UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
|
|
|
þ |
|
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE
QUARTERLY PERIOD ENDED JUNE 30, 2007. |
|
|
|
o |
|
TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR
THE TRANSITION PERIOD FROM to |
Commission file number: 0-16159
(Exact name of small business issuer as specified in its charter)
|
|
|
Minnesota
|
|
41-1301878 |
|
|
|
(State or other jurisdiction of
incorporation or organization)
|
|
(I.R.S. Employer
Identification No.) |
|
|
|
5610 Lincoln Drive, Edina, Minnesota
|
|
55436 |
|
|
|
(Address of principal executive offices)
|
|
(Zip Code) |
(Issuers telephone number, including area code)
(Former name, former address and former fiscal year, if changed since last report)
Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the
Exchange Act during the past 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 þ No o
Indicate by check mark whether registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act).
Yes o No þ
The number of shares outstanding of the issuers common stock as of August 13, 2007 was 4,176,048
shares.
Transitional Small Business Disclosure Format (Check one).
Yes o No þ
LECTEC CORPORATION
REPORT ON FORM 10-QSB FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2007
Table of Contents
Forward-Looking Statements
From time to time, in reports filed with the Securities and Exchange Commission (including
this Form 10-QSB), in press releases, and in other communications to shareholders or the
investment community, the Company may provide forward-looking statements concerning possible or
anticipated future results of operations or business developments which are typically preceded by
the words believes, wants, expects, anticipates, intends, will, may, should, or
similar expressions. Such forward-looking statements are subject to risks and uncertainties which
could cause results or developments to differ materially from those indicated in the
forward-looking statements. Such risks and uncertainties include, but are not limited to, the
Companys dependence on royalty payments from Novartis Consumer Health, Inc. (Novartis), which
is not currently selling the Companys licensed product, the Companys dependence on key personnel
and Board of Director members, the success or failure of any attempt by the Company to protect or
enforce its patents and territories of coverage, the issuance of new accounting pronouncements,
the availability of opportunities for licensing agreements related to patents that the Company
holds, limitations on market expansion opportunities, and other risks and uncertainties as
described in the Cautionary Statements filed as Exhibit 99.01 to Form 10-KSB for the year ended
December 31, 2006.
PART 1 FINANCIAL INFORMATION
ITEM 1 CONDENSED FINANCIAL STATEMENTS AND NOTES TO CONDENSED FINANCIAL STATEMENTS
LECTEC CORPORATION
CONDENSED BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
December 31, |
|
|
|
2007 |
|
|
2006 |
|
|
|
(Unaudited) |
|
|
|
|
|
ASSETS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CURRENT ASSETS: |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
1,053,799 |
|
|
$ |
1,281,785 |
|
Prepaid expenses and other |
|
|
48,952 |
|
|
|
66,285 |
|
|
|
|
|
|
|
|
Total current assets |
|
|
1,102,751 |
|
|
|
1,348,070 |
|
|
|
|
|
|
|
|
OTHER ASSETS: |
|
|
|
|
|
|
|
|
Patent costs |
|
|
53,603 |
|
|
|
65,191 |
|
Prepaid insurance director and officer |
|
|
81,117 |
|
|
|
101,396 |
|
|
|
|
|
|
|
|
|
|
|
134,720 |
|
|
|
166,587 |
|
|
|
|
|
|
|
|
TOTAL ASSETS |
|
$ |
1,237,471 |
|
|
$ |
1,514,657 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS EQUITY |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CURRENT LIABILITIES: |
|
|
|
|
|
|
|
|
Accounts payable |
|
$ |
17,035 |
|
|
$ |
14,479 |
|
Accrued expenses |
|
|
57,020 |
|
|
|
73,395 |
|
Discontinued operations |
|
|
130,000 |
|
|
|
130,000 |
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
204,055 |
|
|
|
217,874 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
COMMITMENTS AND CONTINGENCIES |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SHAREHOLDERS EQUITY: |
|
|
|
|
|
|
|
|
Common stock, $.01 par value; 15,000,000 shares
authorized; 4,163,998 and 4,148,998 shares
issued and outstanding at June 30, 2007
and December 31, 2006, respectively |
|
|
41,640 |
|
|
|
41,490 |
|
Additional contributed capital |
|
|
11,856,436 |
|
|
|
11,847,536 |
|
Accumulated deficit |
|
|
(10,864,660 |
) |
|
|
(10,592,243 |
) |
|
|
|
|
|
|
|
|
|
|
1,033,416 |
|
|
|
1,296,783 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL LIABILITES AND SHAREHOLDERS EQUITY |
|
$ |
1,237,471 |
|
|
$ |
1,514,657 |
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these condensed financial statements.
