UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-KSB
(Mark One)
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ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2007.
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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
LECTEC CORPORATION
(Name of small business issuer in its charter)
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MINNESOTA
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41-1301878 |
(State or other jurisdiction of
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(I.R.S. Employer |
incorporation or organization)
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Identification No.) |
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5610 LINCOLN DRIVE, EDINA, MINNESOTA
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55436 |
(Address of principal executive offices)
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(Zip Code) |
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Issuers telephone number:
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(952) 933-2291 |
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Securities registered under Section 12(b) of the Exchange Act:
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None |
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Securities registered under Section 12(g) of the Exchange Act:
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Common Stock, par value $0.01 per share |
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(Title of class) |
Check whether the issuer is not required to file reports pursuant to Section 13 or 15(d) of
the Exchange Act. o
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
Check if there is no disclosure of delinquent filers in response to Item 405 of Regulation
S-B contained in this form, and no disclosure will be contained, to the best of registrants
knowledge, in definitive proxy or information statements incorporated by reference in Part III of
this Form 10-KSB or any amendment to this Form 10-KSB. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2
of the Exchange Act. Yes o No þ
The issuers revenues for the fiscal year ended December 31, 2007 were $100,431.
The aggregate market value of the voting and non-voting common equity held by non-affiliates
of the registrant as of March 28, 2008 was approximately $7,494,244 based upon the last reported
sale price of the Common Stock at that date by the Over-the-Counter Bulletin Board.
The number of shares outstanding of the issuers Common Stock as of March 28, 2008 was
4,290,026 shares.
DOCUMENTS INCORPORATED BY REFERENCE
None.
Transitional Small Business Disclosure Format (Check One): Yes o No þ
TABLE OF CONTENTS
FORWARD-LOOKING STATEMENTS
From time to time, in reports filed with the Securities and Exchange Commission (including
this Form 10-KSB), 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., which recently
began sales of an adult vapor patch licensed by the Company, 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 this Form
10-KSB for the year ended December 31, 2007.
2
PART I
ITEM 1. DESCRIPTION OF BUSINESS
GENERAL
LecTec Corporation (the Company) is an intellectual property licensing and holding company.
The Company earns royalties and licensing fees from licensing agreements pertaining to patents that
the Company has been granted. The Company currently has one licensing agreement (the Agreement)
with Novartis Consumer Health, Inc., (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 various 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 and trademarks
based upon its topical patch technology.
The Company was organized in 1977 as a Minnesota corporation and went public in December 1986.
Its principal executive office is located at 5610 Lincoln Drive, Edina, Minnesota 55436, its
telephone number is (952)-933-2291, fax number is (952)-942-5369, and internet website is
www.lectec.com.
NOVARTIS SUPPLY AND LICENSE AGREEMENT
On July 19, 2004, the Company entered into a supply and licensing agreement, effective as of
January 1, 2004 (the Agreement), with Novartis. By December 31, 2004, the supply portion of the
licensing agreement was completed and the Company no longer manufactured any product. The Company
moved into its Edina, Minnesota facility in February 2005 after vacating its previous manufacturing
facility in Minnetonka, Minnesota. Under the Agreement, the Company granted 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 that Novartis is selling under the Agreement.
The License will continue in effect for the duration of the patents life permitted under
applicable law. Upon the expiration of the patents included in the licensed intellectual property
(approximately six years), Novartis will have a non-revocable, perpetual, fully paid-up license to
the intellectual property used or useful in the production of vapor patches for the pediatric 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 semi-annual sales of vapor
patches by Novartis for each year the License is in effect.
In June 2006, Novartis issued a nationwide recall of all of its Triaminic® vapor patch
products. 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. According to news reports, the recall resulted
from an adverse event experienced by a child who suffered a seizure after chewing on a Triaminic
Vapor Patch. Novartis confirmed to the Company that the patch involved in this incident was not
manufactured by the Company. As a result of this recall, the Company has been proactive in
assisting Novartis to resolve the FDA issues surrounding the product recall and used its resources
to move the Company forward to revive its royalty income stream. The Company has met with Novartis
representatives to discuss how to prevent an incident where a child or pet chews or ingests a
patch.
In January 2007, the Company engaged an independent consulting firm to audit royalties 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. Based on the results of the audit, the Company agreed with
Novartis to settle any remaining claims for royalties based on sales during this period and
recorded revenue of $21,946 in the fourth quarter of 2007, which was paid in January 2008.
To address the product recall described above, the Company filed a provisional patent
application with the U.S. Patent and Trademark Office (the USPTO) in April 2007 for an adhesive
patch with an aversive agent. The intention of the provisional patent is to introduce an aversive
agent into patches that would be so repulsive, a child or pet would not want to chew, swallow, or
ingest a patch, yet not impair the intended patch functionality. The Companys new
child-proof/pet-proof patch technology is primarily designed to prevent children from ingesting a
patch, but the aversive agent will protect anyone, including adults with dementia (i.e. Alzheimer
disease) or even family pets, from chewing a discarded patch. It is expected this technology can
be applied to numerous patch formulations, most importantly patches potentially harmful if ingested
(i.e. nicotine patches, Alzheimers patches, estrogen patches, osteoporosis patches, nitroglycerin
patches, lidocaine patches, contraceptive patches, antidepressant patches, or any future developed
patch). The Company has also received a pending trademark under the name of SAFEPATCH.
3
In April 2007, the Company was informed that the USPTO had completed a re-examination of a
patent pertinent to the Agreement and the Company was issued a re-examination certificate. 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.
In July 2007, Novartis began shipping a new adult vapor patch product in the United States for
the 2007/2008 cough, cold, and flu season. This is a significant development for the Company in
its effort to rejuvenate its revenue stream. The Company recorded royalty income of $78,485 during
2007 based upon information provided by Novartis related to royalties due to the Company from sales
of the adult vapor patch for the second half of 2007. The Company was paid $75,585 on February 14,
2008 related to the 2007 sales of this licensed product. Differences in what the Company has
recorded as revenue and what the Company receives as payment results from differences in sales
returns and other items the Company cannot control. The Company does not consider these
discrepancies to be material given the past reporting and payment history by Novartis. Novartis
has not announced whether it will re-introduce a vapor patch for the pediatric market.
Currently, the Company is continuing to explore mutual opportunities with Novartis under the
Agreement. The Company is also pursuing other opportunities including research and development
(R&D) in an effort to enhance and add to the Companys revenue stream, and is evaluating
licensing opportunities related to other patents the Company holds.
During the years ended December 31, 2007 and 2006, the Company recorded revenue of $100,431
and $126,660, respectively, for royalties covered under the Agreement.
STRATEGY
The Companys strategy is to pursue additional licensing agreements with Novartis (currently
the Companys only licensee) and similar agreements with domestic and foreign manufacturers to
enable them to use the Companys proprietary patch technology in producing or selling topical patch
products in the future. The Company is exploring research and development opportunities in
emerging markets. 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, potential litigation, or the sale of the Company or public shell. The
Company is taking steps to strengthen its primary patents for territories of use, including Europe
and other countries. The Company has recently filed for two provisional patents (see discussion
below) to enhance and expand its current patent portfolio. It is currently managements intent to
fund continuing operations with royalty income from licensing agreements or from other income
derived from protection of rights pertaining to the Companys intellectual property. There can be
no assurance that the Company will be successful in the protection of the Companys rights related
to intellectual property or that royalty income will be sufficient to fund operations in the
future. In addition, there can be no assurance that the Company will be successful in entering
into future licensing agreements.
PATENTS AND TRADEMARKS
The Company has several U.S. and international patents related to its patch technology.
Eighteen issued U.S. patents and forty-two issued international patents are currently assigned to
the Company. The Company has four U.S. patent pending applications including provisional
applications (see below) and two foreign applications. The patents most pertinent to the Companys
major products have a remaining legal duration ranging from five to fourteen years. The Company
also holds three registered U.S. trademarks.
In 2007, the Company filed for two new provisional patents, which include: (i) adding an
aversive agent to our licensed patch or other patches to prevent ingestion by children or pets and
(ii) a hand sanitizing patch that will attract, trap, and kill targeted infectious organisms. The
hand sanitizing patch will be dry, thereby rendering the patch harmless in the event that it is
licked, chewed or exposed to the eye.
Issued patents can later be held invalid by the patent office issuing the patent or by a
court. The Company cannot be certain that its patents will not be challenged, invalidated,
circumvented, or that the rights granted under the Companys patents will provide a competitive
advantage.
The Company uses both patents and trade secrets to protect its proprietary property and
information. To the
extent the Company relies on confidential information to maintain its competitive position, there
can be no assurance that other parties will not independently develop the same or similar
information.
4
EMPLOYEES
At December 31, 2007, the Company had one full time employee, a three-member Board of
Directors, and has contract labor personnel available to the Company on an as needed basis.
