##### 



SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-Q
 Quarterly Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934
 x
    
    For Quarterly Period Ended: June 30, 2005
  o
    
    Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
  CHAD THERAPEUTICS, INC.
  California
(State of other jurisdiction of
incorporation or organization)
    
    95-3792700
(I.R.S. Employer
Identification No.)
 21622 Plummer Street, Chatsworth, CA 91311
 (818) 882-0883
  
   x o
 o x




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ASSETS
 June 30,
    
    
    March 31,2005
    
    
    2005Current assets:Cash
    
    $
    471,000
    
    
    $
    177,000Accounts receivable, less allowance for
doubtful accounts of $42,000 at
June 30, 2005, and $39,000 at
March 31, 2005
    
    
    3,301,000
    
    
    
    3,745,000Inventories, net (Note 5)
    
    
    8,147,000
    
    
    
    8,512,000Prepaid expenses
    
    
    145,000
    
    
    
    264,000Deferred income taxes
    
    
    488,000
    
    
    
    461,000Total current assets
    
    
    12,552,000
    
    
    
    13,159,000Property and equipment, at cost
    
    
    6,223,000
    
    
    
    6,140,000Less accumulated depreciation
    
    
    5,057,000
    
    
    
    4,949,000Net property and equipment
    
    
    1,166,000
    
    
    
    1,191,000Intangible assets, net
    
    
    837,000
    
    
    
    802,000Deferred income taxes
    
    
    568,000
    
    
    
    568,000Other assets
    
    
    67,000
    
    
    
    70,000Total assets
    
    $
    15,190,000
    
    
    $
    15,790,000LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    775,000
    
    
    $
    1,196,000Accrued expenses
    
    
    1,421,000
    
    
    
    1,370,000Income taxes payable
    
    
    12,000
    
    
    
    200,000Total current liabilities
    
    
    2,208,000
    
    
    
    2,766,000Shareholders equity:Common shares, $.01 par value, authorized
40,000,000 shares; 10,134,000 and 10,134,000
shares issued and outstanding
    
    
    13,369,000
    
    
    
    13,369,000Accumulated deficit
    
    
    (387,000
    )
    
    
    (345,000
    )Total shareholders equity
    
    
    12,982,000
    
    
    
    13,024,000Total liabilities and shareholders equity
    
    $
    15,190,000
    
    
    $
    15,790,000




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Three Months EndedJune 30,2005
    
    
    2004Net sales
    
    $
    5,895,000
    
    
    $
    6,099,000Cost of sales
    
    
    3,794,000
    
    
    
    3,679,000Gross profit
    
    
    2,101,000
    
    
    
    2,420,000Costs and expenses:Selling, general, and administrative
    
    
    1,844,000
    
    
    
    1,736,000Research and development
    
    
    332,000
    
    
    
    410,000Total costs and expenses
    
    
    2,176,000
    
    
    
    2,146,000Operating income (loss)
    
    
    (75,000
    )
    
    
    274,000Other income
    
    
    6,000
    
    
    
    8,000Earnings (loss) before income taxes
    
    
    (69,000
    )
    
    
    282,000Income tax expense (benefit)
    
    
    (27,000
    )
    
    
    20,000Net earnings (loss)
    
    $
    (42,000
    )
    
    $
    262,000Basic earnings per share
    
    $
    0.00
    
    
    $
    0.03Diluted earnings per share
    
    $
    0.00
    
    
    $
    .02Weighted shares outstanding:Basic
    
    
    10,134,000
    
    
    
    10,110,000Diluted
    
    
    10,134,000
    
    
    
    10,617,000




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Common Shares
    
    
    AccumulatedShares
    
    
    Amount
    
    
    DeficitBalance as of March 31, 2005
    
    
    10,134,000
    
    
    $
    13,369,000
    
    
    $
    (345,000
    )Net loss
    
    
    
    
    
    
    
    
    
    
    (42,000
    )Balance at June 30, 2005
    
    
    10,134,000
    
    
    
    13,369,000
    
    
    $
    (387,000
    )




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Three Months EndedJune 30,2005
    
    
    2004Cash flows from operating activities:Net earnings (loss)
    
    $
    (42,000
    )
    
    $
    262,000Adjustments to reconcile net earnings to net cash
provided by operating activities:Depreciation and amortization of property and
equipment
    
    
    108,000
    
    
    
    95,000Amortization of intangibles
    
    
    10,000
    
    
    
    10,000Changes in assets and liabilities:Decrease (increase) in accounts receivable
    
    
    444,000
    
    
    
