Add
CTU to Portfolio
Set Alert
Email to a
Friend
| |||
|
|
Quotes & Info
|
| CTU > SEC Filings for CTU > Form 10-Q on 14-Aug-2008 | All Recent SEC Filings |
14-Aug-2008
Quarterly Report
Cautionary Statement
Certain statements in this report, including statements regarding our strategy,
financial performance, and revenue sources, are forward-looking statements
within the meaning of the Private Securities Litigation Reform Act of 1995,
Section 21E of the Securities Exchange Act of 1934, as amended, and Section 27A
of the Securities Act of 1933, as amended, and are subject to the safe harbors
created by those sections. These forward-looking statements are based on our
current expectations, estimates and projections about our industry, management's
beliefs, and certain assumptions made by us. Such statements are not guarantees
of future performance and are subject to certain risks, uncertainties and
assumptions that are difficult to predict. Therefore, our actual results could
differ materially and adversely from those expressed in any forward-looking
statements as a result of various factors. The section entitled "Risk Factors"
set forth in this Form 10-Q and similar discussions in filings with the
Securities and Exchange Commission made from time to time, including other
quarterly reports on Form 10-Q, our Annual Reports on Form 10-K, and in our
other SEC filings, discuss some of the important risk factors that may affect
our business, results of operations, and financial condition.
The following discussion should be read in conjunction with our condensed
financial statements and notes thereto.
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 "oxygen business").
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
$(393,000) for the three-months ended June 30, 2007 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.
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
Due to the sale of the Company's oxygen assets, the Company does not have any
sales for the three months ended June 30, 2008. In July 2008, the Company
received 510k clearance from the FDA for its first sleep product.
Selling, general, and administrative expenditures for continuing operations
decreased 38% as compared to the prior year due to the sale of the company's
oxygen business.
Research and development expense for continuing operations decreased by $16,000
as compared to the same period 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.
At March 31, 2008, the Company had 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
June 30, 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 June 30, 2008, the Company had cash totaling $683,000 or 39.8% of
total assets, as compared to $2,068,000 (58.4% of total assets) at March 31,
2008. Net working capital decreased from $352,000 at March 31, 2008, to
$(248,000) at June 30, 2008. Net accounts receivable decreased $423,000 during
the three months ended June 30, 2008, due to the sale of the Company's oxygen
product line. The Company sold all of its inventory due to the sale of its
oxygen product line in the fourth quarter of fiscal year 2008.
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
received permission from the FDA to begin marketing the first of its sleep
products in July 2008; however, no assurance can be given with respect to if and
when the Company will begin to generate revenues from 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 $715,000 with $521,000 payable in September 2008, and $194,000 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
financing.
If we do raise additional financing 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
financing may be in the form of senior equity with liquidation and other
preferences over our common stock. The financing 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 will 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 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 three months ended June 30, 2008, was negative and the Company
cannot predict if and 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 was payable in equal
installments over 36 months and bore interest at prime plus 2%, and the Credit
Line bore 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 its 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 could 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 its 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
$0.28 (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, Earl Yager. 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
interest 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 June 30, 2008, all of these intangible assets relate to products
under development for the sleep disorder market. The Company uses actual costs
when recording 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. 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. 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.
Item 3. Quantitative and Qualitative Disclosures about Market Risks
The Company has no significant exposure to market risk sensitive instruments or
contracts.
Item 4. Controls and Procedures
|
|