SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1995. TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ___________ to_____________ Commission file number: 0-16159 LECTEC CORPORATION (Exact name of Registrant as specified in its charter) Minnesota 41-1301878 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 10701 Red Circle Drive, Minnetonka, Minnesota 55343 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (612) 933-2291 Securities registered pursuant to Section 12(b)of the Act: None Securities registered pursuant to Section 12(g)of the Act: Common stock, par value $0.01 per share. Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No The number of shares outstanding of the registrant's common stock as of May 1, 1995 was 3,784,903 shares. LECTEC CORPORATION Table of Contents Part I Financial Information Item 1. Financial Statements . . . . . . . . . . . . . I-1 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. I-7 Part II Other Information Item 1. Legal Proceedings. . . . . . . . . . . . . . . II-1 Item 2. Changes in Securities. . . . . . . . . . . . . II-1 Item 3. Defaults Upon Senior Securities. . . . . . . . II-1 Item 4. Submission of Matters to a Vote of Security Holders . . . . . . . . . . . II-1 Item 5. Other Information. . . . . . . . . . . . . . . II-1 Item 6. Exhibits and Reports on Form 8-K . . . . . . . II-1 Signature Page. . . . . .. . . . . . . . . . . II-2
LECTEC CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
March 31, June 30, 1995 1994 ASSETS (Unaudited) Current assets Cash and cash equivalents $748,778 $785,770 Short-term investments 0 1,396,800 Receivables Trade, less allowance for doubtful accounts of $28,762 (unaudited) and $16,402 2,134,154 1,762,507 Other 467,064 220,572 2,601,218 1,983,079 Inventories Raw materials 1,360,253 1,224,609 Work-in-process 185,209 185,307 Finished goods 749,182 362,119 Total inventories 2,294,644 1,772,035 Prepaid expenses and other 255,561 101,737 Deferred tax asset 77,000 77,000 Total current assets 5,977,201 6,116,421 Property, Plant and Equipment - at Cost Building and improvements 1,528,704 1,426,072 Equipment 5,453,651 3,413,165 Furniture and fixtures 406,542 309,560 7,388,897 5,148,797 Less accumulated depreciation 2,667,778 2,285,900 4,721,119 2,862,897 Construction in progress 551,654 1,594,974 Land 247,731 247,731 5,520,504 4,705,602 Other Assets Patents and trademarks, less accumulated amortization of $523,586 (unaudited) and $436,125 at March 31, 1995 and June 30, 1994, respectively 381,382 362,966 Goodwill, less accumulated amortization of $196,668 (unaudited) and $49,167 at March 31, 1995 and June 30, 1994, respectively 393,332 540,833 Long-term marketable securities at lower of cost or market, net of allowances of $68,682 (unaudited) and $60,964 at March 31, 1995 and June 30, 1994, respectively 578,718 568,673 Other 32,457 60,361 1,385,889 1,532,833 $12,883,594 $12,354,856
See accompanying notes to the consolidated financial statements LECTEC CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
March 31, June 30, 1995 1994 LIABILITIES AND SHAREHOLDER'S EQUITY (Unaudited) Current liabilities Accounts payable $1,057,066 $960,528 Accrued expenses Payroll related 361,498 343,560 Profit sharing contribution 42,607 46,918 Deferred compensation 28,429 27,848 Other 86,331 0 Total current liabilities 1,575,931 1,378,854 Deferred Income Taxes 139,000 139,000 Shareholders' Equity Common stock, $.01 par value: 15,000,000 shares authorized; issued and outstanding: 3,770,000 shares (unaudited) at March 31, 1995 and 3,757,000 shares at June 30, 1994 37,700 37,570 Additional paid-in capital 9,845,518 9,809,079 Allowance for long-term marketable securities (68,682) (60,964) Retained earnings 1,354,127 1,051,317 11,168,663 10,837,002 $12,883,594 $12,354,856
See accompanying notes to the consolidated financial statements LECTEC CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF EARNINGS
