CHAD Hitches Star to Smaller Portable Oxygen Tank By CARLOS MARTINEZ Staff Reporter The salvation of struggling companies comes in all shapes and sizes. For CHAD Therapeutics Inc., it came in the form of a smaller oxygen tank. After several quarters of dismal numbers to report, the Chatsworth-based oxygen device-maker finally is ramping up sales and improving its profit margin, thanks largely to a new oxygen conserver unit. Oxygen conservers deliver oxygen to patients only during inhalation, rather than through a continuous flow, allowing them to carry smaller oxygen tanks that last longer. Last year, CHAD introduced its Oxymatic 400 Series electronic oxygen conserver. It took a while to see results, but it finally spurred improved sales last quarter over the same period last year. “Our sales are driven by the 400 series conserver, especially in the domestic market,” said CHAD CFO Earl Yager. “We were the first one in the market with conservers in the 1980s, but in the late 1990s we lost that position for technological reasons,” Yager said. “Now we’re right back in front.” For the quarter ending March 31, the company reported $996,000 in net income on revenues of $4.1 million, compared to a loss of $750,000 on revenues of $3.3 million a year earlier. In anticipation of the quarterly earnings statement, CHAD’s stock hit its 52-week high on March 11 of $4.35. However, it fell back to $2.51 on April 26 when the entire industry took a hit as one of its biggest competitors, Tyco Inc., announced a $1.9 billion loss for the quarter. Tyco, whose health care unit makes respiratory devices, has been under scrutiny since its chief executive, Dennis Kozlowski, was charged with sales tax evasion and forced to resign June 3. CHAD was trading at around $2.90 last week, with a 52-week high of $4.35 and a 52-week low of $1.90. The company’s market share was decimated by competitors who improved upon CHAD’s oxygen conserver technology just as the Balanced Budget Act of 1997 reduced Medicare reimbursements. The measure effectively cut 30 percent of all Medicare reimbursements to health care providers, many of whom also cut back on spending on such things as portable oxygen systems and other medical devices. Although the company was able to rebound last year with new products and new oxygen conservers, it was still unable to recapture its onetime dominant position in the industry. “But once we had this state-of-the-art device, they again came back to us and the marketplace is now responding,” Yager said. The new conserver, coupled with the company’s Total O2 Delivery System, is driving domestic sales, which have increased 46 percent over the same period last year, Yager said. The new delivery system permits patients to refill their tanks themselves when they are low, thus reducing suppliers’ costs. CHAD’s customers are mainly medical supply companies who sell or lease the equipment and supply oxygen to patients and health care providers. The company was founded in 1982 by the late Charles R. Adams who named the firm after the first two letters of his first and last names. Adams developed the oxygen conservers as a way to reduce the costs and improve the efficiency of providing oxygen to patients. Tony Ramos, publisher of Home Health Care Dealer Provider magazine in Los Angeles, said the recent downturn in the economy has trimmed the competition for CHAD. “At one time they were the only game in town, but that wasn’t going to last forever and they were hurt,” Ramos said. “They played it smart and now, with new products and the industry on the rebound, they’ve improved their sales against less competition.” Thomas E. Jones, CHAD CEO, said the company is looking for sales to continue to improve in the current quarter, despite a decline in international sales which account for about 15 percent of the company’s revenue. “That (drop) was caused by a change in distributors in two of the company’s more important international markets, Canada and Japan,” said Jones. “This process is now essentially complete and we believe the new distribution relationships will provide an improved atmosphere for sales of CHAD’s products in these countries.” Overall, the company expects sales to improve overseas and an increase in domestic sales of between 15 and 20 percent for the fiscal year. CHAD projects net revenue in the range of $1.3 million to $1.5 million for the fiscal year ending March 31, 2003. For the 2002 fiscal year, the company reported $1.1 million net profit on sales of $18.7 million, compared to a $3 million net loss on sales of $12.2 million in 2001.