s senior executives in support of the overall objectives of the Company. In this
regard, the Compensation Committee annually establishes corporate goals and objectives relevant to
compensation for senior executive officers and evaluates the performance of such officers in light
of such goals and objectives. The Compensation Committee determines all aspects of the
compensation of the Company’s Chief Executive Officer. The Compensation Committee is also
responsible for approving all incentive compensation and equity-based compensation plans and
approves all equity grants under such plans. The Compensation Committee also reviews and makes
recommendations to the Board with respect to employee benefit programs, retirement benefits,
severance agreements and policies related to perquisites for Company officers. The Compensation
Committee met four (4) times during the fiscal year ended March 31, 2008. The Compensation
Committee’s charter is available on the Company’s website at http://www.ctuholdingsusa.com.
38
Compensation Committee Interlocks and Insider Participation
John C. Boyd, James M. Brophy and Philip T. Wolfstein are the only persons who served as members of
the Compensation Committee during the fiscal year ended March 31, 2008. There were no Compensation
Committee interlocks or insider participation in the Compensation Committee during the past year.
Corporate Governance Committee
The Corporate Governance Committee is responsible for developing policies related to the
composition, structure and operation of the Board of Directors in order to enhance the
effectiveness of the Board. The Corporate Governance Committee leads the search for qualified
directors and recommends the nomination of candidates for election to the Board. The Corporate
Governance Committee also periodically reviews and makes recommendations with respect to the size
of the Board, the frequency of Board meetings, the Board’s committee structure, compensation of
directors and other matters pertaining to the operations of the Board. The Corporate Governance
Committee oversees planning for CEO and senior management succession. The Corporate Governance
Committee met four (4) times during the fiscal year ended March 31, 2008. The charter of the
Corporate Governance Committee is available on the Company’s website at
http://www.ctuholdingsusa.com.
The Corporate Governance Committee has not established any specific minimum qualifications for
Board nominees. In general, the Corporate Governance Committee seeks candidates who are committed
to serving the long term interests of the shareholders and who bring to the Board good business
judgment, personal integrity, maturity and a diversity of experience and perspectives. The
Corporate Governance Committee will consider candidates recommended by shareholders, current
directors and others. All candidates will be subjected to the same evaluation by the Corporate
Governance Committee. Shareholders wishing to recommend a candidate should submit the name of the
candidate and a description of the candidate’s background and relevant experience to James M.
Brophy, Chair, Corporate Governance Committee, Chad Therapeutics, Inc., 10200 Mason Avenue, Suite
114, Chatsworth, CA 91311.
Shareholder Communications with the Board
Shareholders who wish to communicate directly with the Board of Directors or any individual
director may do so by sending a letter addressed to the Board of Directors or one or more
individual directors to the following address:
Board of Directors
Chad Therapeutics, Inc.