I-1
LECTEC CORPORATION
CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, |
|
|
Six Months Ended June 30, |
|
|
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue royalty and licensing fees |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
92,277 |
|
Operating expenses |
|
|
171,558 |
|
|
|
123,469 |
|
|
|
300,760 |
|
|
|
278,823 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations |
|
|
(171,558 |
) |
|
|
(123,469 |
) |
|
|
(300,760 |
) |
|
|
(186,546 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income |
|
|
13,467 |
|
|
|
17,407 |
|
|
|
28,343 |
|
|
|
28,911 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET LOSS |
|
$ |
(158,091 |
) |
|
$ |
(106,062 |
) |
|
$ |
(272,417 |
) |
|
$ |
(157,635 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted |
|
|
4,157,295 |
|
|
|
4,148,998 |
|
|
|
4,155,572 |
|
|
|
4,148,998 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LOSS PER COMMON SHARE: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted |
|
$ |
(0.04 |
) |
|
$ |
(0.03 |
) |
|
$ |
(0.07 |
) |
|
$ |
(0.04 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these condensed financial statements.
I-2
LECTEC CORPORATION
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, |
|
|
|
2007 |
|
|
2006 |
|
|
|
|
|
|
|
|
|
|
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(272,417 |
) |
|
$ |
(157,635 |
) |
Adjustments to reconcile net cash (used in) provided by
operating activities: |
|
|
|
|
|
|
|
|
Amortization of patent costs |
|
|
11,588 |
|
|
|
13,121 |
|
Changes in operating assets and liabilities: |
|
|
|
|
|
|
|
|
Royalty receivable |
|
|
|
|
|
|
214,906 |
|
Prepaid expenses and other |
|
|
37,612 |
|
|
|
30,420 |
|
Accounts payable |
|
|
2,556 |
|
|
|
17,650 |
|
Accrued expenses |
|
|
(16,375 |
) |
|
|
16,590 |
|
|
|
|
|
|
|
|
Net cash (used in) provided by operating activities |
|
|
(237,036 |
) |
|
|
135,052 |
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
Proceeds from the exercise of stock options |
|
|
9,050 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (decrease) increase in cash and cash equivalents |
|
|
(227,986 |
) |
|
|
135,052 |
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents beginning of period |
|
|
1,281,785 |
|
|
|
1,310,578 |
|
|
|
|
|
|
|
|
|
Cash and cash equivalents end of period |
|
$ |
1,053,799 |
|
|
$ |
1,445,630 |
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these condensed financial statements.
I-3
LECTEC CORPORATION
Notes to Condensed Financial Statements
June 30, 2007 and 2006
(Unaudited)
The accompanying condensed financial statements include the accounts of LecTec Corporation
(the Company) as of June 30, 2007 and December 31, 2006 and for the three and six month periods
ended June 30, 2007 and 2006. The Companys condensed financial statements have been prepared in
accordance with accounting principles generally accepted in the United States of America and should
be read in conjunction with the Companys Annual Report on Form 10-KSB for the year ended December
31, 2006. The interim condensed financial statements are unaudited and in the opinion of
management, reflect all adjustments necessary for a fair presentation of results for the periods
presented. Results for interim periods are not necessarily indicative of results for the full
year.