Three months ended Nine months ended March 31, March 31, 1995 1994 1995 1994 Revenues (Unaudited) (Unaudited) (Unaudited) (Unaudited) Product sales $4,232,402 $2,252,783 $10,822,734 $7,849,547 Contract research 0 0 0 15,275 Total revenues 4,232,402 2,252,783 10,822,734 7,864,822 Cost of goods sold 2,497,670 1,490,172 6,435,146 4,876,905 Gross profit 1,734,732 762,611 4,387,588 2,987,917 Operating expenses Selling, general and administrative 1,034,310 418,463 2,708,480 1,183,217 Research & development 449,235 349,385 1,337,607 1,032,133 1,483,545 767,848 4,046,087 2,215,350 Operating profit 251,187 (5,237) 341,501 772,567 Other income (expense) Interest income 6,149 8,139 33,649 59,814 Dividend income 8,930 12,269 29,355 54,088 Interest expense 5,659 (944) 0 (1,883) Other (5,166) 3,007 2,693 3,024 15,572 22,471 65,697 115,043 Earnings before income taxes and equity in losses of unconsolidated subsidiary 266,759 17,234 407,198 887,610 Income tax expense (benefit) 82,216 (6,020) 104,388 244,111 Earnings before equity in losses of unconsolidated subsidiary 184,543 23,254 302,810 643,499 Equity in losses of unconsolidated subsidiary 0 (3,769) 0 (133,646) Net earnings $184,543 $19,485 $302,810 $509,853 Net earnings per common and common equivalent share Primary $0.05 $0.01 $0.08 $0.13 Fully diluted $0.05 $0.01 $0.08 $0.13 Weighted average number of common and common equivalent shares outstanding during the period Primary 3,808,253 3,813,439 3,806,196 3,802,385 Fully diluted 3,859,488 3,813,457 3,823,325 3,802,432
See accompanying notes to the consolidated financial statements LECTEC CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS
Nine months Nine months Ended Ended March 31, March 31, 1995 1994 Cash flows from operating activities (Unaudited) (Unaudited) Net earnings $302,810 $509,853 Adjustments to reconcile net earnings to net cash provided by operating activities Depreciation and amortization 616,840 363,473 Provision for losses on accounts receivable 12,360 27,572 Equity in losses of unconsolidated subsidiary 0 133,646 Changes in operating accounts, current assets and liabilities Trade and other receivable (630,499) (598,435) Inventories (522,609) (666,197) Prepaid expenses and other (125,920) (49,780) Accounts payable 96,538 206,877 Income taxes payable 0 107,869 Accrued expenses 100,539 11,555 Net cash (used) provided by operating activities (149,941) 46,433 Cash flows from investing activities Purchase of property, plant and equipment (1,196,780) (1,216,084) Investment in patents and trademarks (105,877) (7,833) Purchase of marketable securities and other investments (234,317) (1,729,946) Sale of marketable securities and other investments 1,613,354 2,845,989 Net cash provided (used) in investing activities 76,380 (107,874) Cash flows from financing activities Issuance of common stock 36,569 14,975 Retirement of common stock 0 (3,619) Net cash provided (used) by financing activities 36,569 11,356 Net increase (decrease) in cash and cash equivalents (36,992) (50,085) Cash and cash equivalents at beginning of period 785,770 433,754 Cash and cash equivalents at end of period $748,778 $383,669
See accompanying notes to the consolidated financial statements LECTEC CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS Disclosures in Financial Statements Supplemental Disclosures of Cash Flow Information
Nine months Nine months Ended Ended March 31, March 31, 1995 1994 (Unaudited) (Unaudited) Cash paid during the period for: Interest expense $0 $1,883 Income taxes 94,462 175,066
See accompanying notes to the consolidated financial statements LECTEC CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements March 31, 1995 (1) General The accompanying consolidated financial statements include the accounts of LecTec Corporation (the "Company"), LecTec International Corporation, a wholly-owned subsidiary, and Natus Corporation, a fifty-one percent owned subsidiary. All significant intercompany balances and transactions have been eliminated in consolidation. The interim financial statements are unaudited and in the opinion of management, reflect all adjustments (which consist only of adjustments of a normal recurring nature) necessary for a fair presentation of results for the periods presented. Results for interim periods are not necessarily indicative of results for the year. (2) Stock Dividend During June 1994, the Board of Directors declared a 5% stock dividend payable to shareholders of record as of July 15, 1994 which was paid on July 29, 1994. The weighted average number of common shares outstanding for all periods presented has been retroactively adjusted to give effect to the stock dividends. (3) Natus Corporation The Company began consolidating Natus' results of operations effective April 1, 1994. The Company has restated the Consolidated Financial Statements to reflect Natus, using the equity method, for all fiscal 1994 quarters prior to April 1, 1994. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Results of Operations Product sales for the third quarter of fiscal 1995 were $4,232,402 as compared with $2,252,783 for fiscal 1994. Product sales for the first nine months of fiscal 1995 were $10,822,734 as compared with $7,849,547 for fiscal 1994. Product sales, for the third quarter, increased by 87.9%, reflecting growth in all product groups over the same period of fiscal 1994. Conductive products, the Company's largest product group, increased by 26.4% over the same period of last year. Medical tape sales increased 101.1% primarily due to the receipt of a major tape converter order. Therapeutic product sales experienced a 382.8% increase over the same period last year, mainly due to the increased sales of the analgesic patch through Natus Corporation. Product sales, for the first nine months, increased by 37.9% as compared to the first nine months period of fiscal 1994, primarily as a result of the growth in our Conductive and Therapeutic product groups plus the inclusion of sales of non analgesic patch Natus products. The Company had no contract research revenues for the third quarter of fiscal 1995 or the first nine months of fiscal 1995. In fiscal 1994, the Company had no contract research revenues for the third quarter and $15,275 for the nine months period. Gross profit as a percent of total revenues for the third quarter of fiscal 1995 was 41.0% as compared to 33.9% for the third quarter of fiscal 1994. For the first nine months, gross profit as a percent of total revenues was 40.5% in fiscal 1995 and 38.0% in fiscal 1994. The increase in gross profit percent for the quarter and first nine months reflects the impact of the consolidation of higher margin Natus product sales with LecTec. Selling, general, and administrative expenses for the third quarter, as a percentage of total revenues, were 24.4% and 18.6% for fiscal 1995 and 1994, respectively. For the first nine months, selling, general, and administrative expenses, as a percentage of total revenues, were 25.0% and 15.0% for fiscal 1995 and 1994, respectively. The increase in expenses for fiscal 1995 for the three month and nine month periods are primarily related to the consolidation of Natus with LecTec for fiscal 1995, the higher selling costs associated with the Natus direct selling organization and the inclusion of goodwill amortization related to the acquisition of Natus Corporation. Research and development expenses for the third quarter, as a percentage of total revenues, were 10.6% and 15.5% for fiscal 1995 and 1994, respectively. Actual expenses for the third quarter of fiscal 1995 increased to $449,235 from $349,385 in 1994. For the first nine months, research and development expenses as a percent of total revenues, were 12.4% and 13.1%, respectively. Actual expenses for the first nine months of fiscal 1995 increased to $1,337,607 from $1,032,133 in 1994. LecTec has been aggressively moving forward with the research and development of a non-nicotine active ingredient for alleviating symptoms of tobacco withdrawal. The Company completed the Phase I clinical trials during the fourth quarter of fiscal 1994. Due to encouraging findings on safety and toxicity levels, plus preliminary indications of efficacy from the initial clinical trials, the Company commenced the Phase II clinical study in September 1994. In December 1994, McNeil Consumer Products, a division of Johnson & Johnson, decided not to exercise its option to proceed with the research, development and licensing agreement previously signed with LecTec Corporation, thereby relinquishing all licensing agreement rights to the non-nicotine smoking cessation product. The McNeil action provides LecTec with the opportunity to establish a new marketing alliance under which the Company retains maximum rights to the product. In March, 1995, the Company released preliminary findings from an ongoing study by the Addiction Research Center of the National Institute of Drug Abuse which found that