10200 Mason Avenue, Suite 114
Chatsworth, CA 91311
39
Director Compensation
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Change in
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pension value
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and
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Fees
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Non-equity
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nonqualified
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earned or
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Stock
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Option
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incentive plan
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deferred
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All other
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paid in
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awards
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awards
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compensation
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compensation
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compensation
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Total
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Name
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cash ($)
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($)
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($)
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($)
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earnings
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($)
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($)
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John C. Boyd
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$
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34,000
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None
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None
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None
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None
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None
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$
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34,000
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James M. Brophy
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$
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34,000
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None
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None
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None
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None
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None
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$
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34,000
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Kathleen M. Griggs
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$
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38,000
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None
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None
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None
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None
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None
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$
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38,000
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Philip T. Wolfstein
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$
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34,000
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None
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None
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None
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None
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None
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$
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34,000
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Name
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Age
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Position
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Thomas E. Jones
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64
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Chairman of the Board
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Earl L. Yager
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62
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President and Chief Executive Officer
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Tracy A. Kern
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40
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Chief Financial Officer
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Alfonso Del Toro
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50
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Vice President, Manufacturing
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Kevin McCulloh
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47
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Senior Vice President, Engineering and
Product
Development and Regulatory Affairs
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Paula O’Connor
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55
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Secretary
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Summary Compensation Table
For Fiscal Year Ended March 31, 2008
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Change in
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|
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pension value
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|
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|
|
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|
|
|
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and
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|
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|
|
|
|
|
|
|
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|
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nonqualified
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Non-equity
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deferred
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Name and
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Stock
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Option
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incentive plan
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compensation
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All other
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principal
|
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|
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Salary
|
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Bonus
|
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awards
|
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awards
|
|
compensation
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earnings
|
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compensation
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Total
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position
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Year
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($)
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(1) ($)
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($)
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($)
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($)
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($)
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(2) ($)
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($)
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Earl L. Yager,
President and Chief
Executive Officer
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2008
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240,000
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-0-
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|
-0-
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|
|
|
-0-
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|
|
|
-0-
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-0-
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7,500
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247,500
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Thomas E. Jones,
Chairman
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2008
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160,000
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-0-
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-0-
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|
|
-0-
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|
|
-0-
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-0-
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7,500
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167,500
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Kevin McCulloh, Sr,
VP Engineering,
Product Development
and Regulatory
Affairs
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2008
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|
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165,000
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|
-0-
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|
|
|
-0-
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|
|
|
-0-
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|
|
|
-0-
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|
-0-
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|
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|
4,800
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169,800
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(1)
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Annual bonus amounts are earned and accrued during the fiscal years indicated and paid within
30 days subsequent to the end of the fiscal year indicated.
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(2)
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These amounts consist of contributions by the Company in 2008 to the CHAD Therapeutics, Inc.
Employee Savings and Retirement Plan.
|
40
Outstanding Equity Awards
at March 31, 2008
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Option Awards
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Equity incentive plan
|
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Number of securities
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|
|
|
|
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|
|
|
awards: number of
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|
|
|
|
underlying unexercised
|
|
Option
|
|
Option
|
|
securities underlying
|
|
|
|
|
|
options (#)
|
|
exercise
|
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expiration
|
|
unexercised
|
|
Stock
|
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Name
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ExercisableUnexercisable
|
|
price ($)
|
|
date
|
|
unearned options (#)
|
|
Awards
|
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|
|
|
|
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Earl L. Yager
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|
8,107/-0-
|
|
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|
1.50
|
|
|
|
01/29/2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
30,000/-0-
|
|
|
|
1.00
|
|
|
|
09/14/2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
50,000/-0-
|
|
|
|
1.00
|
|
|
|
09/14/2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thomas E. Jones
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27,779-0-
|
|
|
|
1.50
|
|
|
|
01/29/2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
50,000-0-
|
|
|
|
1.00
|
|
|
|
09/14/2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
50,000-0-
|
|
|
|
1.00
|
|
|
|
09/14/2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Kevin McCulloh
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|
|
10,000/-0-
|
|
|
|
1.75
|
|
|
|
12/01/2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,000/-0-
|
|
|
|
1.00
|
|
|
|
09/13/2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,000/-0-
|
|
|
|
2.00
|
|
|
|
03/21/2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20,000/-0-
|
|
|
|
1.00
|
|
|
|
09/14/2010
|
|
|
|
|
|
|
|
|
|
Employment Agreement
Effective April 1, 1998, the Company and Thomas E. Jones entered into an employment agreement,
which was amended on January 1, 2003, pursuant to which the Company employs Mr. Jones as Chairman
of the Board of Directors (the “Employment Agreement”). The Employment Agreement, as amended,
provides a base salary of $160,000 per year, which amount is subject to annual review by the Board
of Directors. In addition, Mr. Jones is eligible to receive a bonus in an amount to be determined
by the Board of Directors. Mr. Jones is entitled to participate in all stock option, severance and
benefit plans adopted by the Company. The Employment Agreement does not have a specific term. The
Employment Agreement may be terminated at any time by the Company, with or without cause, and may
be terminated by Mr. Jones upon 90-days’ notice. If Mr. Jones resigns or is terminated for cause
(as defined in the Employment Agreement), he is entitled to receive only his base salary and
accrued vacation through the effective date of his resignation or termination. If Mr. Jones is
terminated without cause, he is entitled to receive a severance benefit in accordance with the
Company’s Severance and Change of Control Plan (the “Severance Plan”) or, if such Severance Plan is
not applicable, a severance benefit equal to 200% of his salary and incentive bonus for the prior
fiscal year. A description of the Severance Plan is set forth below.