5
ITEM 2. DESCRIPTION OF PROPERTY
The Company leases a building in Edina, Minnesota containing approximately 14,500 square feet
of warehouse and office space. The lease began in July 2004 and expires in August 2008. The
Company uses the space to maintain daily operations and for record storage requirements. The
Company sub-leases approximately 10,000 square feet of excess space to an independent lessee for
$3,800 per month. The sub-lessee has notified the Company that it will vacate the space by April
30, 2008. The Company is currently negotiating with the landlord to sub-lease the space to another
potential tenant. The Company intends to vacate the premises when the lease expires at the end of
August 2008 and is currently looking for a small office space and other storage alternatives.
ITEM 3. LEGAL PROCEEDINGS
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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PART II
ITEM
5. MARKET FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND SMALL BUSINESS ISSUER PURCHASES OF EQUITY SECURITIES
The Companys common stock trades on the Over the Counter (OTC) Bulletin Board under the
symbol LECT.OB.
The following table sets forth, for each of the calendar periods indicated, the quarterly high
and low closing prices for the Companys common stock quoted on the OTC Bulletin Board. The prices
in the table represent prices between dealers and do not include adjustments for retail mark-up,
markdown, or commission and may not represent actual transactions.
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Year Ended |
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Year Ended |
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December 31, 2007 |
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December 31, 2006 |
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High |
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Low |
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High |
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Low |
Quarter ended March 31 |
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$ |
0.85 |
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$ |
0.55 |
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$ |
0.71 |
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$ |
0.48 |
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Quarter ended June 30 |
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4.95 |
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0.62 |
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0.80 |
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0.35 |
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Quarter ended Sept. 30 |
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8.50 |
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2.10 |
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0.35 |
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0.24 |
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Quarter ended Dec. 31 |
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3.00 |
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1.05 |
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0.72 |
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0.27 |
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As of March 28, 2008, the Company had 4,290,026 shares of common stock outstanding, and
approximately 226 common shareholders of record, based upon information received from our stock
transfer agent. However, this number does not include beneficial owners whose shares were held of
record by nominees or broker dealers. The Company estimates that there are less than 600
individual owners.
The Company did not declare or pay cash dividends on its common stock in 2007 or 2006. The
Company may pay future dividends based upon excess cash the Company may have from royalty and
licensing income exceeding operating expenses of the Company. However, there can be no assurance
that the Company will pay any future dividends.
7
ITEM 6. MANAGEMENTS DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
OVERVIEW
The Companys strategy is to evaluate and promote its current intellectual property portfolio
for licensing purposes, with domestic and foreign manufacturers to enable them to use the Companys
proprietary patch technology in producing or selling topical patch products in the future. This
effort will also enhance the Companys options with respect to future licensing opportunities, and
may attract potential merger or acquisition candidates or the sale of the Company. The Company is
also taking steps to strengthen its patents for territories of use, including the United States,
Europe, and other countries. The Company is also focused on strengthening its position with
respect to protection of rights related to its current intellectual
property portfolio. 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.
In February 2007, the Company engaged a consulting firm to conduct an extensive market
research and intellectual property analysis of its patent portfolio and technology. The Company
subsequently evaluated emerging markets as a strategic growth opportunity for the Company, and has
identified that India has significant potential.
The Company is considering establishing a presence in India, and is specifically evaluating R&D
opportunities, strategic partnerships, and potential licensing opportunities.
In April 2007, the Company was granted a re-examination certificate which expanded the
Companys prior claims related to a patent the Company holds. The Company continues to take steps
to evaluate its current position in light of this event, including market research studies, product
testing, using other outside resources, and other efforts to gather and document information to aid
in the protection of the Companys patent rights. Also in April 2007, the Company filed a
provisional patent application with the U.S. Patent and Trademark Office for an adhesive patch with
aversive agent. The Companys new child-proof/pet-proof patch technology is primarily designed to
prevent children from chewing on or ingesting a patch, but the aversive agent will protect anyone,
including adults with dementia (i.e. Alzheimer disease) and family pets. It is expected this
technology can be applied to numerous patch formulations, most importantly patches potentially
harmful if ingested (i.e. nicotine patches, Alzheimers patches, estrogen patches, osteoporosis
patches, nitroglycerin patches, lidocaine patches, contraceptive patches and antidepressant
patches). The Company has also received a pending trademark under the name SAFEPATCH.
Novartis has launched an adult vapor patch product in the United States for the cough, cold,
and flu season. This is a significant development for the Company in its effort to rejuvenate its
revenue stream. The Company has begun to receive royalty income based upon sales of these vapor
patch products under the terms of the Agreement the Company has with Novartis.
RESULTS OF OPERATIONS
In 2004, the Company wound down its contract manufacturing operations. Because of this, the
past and future financial results related to contract manufacturing operations are treated as
discontinued operations for financial reporting purposes. Continuing operations relate to the
current structure of the Company as an intellectual property licensing and holding company.
COMPARISON OF THE YEARS ENDED DECEMBER 31, 2007 AND 2006
Results of Continuing Operations
The Company recorded royalty income of $100,431 for the year ended December 31, 2007, compared
to royalty income of $126,660 for the year ended December 31, 2006, a decrease of $26,229 or 21%.
The 2007 royalty income consisted of $78,485 recorded to reflect royalties based on sales in 2007
and $21,946 received to settle outstanding claims by the Company for royalties in prior periods.
The decline in royalty income in 2007 is attributable to the previously discussed product recall of
pediatric patches by Novartis. Net loss from continuing operations for 2007 was ($748,980) or
($0.18) per basic and diluted share, compared to a net loss from continuing operations for 2006 of
($335,532), or a loss of ($0.08) per basic and diluted share. The increase in the net loss from
continuing operations of $413,448 for 2007 as compared to 2006 was due primarily to an increase in
compensation expense of $332,925 as a result of granting fully vested options during 2007,
increases in consulting and legal expenses relating to the Companys efforts to evaluate the value
of the Companys intellectual property portfolio for licensing, merger and acquisition
opportunities, new provisional patent costs, and other costs related
to the protection of the Companys intellectual property portfolio.
Results of Discontinued Operations
There was no net loss from discontinued operations for the year ended December 31, 2007. The
net loss from discontinued
8
operations for the year ended December 31, 2006 of ($31,650) resulted from an increase to a
reserve for sales returns and credits for sales prior to the discontinuance of manufacturing. The
loss per share (basic and diluted) from discontinued operation was ($0.01) for the year ended
December 31, 2006.
Net Results of Operations
The net loss for 2007 was ($748,980), or ($0.18) per basic and diluted share, compared to a
net loss of ($367,182), or ($0.09) per basic and diluted share for 2006. The increase in the net
loss for the year ended December 31, 2007 compared to 2006 was due primarily to the compensation
expense discussed above.
Income Taxes
There was no income tax benefit recorded for the years ended December 31, 2007 and 2006, as
realization of available net operating loss carryforwards is not reasonably assured.
Effect of Inflation
Inflation has not had a significant impact on the Companys operations or cash flows.
LIQUIDITY AND CAPITAL RESOURCES
Total assets decreased $414,668 to $1,099,989 at December 31, 2007 from $1,514,657 at December
31, 2006. Cash and cash equivalents decreased $448,860 to $832,925 at December 31, 2007 from
$1,281,785 at December 31, 2006. The decrease in total assets and the reduction 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.
There were no material commitments for capital expenditures at December 31, 2007.
The Company had working capital of $795,059 and a current ratio of 4.95% at December 31, 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 December 31, 2007, compared to December 31,
2006, was primarily due to the net loss of ($748,980) that the Company incurred during 2007, and
partially offset by non-cash compensation expense related to the grant of fully vested options of
$332,925, the exercise of stock options, and other working capital changes.
Shareholders equity decreased $397,968 to $898,815 at December 31, 2007 from $1,296,783 at
December 31, 2006, primarily due to the net loss the Company incurred during 2007, offset by
compensation expense of $332,925, which was credited to additional paid-in capital, and the
exercise of stock options of $18,087 by former employees of the Company.
The Company believes its existing cash and cash equivalents will be sufficient to fund
operations through 2009, based upon its current cash on hand, and the anticipated operating
expenses the Company is likely to incur during 2008 and 2009. Currently, the Company estimates
that it will receive $100,000 to $400,000 per year in royalty income under the licensing agreement
the Company has with Novartis. There can be no assurance that the Company will realize such
amounts because there are many factors that the Company cannot control (see the cautionary
statements contained in Exhibit 99.01 to this Form 10-KSB). The Company earns interest on its
available cash. The Company earned interest income of $50,941 and $61,846 during the years ended
December 31, 2007 and 2006, respectively.
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, re-entry into R&D, strategic partnerships, 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 in Exhibit 99.01 to this Form 10-KSB.
9
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 operations or cash flows for the years ended December 31, 2007 and 2006. Critical accounting
policies are as follows:
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 provided 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. The amount of 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 that no
impairment existed at December 31, 2007 or 2006.
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 and management believes, based upon past payment
experience, that any and all amounts outstanding are fully collectible. At December 31, 2007, the
Company had a royalty receivable due to the Company of $100,431 which has since been collected in
early 2008. At December 31, 2006, the Company did not have an outstanding royalty receivable with
Novartis.