(2) |
|
Business Summary and Critical Accounting Policies |
Business Summary
The Company is an intellectual property licensing and holding company. The Company earns
royalties and licensing fees from licensing agreements pertaining to the Companys patents. The
Company has one licensing agreement (Novartis Agreement or Agreement) with Novartis, which pays
royalties to the Company from time to time, within the terms of the Agreement, based upon a
percentage of Novartis net sales of licensed products. Previously, the Company was a contract
manufacturer of hydrogel topical patches which were sold to major pharmaceutical customers until
the Company ceased its manufacturing operations in December 2004. The Company holds multiple
domestic and international patents on its hydrogel technology. A hydrogel is a gel-like material
having an affinity for water and similar compounds. These gels are ideal for delivering medication
onto the skin.
Critical Accounting Policies
Some of the Companys most critical accounting policies include:
Revenue Recognition. Royalty and licensing fees are recognized when earned under the terms of
the Agreement with Novartis, based upon sales information of licensed products sold by Novartis,
and collection is reasonably assured.
Patent Costs. The carrying value of patent costs is reviewed periodically or when factors
indicating impairment are present. Any impairment loss is measured as the amount by which the
carrying value of the assets exceeds the fair value of the assets. The Company believes no such
impairment existed at June 30, 2007.
Royalty Receivable. The Company grants credit to its only customer, Novartis, in the normal
course of business and under the terms contained in the Agreement. Pursuant to the Agreement,
Novartis pays royalty income within the terms defined in the Agreement. At June 30, 2007, the
Company did not have an outstanding royalty receivable with Novartis due to a voluntary nationwide
recall of licensed products from the Company to Novartis. The Company is currently engaged in an
audit of royalties that are due to the Company pursuant to the Agreement. The audit period was
from January 1, 2005, up to the point of the product recall in June 2006. Royalty income is
recognized based on net sales information provided by Novartis, covering sales of products under
the License Agreement for the applicable periods. The Company believes it has been paid all
royalty income due to the Company in the United States territory based on information provided by
Novartis. This information has been audited and confirmed by an independent firm engaged by the
Company pursuant to the Agreement up to the point of the product recall in June 2006. To date,
however, the Company has not been able to determine and audit the amount of royalties that may be
due to the Company from sales of licensed products in Canada and Mexico, which are listed as
additional fields of use in the Agreement. The Company has contacted Novartis to obtain the
additional information it needs to complete the audit. The Company has not recorded any additional
royalty income due to the audit because of this uncertainty.
Use of Estimates. In preparing financial statements in conformity with accounting principles
generally accepted in the United States of America, management is required to make estimates and
assumptions that affect certain reported amounts of assets and liabilities and the disclosure of
contingent assets and liabilities at the date of the financial statements
I-4
and the reported amounts of revenues and expenses during the reporting period. Actual results
could differ from those estimates.
Stock-Based Compensation. There were no stock options granted during the three and six months
ended June 30, 2007 or 2006 and therefore, the Company did not record any stock compensation
expense. The Company has no back dating issues relating to current outstanding options. All
outstanding options were issued at fair market value at the time of grant.
In December 2004, the Financial Accounting Standards Board (FASB) issued SFAS No. 123(R),
Share-Based Payment, which requires that compensation cost relating to share-based payment
transactions (including the cost of all employee stock options) be recognized in the financial
statements. That cost is measured based on the estimated fair value of the equity or liability
instruments issued. SFAS No. 123(R) covers a wide range of share-based compensation arrangements
including share options, restricted share plans, performance-based awards, share appreciation
rights, and employee share purchase plans. SFAS No. 123(R) replaces SFAS No. 123, Accounting for
Stock-Based Compensation, and supersedes Accounting Principles Board (APB) Opinion No. 25,
Accounting for Stock Issued to Employees. The Company was required to apply SFAS No. 123(R)
effective January 1, 2006. Thus, the Companys financial statements reflect the cost for (a) all
share-based compensation arrangements granted after December 31, 2005 and for any such arrangements
that are modified, cancelled, or repurchased after that date, and (b) the portion of previous
share-based awards for which the requisite service had not been rendered as of that date, based on
the grant date estimated fair value.