Severance and Change of Control Plan
The Company has adopted a Severance and Change of Control Plan pursuant to which four (4) of the
Company’s officers have entered into Severance and Change of Control Agreements with the Company
(the “Severance Agreements”). The Severance Agreements provide that the executive officer is
entitled to a lump sum severance benefit equal to 200% of his aggregate compensation for the prior
calendar year (the amounts vary for other officers) if the officer is terminated without cause (as
defined in the Severance Agreements) and not offered a comparable position within 60 days or if the
executive suffers a change in duties, in either case, within 24 months of a Change of Control or
Ownership Change of the Company (as defined in the Severance Agreements). If any payment due a
named executive officer pursuant to the Severance Agreements would be deemed an excess parachute
payment under Section 280G of the Internal Revenue Code, then the Company may reduce such payment
to the extent necessary to avoid all taxes and penalties under Section 280G. Separately, the
Company provided for accelerated vesting of all outstanding options upon a Change of Control or
Ownership Change of the Company.
A change in duties is defined in the Severance Agreements to include, among other things, an
involuntary reduction in authority, any reduction in annual salary, a reduction of 10% or more in
aggregate compensation or re-location to a site more than 50 miles from the executive’s principal
place of employment.
A Change of Control or Ownership Change shall be deemed to have occurred if (i) as a result of a
tender offer or sale of stock any person acquires 20% or more of the Company’s Common Stock, (ii)
the Company merges into another corporation or, as a result of a merger, shareholders of the
Company own less than 70% of the voting stock of the surviving entity, (iii) more than one third
(1/3) of the Company’s
41
directors are replaced during any 12-month period by directors who were not endorsed by a majority
of the Board, (iv) the Company is dissolved or sells substantially all of its assets, or (v) any
other event occurs which the Board of Directors deems to constitute an Ownership Change.
Compliance with Internal Revenue Code Section 162(m)
Section 162(m) of the Internal Revenue Code disallows a tax deduction to publicly held companies
for compensation paid to certain of their executive officers, to the extent that compensation,
whether payable in cash or stock, exceeds $1 million per covered officer in any fiscal year. The
limitation applies only to compensation that is not considered to be performance-based.
Non-performance-based compensation paid to the Company’s executive officers for the 2008 fiscal
year did not exceed the $1 million limit per officer, there was no non-performance-based
compensation paid to the Company’s executive officers for the 2008 fiscal year, and the Committee
does not anticipate that any non-performance-based compensation payable in cash to the executive
officers for the 2009 fiscal year will exceed that limit. Accordingly, the Committee has decided
not to take any action at this time to limit or restructure the elements of cash compensation
payable to the Company’s executive officers but will reconsider this decision should the individual
cash compensation of any executive officer ever approach the $1 million level. The Company’s Stock
Option Plan has been structured so that any compensation deemed paid by the Company in connection
with the exercise of option grants made under that plan with an exercise price equal to the fair
market value of the option shares on the grant date will qualify as performance-based compensation
that will not be subject to the $1 million limitation on deductibility.
Item 12.
Security Ownership of Certain Beneficial Owners and Management
.