the non-nicotine smoking cessation product has a very low potential for addictiveness. Furthermore, in April, 1995, the Company announced completion of the Phase II clinical study and results which indicate the non-nicotine smoking cessation product has been found to be effective at assisting smokers to quit by alleviating tobacco withdrawal symptoms. The Company has a strategy of developing therapeutic products internally through clinical trials to market-ready status. Although the Company will continue to seek strong partners to market selected therapeutic products and help defray development costs, this in-house strategy permits LecTec to negotiate with potential partners from a position of strength. The Company anticipates research and development expenses will continue in the range of 10% to 15% of revenues. The Company will also continue product development in the Conductive and Medical Tape product groups. Other income (expense) decreased in the third quarter of fiscal 1995 to $15,572 from $22,471 in the third quarter of 1994. Other income (expense) for the first nine months of fiscal 1995 decreased to $65,697 from $115,043 in the same period of fiscal 1994. The decline resulted from the liquidation of short-term investments to finance the acquisition of a new medical tape production line and a new therapeutic production line plus the increases in receivables and inventory necessary to support the growing business. Earnings before income taxes and equity in losses of unconsolidated subsidiary for the third quarter, as a percent of total revenues, increased from 0.8% in fiscal 1994 to 6.3% in fiscal 1995. Earnings before income taxes and equity in losses of unconsolidated subsidiary for the third quarter were $17,234 and $266,759 in 1994 and 1995, respectively. For the first nine months earnings before income taxes and equity in losses of unconsolidated subsidiary as a percent of total revenues decreased from 11.3% in fiscal 1994 to 3.8% in fiscal 1995. Earnings before income taxes and equity in losses of unconsolidated subsidiary for the first nine months were $887,610 and $407,198 in 1994 and 1995, respectively. The increase in earnings before income taxes and equity in losses of unconsolidated subsidiary for the quarter was the result of increased sales, the inclusion of Natus Corporation sales and increased margins which were offset to a lesser degree by increased selling, general and administrative expenses associated with the inclusion of Natus Corporation and increased research and development expenses. The decrease in earnings before income taxes and equity in losses of unconsolidated subsidiary for the nine months was the result of significantly reduced margins on medical tape plus the increased selling, general and administrative expenses associated with the inclusion of Natus Corporation and increased research and development expenses. Liquidity and Capital Resources The Company has used internally generated cash to support growth and capital spending. The Company continues to have an unused $1,000,000 line of credit available to meet current operating requirements. The Company estimates that capital expenditures will exceed $1,300,000 for equipment and capital improvements during fiscal 1995. The Company continues to have a strong Balance Sheet with no long term debt and a current ratio at the end of the third quarter of fiscal 1995 of 3.79 as compared to 7.45 at the end of the same period of 1994. Working capital, at the end of the third quarter of fiscal 1995, decreased to $4,401,270 from $5,957,622 at the end of the same period of fiscal 1994. PART II OTHER INFORMATION Item 1. Legal Proceedings None Item 2. Changes in Securities There have been no changes in the rights of security holders. Item 3. Defaults Upon Senior Securities Not applicable. Item 4. Submission of Matters to a Vote of Security Holders None Item 5. Other Information The registrant is not aware of any other information of material importance to be included in this report. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits - EX.27 Financial Data Schedule for SEC use. (b) Reports on Form 8-K None SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. LECTEC CORPORATION Date May 12, 1995 /s/ Erwin W. Templin II Erwin W. Templin II, EVP & CFO