FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Quarterly Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934
For Quarter Ended: September 30, 2002
Commission file number: 0-11363
CHAD THERAPEUTICS, INC.
(Exact name of registrant as specified in its charter)
| California (State of other jurisdiction of incorporation or organization) |
95-3792700 (I.R.S. Employer Identification No.) |
21622 Plummer Street, Chatsworth, CA 91311
(Address of principal executive offices)(Zip Code)
(818) 882-0883
(Registrant’s telephone number, including area code)
(Former name, former address and former fiscal year, if changed since last report.)
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 X... No....
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:
| Common Shares | 10,068,000 |
CHAD THERAPEUTICS, INC.
Condensed Balance Sheets
September 30, 2002 and March 31, 2002
(Unaudited)
ASSETS
| September 30, | March 31, | ||||||||||
| 2002 | 2002 | ||||||||||
Current Assets: |
|||||||||||
Cash |
$ | 1,404,000 | $ | 520,000 | |||||||
Accounts receivable, less allowance for
doubtful accounts of $84,000 at
September 30, 2002 and $76,000 at
March 31, 2002 |
2,665,000 | 2,333,000 | |||||||||
Income taxes refundable |
— | 995,000 | |||||||||
Inventories (Note 2) |
5,321,000 | 5,284,000 | |||||||||
Prepaid expenses |
358,000 | 315,000 | |||||||||
Total current assets |
9,748,000 | 9,447,000 | |||||||||
Property and equipment, at cost |
6,119,000 | 5,972,000 | |||||||||
Less accumulated depreciation |
4,658,000 | 4,320,000 | |||||||||
Net property and equipment |
1,461,000 | 1,652,000 | |||||||||
Other assets, net |
1,156,000 | 1,224,000 | |||||||||
Total assets |
$ | 12,365,000 | $ | 12,323,000 | |||||||
LIABILITIES AND SHAREHOLDERS’ EQUITY |
|||||||||||
Current liabilities: |
|||||||||||
Accounts payable |
$ | 686,000 | $ | 777,000 | |||||||
Accrued expenses |
1,108,000 | 1,169,000 | |||||||||
Income taxes payable |
9,000 | 4,000 | |||||||||
Total current liabilities |
1,803,000 | 1,950,000 | |||||||||
Shareholders’ equity: |
|||||||||||
Common shares, $.01 par value, authorized
40,000,000 shares; 10,068,000 and 10,059,000
shares issued and outstanding |
13,106,000 | 13,097,000 | |||||||||
Accumulated deficit |
(2,544,000 | ) | (2,724,000 | ) | |||||||
Total shareholders’ equity |
10,562,000 | 10,373,000 | |||||||||
Total liabilities and shareholders’ equity |
$ | 12,365,000 | $ | 12,323,000 | |||||||
See accompanying notes to condensed financial statements.
CHAD THERAPEUTICS, INC.
| Three Months
Ended September 30 |
||||||||||||
| 2002 | 2001 | |||||||||||
Net sales |
$ | 4,763,000 | $ | 5,106,000 | ||||||||
Cost of sales |
2,706,000 | 3,234,000 | ||||||||||
Gross profit |
2,057,000 | 1,872,000 | ||||||||||
Costs and expenses: |
||||||||||||
Selling, general and administrative |
1,822,000 | 1,620,000 | ||||||||||
Research and development |
225,000 | 200,000 | ||||||||||
Total costs and expenses |
2,047,000 | 1,820,000 | ||||||||||
Operating income |
10,000 | 52,000 | ||||||||||
Other income — interest income, net |
5,000 | 17,000 | ||||||||||
Earnings before income taxes |
15,000 | 69,000 | ||||||||||
Income tax expense |
13,000 | 2,000 | ||||||||||
Net earnings |
$ | 2,000 | $ | 67,000 | ||||||||
Basic earnings per share |
$ | — | $ | .01 | ||||||||
Diluted earnings per share |
$ | — | $ | .01 | ||||||||
Weighted shares outstanding: |
||||||||||||
Basic |
10,068,000 | 10,053,000 | ||||||||||
Diluted |
10,406,000 | 10,409,000 | ||||||||||
See accompanying notes to condensed financial statements.
CHAD THERAPEUTICS, INC.
| Six Months Ended | |||||||||||
| September 30 | |||||||||||
| 2002 | 2001 | ||||||||||
Net sales |
$ | 9,726,000 | $ | 9,953,000 | |||||||
Cost of sales |
5,518,000 | 6,355,000 | |||||||||
Gross profit |
4,208,000 | 3,598,000 | |||||||||
Costs and expenses: |
|||||||||||
Selling, general and administrative |
3,533,000 | 3,141,000 | |||||||||
Research and development |
488,000 | 405,000 | |||||||||
Total costs and expenses |
4,021,000 | 3,546,000 | |||||||||
Operating income |
187,000 | 52,000 | |||||||||
Other income — interest income, net |
9,000 | 31,000 | |||||||||
Earnings before income taxes |
196,000 | 83,000 | |||||||||
Income tax expense |
16,000 | 3,000 | |||||||||
Net earnings |
$ | 180,000 | $ | 80,000 | |||||||
Basic earnings per share |
$ | .02 | $ | .01 | |||||||
Diluted earnings per share |
$ | .02 | $ | .01 | |||||||
Weighted shares outstanding: |
|||||||||||
Basic |
10,068,000 | 10,053,000 | |||||||||
Diluted |
10,417,000 | 10,340,000 | |||||||||
See accompanying notes to condensed financial statements.