The following table sets forth as of May 30, 2008, the ownership of the Common Shares by those
persons known by the Company to own beneficially five percent (5%) or more of such shares, by each
director who owns any such shares, and by all officers and directors of the Company as a group:
|
|
|
|
|
|
|
|
|
|
|
Name and Address (1)
|
|
Amount (2)
|
|
Percent Owned
|
|
|
|
Thomas E. Jones
|
|
|
347,392
|
|
|
|
3.4
|
%
|
|
Earl L. Yager
|
|
|
299,903
|
|
|
|
3.0
|
%
|
|
John C. Boyd
|
|
|
208,619
|
|
|
|
2.1
|
%
|
|
Philip T. Wolfstein
|
|
|
202,280
|
|
|
|
2.0
|
%
|
|
James M. Brophy
|
|
|
103,579
|
|
|
|
1.0
|
%
|
|
Kathleen M. Griggs
|
|
|
77,405
|
|
|
|
0.8
|
%
|
|
All Officers & Directors as a group (9 people)
|
|
|
1,399,411
|
|
|
|
13.8
|
%
|
|
Kevin Kimberlin (3)
|
|
|
836,560
|
|
|
|
8.2
|
%
|
|
|
|
|
|
(1)
|
|
The address of each director is 10200 Mason Avenue, Suite 114, Chatsworth, CA 91311.
|
|
|
|
(2)
|
|
Includes shares subject to options which are currently exercisable or which become
exercisable within sixty (60) days: Thomas E. Jones – 127,779 shares, John C. Boyd – 35,448
shares, Philip T. Wolfstein – 35,448 shares, James M. Brophy
– 43,174 shares, Kathleen M.
Griggs – 15,000 shares, Earl L. Yager – 88,107 shares, all Officers and Directors as a group –
558,210 shares.
|
|
|
|
(3)
|
|
Mr. Kimberlin’s address is c/o Spencer Trask, 535 Madison Avenue, New York, NY 10022.
|
Item 13.
Certain Relationships and Related Transactions and Director Independence
.
In order to address the Company’s limited ability to draw against its Credit Line at the end of the
second fiscal quarter, on January 2, 2008, the Company entered a Subordinated Secured Note and
Warrant Purchase Agreement (the “Credit Facility”) with Mr. Earl Yager and Mr. Thomas Jones, our
Chief Executive Officer and our Chairman of the Board, respectively. The Company entered into the
financing arrangement after it was unsuccessful in obtaining financing on acceptable terms from a
third party. The terms of the financing arrangement were negotiated and approved by the Company’s
independent directors who concluded that the terms were more favorable to the Company than those
available from third party lenders. Pursuant to the terms of the Credit Facility, the Company may
draw an aggregate of $1,000,000, subject to certain conditions. As of February 12, 2008, the
Company had borrowed $550,000
42
under this facility. The Company voluntarily terminated the Credit Facility on February 15, 2008
and paid all amounts due thereunder with proceeds from the sale of the oxygen conserver assets to
Inovo.
In connection with the Credit Facility, Mr. Yager and Mr. Jones each received 321,428 warrants to
purchase our common stock at a price per share equal to $.28 (the average closing price of our
common stock on the American Stock Exchange for the five days immediately preceding the initial
funding under the Credit Facility). The warrants have a term of five years.
Item 14.
Principal Accountant Fees and Services
.
Accountant Fees and Services
During the fiscal years ended March 31, 2008 and 2007, Rose, Snyder & Jacobs and KPMG LLP provided
various audit, audit-related and non-audit services to us as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rose, Snyder and Jacobs
|
|
KPMG
|
|
Fee Category
|
|
Fiscal 2008 fees
|
|
Fiscal 2007 fees
|
|
Fiscal 2008 fees
|
|
Fiscal 2007 fees
|
|
|
|
|
|
Audit Fees
(1)
|
|
$
|
87,900
|
|
|
$
|
14,400
|
|
|
|
-0-
|
|
|
$
|
166,100
|
|
|
Audit Related Fees
(2)
|
|
|
3,850
|
|
|
|
-0-
|
|
|
|
-0-
|
|
|
|
-0-
|
|
|
Tax Fees
(3)
|
|
|
-0-
|
|
|
|
-0-
|
|
|
|
39,587
|
|
|
|
26,905
|
|
|
All Other Fees
|
|
|
-0-
|
|
|
|
-0-
|
|
|
|
-0-
|
|
|
|
-0-
|
|
|
|
|
|
|
Total Feels
|
|
$
|
91,750
|
|
|
$
|
14,400
|
|
|
$
|
39,587
|
|
|
$
|
193,005
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Aggregate fees billed for professional services rendered for the audit of our 2007 and 2006
fiscal year annual financial statements and review of financial statements included in our
quarterly reports on Form 10-Q or services that are normally provided in connection with
statutory and regulatory filings or engagements for the 2007 and 2006 fiscal years.
