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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: December 31, 2006
 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.)
 21622 Plummer Street, Chatsworth, CA 91311
 (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  
 December 31,
    
    
    March 31,2006
    
    
    2006ASSETSCurrent assets:Cash
    
    $
    1,070,000
    
    
    $
    935,000Accounts receivable, less allowance for
doubtful accounts of $43,000 at
December 31, 2006, and $52,000 at
March 31, 2006
    
    
    2,239,000
    
    
    
    3,220,000Income taxes refundable
    
    
    300,000
    
    
    
    383,000Inventories (Note 5)
    
    
    6,768,000
    
    
    
    6,381,000Prepaid expenses and other assets
    
    
    292,000
    
    
    
    178,000Deferred income taxes
    
    
    640,000
    
    
    
    666,000Total current assets
    
    
    11,309,000
    
    
    
    11,763,000Property and equipment, at cost
    
    
    6,174,000
    
    
    
    6,101,000Less accumulated depreciation
    
    
    5,423,000
    
    
    
    5,151,000Net property and equipment
    
    
    751,000
    
    
    
    950,000Intangible assets, net
    
    
    1,094,000
    
    
    
    972,000Deferred income taxes
    
    
    796,000
    
    
    
    600,000Other assets
    
    
    46,000
    
    
    
    71,000Total assets
    
    $
    13,996,000
    
    
    $
    14,356,000LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    1,132,000
    
    
    $
    522,000Accrued expenses
    
    
    1,260,000
    
    
    
    1,435,000Total current liabilities
    
    
    2,392,000
    
    
    
    1,957,000Other long-term liabilities
    
    
    
    
    
    
    4,000Total liabilities
    
    
    2,392,000
    
    
    
    1,961,000Shareholders equity:Common shares, $.01 par value, authorized
40,000,000 shares; 10,169,000 and 10,158,000
shares issued and outstanding
    
    
    13,480,000
    
    
    
    13,413,000Accumulated deficit
    
    
    (1,876,000
    )
    
    
    (1,018,000
    )Total shareholders equity
    
    
    11,604,000
    
    
    
    12,395,000Total liabilities and shareholders equity
    
    $
    13,996,000
    
    
    $
    14,356,000




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Three Months EndedDecember 31,2006
    
    
    2005Net sales
    
    $
    4,307,000
    
    
    $
    5,907,000Cost of sales
    
    
    3,248,000
    
    
    
    3,806,000Gross profit
    
    
    1,059,000
    
    
    
    2,101,000Costs and expenses:Selling, general, and administrative
    
    
    1,421,000
    
    
    
    1,558,000Research and development
    
    
    396,000
    
    
    
    435,000Total costs and expenses
    
    
    1,817,000
    
    
    
    1,993,000Operating income (loss)
    
    
    (758,000
    )
    
    
    108,000Other income
    
    
    18,000
    
    
    
    4,000Earnings (loss) before income taxes
    
    
    (740,000
    )
    
    
    112,000Income tax expense (benefit)
    
    
    (305,000
    )
    
    
    73,000Net earnings (loss)
    
    $
    (435,000
    )
    
    $
    39,000Basic earnings (loss) per share
    
    $
    (0.04
    )
    
    $
    0.00Diluted earnings (loss) per share
    
    $
    (0.04
    )
    
    $
    0.00Weighted shares outstanding:Basic
    
    
    10,169,000
    
    
    
    10,151,000Diluted
    
    
    10,169,000
    
    
    
    10,569,000




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Nine Months EndedDecember 31,2006
    
    
    2005Net sales
    
    $
    14,766,000
    
    
    $
    17,177,000Cost of sales
    
    
    10,276,000
    
    
    
    11,194,000Gross profit
    
    
    4,490,000
    
    
    
    5,983,000Costs and expenses:Selling, general, and administrative
    
    
    4,805,000
    
    
    
    5,101,000Research and development
    
    
    1,053,000
    
    
    
    1,202,000Total costs and expenses
    
    
    5,858,000
    
    
    
    6,303,000Operating loss
    
    
    (1,368,000
    )
    
    
    (320,000
    )Other income
    
    
    57,000
    
    
    
    23,000Loss before income taxes
    
    
    (1,311,000
    )
    
    
    (297,000
    )Income tax benefit
    
    
    (453,000
    )
    
    
    (84,000
    )Net loss
    
    $
    (858,000
    )
    
    $
    (213,000
    )Basic loss per share
    
    $
    (0.08
    )
    
    $
    (0.02
    )Diluted loss per share
    
    $
    (0.08
    )
    
    $
    (0.02
    )Weighted shares outstanding:Basic
    
    
    10,169,000
    
    
    
    10,142,000Diluted
    
    
    10,169,000
    
    
    
    10,142,000




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Common Shares
    
    
    AccumulatedShares
    
    
    Amount
    
    
    DeficitBalance as of March 31, 2006
    
    
    10,158,000
    
    
    $
    13,413,000
    
    
    $
    (1,018,000
    )Stock-based compensation  options
    
    
    
