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| CTU > SEC Filings for CTU > Form 10-K on 27-Jun-2008 | All Recent SEC Filings |
27-Jun-2008
Annual Report
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.
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
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.
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.
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.
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