|
|
|
|
(2)
|
|
Aggregate fees billed for assurance and related services that are reasonably related to the
performance of the audit or review of our financial statements which are not reported under
“Audit Fees” above.
|
|
|
|
(3)
|
|
Aggregate fees billed for tax compliance and tax planning.
|
Our Audit Committee has considered whether provision of the above services other than audit
services is compatible with maintaining the independent accountant’s independence and has
determined that such services have not adversely affected Rose, Snyder, and Jacobs’ or KPMG LLP’s
independence.
Policy on Audit Committee Pre-Approval of Audit and Permissible Non-Audit Services of Independent
Accountants
The Audit Committee’s policy is to pre-approve all audit and permissible non-audit services
provided by the independent accountants. These services may include audit services, audit-related
services, tax services, and other services. Pre-approval is generally provided for up to one (1)
year, and any pre-approval is detailed as to the particular service or category of services and is
generally subject to a specific budget. The independent accountants and management are required to
periodically report to the Audit Committee regarding the extent of services provided by the
independent accountants in accordance with this pre-approval and the fees for the services
performed to date. The Audit Committee may also pre-approve particular services on a case-by-case
basis.
Since the May 6, 2003, effective date of the Securities and Exchange Commission rules stating that
an auditor is not independent of an audit client if the services it provides to the client are not
appropriately approved, each new engagement of KPMG LLP was approved in advance by the Audit
Committee, and none of those engagements made use of the de minimus exception to pre-approval
contained in the SEC’s rules.
43
Audit Committee Report
The following is the report of the Audit Committee of the Board of Directors of the Company. The
information contained in this report shall not be deemed to be “soliciting material” or to be
“filed” with
the Securities and Exchange Commission, nor shall such information be incorporated by reference
into any future filing under the Securities Act of 1933, as amended, or the Securities Exchange Act
of 1934, as amended, except to the extent that the Company specifically incorporates it by
reference in such filing.
On behalf of the Board of Directors, the Audit Committee monitors the Company’s financial reporting
processes and internal controls, as well as the Company’s relationship with its independent
accountants and the performance of such accountants. All of the members of the Audit Committee are
independent directors, and the Chairman of the Audit Committee has been determined to have the
expertise to serve as chairman by the Corporate Governance Committee. The Board of Directors has
adopted a charter for the Audit Committee, which can be accessed under the Investor Relations
section on the Company’s website.
Management has the primary responsibility for preparation of the Company’s financial reports, the
Company’s financial reporting systems, and its internal controls. The Audit Committee is not
intended to supersede in any respect management’s responsibilities in this regard. Management has
represented to the Audit Committee that the Company’s financial statements were prepared in
accordance with generally accepted accounting principles, and the Audit Committee has reviewed and
discussed such financial statements with management and with the Company’s independent accountants.
The Audit Committee has also discussed with the independent accountants their evaluation of the
Company’s financial reporting systems and internal controls, their plan of audit for fiscal 2008,
the application of new accounting principles to the Company’s financial statements, and other
matters required to be communicated to the Committee by the independent accountants pursuant to
standards established by the American Institute of Certified Public Accountants. The Audit
Committee has also dicussed with the independent accountants the matters required to be discussed
by the Statement on Auditing Standards no. 61. The Audit Committee has received from the
independent accountants a letter addressing matters which might bear on the independence of the
accountants as required by Independence Standards Board Standard No. 1. The Audit Committee has
discussed independence issues with the accountants and has reviewed their fees and scope of
services rendered to the Company. The Audit Committee has discussed the performance of the
independent accountants with the Company’s management.
