##### Table of Contents



SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-Q
 þ Quarterly Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934
 For Quarterly Period Ended: June 30, 2007
 Or
 o Transition Report Pursuant to Section 13 or 15(d) of
the
Securities Exchange Act of 1934
 Commission file number: 1-12214
 CHAD THERAPEUTICS, INC.
  California
    
    95-3792700(State of other jurisdiction of
    
    (I.R.S. Employerincorporation or organization)
    
    Identification No.)
 (Address of principal executive offices)       (Zip Code)
 (818) 882-0883
 
   þ o
  o o þ
 o þ




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TABLE OF CONTENTS  Item 2. Managements Discussion and Analysis of Financial Condition and Results of OperationsItem 3. Quantitative and Qualitative Disclosures about Market RisksItem 4. Controls and ProceduresPart IIItem 1. Legal ProceedingsItem 1A. Risk FactorsItem 2. Unregistered Sales of Equity Securities and Use of ProceedsItem 3. Defaults Upon Senior SecuritiesItem 4. Submission of Matters to a Vote of Security HoldersItem 5. Other InformationItem 6. ExhibitsSIGNATUREINDEX TO EXHIBITSEXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32EXHIBIT 99.1    Table of Contents  
 June 30,
    
    
    March 31,2007
    
    
    2007ASSETSCurrent assets:Cash
    
    $
    261,000
    
    
    $
    375,000Accounts receivable, less allowance for
doubtful accounts of $37,000 at
June 30, 2007, and $38,000 at
March 31, 2007
    
    
    1,482,000
    
    
    
    2,376,000Income taxes refundable
    
    
    290,000
    
    
    
    291,000Inventories (Note 5)
    
    
    5,870,000
    
    
    
    6,557,000Prepaid expenses and other assets
    
    
    290,000
    
    
    
    321,000Total current assets
    
    
    8,193,000
    
    
    
    9,920,000Property and equipment, at cost
    
    
    6,206,000
    
    
    
    6,186,000Less accumulated depreciation
    
    
    5,578,000
    
    
    
    5,501,000Net property and equipment
    
    
    628,000
    
    
    
    685,000Intangible assets, net
    
    
    1,073,000
    
    
    
    1,107,000Other assets
    
    
    35,000
    
    
    
    36,000Total assets
    
    $
    9,929,000
    
    
    $
    11,748,000LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    731,000
    
    
    $
    1,282,000Accrued expenses
    
    
    1,390,000
    
    
    
    1,372,000Total current liabilities
    
    
    2,121,000
    
    
    
    2,654,000Shareholders equity:Common shares, $.01 par value, authorized
40,000,000 shares; 10,180,000 and 10,158,000
shares issued and outstanding
    
    
    13,530,000
    
    
    
    13,526,000Accumulated deficit
    
    
    (5,722,000
    )
    
    
    (4,432,000
    )Total shareholders equity
    
    
    7,808,000
    
    
    
    9,094,000Total liabilities and shareholders equity
    
    $
    9,929,000
    
    
    $
    11,748,000




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Three Months EndedJune 30,2007
    
    
    2006Net sales
    
    $
    3,973,000
    
    
    $
    5,476,000Cost of sales
    
    
    3,178,000
    
    
    
    3,662,000Gross profit
    
    
    795,000
    
    
    
    1,814,000Costs and expenses:Selling, general, and administrative
    
    
    1,549,000
    
    
    
    1,702,000Research and development
    
    
    462,000
    
    
    
    335,000Total costs and expenses
    
    
    2,011,000
    
    
    
    2,037,000Operating loss
    
    
    (1,216,000
    )
    
    
    (223,000
    )Interest (income) expense
    
    
    22,000
    
    
    
    (14,000
    )Other (income) expense
    
    
    48,000
    
    
    
    (9,000
    )Loss before income taxes
    
    
    (1,286,000
    )
    
    
    (200,000
    )Income tax expense (benefit)
    
    
    4,000
    
    
    
    (84,000
    )Net loss
    
    $
    (1,290,000
    )
    
    $
    (116,000
    )Basic loss per share
    
    $
    (0.13
    )
    
    $
    (0.01
    )Diluted loss per share
    
    $
    (0.13
    )
    
    $
    (0.01
    )Weighted shares outstanding:Basic
    
    
    10,180,000
    
    
    
    10,169,000Diluted
    
    
    10,180,000
    
    
    
    10,169,000




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Common Shares
    
    
    AccumulatedShares
    
    
    Amount
    
    
    DeficitBalance as of March 31, 2007
    
    
    10,180,000
    
    
    $
    13,526,000
    
    
    $
    (4,432,000
    )Stock-based compensation  options
    
    
    
    
    
    
    4,000
    
    
    