    
    
    
    27,000Stock-based
compensation  restricted stock
    
    
    11,000
    
    
    
    40,000
    
    
    
    Net loss
    
    
    
    
    
    
    
    
    
    
    (858,000
    )Balance at December 31, 2006
    
    
    10,169,000
    
    
    
    13,480,000
    
    
    $
    (1,876,000
    )




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Nine Months EndedDecember 31,2006
    
    
    2005Cash flows from operating activities:Net loss
    
    $
    (858,000
    )
    
    $
    (213,000
    )Adjustments to reconcile net loss to net cash
provided by operating activities:Depreciation and amortization of property and equipment
    
    
    272,000
    
    
    
    311,000Amortization of intangibles
    
    
    32,000
    
    
    
    29,000Provision for losses on receivables
    
    
    (9,000
    )
    
    
    1,000Decrease (increase) in deferred income taxes
    
    
    (170,000
    )
    
    
    152,000Stock-based compensation
    
    
    67,000
    
    
    
    Changes in assets and liabilities:Decrease (increase) in accounts receivable
    
    
    990,000
    
    
    
    542,000Decrease (increase) in inventories
    
    
    (387,000
    )
    
    
    1,156,000Decrease (increase) in income taxes refundable
    
    
    83,000
    
    
    
    (402,000
    )Decrease (increase) in prepaid expenses and other assets
    
    
    (89,000
    )
    
    
    76,000Increase (decrease) in accounts payable
    
    
    617,000
    
    
    
    (341,000
    )Increase (decrease) in accrued expenses
    
    
    (175,000
    )
    
    
    (228,000
    )Increase (decrease) in income taxes payable
    
    
    
    
    
    
    (200,000
    )Net cash provided by operating activities
    
    
    373,000
    
    
    
    883,000Cash flows from investing activities:Additions to intangible assets
    
    
    (154,000
    )
    
    
    (104,000
    )Capital expenditures
    
    
    (73,000
    )
    
    
    (162,000
    )Net cash used in investing activities
    
    
    (227,000
    )
    
    
    (266,000
    )Cash flows from financing activities:Exercise of stock options
    
    
    
    
    
    
    28,000Other long-term liabilities
    
    
    (11,000
    )
    
    
    (2,000
    )Net cash (used in) provided by financing activities
    
    
    (11,000
    )
    
    
    26,000Net increase in cash
    
    
    135,000
    
    
    
    643,000Cash beginning of period
    
    
    935,000
    
    
    
    177,000Cash end of period
    
    $
    1,070,000
    
    
    $
    820,000Supplemental disclosure of cash flow information:Acquisition of capital assets through capital lease
    
    $
    
    
    
    $
    14,000




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CHAD THERAPEUTICS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
 1.
    
    Interim Reporting
   2.
    
    Revenue Recognition
  3.
    
    Major Customers
 Three Months Ended
    
    Nine Months EndedDecember 31,
    
    December 31,2006
    
    2005
    
    2006
    
    2005Customer A**
    
    
    43.9
    %
    
    
    32.6
    %
    
    
    39.7
    %
    
    
    35.9
    %Customer B
    
    
    *
    
    
    
    13.7
    %
    
    
    *
    
    
    
    10.1
    %
 
 *
    
    Indicates sales less than 10% of the Companys net sales**
    
    Indicates national chain customer
  4.
    
    Concentration of Credit Risk




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December 31
    
    
    March 31Customer A**
    
    
    44.2
    %
    
    
    25.4
    %Customer B**
    
    
    18.7
    %
    
    
    *Customer C
    
    
    *
    
    
    
    21.6
    %Customer D
    
    
    *
    
    
    
    *
 
 *
    
    Indicates receivables balance less than 10% of the Companys net accounts receivable balance.**
    
    Indicates national chain customer.
 5.
    
    Inventories
  December 31
    
    
    March 31Finished goods
    
    $
    1,888,000
    
    
    $
    1,706,000Work-in-process
    
    
    1,927,000
    
    
    
    1,234,000Raw materials
    
    
    2,953,000
    
    
    
    3,441,000$
    6,768,000
    
    
    $
    6,381,000
 6.
    
    Leasing Arrangements




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7.
    