10
ITEM 7. FINANCIAL STATEMENTS
CONTENTS
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FINANCIAL STATEMENTS |
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11
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and
Board of Directors of
LecTec Corporation
We have audited the accompanying balance sheets of LecTec Corporation as of December 31, 2007
and 2006, and the related statements of operations, shareholders equity, and cash flows for the
years then ended. These financial statements are the responsibility of the Companys management.
Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of material
misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its
internal control over financial reporting. Our audits included consideration of internal control
over financial reporting as a basis for designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion on the effectiveness of the
Companys internal control over financial reporting. Accordingly, we express no such opinion. An
audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material
respects, the financial position of LecTec Corporation as of December 31, 2007 and 2006, and the
results of its operations and its cash flows for the years then ended in conformity with accounting
principles generally accepted in the United States of America.
/s/ LURIE BESIKOF LAPIDUS & COMPANY, LLP
Minneapolis, Minnesota
April 10, 2008
12
LecTec Corporation
BALANCE SHEETS
December 31, 2007 and 2006
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2007 |
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2006 |
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ASSETS |
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CURRENT ASSETS: |
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Cash and cash equivalents |
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$ |
832,925 |
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$ |
1,281,785 |
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Royalty receivable |
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100,431 |
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Prepaid expenses and other |
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62,877 |
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66,285 |
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Total current assets |
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996,233 |
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1,348,070 |
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OTHER ASSETS: |
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Patent costs |
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42,918 |
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65,191 |
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Prepaid insurance director and officer |
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60,838 |
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101,396 |
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103,756 |
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166,587 |
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|
|
|
|
|
$ |
1,099,989 |
|
|
$ |
1,514,657 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
|
CURRENT LIABILITIES: |
|
|
|
|
|
|
|
|
Accounts payable |
|
$ |
13,407 |
|
|
$ |
14,479 |
|
Accrued expenses |
|
|
57,767 |
|
|
|
73,395 |
|
Discontinued operations |
|
|
130,000 |
|
|
|
130,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
201,174 |
|
|
|
217,874 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
COMMITMENTS AND CONTINGENCIES |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SHAREHOLDERS EQUITY: |
|
|
|
|
|
|
|
|
Common stock, $.01 par value; 15,000,000 shares
authorized; 4,176,048 and 4,148,998 shares issued
and outstanding at December 31, 2007 and 2006, respectively |
|
|
41,760 |
|
|
|
41,490 |
|
Additional contributed capital |
|
|
12,198,278 |
|
|
|
11,847,536 |
|
Accumulated deficit |
|
|
(11,341,223 |
) |
|
|
(10,592,243 |
) |
|
|
|
|
|
|
|
|
|
|
898,815 |
|
|
|
1,296,783 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
1,099,989 |
|
|
$ |
1,514,657 |
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these financial statements.
13
LecTec Corporation
STATEMENTS OF OPERATIONS
Years ended December 31, 2007 and 2006
|
|
|
|
|
|
|
|
|
|
|
2007 |
|
|
2006 |
|
CONTINUING OPERATIONS: |
|
|
|
|
|
|
|
|
Revenue royalty and licensing fees |
|
$ |
100,431 |
|
|
$ |
126,660 |
|
Operating expenses |
|
|
900,352 |
|
|
|
524,038 |
|
|
|
|
|
|
|
|
Loss from operations |
|
|
(799,921 |
) |
|
|
(397,378 |
) |
|
|
|
|
|
|
|
|
|
Interest income |
|
|
50,941 |
|
|
|
61,846 |
|
|
|
|
|
|
|
|
Net loss from continuing operations |
|
|
(748,980 |
) |
|
|
(335,532 |
) |
|
|
|
|
|
|
|
|
|
DISCONTINUED OPERATIONS: |
|
|
|
|
|
|
|
|
Net loss from discontinued operations |
|
|
|
|
|
|
(31,650 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET LOSS |
|
$ |
(748,980 |
) |
|
$ |
(367,182 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING: |
|
|
|
|
|
|
|
|
Basic and diluted |
|
|
4,165,724 |
|
|
|
4,148,998 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LOSS PER COMMON SHARE: |
|
|
|
|
|
|
|
|
Basic and diluted - |
|
|
|
|
|
|
|
|
Continuing operations |
|
$ |
(0.18 |
) |
|
$ |
(0.08 |
) |
Discontinued operations |
|
|
|
|
|
|
(0.01 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
(0.18 |
) |
|
$ |
(0.09 |
) |
|
|
|
|
|
|
|
The accompanying notes are an integral part of these financial statements.
14
LecTec Corporation
STATEMENTS OF SHAREHOLDERS EQUITY
Years ended December 31, 2007 and 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional |
|
|
|
|
|
|
|
|
|
Common stock |
|
|
contributed |
|
|
Accumulated |
|
|
|
|
|
|
Shares |
|
|
Amount |
|
|
capital |
|
|
deficit |
|
|
Total |
|
Balance at December 31, 2005 |
|
|
4,148,998 |
|
|
$ |
41,490 |
|
|
$ |
11,847,536 |
|
|
$ |
(10,225,061 |
) |
|
$ |
1,663,965 |
|
Net loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(367,182 |
) |
|
|
(367,182 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2006 |
|
|
4,148,998 |
|
|
|
41,490 |
|
|
|
11,847,536 |
|
|
|
(10,592,243 |
) |
|
|
1,296,783 |
|
Stock compensation expense |
|
|
|
|
|
|
|
|
|
|
332,925 |
|
|
|
|
|
|
|
332,925 |
|
Exercise of stock options |
|
|
27,050 |
|
|
|
270 |
|
|
|
17,817 |
|
|
|
|
|
|
|
18,087 |
|
Net loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(748,980 |
) |
|
|
(748,980 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2007 |
|
|
4,176,048 |
|
|
$ |
41,760 |
|
|
$ |
12,198,278 |
|
|
$ |
(11,341,223 |
) |
|
$ |
898,815 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these financial statements.
15
LecTec Corporation
STATEMENTS OF CASH FLOWS
Years ended December 31, 2007 and 2006
|
|
|
|
|
|
|
|
|
|
|
2007 |
|
|
2006 |
|
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(748,980 |
) |
|
$ |
(367,182 |
) |
Net loss from discontinued operations |
|
|
|
|
|
|
31,650 |
|
|
|
|
|
|
|
|
Net loss from continuing operations |
|
|
(748,980 |
) |
|
|
(335,532 |
) |
Adjustments to reconcile net loss from continuing
operations to net cash used by operating activities: |
|
|
|
|
|
|
|
|
Share-based compensation expense |
|
|
332,925 |
|
|
|
|
|
Amortization of patent costs |
|
|
22,273 |
|
|
|
25,460 |
|
Changes in operating assets and liabilities of continuing
operations: |
|
|
|
|
|
|
|
|
Royalty receivable |
|
|
(100,431 |
) |
|
|
214,906 |
|
Prepaid expenses and other |
|
|
43,966 |
|
|
|
41,009 |
|
Accounts payable |
|
|
(1,072 |
) |
|
|
3,984 |
|
Accrued expenses |
|
|
(15,628 |
) |
|
|
21,380 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used by operating activities from
continuing operations |
|
|
(466,947 |
) |
|
|
(28,793 |
) |
|
|
|
|
|
|
|
|
|
Cash flows from financing activity from continuing operations: |
|
|
|
|
|
|
|
|
Proceeds from the exercise of stock options |
|
|
18,087 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net decrease in cash and cash equivalents |
|
|
(448,860 |
) |
|
|
(28,793 |
) |
|
|
|
|
|
|
|
|
|
Cash and cash equivalents beginning of year |
|
|
1,281,785 |
|
|
|
1,310,578 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents end of year |
|
$ |
832,925 |
|
|
$ |
1,281,785 |
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these financial statements.
16
LecTec Corporation
NOTES TO FINANCIAL STATEMENTS
December 31, 2007 and 2006
NOTE A SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
LecTec Corporation (the Company) is primarily an intellectual property licensing and holding
company. The Company earns royalties and licensing fees from licensing agreements pertaining to
the Companys patents. The Company currently has one licensing agreement (Agreement) with
Novartis Consumer Health, Inc. (Novartis), which pays the Company royalties from time to time,
based upon a percentage of Novartis net sales as specified in the Agreement. The Company
previously was a contract manufacturer of topical patches sold to major pharmaceutical customers
until the Company ceased its manufacturing operations in December 2004. A summary of the
Companys significant accounting policies consistently applied in the preparation of the
accompanying financial statements follows:
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 and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those estimates.
Cash and Cash Equivalents
The Company considers all highly liquid temporary investments purchased with original maturities
of three months or less to be cash equivalents. Cash and cash equivalents includes a money market
account with a balance of $828,239 earning approximately 4.5% annual interest at December 31,
2007, which is not insured by the Federal Deposit Insurance Corporation.