    (163,000
    )Decrease (increase) in inventories
    
    
    365,000
    
    
    
    216,000Decrease (increase) in prepaid expenses
    
    
    119,000
    
    
    
    95,000Decrease (increase) in other assets
    
    
    3,000
    
    
    
    (25,000
    )Decrease (increase) in deferred income tax
    
    
    (27,000
    )
    
    
    Increase (decrease) in accounts payable
    
    
    (421,000
    )
    
    
    309,000Increase (decrease) in accrued expenses
    
    
    51,000
    
    
    
    122,000Increase (decrease) in income taxes payable
    
    
    (188,000
    )
    
    
    (140,000
    )Net cash provided by operating activities
    
    
    422,000
    
    
    
    781,000Cash flows from investing activities:Additions to other assets
    
    
    (45,000
    )
    
    
    Capital expenditures
    
    
    (83,000
    )
    
    
    (52,000
    )Net cash used in investing activities
    
    
    (128,000
    )
    
    
    (52,000
    )Cash flows from financing activities:Exercise of stock options
    
    
    
    
    
    
    38,000Net cash provided by financing activities
    
    
    
    
    
    
    38,000Net increase in cash
    
    
    294,000
    
    
    
    767,000Cash beginning of period
    
    
    177,000
    
    
    
    2,708,000Cash end of period
    
    $
    471,000
    
    
    $
    3,475,000




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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, 2005, are not necessarily indicative of
the results expected for the year ended March 31, 2006. 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, 2005, Annual Report and particularly to Note 1 which includes a summary of
significant accounting policies.2.
    
    ReclassificationsThe Company reclassified royalty expense of $127,000 from selling, general, and administrative
expense to costs of sales for the three-month period ended June 30, 2004 to conform to the 2005
presentation.3.
    
    Major CustomerOne national chain customer accounted 37% and 32% of net sales during the three-month periods
ended June 30, 2005 and 2004, respectively. Another national chain customer accounted for 16%
of sales for the three-month period ended June 30, 2004. The Companys customers are affected
by Medicare reimbursement policy as 80% of home oxygen patients are covered by Medicare and
other government programs4.
    
    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. 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 account over $100,000. At March 31, 2005, the amount
at risk was approximately $371,000.At June 30, 2005, the outstanding accounts receivable balance from one customer was 29% of
gross accounts receivable and from a second customer was 12% of gross accounts receivable. At
March 31, 2005, the outstanding accounts receivable balance from one customer was 26% of gross
accounts receivable and from a second customer was 23% of gross accounts receivable.




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5.
    
    InventoriesInventories in 2005 are summarized as follows:
 June 30
    
    
    March 31Finished goods
    
    $
    2,244,000
    
    
    $
    2,767,000Work-in-process
    
    
    1,918,000
    
    
    
    1,790,000Raw materials
    
    
    4,097,000
    
    
    
    4,063,000Inventory reserve
    
    
    (112,000
    )
    
    
    (108,000
    )$
    8,147,000
    
    
    $
    8,512,000
 6.
    
    Earnings (Loss) Per Common ShareFollowing is a reconciliation of the numerators and denominators used in the calculation of
basic and diluted earnings (loss) per common share:
 Three Months Ended June 30,2005
    
    
    2004Basic earnings (loss) per share:Numerator-net earnings (loss)
    
    $
    (42,000
    )
    
    $
    262,000Denominator-weighted average
common shares outstanding
    
    
    10,134,000
    
    
    
    10,110,000Basic earnings (loss) per share
    
    $
    0.00
    
    
    $
    0.03Diluted earnings (loss) per share:Numerator-net earnings (loss)
    
    $
    (42,000
    )
    
    $
    262,000Denominator:Weighted average common shares
outstanding
    
    
    10,134,000
    
    
    
    10,110,000Diluted effect of common stock options
    
    
    
    
    
    
    507,00010,134,000
    
    
    
    10,617,000Diluted earnings (loss) per share
    
    $
    0.00
    
    
    $
    0.02
 Options to purchase 975,000 shares of common stock at prices ranging from $0.50 to $12.54
per share and 246,000 shares of common stock at prices ranging from $5.00 to $12.54 were not
included in the computation of diluted earnings per share for the three-month periods ended June
30, 2005 and 2004, respectively, because their effect would have been anti-dilutive.7.
    
    Income Tax ExpenseBased on managements earnings projections for the fiscal year ended 2006, the Company has
established an effective tax rate of 40%. The Company has California net operating loss
carryforwards of $1,915,00. California suspended the utilization of net operating loss
carryforwards during tax years starting in 2002 and 2003. As a result, the Company had been
unable to use its California net operating loss carryforwards until the tax year that began
April 1, 2004. The California net operating losses expire in 2008.