In reliance on the foregoing, the Audit Committee has recommended to the Board of Directors the
inclusion of the audited financial statements in the Company’s Annual Report on Form 10-K for the
year ended March 31, 2008.
Submitted by the Audit Committee of the Board of Directors,
Kathleen M. Griggs, Chairman
James M. Brophy
Philip T. Wolfstein
44
PART IV
Item 15. Exhibits, Financial Statement Schedules
|
|
|
|
|
|
|
(3)
|
|
Exhibits.
|
|
|
|
|
|
|
|
3.1
|
|
Articles of Incorporation of the Registrant, as amended
(5)
|
|
|
|
|
|
|
|
3.2
|
|
Bylaws of the Registrant, as amended
(1)
|
|
|
|
|
|
|
|
10.5
|
|
Pulser System License Agreement, as amended, with Robert E. Phillips, Brian L. Tiep,
M.D., and Ben A. Otsap. (The Pulser System is now called the OXYMATIC.)
(1)
|
|
|
|
|
|
|
|
10.20
|
|
OXYCOIL tubing License Agreement with Mary Smart (licensed under the name
Respi-Coil).
(3)
|
|
|
|
|
|
|
|
10.23
|
|
Summary plan description for CHAD Therapeutics, Inc. Employee Savings and
Retirement Plan
(4)
|
|
|
|
|
|
|
|
10.24
|
|
1994 Stock Option Plan
(6)
|
|
|
|
|
|
|
|
10.25
|
|
Lease on real property at 21622 Plummer Street, Chatsworth, California
(6)
|
|
|
|
|
|
|
|
10.26
|
|
TOTAL O
2
Delivery System License Agreement, as amended, with the Carleton
Life Support Division of Litton Industries, Inc.
(7)
|
|
|
|
|
|
|
|
10.27
|
|
2004 Equity Incentive Plan
(12)
|
|
|
|
|
|
|
|
10.28
|
|
Registration Rights Agreement between Calliope Capital Corporation and CHAD
Therapeutics, Inc., dated July 30, 2007
(15)
|
|
|
|
|
|
|
|
10.29
|
|
Security Agreement between Calliope Capital Corporation and CHAD Therapeutics, Inc.,
dated July 30, 2007
(15)
|
|
|
|
|
|
|
|
10.30
|
|
Secured Convertible Note between Calliope Capital Corporation and CHAD Therapeutics,
Inc., dated July 30, 2007
(15)
|
|
|
|
|
|
|
|
10.31
|
|
Secured Revolving Note between Calliope Capital Corporation and CHAD Therapeutics,
Inc., dated July 30, 2007
(15)
|
|
|
|
|
|
|
|
10.32
|
|
Common Stock Purchase Warrant Agreement between Calliope Capital Corporation and CHAD
Therapeutics, Inc., dated July 30, 2007
(15)
|
|
|
|
|
|
|
|
10.33
|
|
Asset Purchase Agreement between Inovo, Inc. and CHAD Therapeutics, Inc., dated
November 16, 2007
(16)
|
|
|
|
|
|
|
|
10.34
|
|
Subordinated Secured Note and Warrant Purchase Agreement between Mr. Earl Yager and
Mr. Thomas Jones and CHAD Therapeutics, Inc., dated January 2, 2008
(17)
|
|
|
|
|
|
|
|
10.35
|
|
Asset Purchase Agreement between Respironics, Inc. and CHAD Therapeutics, Inc., dated
March 6, 2008
(18)
|
45
|
|
|
|
|
|
|
23.1
|
|
Consent of Independent Registered Public Accounting Firm for the years ended
March 31, 2008 and 2007
|
|
|
|
|
|
|
|
31.1
|
|
Certification of the Chief Executive Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
|
|
|
|
|
|
|
|
31.2
|
|
Certification of the Chief Financial Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
|
|
|
|
|
|
|
|
32.1
|
|
Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