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 the royalty
income within the terms defined in the Agreement. At December 31, 2007, the Company had an
outstanding royalty receivable with Novartis of $100,431. At December 31, 2006, the Company did
not have an outstanding royalty receivable with Novartis.
17
LecTec Corporation
NOTES TO FINANCIAL STATEMENTS CONTINUED
December 31, 2007 and 2006
NOTE A SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Continued
Patent Costs
Patent costs consist primarily of the cost of applying for patents and are amortized on a
straight-line basis over the estimated useful life of the asset, which is generally five years.
Patent maintenance costs are expensed as incurred.
Patent costs consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2007 |
|
|
December 31, 2006 |
|
|
|
Gross carrying |
|
|
Accumulated |
|
|
Gross carrying |
|
|
Accumulated |
|
|
|
amount |
|
|
amortization |
|
|
amount |
|
|
amortization |
|
Patents costs |
|
$ |
291,922 |
|
|
$ |
249,004 |
|
|
$ |
291,922 |
|
|
$ |
226,731 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization expense is expected to be as follows:
|
|
|
|
|
Years ending December 31, |
2008 |
|
|
18,894 |
|
2009 |
|
|
15,024 |
|
2010 |
|
|
9,000 |
|
The carrying value of patent costs is reviewed periodically or when factors indicating impairment
are present. The 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 that no impairment existed at
December 31, 2007 and 2006.
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 provided by Novartis, and collection
is reasonably assured.
18
LecTec Corporation
NOTES TO FINANCIAL STATEMENTS CONTINUED
December 31, 2007 and 2006
NOTE A SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Continued
Income Taxes
Deferred income taxes are provided for temporary differences between the financial reporting and
tax basis of assets and liabilities. Deferred taxes are reduced by a valuation allowance when, in
the opinion of management, it is more likely than not that some portion or all of the deferred tax
assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of
changes in tax laws and rates on the date of the enactment.
On January 1, 2007, the Company adopted the provisions of Financial Accounting Standards Board
(FASB) Interpretation (FIN) No. 48, Accounting for Uncertainty in Income Taxes an
Interpretation of FASB Statement No. 109. Previously, the Company had accounted for tax
contingencies in accordance with Statement of Financial Accounting Standards (SFAS) No. 5,
Accounting for Contingencies. As required by FIN 48, the Company recognizes the financial
statement benefit of a tax position only after determining that the relevant tax authority would
more likely than not sustain the position. For tax positions meeting the more likely than not
threshold, the amount recognized in the financial statements is the largest benefit that has a
greater than 50 percent likelihood of being realized upon ultimate settlement with the relevant
tax authority. At the adoption date, the Company applied FIN 48 to all tax positions for which
the statute of limitations remained open. The adoption of FIN 48 did not have a material impact
on the Companys financial position or results of operations.
Loss Per Common Share
Basic loss per common share is computed by dividing the net loss by the weighted average number of
common shares outstanding. Diluted loss per share is computed by dividing the 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 375,200 and 391,250 shares of common stock with a
weighted average exercise price of $2.35 and $2.04 were outstanding at December 31, 2007 and 2006,
respectively. As the Company had a loss from continuing operations in both 2007 and 2006, those
shares were excluded from the loss per common share computations because they were antidilutive.
Share-Based Compensation
The Company recorded share-based compensation expense of $332,925 or $0.08 per share for the year
ended December 31, 2007. The fair value of the options granted were determined utilizing the
Black-Scholes-Merton option pricing model with the following weighted-average assumptions: zero
dividend yield, expected volatility of 147%, risk-free interest rate of 4.35%, and expected life
of 4.0 years. There was no share-based compensation expense recorded for the year ended December
31, 2006.
19
LecTec Corporation
NOTES TO FINANCIAL STATEMENTS CONTINUED
December 31, 2007 and 2006
NOTE A SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Continued
Accounting for Discontinued Operations
The Company ceased manufacturing operations of topical patches and sold off all of its
manufacturing assets related to the production of patches to its only remaining customer,
Novartis, as of December 31, 2004. The assets related to the Companys manufacturing operations
have been classified as discontinued operations due to the sale of the manufacturing assets. The
operations and cash flows of the manufacturing operations have been eliminated from the
continuing operations as a result of the sale transaction. The surviving entity (intellectual
property licensing and holding company) will not have any significant involvement in the
operations of the previously sold manufacturing operations. The Company used reasonable judgment
combined with quantitative analysis in determining the amounts of assets, liabilities, revenues,
and expenses that were allocated between continuing operations and discontinued operations. It
is therefore managements position that the conditions for reporting the Companys financial
statements, balance sheets and statements of cash flows under the requirements of SFAS 144 as
discontinued operations are appropriate.
Fair Value of Financial Instruments
The carrying value of current financial assets and liabilities approximates their fair values due
to their short-term nature.
Recent Accounting Pronouncements
In December 2007, the FASB issued SFAS No. 141(revised 2007), Business Combinations. SFAS 141R
significantly changes the accounting for business combinations in a number of areas including the
treatment of contingent consideration, pre-acquisition contingencies, transaction costs,
in-process research and development, and restructuring costs. In addition, under SFAS 141R,
changes in an acquired entitys deferred tax assets and uncertain tax position after the
measurement period will impact income tax expense. SFAS 141R is effective for fiscal years
beginning after December 15, 2008. In December 2007, the FASB issued SFAS No. 160, Noncontrolling
Interests in Consolidated Financial Statements, an amendment of ARB No 51. SFAS 160 changes the
accounting and reporting for minority interests, which will be recharacterized as noncontrolling
interests and classified as a component of equity. This new consolidation method significantly
changes the accounting for transactions with minority interest holders. SFAS is effective for
fiscal years beginning after December 31, 2008. These standards will change our accounting
treatment for business combinations on a prospective basis.
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and
Financial Liabilities. SFAS 159 permits companies to choose to measure many financial instruments
and certain other items at fair value. The objective is to improve financial reporting by
providing companies with the opportunity to mitigate volatility in reported earnings caused by
measuring related assets and liabilities differently without having to apply complex hedge
accounting provisions. SFAS 159 is effective for fiscal years beginning after November 15, 2007.
The Company is evaluating the impact, if any, that the adoption of SFAS 159 will have on our
financial position or results of operations.
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements. This statement defines
fair value and establishes a framework for measuring fair value in generally accepted accounting
principles (GAAP). More precisely, this statement sets forth a standard definition of fair value
as it applies to assets or liabilities, the principal market (or most advantageous market) for
determining fair value (price), the market participants, inputs, and the application of the
derived fair value to those assets and liabilities. The effective date of this pronouncement was
for all full fiscal and interim periods beginning after November 15, 2007. On December 14, 2007,
the FASB issued staff position FAS 157-b, which deferred the effective date of SFAS 157 for one
year, as it relates to nonfinancial assets and liabilities. The Company is currently evaluating
the impact, if any, that the adoption of SFAS 157 will have on our financial position or results
of operations.
20
LecTec Corporation
NOTES TO FINANCIAL STATEMENTS CONTINUED
December 31, 2007 and 2006
NOTE B NOVARTIS SUPPLY AND LICENSE AGREEMENT
On July 19, 2004, the Company entered into a supply and licensing agreement with Novartis,
effective January 1, 2004 (the Agreement). By December 31, 2004, the supply portion of the
licensing agreement was completed and the Company no longer manufactured any product. The Company
moved into its Edina, Minnesota facility in February 2005 after vacating its previous
manufacturing facility in Minnetonka, Minnesota. Under the Agreement, the Company granted
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 that Novartis is
selling under the Agreement. The License will continue in effect for the duration of the patents
life permitted under applicable law. Upon the expiration of the patents included in the licensed
intellectual property (approximately six years), Novartis will have a non-revocable, perpetual,
fully paid-up license to the intellectual property used or useful in the production of vapor
patches for the pediatric and the adult cough/cold market. Novartis is required by the Agreement
to pay royalties, at an agreed upon percentage, to the Company based on net semi-annual sales of
vapor patches by Novartis for each year the License is in effect.
In June 2006, Novartis issued a nationwide recall of all of its Triaminic® vapor patch products.
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. According to news reports, the recall resulted from an adverse
event experienced by a child who suffered a seizure after chewing on a Triaminic Vapor Patch.
Novartis confirmed to the Company that the patch involved in this incident was not manufactured by
the Company. As a result of this recall, the Company has been proactive in assisting Novartis to
resolve the FDA issues surrounding the product recall and used its resources to move the Company
forward to revive its royalty income stream. The Company has met with Novartis representatives to
discuss how to prevent an incident where a child or pet chews or ingests a patch.
In January 2007, the Company engaged an independent consulting firm to audit royalties 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. Based on the results of the audit, the Company agreed with
Novartis to settle any remaining claims for royalties based on sales during this period and
recorded revenue of $21,946 in the fourth quarter of 2007, which was paid in January 2008.