All of the Companys options were fully vested as of December 31, 2006 and there were no new
grants, or modifications to existing grants, during the three and six months ended June 30, 2007.
Therefore, the adoption of SFAS No. 123(R) had no impact on the Companys financial statements.
(3) |
|
Loss Per Common Share |
Basic loss per common share is computed by dividing net loss by the weighted average number of
common shares outstanding. Diluted loss per common share is computed by dividing net loss by the
weighted average number of common shares outstanding and common share equivalents related to stock
options and warrants when dilutive. Common stock options and warrants to purchase 255,250 and
260,250 shares of common stock with a weighted average exercise price of $1.55 and $1.53 were
outstanding during the three and six months ended June 30, 2007, respectively. Common stock
options and warrants to purchase 421,250 and 446,250 shares of common stock with a weighted average
exercise price of $2.02 and $2.02 were outstanding during the three and six months ended June 30,
2006, respectively. Because the Company had a loss from operations during the three and six months
ended June 30, 2007 and 2006, those shares were excluded from the loss per share computations
because they were antidilutive.
The income tax benefit for the three and six months ended June 30, 2007 and 2006, was offset
by a valuation allowance for deferred taxes. No federal or state income tax benefit was provided
for the three and six months ended June 30, 2007 and 2006, as the realization of such benefit is
not reasonably assured.
In July 2006, the FASB issued Interpretation No. 48, Accounting for Uncertainty in Income
Taxes (FIN 48). FIN 48 creates a single model to address uncertainty in income tax positions.
FIN 48 clarifies the accounting for income taxes by prescribing the minimum recognition threshold a
tax position is required to meet before being recognized in the financial statements. It also
provides guidance on de-recognition, measurement, classification, interest and penalties,
accounting in interim periods, disclosures and transition. FIN 48 is effective for an entitys
fiscal year beginning after December 15, 2006. The Company does not believe the adoption of Fin 48
had a significant impact on its financial statements.
(5) |
|
Novartis Supply and License Agreement |
In July 2004, the Company entered into a supply and license agreement, effective as of January
1, 2004 (the Agreement), with Novartis. Under the Agreement, the Company also granted to
Novartis an exclusive license (the License) to all of the intellectual property of the Company to
the extent that it is used or useful in the production of the vapor patches being supplied under
the Agreement. The License will continue for the duration of any patents included in the licensed
intellectual property and, with respect to all other elements of the licensed intellectual
property, for the
maximum duration (14 years) permitted under applicable law. Upon the expiration of the
patents included in the licensed intellectual property, Novartis will have a non-revocable,
perpetual, fully paid-up license to the intellectual property used or useful in the
I-5
production of vapor patches for the pediatric market and the adult cough/cold market.
Commencing January 1, 2005, Novartis is required by the Agreement to pay royalties at an agreed
upon percentage to the Company based on net sales as defined in the Agreement of vapor patches by
Novartis for each year the License is in effect.
In March 2005, Novartis notified the Company of its intention to enter the adult market
pursuant to an option under the Agreement. The royalty terms related to sales by Novartis in the
adult market are the same as the pediatric market in the defined fields of use in the Agreement.
In June 2006, Novartis issued a nationwide recall of all of its Triaminic® vapor patch
products. The Company has not recorded any royalty income since June 2006 because of the
uncertainties related to the recall. In a press release issued by Novartis pertaining to the
recall, Novartis explained that the recall was due to the serious adverse health effects that
could result if the product is ingested by a child removing the patch and chewing on it. At the
same time that Novartis announced this voluntary recall, the U.S. Food and Drug Administration
(FDA) issued a release warning consumers not to use the Triaminic Vapor Patch due to reports of
serious adverse events associated with accidental ingestion by children. Novartis confirmed to the
Company that the patch involved in this incident was not manufactured by the Company.