    Net loss
    
    
    
    
    
    
    
    
    
    
    (1,290,000
    )Balance at June 30, 2007
    
    
    10,180,000
    
    
    
    13,530,000
    
    
    $
    (5,722,000
    )




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Three Months EndedJune 30,2007
    
    
    2006Cash flows from operating activities:Net loss
    
    $
    (1,290,000
    )
    
    $
    (116,000
    )Adjustments to reconcile net loss to net cash
(used in) provided by operating activities:Depreciation and amortization of property and equipment
    
    
    77,000
    
    
    
    98,000Amortization of intangibles
    
    
    59,000
    
    
    
    11,000Provision for losses on receivables
    
    
    (1,000
    )
    
    
    Decrease (increase) in deferred income taxes
    
    
    
    
    
    
    (9,000
    )Stock-based compensation
    
    
    4,000
    
    
    
    20,000Changes in assets and liabilities:Decrease (increase) in accounts receivable
    
    
    895,000
    
    
    
    36,000Decrease (increase) in inventories
    
    
    687,000
    
    
    
    124,000Decrease (increase) in income taxes refundable
    
    
    1,000
    
    
    
    93,000Decrease (increase) in prepaid expenses and other assets
    
    
    32,000
    
    
    
    35,000Increase (decrease) in accounts payable
    
    
    (551,000
    )
    
    
    487,000Increase (decrease) in accrued expenses
    
    
    18,000
    
    
    
    118,000Net cash (used in) provided by operating activities
    
    
    (69,000
    )
    
    
    897,000Cash flows from investing activities:Additions to intangible assets
    
    
    (25,000
    )
    
    
    (77,000
    )Capital expenditures
    
    
    (20,000
    )
    
    
    (49,000
    )Net cash (used in) provided by investing activities
    
    
    (45,000
    )
    
    
    (126,000
    )Cash flows from financing activities:Other long-term liabilities
    
    
    
    
    
    
    (2,000
    )Net cash (used in) provided by financing activities
    
    
    
    
    
    
    (2,000
    )Net increase in cash
    
    
    (114,000
    )
    
    
    769,000Cash beginning of period
    
    
    375,000
    
    
    
    935,000Cash end of period
    
    $
    261,000
    
    
    $
    1,704,000




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CHAD THERAPEUTICS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
 1.
    
    Interim ReportingCHAD 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 three-month period ended June 30, 2007, are not necessarily
indicative of the results expected for the year ended March 31, 2008. 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, 2007, Annual Report and particularly to Note 1 which includes
a summary of significant accounting policies.2.
    
    Revenue RecognitionRevenue 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. Allowances 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.3.
    
    Major Customers
 Three Months EndedJune 30,2007
    
    2006Customer A**
    
    
    47.7
    %
    
    
    36.6
    %Customer B
    
    
    *
    
    
    
    12.8
    %
 
 *
    
    Indicates sales less than 10% of the Companys net sales**
    
    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.4.
    
    Concentration of Credit RiskAt times the Company maintains balances of cash that exceed $100,000 per account, 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




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any one
account over $100,000 and/or all funds in the interest bearing account. At June 30, 2007, the
amount at risk was approximately $247,000.The significant outstanding accounts receivable balances in 2007 were as follows:
 June 30
    
    March 31Customer A**
    
    
    33.8
    %
    
    
    41.0
    %Customer B**
    
    
    14.4
    %
    
    
    *
 
 *
    
    Indicates receivables balance less than 10% of the Companys net accounts receivable balance.**
    
    Indicates national chain customer. 5.
    
    InventoriesInventories in 2007 are summarized as follows:
 June 30
    
    
    March 31Finished goods
    
    $
    1,475,000
    
    
    $
    1,841,000Work-in-process
    
    
    2,006,000
    
    
    
    2,240,000Raw materials
    
    
    2,389,000
    
    
    
    2,476,000$
    5,870,000
    
    
    $
    6,557,000
 6.
    
    Leasing ArrangementsIn the second quarter of fiscal year 2006, the Company entered into a capital lease agreement
for certain plant equipment totaling $14,000, with annual lease payments of $7,000, a fixed
interest rate of 7% and a purchase option at lease end in August 2007. The capital lease
obligation of $2,000 is included in accounts payable. Amortization of plant equipment under
capital leases is included in depreciation expense.




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7.
    