To address the product recall described above, the Company filed a provisional patent application
with the U.S. Patent and Trademark Office (the USPTO) in April 2007 for an adhesive patch with
an aversive agent. The intention of the provisional patent is to introduce an aversive agent into
patches that would be so repulsive, a child or pet would not want to chew, swallow, or ingest a
patch, yet not impair the intended patch functionality. The Companys new child-proof/pet-proof
patch technology is primarily designed to prevent children from ingesting a patch, but the
aversive agent will protect anyone, including adults with dementia (i.e. Alzheimer disease) or
even family pets, from chewing a discarded patch. It is expected this technology can be applied
to numerous patch formulations, most importantly patches potentially harmful if ingested (i.e.
nicotine patches, Alzheimers patches, estrogen patches, osteoporosis patches, nitroglycerin
patches, lidocaine patches, contraceptive patches, antidepressant patches, or any future developed
patch). The Company has also received a pending trademark under the name of SAFEPATCH.
In April 2007, the Company was informed that the USPTO had completed a re-examination of a patent
pertinent to the Agreement and the Company was issued a re-examination certificate. 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 and inhalation of vapors.
21
LecTec Corporation
NOTES TO FINANCIAL STATEMENTS CONTINUED
December 31, 2007 and 2006
NOTE B NOVARTIS SUPPLY AND LICENSE AGREEMENT Continued
In July 2007, Novartis began shipping a new adult vapor patch product in the United States for the
2007/2008 cough and cold season. The Company recorded royalty income of $78,485 during 2007 based
upon information provided by Novartis related to royalties due to the Company from sales of the
adult vapor patch for 2007. Novartis has not announced whether it will re-introduce a vapor patch
for the pediatric market.
During the years ended December 31, 2007 and 2006, the Company recorded revenue of $100,431 and
$126,660, respectively, for royalties covered under the Agreement.
22
LecTec Corporation
NOTES TO FINANCIAL STATEMENTS CONTINUED
December 31, 2007 and 2006
NOTE C DISCONTINUED OPERATIONS
The Company ceased manufacturing operations of topical patches in 2004 and reported these
activities as discontinued operations. There was not any cost for assets of discontinued
operations at December 31, 2007 or 2006. However, the Company has fully depreciated assets on
hand that may be sold from time to time. Liabilities of discontinued operations was $130,000 at
both December 31, 2007 and 2006, which consisted of a reserve for sales returns and credits for
sales prior to the discontinuance of operations.
NOTE D COMMITMENTS AND CONTINGENCIES
Leases
The Company conducted its operations in one leased facility during 2007 and 2006. The Company
currently sub-leases approximately 10,000 square feet of excess space to an independent lessee for
$3,800 per month. The lessee notified the Company that they will vacate the space when their
sub-lease expires in April 2008. The Companys lease requires payment of a portion of taxes,
common area charges, and other operating expenses. Rent expense, excluding sub-lease income of
$41,600 and $22,500, was $99,882 and $119,078 for 2007 and 2006, respectively.
The Company has given notice to its landlord that it will be vacating the Edina Facility when its
lease expires on August 31, 2008. The Company is currently searching for a small office location
and alternate storage space to maintain the current operations of the Company.
The future minimum lease commitment under the current operating lease is $34,360 for 2008.
Employee Benefit Plan
The Company has a contributory 401(k) profit sharing benefit plan covering its sole employee. The
Plan allows for discretionary contributions by the Company. No discretionary contributions were
made for 2007 and 2006.
Legal Proceedings
There are currently no pending legal proceedings against the Company. However, the Company is
subject to various legal proceedings in the normal course of business.
23
LecTec Corporation
NOTES TO FINANCIAL STATEMENTS CONTINUED
December 31, 2007 and 2006
NOTE E INCOME TAXES
Differences between income tax expense (benefit) and the statutory federal income tax rate are
as follows:
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31, |
|
|
2007 |
|
2006 |
Federal statutory income tax rate |
|
|
(34.0 |
%) |
|
|
(34.0 |
%) |
State income taxes, net of federal effect |
|
|
(1.6 |
) |
|
|
(1.6 |
) |
Incentive stock option compensation |
|
|
5.3 |
|
|
|
|
|
Increase in valuation allowance |
|
|
30.3 |
|
|
|
33.0 |
|
Other |
|
|
|
|
|
|
2.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% |
|
|
|
% |
|
|
|
|
|
|
|
|
|
Deferred tax assets and liabilities consist of the following:
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2007 |
|
|
2006 |
|
Current assets: |
|
|
|
|
|
|
|
|
Accrued expenses |
|
$ |
48,600 |
|
|
$ |
47,900 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term assets (liabilities): |
|
|
|
|
|
|
|
|
Net operating loss carryforwards |
|
|
4,365,900 |
|
|
|
4,215,000 |
|
Tax credit carryforwards |
|
|
317,200 |
|
|
|
317,200 |
|
Nonqualified option compensation |
|
|
80,900 |
|
|
|
|
|
Other |
|
|
(133,800 |
) |
|
|
(128,500 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net long-term assets |
|
|
4,630,200 |
|
|
|
4,403,700 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets |
|
|
4,678,800 |
|
|
|
4,451,600 |
|
Less valuation allowance |
|
|
(4,678,800 |
) |
|
|
(4,451,600 |
) |
|
|
|
|
|
|
|
Net deferred tax asset |
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
At December 31, 2007, the Company has available federal and state net operating loss
carryforwards of approximately $11,709,000 and $3,927,000, respectively, which can be used to
reduce future taxable income. The utilization of a portion of these net operating loss
carryforwards is restricted under Section 382 of the Internal Revenue Code due to past ownership
changes. These net operating loss carryforwards begin to expire in 2017. A valuation allowance
has been recorded for these net operating loss carryforwards and all other deferred tax assets,
as it is more likely than not that the net deferred asset will not be realized. The Company
continually reviews the adequacy of the valuation allowance and recognizes those benefits only
as the Companys assessment indicates that it is more likely than not that future tax benefits
will be realized. The valuation allowance increased by approximately $227,200 and $121,000 for
2007 and 2006, respectively.
The Company adopted the provisions of FIN 48 on January 1, 2007. Previously, the Company had
accounted for tax contingencies in accordance with SFAS No. 5. As required by FIN 48, the
Company recognizes the financial statement benefit of a tax position only after determining that
the relevant tax authority would more likely than not sustain the position. For tax positions
meeting the more likely than not threshold, the amount recognized in the financial statements is
the largest benefit that has a greater than 50 percent likelihood of being realized upon ultimate
settlement with the relevant tax authority. At the adoption date, the Company applied FIN 48 to
all tax positions for which the statute of limitations remained open. The adoption of FIN 48 did
not have a material impact on the Companys financial position or results of operations.
24
LecTec Corporation
NOTES TO FINANCIAL STATEMENTS CONTINUED
December 31, 2007 and 2006
NOTE E INCOME TAXES Continued
It is the Companys practice to recognize penalties and/or interest related to income tax matters
in interest and penalties expense. As of December 31, 2007, the amount of accrued interest and
penalties is not material.
The Company is subject to income taxes in the U.S. federal jurisdiction and various states and
local jurisdictions. Tax regulations within each jurisdiction are subject to the interpretation
of the related tax laws and regulations and require significant judgment to apply. With few
exceptions, the Company is no longer subject to U.S. federal, state, or local income tax
examinations by tax authorities for the years before 2004. The Company is not currently under
examination by any taxing jurisdiction.
NOTE F EQUITY TRANSACTIONS
Stock Options
The Company has stock option plans (Plans) for the benefit of officers, employees and
directors of the Company. A total of 1,132,779 shares of common stock are available for grants
under the Plans at December 31, 2007. Options under the Companys Plans are granted at fair
market value on the date of grant and generally expire ten years from the grant date. Options
given to directors, officers, and employees are exercisable at such times as set forth in their
individual option agreements. All options that have been granted and outstanding are fully
vested and exercisable as of December 31, 2007. There were no stock options granted during
fiscal 2006.
Stock option activity for fiscal 2007 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
Weighted |
|
|
Average |
|
|
|
|
|
|
|
Average |
|
|
Remaining |
|
|
|
Number of |
|
|
Exercise Price |
|
|
Contractual |
|
|
|
Options |
|
|
per Share |
|
|
Term ( in years) |
|
Outstanding on December 31, 2006 |
|
|
191,250 |
|
|
$ |
3.24 |
|
|
|
|
|
Granted |
|
|
200,000 |
|
|
|
3.90 |
|
|
|
|
|
Exercised |
|
|
(27,050 |
) |
|
|
0.67 |
|
|
|
|
|
Canceled |
|
|
(189,000 |
) |
|
|
(3.59 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding on December 31, 2007 |
|
|
175,200 |
|
|
$ |
4.00 |
|
|
8.4 years |
|
|
|
|
|
|
|
|
|
|
Options granted during fiscal 2007 had a weighted-average fair value of $2.22 per option. The
aggregate intrinsic value of our stock options (the amount by which the market price exceeded the
exercise price of the option) exercised during fiscal 2007 was $82,938. There were no options
exercised during fiscal 2006. At December 31, 2007, the exercise price of all outstanding
options exceeded the market price of the Companys stock.