|
|
|
|
|
|
|
|
32.2
|
|
Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
|
|
|
|
|
|
|
|
99.1
|
|
Letter from the FDA authorizing the Company to market the OXYMIZER oxygen
conserving device as a Class I device
(1)
|
|
|
|
|
|
|
|
99.2
|
|
Letter from the FDA authorizing the Company to market the OXYMIZER Pendant oxygen
conserving device as a Class I device
(2)
|
|
|
|
|
|
|
|
99.3
|
|
Letter from the FDA authorizing the Company to market the OXYMATIC electronic
oxygen conserver as a Class II device
(3)
|
|
|
|
|
|
|
|
99.4
|
|
Letter from the FDA authorizing the Company to market the OXYCOIL coiled oxygen
tubing as a Class II device
(3)
|
|
|
|
|
|
|
|
99.5
|
|
Letter from the FDA authorizing the Company to market the TOTAL O
2
Delivery System as a Class II device
(7)
|
|
|
|
|
|
|
|
99.6
|
|
Letter from the FDA authorizing the Company to market the OXYMATIC 411 conserver as a
Class II device
(8)
|
|
|
|
|
|
|
|
99.7
|
|
Letter from the FDA authorizing the Company to market the OXYMATIC 401A and 411A
conservers as Class II devices
(8)
|
|
|
|
|
|
|
|
99.8
|
|
Letter from the FDA authorizing the Company to market the TOTAL O
2
Post
Valve Cylinders
(9)
|
|
|
|
|
|
|
|
99.9
|
|
Letter from the FDA authorizing the Company to market the CYPRESS OXYPneumatic
conserver
(10)
|
|
|
|
|
|
|
|
99.10
|
|
Letter from the FDA authorizing the Company to market the SAGE Oxygen Therapeutic
Device
(11)
|
|
|
|
|
|
|
|
99.11
|
|
Letter from the FDA authorizing the Company to market the LOTUS Electronic Oxygen
Conserver
(13)
|
|
|
|
|
|
|
|
99.12
|
|
Letter from the FDA authorizing the Company to market the Bonsai Pneumatic Conserver
(14)
|
46
|
|
|
|
|
(1)
|
|
Previously filed as an Exhibit to the Registrant’s Registration Statement on Form S-18, File
No. 2-83926.
|
|
|
|
(2)
|
|
Previously filed as an Exhibit to the Registrant’s Annual Report on Form 10-K for the year
ended March 31, 1984.
|
|
|
|
(3)
|
|
Previously filed as an Exhibit to the Registrant’s Annual Report on Form 10-K for the year
ended March 31, 1986.
|
|
|
|
(4)
|
|
Previously filed as an Exhibit to the Registrant’s Annual Report on Form 10-K for the year
ended March 31, 1993.
|
|
|
|
(5)
|
|
Previously filed as an exhibit to the Registrant’s Annual Report on Form 10-K for the year
ended March 31, 1994.
|
|
|
|
(6)
|
|
Previously filed as an exhibit to the Registrant’s Annual Report on Form 10-K for the year
ended March 31, 1996.
|
|
|
|
(7)
|
|
Previously filed as an exhibit to the Registrant’s Annual Report on Form 10-K for the year
ended March 31, 1998.
|
|
|
|
(8)
|
|
Previously filed as an exhibit to the Registrant’s Annual Report on Form 10-K for the year
ended March 31, 2001.
|
|
|
|
(9)
|
|
Previously filed as an exhibit to the Registrant’s Annual Report on Form 10-K for the year
ended March 31, 2002.
|
|
|
|
(10)
|
|
Previously filed as an exhibit to the Registrant’s Annual Report on Form 10-K for the year
ended March 31, 2003.
