Chad Therapeutics Inc. said Wednesday that it has suspended operations after a deal fell through that would have provided capital to market its new sleep disorder products.

The Chatsworth medical device company, which had trouble raising expansion money since the onset of the credit crisis last summer, said it had reached a tentative deal with a private equity firm for $2 million. The money would have enabled a stronger launch for its proprietary FloChannel Diagnostic System which received FDA marketing clearance in July.

But as a condition, the equity firm demanded that all Chad officers, directors, and former officers agree to settle claims for back salary and severance obligations for no more than $250,000 in cash, plus stock in the company. One of four key officers, who combined were owed $293,750, balked at the plan.

The company is exploring other funding sources, said Chief Executive Earl Yager in a statement, adding that current prospects were not promising and the company could be forced to file for bankruptcy.

Chad had hoped to reinvent itself as a sleep disorder solutions provider after continued low insurance reimbursements for its former core products portable and home oxygen machines for pulmonary patients made the company unprofitable. Chad sold its remaining oxygen line earlier this year.

Chad shares fell 5 cents to 2 cents in morning trading on the over-the-counter Bulletin Board.