In January 2007, the Company engaged an independent firm to audit the royalties due to the
Company pursuant to the Agreement. The audit period was from January 1, 2005, up to the product
recall in June 2006. Royalty income recognized during this period was based on net sales
information provided by Novartis, covering sales of products under the Agreement for the applicable
periods. The Company believes that it has earned and been paid all royalty income due to the
Company in the North America territory up to the product recall in June 2006. To date, the Company
has not been able to audit the amount of royalties that may be due to the Company from sales of
licensed products in Canada and Mexico, which are listed as additional fields of use in the
Agreement. The Company has contacted Novartis to obtain the additional information it needs to
complete the audit. The Company has not recorded any additional royalty income due to the
uncertainty of the pending outstanding audit issues.
On April 24, 2007, the Company was informed that the United States Patent & Trademark Office
(USPTO) had completed a re-examination of a critical patent pertinent to the Agreement and has
been issued a re-examination certificate. The re-issued patent essentially strengthens the
Companys position with respect to protection of its rights under this patent. The patent is
entitled Non-Occlusive Adhesive Patch for Applying Medication to the Skin and covers the design
for adhesive patches which contain a reservoir of medication to be delivered into the body by
absorption through the skin. Patches produced under this patent have been used for a number of
applications including, among others, the localized treatment of pain and the delivery by infusion
of certain medications for systemic conditions.
The Company is exploring mutual opportunities with Novartis under the Agreement in an effort
to rejuvenate the Companys revenue stream and is pursuing other licensing opportunities related to
patents the Company holds.
(6) |
|
Discontinued Operations |
The liability for discontinued operations at June 30, 2007 and December 31, 2006 consisted of
a reserve for sales returns and credits for sales prior to the discontinuance of operations in
December 2004.
I-6
ITEM 2 MANAGEMENTS DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
RESULTS OF OPERATIONS
The Company wound down and ceased its previous contract manufacturing operations at the end of
2004. Because of this, the past and future financial results related to contract manufacturing
have been treated as discontinued operations for financial reporting purposes. Continuing
operations consist of the Companys current structure as an intellectual property licensing and
holding company. There were no costs involved for discontinued operations for the three and six
months ended June 30, 2007 or 2006.
COMPARISON OF THE THREE AND SIX MONTHS ENDED JUNE 30, 2007 AND 2006
Results of Operations
The Company did not record any royalty income during the three or six months ended June 30,
2007, compared to royalty income of $0 and $92,277 for the three and six months ended June 30,
2006, respectively. The decrease is attributable to the previously discussed product recall by
Novartis, (See Note 5 of Notes to Condensed Financial Statements in this Form 10-QSB).
Operating expenses increased $48,089, to $171,558 for the second quarter ended June 30, 2007,
from operating expenses of $123,469 for the comparable quarter in 2006. The increase in operating
expenses resulted primarily from an increase in consulting expenses relating to the Companys
efforts to strengthen its patent protection rights. For the six months ended June 30, 2007,
operating expenses increased $21,937 to $300,760, from $278,823 for the six months ended June 30,
2006. The increase in operating expenses resulted from an increase in consulting expenses related
to the Companys efforts to strengthen its patent protection rights, new patent costs, and general
patent maintenance costs, which were partially offset by reductions in net lease expenses, legal
and accounting costs, and general overall reductions in operating expenses. The Company
anticipates that it can further reduce operating expenses. However, these savings may be offset
with costs related to additional actions the Company decides to take with respect to protecting its
intellectual property.
For the second quarter ended June 30, 2007, the Company recorded a net loss of $(158,091), or
$(0.04) per basic and diluted share, compared to a net loss of $(106,062), or $(0.03) per basic and
diluted share, for the same quarter in 2006. For the six months ended June 30, 2007, the Company
recorded a net loss of $(272,417), or $(0.07) per basic and diluted share, compared to a net loss
of $(157,635), or $(0.04) per basic and diluted share, for the same period in the 2006. The
increase in net loss for the three and six month periods ended June 30, 2007 from the comparable
periods in 2006 is due to the lack of royalty income during the three and six month periods ended
June 30, 2007 and the increase in operating expenses discussed above.
Income Taxes
The income tax benefit for the three and six months ended June 30, 2007 and 2006 was offset by
a valuation allowance for deferred taxes. No federal or state income tax benefit was provided for
the three and six months ended June 30, 2007 and 2006, as the realization of such benefits is not
reasonably assured.