    Earnings (Loss) Per Common ShareFollowing is a reconciliation of the numerators and denominators used in the calculation of
basic and diluted loss per common share:
 Three Months EndedJune 30,2007
    
    
    2006Basic earnings (loss) per share:Numerator-net earnings (loss)
    
    $
    (1,290,000
    )
    
    $
    (116,000
    )Denominator-weighted average
common shares outstanding
    
    
    10,180,000
    
    
    
    10,169,000Basic earnings (loss) per share
    
    $
    (0.13
    )
    
    $
    (0.01
    )Diluted earnings (loss) per share:Numerator-net earnings (loss)
    
    $
    (1,290,000
    )
    
    $
    (116,000
    )Denominator-weighted average
common shares outstanding
    
    
    10,180,000
    
    
    
    10,169,000Diluted effect of common stock options
    
    
    
    
    
    
    10,180,000
    
    
    
    10,169,000
  8.
    
    Income Tax ExpenseBased on managements earnings projections for the fiscal year ended 2008, the Company has
forecasted an effective tax rate of 35 percent. The Company has Federal net operating loss
carryforwards of $1,459,000 expiring in 2027 and California net operating loss carryforwards of
$3,442,000 expiring in 2013. In assessing the realizability of deferred tax assets, management
considered whether it is more likely than not that some portion or all of the deferred tax
assets will not be realized. At June 30, 2007, the Companys deferred tax assets are fully
offset by a valuation allowance.




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9.
    
    Geographic InformationThe Company has one reportable operating segment. Geographic information regarding the
Companys net sales is as follows:
 Three Months EndedJune 30,2007
    
    
    2006United States
    
    $
    3,579,000
    
    
    $
    4,354,000Canada
    
    
    35,000
    
    
    
    54,000Japan
    
    
    58,000
    
    
    
    126,000Europe
    
    
    143,000
    
    
    
    854,000All other countries
    
    
    158,000
    
    
    
    88,000$
    3,973,000
    
    
    $
    5,476,000
   10.
    
    Stock Option Plan




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RemainingExercise
    
    
    ContractualPrice Per
    
    
    TermShares
    
    
    Share
    
    
    (in years)Outstanding at March 31, 2007
    
    
    904,000
    
    
    $
    2.09Granted
    
    
    
    
    
    
    Exercised
    
    
    
    
    
    
    Forfeited or expired
    
    
    2,000
    
    
    
    4.25Outstanding at June 30, 2007
    
    
    902,000
    
    
    $
    2.09
    
    
    
    3.8As of June 30, 2007:Exercisable
    
    
    890,000
    
    
    $
    2.13
    
    
    
    3.8Vested and expected to vest
    
    
    900,000
    
    
    $
    2.13
    
    
    
    3.8
 No options were granted or exercised during the first three months of fiscal year 2007 or
2006.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 June 30, 2007 for the
options that were in-the-money June 30, 2007. As of June 30, 2007, there was approximately
$10,000 of unrecognized compensation cost related to unvested stock-based compensation
arrangements granted under the Plan. That cost is expected to be recognized over a
weighted-average period of 9 months.11.
    
    CommitmentsThe Company is currently leasing its administrative and plant facilities and certain office
equipment under noncancelable operating leases that expire through June 2008.The Company has minimum annual royalty requirements pursuant to the terms of license agreements
related to certain products in the amount of $515,000. License agreements with minimum annual
royalty requirements are in place through fiscal year 2016.




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12.
    
    Use of EstimatesThe 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, liabilities, revenues, and expenses, and the disclosure of contingent assets
and liabilities at the date of the financial statements. Actual results may differ from those
estimates.13.
    
    Accounting StandardsIn June 2006, the Financial Accounting Standards Board ratified EITF Issue No. 06-3, How Taxes
Collected from Customers and Remitted to Governmental Authorities Should be Presented in the
Income Statement. The EITF provides guidance on the