25
LecTec Corporation
NOTES TO FINANCIAL STATEMENTS CONTINUED
December 31, 2007 and 2006
NOTE F EQUITY TRANSACTIONS Continued
On September 20, 2007, the Companys Compensation Committee, granted stock options to each of the
three members of the Board of Directors, as well as to its sole employee. The terms of the
options granted to the four optionees were identical; except that the options granted to the
Companys only employee qualified as incentive stock options under the Internal Revenue Code of
1986, as amended, while each of the Directors was granted non-qualified stock options. Each of
the four optionees was granted two options. Each optionee received an option to purchase 25,000
shares of the Companys common stock at $2.60 per share; the closing price for the stock on
September 20, 2007, as reported on the OTC Bulletin Board. In addition, each optionee received a
second option to purchase 25,000 shares of the Companys common stock at $5.20 per share. All of
the options are fully vested and exercisable as of the date of grant and expire on September 20,
2017. All of the options provide that termination of service as a Director or employee of the
Company for any reason other than for cause will not affect the terms of the option or cause the
option to terminate. Subsequent to the grant of these options, the Companys Chief Executive
Officer informed the other members of the Board that, given his existing significant equity
holdings in the Company, he would surrender to the Company for cancellation these two options
granted to him. The net 150,000 option grants were the only grants for the year ended December
31, 2007.
Warrants
In connection with the sale of the Companys corporate facility during 2003, the Company issued
warrants to an outside party to purchase 200,000 shares of the Companys common stock. The
warrants were exercisable, and may be exercised on a cashless basis and entitled the holder to
purchase common stock at $0.90 per share until February 25, 2008.
On February 21, 2008, the warrant holder exercised, on a cashless basis, the warrant.
Accordingly, the warrant holder forfeited a number of shares underlying the warrant with a fair
market value (calculated pursuant to the warrant agreement) and received 113,978 shares of the
Companys common stock upon exercise of the warrant. As a result of the cashless exercise, the
Company did not receive any cash proceeds from the exercise. As of the filing date of this 2007
Form 10-KSB, the Company has no outstanding warrants.
26
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None.
ITEM 8A(T). CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
The Company maintains disclosure controls and procedures as defined in Rules 13a-15(e) and
15d-15(e) under the Securities Exchange Act of 1934, as amended (the Exchange Act), that are
designed to ensure that information required to be disclosed by us in reports we file or submit
under the Exchange Act is recorded, processed, summarized and reported within the time periods
specified in the SECs rules and forms, and that such information is accumulated and communicated
to our management, including our Chief Executive Officer and Chief Financial Officer, and Board of
Directors, as appropriate, to allow timely decisions regarding required disclosure. In designing
and evaluating our disclosure controls and procedures, management recognizes that disclosure
controls and procedures, no matter how well conceived and operated, can provide only reasonable
assurance of achieving the desired objectives, and we necessarily are required to apply our
judgment in evaluating the cost-benefit relationship of possible disclosure controls and
procedures.
Our management, including our Chief Executive Officer and Chief Financial Officer, evaluated
the effectiveness of the design and operation of our disclosure controls and procedures as of
December 31, 2007 and concluded that our disclosure controls and procedures were effective as of
December 31, 2007.
Managements Annual Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining internal control over financial
reporting, as such term is defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act. The
Companys internal control system is designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements for external
purposes, in accordance with generally accepted accounting principles. Because of inherent
limitations, a system of internal control over financial reporting may not prevent or detect
misstatements. Also, projections of any evaluation of effectiveness to future periods are subject
to the risk that controls may become inadequate due to change in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.
Our management, including our Chief Executive Officer and Chief Financial Officer, conducted
an evaluation of the effectiveness of our internal control over financial reporting using the
criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO)
in Internal Control-Integrated Framework. Based on its evaluation, our management concluded that
our internal control over financial reporting was effective as of December 31, 2007.
This Form 10-KSB does not include an attestation report of the Companys registered public
accounting firm regarding internal control over financial reporting. Managements report was not
subject to attestation by the Companys registered public accounting firm pursuant to temporary
rules of the SEC that permit the Company to provide only managements report in this annual report.
Changes in Internal Controls over Financial Reporting
During the quarter ended December 31, 2007, there were no changes in the Companys internal
control over financial reporting (as defined in Rule 13a-15(f) and 15d15(f) under the Exchange
Act) that has materially affected, or is reasonably likely to materially affect, the Companys
internal control over financial reporting.
ITEM 8B. OTHER INFORMATION
None.
27
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS, CONTROL PERSONS AND CORPORATE GOVERNANCE;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
Executive Officers and Directors
|
|
|
|
|
|
|
Name |
|
Age |
|
Title |
Judd A. Berlin
|
|
|
51 |
|
|
Chief Executive Officer, Chief Financial Officer, Chairman of the Board of Directors |
|
|
|
|
|
|
|
C. Andrew Rollwagen
|
|
|
52 |
|
|
Director |
|
|
|
|
|
|
|
Daniel C. Sigg, M.D. PhD
|
|
|
43 |
|
|
Director |
Judd A. Berlin, 51 years old, has been a director since May 2003. Mr. Berlin was elected to
the offices of Chief Executive Officer, Chief Financial Officer, and Chairman of the Board on
November 21, 2006. Mr. Berlin is a multinational entrepreneur and founder of Hello Corporation, an
Asian-based company operating call centers for Fortune 100 companies. Mr. Berlin has also founded
companies in Europe, the Middle East and Asia in food distribution, broadcasting, and entertainment
production. Mr. Berlin has an MBA from St. Thomas University in St. Paul, Minnesota.
C. Andrew Rollwagen, 52 years old, has been a director since January 2005. Mr. Rollwagen has
more than 25 years experience in banking and finance. He holds a Master of Business Administration
degree from the University of St. Thomas in Minneapolis, Minnesota and has served as Senior Vice
President and Chief Operating Officer of First State Bank and Trust, a locally owned community bank
serving the greater St. Croix Valley area in Minnesota, since January 2007. Mr. Rollwagen began
serving as a director of First State Bank and Trust in March 2008. Mr. Rollwagen served as Vice
President of Business Banking at First State Bank and Trust from November 1998 to January 2007.
Daniel C. Sigg M.D. PhD, 43 years old, has been a director since November 2006. Dr. Sigg, a
Swiss national, is currently serving as Sr. Manager in the R&D Division of Cardiac Rhythm Disease
Management at Medtronic, Inc., a leading medical device and technology company, which he joined in
2001. Dr. Sigg is a board-certified anesthesiologist and has significant clinical experience. His
pre-clinical expertise includes both academic and industrial R&D. His areas of interest and
expertise include cardiovascular physiology, biotechnology, pharmacology and local drug delivery.
To date, Dr. Sigg has published 19 peer-reviewed scientific manuscripts, as well as numerous book
chapters and abstracts, and is inventor of five issued U.S. patents and over 20 pending
U.S. patents. Dr. Sigg obtained his Medical Degree from the University of Basel, Switzerland, and
his PhD degree in Physiology from the University of Minnesota. Dr. Sigg speaks German, English,
French, and some Italian.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934 requires our executive officers and
directors and persons who beneficially own more than 10% of our common stock to file initial
reports of ownership and reports of changes in ownership with the Securities and Exchange
Commission. Such executive officers, directors, and greater than 10% beneficial owners are
required by the regulations of the Securities and Exchange Commission to furnish us with copies of
all Section 16(a) reports they file.
Based solely on a review of the copies of such reports furnished to us and representations
from the executive officers and directors, we believe that all Section 16(a) filing requirements
applicable to our executive officers, directors and greater than 10% beneficial owners during 2007
have been satisfied, except that C. Andrew Rollwagen, one of our directors, filed a late Form 3
report on September 24, 2007.
Audit Committee
Judd A. Berlin (Chairman) and C. Andrew Rollwagen comprise the Audit Committee of the Board of
Directors pursuant to the rules of the Securities and Exchange Commission. Due to our size,
financial condition and
28
prospects, the Board has not sought to add a Board member who would qualify
as an audit committee financial expert under the definition promulgated by the Securities and
Exchange Commission. Based on the size and complexity of our financial statements, the Board does not believe that the absence of an
audit committee financial expert materially undermines the ability of our Audit Committee to
fulfill its obligations.
Ethics Code
We have adopted a Code of Business Ethics applicable to all employees and its executive
officers. Our Code of Business Ethics is an incorporated part of the LecTec Employee Handbook and
is required to be read and signed upon the commencement of employment with the Company. A copy of
our Code of Business Ethics is available free of charge from the acting Secretary of the Company.
ITEM 10. EXECUTIVE COMPENSATION
Summary of Cash and Certain Other Compensation
The following table sets forth the cash and non-cash compensation for the last two fiscal
years awarded to or earned by our Chief Executive Officer and Chief Financial Officer. No other
individual served as an executive officer of LecTec during fiscal 2007.