CHAD THERAPEUTICS, INC.
| Common Shares | Accumulated | |||||||||||
| Shares | Amount | Deficit | ||||||||||
Balance at March 31, 2002 |
10,059,000 | $ | 13,097,000 | $ | (2,724,000 | ) | ||||||
Exercise of stock options |
9,000 | 9,000 | — | |||||||||
Net earnings |
— | — | 180,000 | |||||||||
Balance at September 30, 2002 |
10,068,000 | $ | 13,106,000 | $ | (2,544,000 | ) | ||||||
See accompanying notes to condensed financial statements.
CHAD THERAPEUTICS, INC.
| Six Months Ended | ||||||||||||
| September 30 | ||||||||||||
| 2002 | 2001 | |||||||||||
Cash flows from operating activities: |
||||||||||||
Net earnings |
$ | 180,000 | $ | 80,000 | ||||||||
Adjustments to reconcile net earnings to
net cash provided by operating activities: |
||||||||||||
Depreciation and amortization of property and
equipment |
338,000 | 418,000 | ||||||||||
Amortization of intangibles |
55,000 | 57,000 | ||||||||||
Changes in assets and liabilities: |
||||||||||||
Decrease (increase) in accounts receivable |
(332,000 | ) | (1,007,000 | ) | ||||||||
Decrease (increase) in inventories |
(37,000 | ) | 258,000 | |||||||||
Decrease (increase) in income taxes refundable |
995,000 | — | ||||||||||
Decrease (increase) in prepaid expenses |
(43,000 | ) | 89,000 | |||||||||
Decrease (increase) in other assets |
13,000 | 22,000 | ||||||||||
Increase (decrease) in accounts payable |
(91,000 | ) | 749,000 | |||||||||
Increase (decrease) in accrued expenses |
(61,000 | ) | (64,000 | ) | ||||||||
Increase (decrease) in income taxes payable |
5,000 | (1,000 | ) | |||||||||
Net cash provided by
operating activities |
1,022,000 | 601,000 | ||||||||||
Cash flows from investing activities: |
||||||||||||
Capital expenditures |
(147,000 | ) | (237,000 | ) | ||||||||
Net cash used in investing activities |
(147,000 | ) | (237,000 | ) | ||||||||
Cash flows from financing activities: |
||||||||||||
Exercise of stock options |
9,000 | — | ||||||||||
Net cash provided by financing activities |
9,000 | — | ||||||||||
Net increase in cash |
884,000 | 364,000 | ||||||||||
Cash beginning of period |
520,000 | 1,059,000 | ||||||||||
Cash end of period |
$ | 1,404,000 | $ | 1,423,000 | ||||||||
See accompanying notes to condensed financial statements.
CHAD THERAPEUTICS, INC.
September 30, 2002
(Unaudited)
| 1. | Interim Reporting | |
| Chad Therapeutics, Inc. (the Company) is in the business of developing, producing and marketing respiratory care devices designed to improve the efficiency of oxygen delivery systems for home health care and hospital treatment of patients suffering from pulmonary diseases. | ||
| In the opinion of management, all adjustments necessary, which are of a normal and recurring nature, for a fair presentation of the results for the interim periods presented have been made. The results for the six-month period ended September 30, 2002, are not necessarily indicative of the results expected for the year ended March 31, 2003. The interim statements are condensed and do not include some of the information necessary for a more complete understanding of the financial data. Accordingly, your attention is directed to the footnote disclosures found in the March 31, 2002, Annual Report and particularly to Note 1 which includes a summary of significant accounting policies. | ||
| 2. | Inventories | |
| Inventories in 2002, are summarized as follows: |
| September 30 | March 31 | |||||||
Finished goods |
$ | 1,056,000 | 935,000 | |||||
Work-in-process |
1,416,000 | 987,000 | ||||||
Raw materials |
2,849,000 | 3,362,000 | ||||||
| $ | 5,321,000 | 5,284,000 | ||||||
| 3. | Earnings Per Common Share | |
| Following is a reconciliation of the numerators and denominators used in the calculation of basic and diluted earnings per common shares: |
| Three Months Ended | Six Months Ended | |||||||||||||||||
| September 30 | September 30 | |||||||||||||||||
| 2002 | 2001 | 2002 | 2001 | |||||||||||||||
Basic earnings per share: |
||||||||||||||||||
Numerator
— net earnings |
$ | 2,000 | $ | 67,000 | $ | 180,000 | $ | 80,000 | ||||||||||
Denominator
— weighted average
common shares outstanding |
10,068,000 | 10,053,000 | 10,068,000 | 10,053,000 | ||||||||||||||
Basic earnings per share |
$ | .00 | $ | .01 | $ | .02 | $ | .01 | ||||||||||
Diluted earnings per share: |
||||||||||||||||||
Numerator
— net earnings |
$ | 2,000 | $ | 67,000 | $ | 180,000 | $ | 80,000 | ||||||||||
Denominator: |
||||||||||||||||||
Weighted average common
shares outstanding |
10,068,000 | 10,053,000 | 10,068,000 | 10,053,000 | ||||||||||||||
Dilutive effect of common
stock options |
338,000 | 356,000 | 349,000 | 287,000 | ||||||||||||||
| 10,406,000 | 10,409,000 | 10,417,000 | 10,340,000 | |||||||||||||||
Diluted earnings per share |
$ | .00 | $ | .01 | $ | .02 | $ | .01 | ||||||||||
CHAD THERAPEUTICS, INC.