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proper presentation of tax assessed by a governmental authority that is directly imposed on a
revenue-producing transaction between a seller and a customer and requires disclosure of the
Companys accounting policy decision. The consensus becomes effective for periods beginning
after December 15, 2006. The implementation of this interpretation did not have a significant
impact on the Companys financial statements.In June 2006, the Financial Accounting Standards Board issued Interpretation No. 48,
Accounting for Uncertainty in Income Taxes. Interpretation No. 48 prescribes a recognition
threshold and measurement attribute for financial statement recognition and measurement of a
tax position taken, or expected to be taken, in a tax return. The Interpretation also provides
guidance on derecognition, classification, interest and penalties, accounting in interim
periods, disclosure, and transition. This Interpretation is effective for fiscal years
beginning after December 15, 2006. The implementation of this interpretation did not have a
significant impact on the Companys financial statements.In September 2006, the Financial Accounting Standards Board issued Staff Accounting Bulletin
No. 108, Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in
Current Year Financial Statements. SAB 108 requires registrants to quantify misstatements
using both the balance sheet and income-statement approaches and to evaluate whether either
approach results in quantifying an error that is material in light of relevant quantitative and
qualitative factors. The requirements are effective for annual financial statements covering
the first fiscal year ending after November 15, 2006. The implementation of this interpretation
did not have a significant impact on the Companys financial statements.In September 2006, the Financial Accounting Standards Board issued Statement of Financial
Accounting Standard (SFAS) No. 157 Share-Based Payment. SFAS 157 establishes a single
authoritative definition of fair value, sets out a framework for measuring fair value, and
requires additional disclosures about fair-value measurements. SFAS 157 applies only to
fair-value measurements that are already required or permitted by other accounting standards.
The Statement is effective for fair-value measures already required or permitted by other
standards for financial statements issued for fiscal years beginning after November 15, 2007,
and interim periods within those fiscal years. The Company is evaluating the impact of this
interpretation and does not anticipate a significant impact to its financial statements upon
implementation.In September 2006, the Financial Accounting Standards Board issued Statement of Financial
Accounting Standard (SFAS) No. 158 Employers Account for Defined Benefit Pension and Other
Post-retirement Plans. SFAS 158 requires employers to recognize on their balance sheets the
funded status of pension and other post-retirement benefit plans as of June 30, 2007, for the
calendar-year public companies. SFAS 158 will also require fiscal-year-end measurements of
plan assets and benefit obligations, eliminating the use of earlier measurement dates currently
permissible. The Company does not have a defined benefit pension plan, nor does it have any
other post-retirement plans. The implementation of this interpretation did not have a
significant impact on the Companys financial statements.




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
    
    Development of additional oxygen conserver with a view to diversifying our product line in
order to offer customers a range of oxygen conservation choices.
  
    
    An effort to expand the Companys product offerings in order to reduce its dependence upon
the oxygen conserver sector.




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
    
    A continued promotional and educational campaign with respect to the benefits of the TOTAL
O2 system.
  
    
    Continuing efforts to reduce manufacturing costs.




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Payments Due by PeriodContractual
    
    
    
    
    
    Less than 1
    
    1  3
    
    3-5
    
    After 5Obligations
    
    Total
    
    Year
    
    Years
    
    Years
    
    YearsOperating lease
obligations
    
    $
    467,000
    
    
    $
    462,000
    
    
    $
    5,000
    
    
    
    
    
    
    
    Minimum royalty
obligations
    
    $
    2,039,000
    
    
    $
    530,000
    
    
    $
    1,382,000
    
    
    $
    90,000
    
    
    $
    37,000Employee obligations
    
    $
    320,000
    
    
    $
    160,000
    
    
    $
    160,000
    
    
    
    
    
    
    
    Capital lease
obligations
    
    $
    2,000
    
    
    $
    2,000
    
    
    
    
    
    
    
    
    
    
    
    Factoring Agreement
    
    $
    54,000
    
    
    $
    54,000
    
    
    
    
    
    
    
    
    
    
    
    




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(1)
 (2)
 (3)
 (4)
 (4)
 (5)
 (6)
 (7)
 (7)
 (7)
 (7)
 (7)
     *
 
 (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, 1986.(3)
    
    Previously filed as an Exhibit to the Registrants Annual Report
on Form 10-K for the year ended March 31, 1993.(4)
    
    Previously filed as an exhibit to the Registrants Annual Report on Form
10-K for the year ended March 31, 1996.(5)
    
    Previously filed as an exhibit to the Registrants Annual Report on Form
10-K for the year ended March 31, 1998.(6)
    
    Previously filed as Appendix A of the Registrants Proxy Statement
for the 2004 Annual Shareholders Meeting.(7)
    
    Previously filed as an Exhibit to the Registrants Form 8-K dated
August 3, 2007.




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CHAD THERAPEUTICS, Inc.(Registrant)Date  08/14/2007
    /s/ Earl L. YagerEarl L. YagerPresident and Chief Executive OfficerDate  08/14/2007
    /s/ Tracy A. KernTracy A. KernChief Financial Officer




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Exhibit No.
    
    Description of Exhibits31.1
    
    Certification pursuant to Section 302 of Sarbanes-Oxley Act of 2002 for CEO31.2
    
    Certification pursuant to Section 302 of Sarbanes-Oxley Act of 2002 for CFO32*
    
    Certification pursuant to 18 U.S.C Section 1350, as adopted pursuant to Section 906 of
Sarbanes-Oxley Act of 200299.1
    
    Press release dated August 13, 2007
 
 *
    
    The information in Exhibit 32 shall not be deemed filed for purposes of Section 18 of the
Securities Exchange Act of 1934, as amended (the Exchange Act) or otherwise subject to the
liabilities of that section, nor shall they be deemed incorporated by reference in any filing under
the Securities Act of 1933, as amended, or the Exchange Act (including this quarterly report),
unless CHAD Therapeutics specifically incorporates the foregoing information into those documents
by reference.