Summary Compensation Table
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock |
|
Option |
|
All Other |
|
|
|
|
|
|
|
|
Salary |
|
Bonus |
|
Awards |
|
Awards |
|
Compensation |
|
Total |
Name and Principal Position |
|
Year |
|
($) |
|
($) |
|
($) |
|
($) |
|
($) |
|
($) |
Judd A. Berlin |
|
|
2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Chief Executive
Officer and Chief
Financial Officer |
|
|
2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
On September 20, 2007, Mr. Berlin was awarded options to purchase 25,000 shares of our common
stock at an exercise price of $2.60 per share and options to purchase 25,000 shares of our common
stock at an exercise price of $5.20 per share. These options were immediately vested in full on
the date of grant and expire on September 20, 2017. Subsequent to the grant of these options, Mr.
Berlin informed the Company that, given his existing significant equity holdings in the company, he
would surrender to LecTec for cancellation the 50,000 options granted to him on September 20, 2007.
Mr. Berlin did not have any options or shares of restricted stock outstanding as of December
31, 2007.
Compensation of Directors
Our Board of Directors has established a policy that each of our non-employee directors
receives an annual cash payment of $17,500 for annual services to LecTec, as illustrated in the
table below. This cash payment is paid in advance in quarterly installments of $4,375 before the
beginning of each of the quarters in which services will be performed.
On September 20, 2007, Mr. Rollwagen and Dr. Sigg were each awarded options to purchase 25,000
shares of our common stock at an exercise price of $2.60 per share and options to purchase 25,000
shares of our common stock at an exercise price of $5.20 per share. These options were immediately
vested in full on the date of grant and will expire on September 20, 2017. The options provide
that termination of service as a director of LecTec for any reason other than for cause will not
affect the terms of the option or cause the option to terminate.
The following table shows the compensation of the members of our Board of Directors during
2007.
29
Director Compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fees Earned or |
|
|
|
|
|
|
|
|
Paid in Cash |
|
Stock Awards |
|
Option Awards |
|
|
Name |
|
($) |
|
($)(1) |
|
($)(2) |
|
Total ($) |
Judd A. Berlin(3) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
C. Andrew Rollwagen |
|
|
17,500 |
|
|
|
|
|
|
|
110,975 |
|
|
|
128,475 |
|
Daniel C. Sigg M.D. PhD |
|
|
17,500 |
|
|
|
|
|
|
|
110,975 |
|
|
|
128,475 |
|
|
|
|
(1) |
|
None of our directors held any shares of restricted stock as of December 31, 2007. |
|
(2) |
|
The amounts in this column are calculated based on FAS 123R and equal the financial statement
compensation expense for stock option awards as reported in our statements of operations for
the fiscal year ended December 31, 2007. The initial expense is based on the fair value of
the stock option grants as estimated using the Black-Scholes option-pricing model. The
assumptions used to arrive at the Black-Scholes value are disclosed in Note A to our financial
statements included in our 2007 Annual Report on Form 10-KSB. The aggregate number of stock
options outstanding at December 31, 2007 for each of our directors was 0 options for Mr.
Berlin, 50,000 options for Mr. Rollwagen and 50,000 options for Dr. Sigg. The full grant date
FAS 123R value of the option awards granted in 2007 to
Mr. Rollwagen and Dr. Sigg was $110,975
each. |
|
(3) |
|
Mr. Berlin, our Chief Executive Officer and Chief Financial Officer, has chosen not to
receive any cash or equity compensation for his service as a director. See the discussion of
stock options surrendered by Mr. Berlin during 2007 under Executive Compensation below. |
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
Equity Compensation Plan Information
The following table summarizes, with respect to the Companys equity compensation plans, the
number of shares of the Companys common stock to be issued upon exercise of outstanding options,
warrants and other rights to acquire shares, the weighted-average exercise price of these
outstanding options, warrants and rights and the number of shares remaining available for future
issuance under the Companys equity compensation plans as of December 31, 2007.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Securities |
|
|
|
|
|
|
|
Weighted-Average |
|
|
Remaining Available for |
|
|
|
Number of Securities to be |
|
|
Exercise Price of |
|
|
Future Issuance Under |
|
|
|
Issued Upon Exercise of |
|
|
Outstanding |
|
|
Equity Compensation Plans |
|
|
|
Outstanding Options, |
|
|
Options, Warrants |
|
|
(Excluding Securities |
|
Plan Category |
|
Warrants and Rights |
|
|
and Rights |
|
|
Reflected in the First Column) |
|
Equity compensation plans
approved by security
holders |
|
|
175,200 |
|
|
$ |
4.00 |
|
|
|
468,500 |
|
|
Equity compensation plans
not approved by security
holders |
|
|
|
|
|
|
|
|
|
|
664,279 |
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
175,200 |
|
|
$ |
4.00 |
|
|
|
1,132,779 |
|
|
|
|
|
|
|
|
|
|
|
LecTec Corporation 2001 Stock Option Plan
The LecTec Corporation 2001 Stock Option Plan (the Plan) was designed (i) to aid in
maintaining and developing personnel capable of assuring the future success of the Company and to
offer such personnel additional incentives to put forth maximum efforts for the success of the
business, and (ii) to afford such personnel an opportunity to acquire a proprietary interest in the
Company through stock options. An aggregate of 750,000 shares are authorized for issuance under
the Plan pursuant to the grant of stock options, stock appreciation rights, restricted stock,
restricted stock units or other stock grants (Awards). The Plan became effective on July 1, 2001
and terminates on July 1, 2011.
30
The Plan authorizes the grant of Awards to any employee, consultant or independent contractor
providing services to the Company or any affiliate of the Company, except that officers and
directors of the Company or the Companys affiliates are not eligible to participate in the Plan.
A committee of directors designated by the Companys Board of Directors (the Committee) is
responsible for administering the Plan.
The exercise price, option term, and time and method of exercise of the stock options granted
under the Plan are determined by the Committee. Subject to the terms of the Plan and any
applicable agreement, the grant price, term, method of exercise, date of exercise, method of
settlement and any other term and condition of any stock appreciation rights are determined by the
Committee. The Committee may impose such conditions or restrictions on the exercise of any stock
appreciation right as it may deem appropriate. Shares of restricted stock and restricted stock
units are subject to such restrictions as the Committee may impose (including, without limitation,
a waiver by participants of the right to vote or to receive any dividend or other right or property
with respect thereto), which restrictions may lapse separately or in combination at such time or
times, in such installments or otherwise as the Committee may deem appropriate. Any restricted
stock granted under the Plan is evidenced by issuance of a stock certificate or certificates, which
certificate or certificates are held by the Company. Except as otherwise determined by the
Committee, upon a participants termination of employment during the applicable restriction period,
all shares of restricted stock and all restricted stock units held by the participant at such time
are forfeited and reacquired by the Company. The Committee may, when it finds that a waiver would
be in the best interest of the Company, waive in whole or in part any or all-remaining restrictions
with respect to shares of restricted stock or restricted stock units. Finally, the Committee is
authorized, subject to the terms of the Plan and any applicable award agreement, to grant to
eligible persons shares of common stock without restrictions thereon as are deemed by the Committee
to be consistent with the purpose of the Plan.
Table of Security Ownership of Certain Beneficial Owners and Management
The following table sets forth certain information with respect to the beneficial ownership of
our common stock as of March 14, 2008, by each person, or group of affiliated persons, who is known
by us to beneficially own more than 5% of our common stock, each of our directors, each of our
executive officers named in the Summary Compensation Table below and all of our directors and
executive officers as a group.
Beneficial ownership is determined in accordance with the rules of the Securities and Exchange
Commission. In computing the number of shares beneficially owned by a person and the percentage
ownership of that person, shares of common stock under options held by that person that are
currently exercisable or exercisable within 60 days of March 14, 2008 are considered outstanding.
The column entitled Number of Shares Beneficially Owned includes the number of shares of common
stock subject to options held by that person that are currently exercisable or that will become
exercisable within 60 days of March 14, 2008. The number of shares subject to options that each
beneficial owner has the right to acquire within 60 days of March 14, 2008 are listed separately
under the column entitled Number of Shares Underlying Options Beneficially Owned. Each
shareholder named in the table has sole voting and investment power for the shares shown as
beneficially owned by them, and such shares are not subject to any pledge. Percentage of ownership
is based on 4,290,026 shares of common stock outstanding on March 14, 2008.