Effect of Inflation
Inflation has not had a significant impact on the Companys operations or cash flow.
Liquidity and Capital Resources
Cash and cash equivalents decreased $227,986 for the six month period ended June 30, 2007, to
$1,053,799, from cash and cash equivalents of $1,281,785 at December 31, 2006. The decrease in
cash and cash equivalents resulted primarily from a lack of royalty income from Novartis relating
to the previously discussed product recall and the reduction in cash resulting from the general
outflow of operating expenses.
I-7
There were no material commitments for capital expenditures at June 30, 2007 or 2006.
The Company had working capital of $898,696 and a current ratio of 5.40% at June 30, 2007
compared to working capital of $1,130,196 and a current ratio of 6.19% at December 31, 2006. The
decline in working capital and the current ratio at June 30, 2007, compared to December 31, 2006,
was primarily due to the net loss of ($272,417) that the Company incurred during the six months
ended June 30, 2007, and partially offset by the exercise of stock options and other working
capital changes.
Shareholders equity decreased $263,367, to $1,033,416 at June 30, 2007 from $1,296,783 at
December 31, 2006, primarily due to the net loss the Company incurred during the six months ended
June 30, 2007, partially offset by stock option exercises by former employees of the Company.
The Company believes its existing cash and cash equivalents will be sufficient to fund
operations through 2007 and 2008, based upon its current cash on hand, and the anticipated
operating expenses the Company is likely to incur during 2007 and 2008. The Company earns interest
on its available cash. Interest income earned during the three and six month periods ended June
30, 2007 was $13,467 and $28,343, respectively (4.9% average annual interest). Interest income
earned during the three and six month periods ended June 30, 2006 was $17,407 and $28,911,
respectively (4.2% average annual interest). Management has been proactive to rejuvenate its
revenue stream from Novartis and other sources in order for the Company to be viable in the future.
Management has been working with Novartis to address the issues surrounding the product recall as
well as exploring other licensing opportunities pertaining to the intellectual property the Company
owns.
The Companys strategy is to pursue additional agreements with Novartis and concurrently
pursue similar agreements with other domestic and foreign manufacturers to enable them to use the
Companys proprietary patch technology in producing or selling topical patch products in the
future. Furthermore, the Company is assessing the value of its patent portfolio to enhance its
options with respect to future licensing opportunities, attraction of potential merger or
acquisition candidates, or the sale of the Company or public shell as a whole. The Company is also
taking steps to strengthen its primary patents for territories of use, including the United States,
Europe, and other countries. This effort is also intended to strengthen the Companys position
with respect to other companies that may be infringing on the patents the Company owns. It is
currently managements intent to fund operations with royalty income from licensing agreements or
from other income derived from the protection of patent rights pertaining to the Companys
intellectual property.
The Company was recently granted a re-examination certificate which expands the Companys
prior claims for a major patent the Company holds. This will enhance and strengthen the Companys
position with respect to potential patent infringement in the marketplace and differentiate and
clarify our claims under this particular patent. The Company is taking steps to evaluate its
current position in light of this event, including market research studies and other efforts to
gather and document information to solidify the Companys patent protection rights.
The Companys working capital requirements are dependent upon adequate levels of royalty and
licensing income to fund operations. Without this income the Company will continue to use cash to
fund continuing operations. Management has been proactive with Novartis in an effort to rejuvenate
its revenue stream, and is pursuing other options including territory expansion, pediatric and
adult market expansion, consideration of other licensing opportunities of products for which the
Company has patents, and other efforts to protect the Companys patent rights. Royalty income is
uncertain because it is subject to factors that the Company cannot control. There can be no
assurance that the anticipated revenue stream or the anticipated expenses will be as planned, or
that the Company will be successful in negotiating other licensing opportunities with Novartis or
other companies, due to the uncertainties and risks described in the Cautionary Statements
included as Exhibit 99.01 to the Companys annual report on Form 10-KSB for the fiscal year ended
December 31, 2006.