|
|
|
|
(11)
|
|
Previously filed as an exhibit to the Registrant’s Annual Report on Form 10-K for the year
ended March 31, 2004.
|
|
|
|
(12)
|
|
Previously filed as Appendix A of the Registrant’s Proxy Statement for the 2004 Annual
Shareholders’ Meeting.
|
|
|
|
(13)
|
|
Previously filed as an exhibit to the Registrant’s Annual Report on Form 10-K for the year
ended March 31, 2005.
|
|
|
|
(14)
|
|
Previously filed as an exhibit to the Registrant’s Annual Report on Form 10-K for the year
ended March 31, 2007.
|
|
|
|
(15)
|
|
Previously filed as an exhibit to the Registrants Form 8-K filed on August 3, 2007.
|
|
|
|
(16)
|
|
Previously filed as an exhibit to the Registrants Form 10-Q filed on November 19, 2007.
|
|
|
|
(17)
|
|
Previously filed as an exhibit to the Registrants Form 8-K filed on January 4, 2008.
|
|
|
|
(18)
|
|
Previously filed as an exhibit to the Registrants Form 8-K filed on March 11, 2008.
|
47
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of Los Angeles, State of California, on the 27th day of June, 2008.
|
|
|
|
|
|
|
|
CHAD THERAPEUTICS, INC.
|
|
|
|
By
|
/s/ Earl L. Yager
|
|
|
|
|
Earl L. Yager, Chief Executive Officer
|
|
|
|
|
|
|
|
|
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the Registrant and in the capacities and on the
dates indicated.
|
|
|
|
|
|
|
Signature
|
|
Title
|
|
Date
|
|
|
|
|
|
|
|
/s/ Thomas E. Jones
|
|
Chairman of the Board of Directors
|
|
June 27, 2008
|
|
|
|
|
|
|
|
Thomas E. Jones
|
|
|
|
|
|
|
|
|
|
|
|
/s/ Earl L. Yager
|
|
Chief Executive Officer, President, and Director
|
|
June 27, 2008
|
|
|
|
|
|
|
|
Earl L. Yager
|
|
(Principal Executive Officer)
|
|
|
|
|
|
|
|
|
|
/s/ Tracy A. Kern
|
|
Chief Financial Officer
|
|
June 27, 2008
|
|
|
|
|
|
|
|
Tracy A. Kern
|
|
(Principal Financial and Accounting Officer)
|
|
|
|
|
|
|
|
|
|
/s/ Kathleen M. Griggs
|
|
Director
|
|
June 27, 2008
|
|
|
|
|
|
|
|
Kathleen M. Griggs
|
|
|
|
|
|
|
|
|
|
|
|
/s/ John C. Boyd
|
|
Director
|
|
June 27, 2008
|
|
|
|
|
|
|
|
John C. Boyd
|
|
|
|
|
|
|
|
|
|
|
|
/s/ Philip T. Wolfstein
|
|
Director
|
|
June 27, 2008
|
|
|
|
|
|
|
|
Philip T. Wolfstein
|
|
|
|
|
|
|
|
|
|
|
|
/s/ James M. Brophy
|
|
Director
|
|
June 27, 2008
|
|
|
|
|
|
|
|
James M. Brophy
|
|
|
|
|
48
Exhibit Index
|
|
|
|
|
|
|
Exhibit Index
|
|
Exhibit No.
|
|
Document
|
|
|
|
|
|
23.1
|
|
Consent of Independent Registered Public Accounting Firm for the years ended March 31,
2008 and 2007
|
|
|
|
|
|
31.1
|
|
Certification of the Chief Executive Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
|
|
|
|
|
|
31.2
|
|
Certification of the Chief Financial Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
|
|
|
|
|
|
32.1
|
|
Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
|
|
|
|
|
|
32.2
|
|
Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
|
Chad Therapeutics (AMEX:CTU)
過去 株価チャート
から 11 2024 まで 12 2024
Chad Therapeutics (AMEX:CTU)
過去 株価チャート
から 12 2023 まで 12 2024