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8.
    
    Geographic InformationThe Company has one reportable operating segment. Geographic information regarding the
Companys sales is as follows:
 Three Months EndedJune 30,2005
    
    
    2004United States
    
    $
    5,121,000
    
    
    $
    5,810,000Canada
    
    
    56,000
    
    
    
    81,000Japan
    
    
    188,000
    
    
    
    83,000Europe
    
    
    466,000
    
    
    
    91,000All other countries
    
    
    64,000
    
    
    
    34,000$
    5,895,000
    
    
    $
    6,099,000
 All long-lived assets are located in the United States.Sales of OXYMATIC® and CYPRESS OXYPneumatic® conservers accounted for 67% and 76% of the
Companys sales for the three-month periods ended June 30, 2005 and 2004, respectively.9.
    
    Stock Option PlanThe company accounts for its stock option plan in accordance with the provisions of Accounting
Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, and related
interpretations. The Company has also adopted the pro forma disclosure provisions of Statement
of Financial Accounting Standards (SFAS) No. 123, Accounting for Stock-Based Compensation, which
permits entities to provide pro forma net income and pro forma net earnings per share
disclosures as if the fair-value-based method defined in SFAS 123 had been applied.The Company applies Accounting Principles Board Opinion No. 25 in accounting for the Plan, and
no compensation expense has been recognized for its stock options in the accompanying financial
statements. The following table illustrates the effect on net earnings and earnings per share
if the Company had applied the fair value recognition provision of FASB Statement No.123,
Accounting for Stock Based Compensation, to stock-based employee compensation:
 Three Months EndedJune 30,2005
    
    
    2004Net earnings (loss), as reported
    
    $
    (42,000
    )
    
    $
    262,000Deduct: Total stock-based employee
compensation expense determined under
fair value-based method for all awards, net
of related tax effects
    
    
    21,000
    
    
    
    37,000Pro forma net income (loss)
    
    $
    (63,000
    )
    
    $
    225,000Earnings (loss) per share:Basic  as reported
    
    $
    0.00
    
    
    $
    0.03Basic  pro forma
    
    
    (0.01
    )
    
    
    0.02Diluted  as reported
    
    
    0.00
    
    
    
    0.02Diluted  proforma
    
    $
    (0.01
    )
    
    $
    0.02




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
    
    Development of additional oxygen conserver models, such as the LOTUS
Electronic Oxygen Conserver introduced in October 2004, that
diversify the product line in order to offer customers a range of
oxygen conservation choices;
    
    An effort to expand the Companys product lines and improve existing
products through the investment in and development of new
technologies, such as proprietary sensor technology and control
software licensed in January of 2003 and the introduction of the SAGE
Oxygen Therapeutic Device in May 2004. These new technologies should
provide the Company with an opportunity to expand its oxygen delivery
product lines and potentially enter the high-growth sleep disorder
market; and
    
    A continued promotional and education campaign with respect to the
benefits of the TOTAL O2 system.




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Payments Due by PeriodContractual
    
    
    
    
    
    Less than 1
    
    
    1  3
    
    
    3-5
    
    
    After 5Cash Obligations
    
    Total
    
    
    Year
    
    
    Years
    
    
    Years
    
    
    YearsOperating lease
obligations
    
    $
    1,332,000
    
    
    $
    431,000
    
    
    $
    901,000
    
    
    
    
    
    
    
    Minimum royalty
obligations
    
    $
    3,285,000
    
    
    $
    515,000
    
    
    $
    1,590,000
    
    
    $
    1,090,000
    
    
    $
    90,000Employee obligations
    
    $
    640,000
    
    
    $
    160,000
    
    
    $
    480,000




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Additional Risk Factors




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(a)
    
    
    31.1
    
    
    Certification pursuant to Section 302 of Sarbanes-Oxley Act of 2002 for CEO(b)
    
    
    31.2
    
    
    Certification pursuant to Section 302 of Sarbanes-Oxley Act of 2002 for CFO(c)
    
    
    32*
    
    
    Certification pursuant to 18 U.S.C Section 1350, as adopted pursuant to Section 906 of
Sarbanes-Oxley Act of 2002




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CHAD THERAPEUTICS, Inc.
    (Registrant)Date  08/11/2005
    /s/ Earl L. YagerEarl L. YagerPresident and Chief Executive OfficerDate  08/11/2005
    /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 2002