CRITICAL ACCOUNTING POLICIES
Management believes that the Company has not adopted any critical accounting policies which,
if changed, would result in a material change in financial estimates, financial condition, results
of operation or cash flows for the three months ended June 30, 2007 and 2006. The critical
accounting policies appear in Note 2 of Notes to Condensed Financial Statements in this Form
10-QSB.
I-8
ITEM 3 CONTROLS AND PROCEDURES
Under the supervision and with the participation of our management, including our principal
executive officer and principal financial officer, we have evaluated the effectiveness of the
design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) and
15d-15(e) under the Securities Exchange Act of 1934 (the Exchange Act)). Based upon this
evaluation, the principal executive officer and principal financial officer have concluded that, as
of the end of the period covered by this report, our disclosure controls and procedures were
effective.
During the three months ended June 30, 2007, there were no changes in the Companys internal
control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) that has
materially affected, or is reasonably likely to materially affect, the Companys internal control
over financial reporting.
I-9
PART II OTHER INFORMATION
ITEM 1 LEGAL PROCEEDINGS
None.
ITEM 2 UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None.
ITEM 3 DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5 OTHER INFORMATION
None.
ITEM 6 EXHIBITS
|
|
|
|
|
Exhibit No. |
|
Description |
|
|
|
|
|
|
3.01 |
|
|
Articles of Incorporation of LecTec Corporation, as amended
(Incorporated herein by reference to the Companys Form S-1 Registration Statement
(file number 33-9774C) filed on October 31, 1986 and amended on December 12,
1986). |
|
|
|
|
|
|
3.02 |
|
|
Bylaws of LecTec Corporation (Incorporated herein by reference to the
Companys Form S-1 Registration Statement (file number 33-9774C) filed on October
31, 1986 and amended on December 12, 1986). |
|
|
|
|
|
|
31.01 |
|
|
Certification of Principal Executive Officer Pursuant to Section 302
of the Sarbanes-Oxley Act of 2002, filed herewith. |
|
|
|
|
|
|
31.02 |
|
|
Certification of Principal Financial Officer Pursuant to Section 302
of the Sarbanes-Oxley Act of 2002, filed herewith. |
|
|
|
|
|
|
32.01 |
|
|
Certification Pursuant to 18 U.S.C. §1350, as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002, filed herewith. |
|
|
|
|
|
|
99.01 |
|
|
Cautionary Statements (Incorporated herein by reference to Exhibit
99.01 to the Companys Report on Form 10-KSB for the fiscal year ended December
31, 2006). |
II-1
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.
|
|
|
|
|
|
LECTEC CORPORATION
|
|
Date: August 13, 2007 |
By |
/s/ Judd A. Berlin
|
|
|
|
Judd A. Berlin |
|
|
|
Chief Executive Officer, Chief Financial Officer, & Director
(principal financial officer and duly authorized officer) |
|
II-2
EXHIBIT INDEX
|
|
|
|
|
Exhibit No. |
|
Description |
|
|
|
|
|
|
3.01 |
|
|
Articles of Incorporation of LecTec Corporation, as amended (Incorporated herein by
reference to the Companys Form S-1 Registration Statement (file number 33-9774C) filed on
October 31, 1986 and amended on December 12, 1986). |
|
|
|
|
|
|
3.02 |
|
|
Bylaws of LecTec Corporation (Incorporated herein by reference to the Companys Form S-1
Registration Statement (file number 33-9774C) filed on October 31, 1986 and amended on
December 12, 1986). |
|
|
|
|
|
|
31.01 |
|
|
Certification of Principal Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002, filed herewith. |
|
|
|
|
|
|
31.02 |
|
|
Certification of Principle Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002, filed herewith. |
|
|
|
|
|
|
32.01 |
|
|
Certification Pursuant to 18 U.S.C. §1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, filed herewith. |
|
|
|
|
|
|
99.01 |
|
|
Cautionary Statements (Incorporated herein by reference to Exhibit 99.01 to the Companys
Report on Form 10-KSB for the fiscal year ended December 31, 2006). |