September 30, 2002
(Unaudited)
| 3. | Earnings Per Common Share (cont’d) | |
| Options to purchase 458,000 shares of common stock at prices ranging from $3.35 to $13.47 per share and 429,000 shares of common stock at prices ranging from $3.38 to $13.47 per share were not included in the computation of diluted earnings per share for the three and six month periods ended September 30, 2002 and 2001, respectively, because their effect would have been anti-dilutive. | ||
| 4. | Income Taxes | |
| Income taxes for the period ended September 30, 2002, relate primarily to state income taxes which are provided for at an effective rate of 8.4%. The Company has federal and California net operating loss carryforwards of $673,000 and $2,640,000, respectively, against which a full valuation allowance has been recorded. In September, 2002, the state of California enacted legislation that suspends the utilization of net operating loss carryforwards during tax years starting 2002 and 2003, effective retroactively back to January 1, 2002. As a result, the Company will be unable to use its California net operating loss carryforwards until the tax year beginning April 1, 2004. Further, due to the retroactive nature of the law, California income taxes of $12,000 have been recorded in the quarter ended September 30, 2002, that relates to income earned in the quarter ended June 30, 2002. | ||
| 5. | Geographic Information | |
| The Company has one reportable operating segment. Geographic information regarding the Company’s sales is as follows: |
| Three Months Ended Six | Months Ended | |||||||||||||||
| September 30 | September 30 | |||||||||||||||
| 2002 | 2001 | 2002 | 2001 | |||||||||||||
United States |
$ | 4,529,000 | $ | 4,833,000 | $ | 9,261,000 | $ | 9,129,000 | ||||||||
Canada |
68,000 | 92,000 | 105,000 | 195,000 | ||||||||||||
Germany |
5,000 | 25,000 | 18,000 | 334,000 | ||||||||||||
Japan |
66,000 | 52,000 | 117,000 | 123,000 | ||||||||||||
All other countries |
95,000 | 104,000 | 225,000 | 172,000 | ||||||||||||
| $ | 4,763,000 | $ | 5,106,000 | $ | 9,726,000 | $ | 9,953,000 | |||||||||
| All long-lived assets are located in the United States. | ||
| Sales of OXYMATIC® conservers and OXYLITE® systems accounted for 73% and 54% of the Company’s sales for the six-month periods ended September 30, 2002 and 2001, respectively. |
CHAD THERAPEUTICS, INC.
September 30, 2002
Overview
The Company develops, assembles and markets medical devices that furnish supplementary oxygen to home health care patients. The Company was a pioneer in developing oxygen conserving devices that enhance the quality of life for patients by increasing their mobility and, at the same time, lower operating costs by achieving significant savings in the amount of oxygen actually required to properly oxygenate patients. The market for oxygen conserving devices has been significantly affected during the past several years by increased competition, consolidation among home oxygen dealers and revisions (and proposed revisions) in governmental reimbursement policies. All of these factors, as described more fully below, contributed to an erosion of the Company’s market share, as devices that are less expensive but which provide lower oxygen savings (or, in some cases, do not truly provide ambulatory oxygen) prospered in this environment. The Company’s market share for conservers was also affected by the introduction of competing devices that offer features not available on the OXYMATIC 301, which was the Company’s primary product in this market until July of 2000.
In 1998 the Company introduced the TOTAL O2 Delivery System, which combines the benefits of an oxygen concentrator with a system enabling patients to refill their portable cylinders. Initial sales of the TOTAL O2 system by home oxygen dealers were slowed by several factors discussed below.
In order to address this situation, the Company implemented a four-part strategy:
| • | Introduction of the OXYMATIC 400 series in July 2000 with improved features, which should place these oxygen conservers at the forefront of the industry; | |
| • | Development of additional |