    Earnings (Loss) Per Common Share
  Three Months Ended
    
    
    Nine Months EndedDecember 31,
    
    
    December 31,2006
    
    
    2005
    
    
    2006
    
    
    2005Basic earnings (loss) per share:Numerator-net earnings (loss)
    
    $
    (435,000
    )
    
    $
    39,000
    
    
    $
    (858,000
    )
    
    $
    (213,000
    )Denominator-weighted average
common shares outstanding
    
    
    10,169,000
    
    
    
    10,151,000
    
    
    
    10,169,000
    
    
    
    10,142,000Basic earnings (loss) per share
    
    $
    (0.04
    )
    
    $
    0.00
    
    
    $
    (0.08
    )
    
    $
    (0.02
    )Diluted earnings (loss) per share:Numerator-net earnings (loss)
    
    $
    (435,000
    )
    
    $
    39,000
    
    
    $
    (858,000
    )
    
    $
    (213,000
    )Denominator-weighted average
common shares outstanding
    
    
    10,169,000
    
    
    
    10,151,000
    
    
    
    10,169,000
    
    
    
    10,142,000Diluted effect of common stock options
    
    
    
    
    
    
    418,000
    
    
    
    
    
    
    
    10,169,000
    
    
    
    10,569,000
    
    
    
    10,169,000
    
    
    
    10,142,000Diluted earnings (loss) per share
    
    $
    (0.04
    )
    
    $
    0.00
    
    
    $
    (0.08
    )
    
    $
    (0.02
    )
  8.
    
    Income Tax Expense




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9.
    
    Geographic Information
  Three Months Ended
    
    
    Nine Months EndedDecember 31,
    
    
    December 31,2006
    
    
    2005
    
    
    2006
    
    
    2005United States
    
    $
    3,774,000
    
    
    $
    4,242,000
    
    
    $
    11,916,000
    
    
    $
    13,898,000Canada
    
    
    46,000
    
    
    
    47,000
    
    
    
    132,000
    
    
    
    145,000Japan
    
    
    73,000
    
    
    
    134,000
    
    
    
    267,000
    
    
    
    397,000Europe
    
    
    82,000
    
    
    
    1,424,000
    
    
    
    1,943,000
    
    
    
    2,549,000Indonesia
    
    
    252,000
    
    
    
    38,000
    
    
    
    270,000
    
    
    
    41,000All other countries
    
    
    80,000
    
    
    
    22,000
    
    
    
    238,000
    
    
    
    147,000$
    4,307,000
    
    
    $
    5,907,000
    
    
    $
    14,766,000
    
    
    $
    17,177,000
   10.
    
    Stock Option Plan




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Expected life (in years)
    
    
    8.0Expected volatility factor
    
    
    79.0
    %Risk free interest rate
    
    
    4.3
    %Dividend yield
    
    
    0.0Forfeiture rate
    
    
    4.0
    %
  RemainingExercise
    
    
    ContractualPrice Per
    
    
    TermShares
    
    
    Share
    
    
    (in years)Outstanding at March 31, 2006
    
    
    945,000
    
    
    $
    2.22Granted
    
    
    
    
    
    
    Exercised
    
    
    
    
    
    
    Forfeited or expired
    
    
    31,000
    
    
    
    3.52Outstanding at December 31, 2006
    
    
    914,000
    
    
    $
    2.17
    
    
    
    4.52As of December 31, 2006:Exercisable
    
    
    887,000
    
    
    $
    2.21
    
    
    
    4.5Vested and expected to vest
    
    
    921,000
    
    
    $
    2.24
    
    
    
    4.6




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Three Months Ended
    
    
    Nine Months EndedDecember 31, 2005
    
    
    December 31, 2005Net earnings (loss), as reported
    
    $
    39,000
    
    
    $
    (213,000
    )Deduct: Total stock-based employee
compensation expense determined under
fair value-based method for all awards, net
of related tax effects
    
    
    32,000
    
    
    
    97,000Pro forma net loss
    
    $
    7,000
    
    
    $
    (310,000
    )Earnings (loss) per share:Basic  as reported
    
    $
    0.00
    
    
    $
    (0.02
    )Basic  pro forma
    
    
    0.00
    
    
    
    (0.03
    )Diluted  as reported
    
    
    0.00
    
    
    
    (0.02
    )Diluted  pro forma
    
    $
    0.00
    
    
    $
    (0.03
    )
 11.
    
    Use of Estimates
  12.
    
    Accounting Standards




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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 offering sin 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 5Cash obligations
    
    Total
    
    Year
    
    Years
    
    Years
    
    YearsOperating lease
obligations
    
    $
    697,000
    
    
    $
    457,000
    
    
    $
    240,000
    
    
    
    
    
    
    
    Minimum royalty
obligations
    
    $
    2,672,000
    
    
    $
    523,000
    
    
    $
    1,590,000
    
    
    $
    507,000
    
    
    $
    52,000Employee obligations
    
    $
    360,000
    
    
    $
    160,000
    
    
    $
    200,000
    
    
    
    
    
    
    
    Capital lease
obligations
    
    $
    5,000
    
    
    $
    5,000
    
    
    
    
    
    
    
    
    
    
    
    




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(a)
(b)
    
    
    31.1
31.2
    
    
    Certification pursuant to Section 302 of Sarbanes-Oxley Act of 2002 for CEO
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(d)
    
    
    99.1
    
    
    Press release dated February 7, 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.




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CHAD THERAPEUTICS, Inc.(Registrant)Date 02/08/2007
    
    /s/ Earl L. YagerEarl L. YagerPresident and Chief Executive OfficerDate 02/08/2007
    
    /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 February 7, 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.