31
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Number of |
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|
Shares |
|
Number of Shares |
|
|
|
|
Beneficially |
|
Underlying Options |
|
Percent of Shares |
Name of Beneficial Owner |
|
Owned |
|
Beneficially Owned |
|
Outstanding |
Larry C. Hopfenspirger(1) |
|
|
412,978 |
|
|
|
|
|
|
|
9.6 |
% |
2025 Nicollet Ave. S., #203
Minneapolis, MN 55402 |
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Estate of Lee M. Berlin |
|
|
405,759 |
|
|
|
|
|
|
|
9.5 |
% |
c/o Helen Berlin, personal representative
4417 White Oak Drive
Janesville, WI 53546 |
|
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Judd A. Berlin |
|
|
137,145 |
|
|
|
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3.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
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|
C. Andrew Rollwagen |
|
|
50,000 |
|
|
|
50,000 |
|
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1.2 |
% |
|
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|
|
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|
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|
Daniel C. Sigg M.D. PhD |
|
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50,000 |
|
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|
50,000 |
|
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1.2 |
% |
|
|
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|
|
|
|
|
|
|
|
|
|
All directors and executive officers as
a group (3 persons) |
|
|
237,145 |
|
|
|
100,000 |
|
|
|
5.4 |
% |
|
|
|
(1) |
|
Includes 274,000 shares held directly by Mr. Hopfenspirger, 25,000 shares held by Mr.
Hopfenspirgers wife and 113,978 shares held by 10701 Red Circle Drive, LLC, of which Mr.
Hopfenspirger is the sole beneficial owner. |
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
We are not a listed issuer and so are not subject to the director independence requirements of
any exchange or inter-dealer quotation system. Nevertheless, in determining whether our directors
and director nominees are independent, we use the definition of independence provided in Rule
4200(a)(15) of The NASDAQ Stock Markets Marketplace Rules. Under this definition of independence,
directors C. Andrew Rollwagen and Dr. Daniel C. Sigg, who comprise a majority of our Board of
Directors, would be considered independent directors. Judd A. Berlin, the third member of our
current Board of Directors would not be considered independent because he serves as our Chief
Executive Officer and Chief Financial Officer.
32
ITEM 13. EXHIBITS
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Method of |
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Filing |
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3.01 |
|
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Articles of Incorporation of LecTec Corporation, as amended
|
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(1 |
) |
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3.02 |
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Bylaws of LecTec Corporation
|
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(1 |
) |
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**10.01 |
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LecTec Corporation 1989 Stock Option Plan
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(2 |
) |
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**10.02 |
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LecTec Corporation 1991 Directors Stock Option Plan
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(2 |
) |
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**10.03 |
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LecTec Corporation 1998 Stock Option Plan
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(3 |
) |
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**10.04 |
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LecTec Corporation 1998 Directors Stock Option Plan
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(3 |
) |
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**10.05 |
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|
LecTec Corporation 2001 Stock Option Plan
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(4 |
) |
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10.06 |
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Sale Leaseback Agreement By and Between LecTec Corporation and
Larry Hopfenspirger, dated February 25, 2003.
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(5 |
) |
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10.07 |
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Office/warehouse lease dated May 23, 2003, by and between SMD
Lincoln Investments LLC and LecTec Corporation.
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(6 |
) |
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|
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|
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*10.08 |
|
|
Supply and License Agreement By and Between LecTec Corporation and
Novartis Consumer Health, Inc. executed on July 19, 2004 and
effective as of January 1, 2004.
|
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(7 |
) |
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10.09 |
|
|
Promissory Note By and Between LecTec Corporation and Novartis
Consumer Health, Inc. executed on July 19, 2004 and effective as of
January 1, 2004.
|
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(7 |
) |
|
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10.10 |
|
|
Security Agreement By and Between LecTec Corporation and Novartis
Consumer Health, Inc. executed on July 19, 2004 and effective as of
January 1, 2004.
|
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|
(7 |
) |
|
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|
|
|
|
|
|
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|
10.11 |
|
|
General Terms and Conditions for the Purchase of Capital Equipment
dated as of December 2, 2004 between Novartis Consumer Health, Inc.
and LecTec Corporation.
|
|
|
(8 |
) |
|
|
|
|
|
|
|
|
|
|
**10.12 |
|
|
Separation Agreement dated December 28, 2004 by and between LecTec
Corporation and Timothy P. Fitzgerald.
|
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|
(9 |
) |
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|
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|
10.13 |
|
|
Sub-Lease Agreement by and between LecTec Corporation and The
Furniture Source dated May 10, 2006
|
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|
(10 |
) |
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10.14 |
|
|
Form of Non-Qualified Stock Option Agreement under the LecTec
Corporation 1998 Directors Stock Option Plan
|
|
|
(11 |
) |
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10.15 |
|
|
Form of Employee Incentive Stock Option Agreement
|
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(11 |
) |
|
|
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|
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|
23.01 |
|
|
Consent of Lurie Besikof Lapidus & Company, LLP
|
|
|
(12 |
) |
|
|
|
|
|
|
|
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|
|
24.01 |
|
|
Power of Attorney
|
|
|
(13 |
) |
|
|
|
|
|
|
|
|
|
|
31.01 |
|
|
Certification of Principal Executive Officer
|
|
|
(12 |
) |
|
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|
|
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|
31.02 |
|
|
Certification of Principal Financial Officer
|
|
|
(12 |
) |
|
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|
|
|
|
32.01 |
|
|
Chief Executive Officer Certification Pursuant to 18 U.S.C. 1350, as
adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002.
|
|
|
(12 |
) |
33
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Method of |
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|
|
|
|
Filing |
|
99.01 |
|
|
Cautionary Statements
|
|
|
(12 |
) |
|
|
|
Notes to Exhibits Method of Filing |
|
* |
|
Confidential treatment has been granted for portions of this Exhibit pursuant to
Rule 24b-2 under the Securities Exchange Act of 1934 as amended. The confidential portions
have been deleted and filed separately with the United States Securities and Exchange
Commission. |
|
** |
|
Management contract or compensatory plan or arrangement required to be filed as an
exhibit to this Form 10-KSB. |
|
(1) |
|
Incorporated herein by reference to the Companys Form S-18 Registration Statement (file
number 33-9774C) filed on October 31, 1986 and amended on December 12, 1986. |
|
(2) |
|
Incorporated herein by reference to the Companys Annual Report on Form 10-K for the year
ended June 30, 1997. |
|
(3) |
|
Incorporated herein by reference to the Companys Registration Statement on Form S-8
(file number 333-72569) filed on February 18, 1999. |
|
(4) |
|
Incorporated herein by reference to the Companys Registration Statement on Form S-8
(file number 333-68920) filed on September 4, 2001. |
|
(5) |
|
Incorporated herein by reference to the Companys Annual Report on Form 10-K for the year
ended December 31, 2002. |
|
(6) |
|
Incorporated herein by reference to the Companys Quarterly Report on Form 10-Q for the
quarter ended June 30, 2003. |
|
(7) |
|
Incorporated herein by reference to the Companys Quarterly Report on Form 10-QSB for the
quarter ended June 30, 2004. |
|
(8) |
|
Incorporated herein by reference to the Companys Current Report on Form 8-K filed on
December 30, 2004. |
|
(9) |
|
Incorporated herein by reference to the Companys Annual Report on Form 10-KSB for the
year ended December 31, 2004. |
|
(10) |
|
Incorporated herein by reference to the Companys Quarterly Report on Form 10-QSB for the
quarter ended March 31, 2006. |
|
(11) |
|
Incorporated by reference to the Companys Current Report on Form 8-K filed on September
26, 2007. |
|
(12) |
|
Filed herewith. |
|
(13) |
|
Included on signature page. |
34
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The following table sets forth information concerning fees and services billed or expected to
be billed by our independent registered public accounting firm, Lurie Besikof Lapidus & Company,
LLP for 2007 and 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
2007 |
|
|
2006 |
|
|
Nature of Services Provided |
Audit Fees |
|
$ |
31,340 |
|
|
$ |
31,800 |
|
|
Audits and quarterly reviews of our financial statements |
Audit-Related Fees |
|
|
|
|
|
|
|
|
|
|
Tax Fees |
|
|
7,000 |
|
|
|
7,495 |
|
|
Tax return preparation and research |
All Other Fees |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
38,340 |
|
|
$ |
39,295 |
|
|
|
|
|
|
|
|
|
|
|
|
Because of our size, complexity, financial condition and prospects, the Audit Committee is
apprised of and pre-approves all fees for services provided by our independent registered public
accounting firm. All fees paid to our independent registered public accounting firm for 2007 and
2006 were approved by our Audit Committee. The Audit Committee has considered whether non-audit
services provided by the independent registered public accounting firm during 2007 and 2006 were
compatible with maintaining the accounting firms independence.
35
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant has caused this
report to be signed on its behalf by the undersigned, thereunto duly authorized, on the 11th day of
April 2008.
|
|
|
|
|
|
LECTEC CORPORATION
|
|
|
/s/ Judd A. Berlin
|
|
|
Judd A. Berlin |
|
|
Chief Executive Officer |
|
|
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and
appoints Judd A. Berlin (with full power to act alone), as his or her true and lawful
attorney-in-fact and agent, with full powers of substitution and re-substitution, for him or her
and in his or her name, place and stead, in any and all capacities, to sign any and all amendments
to the Annual Report on Form
10-KSB of LecTec Corporation, and to file the same, with all exhibits
thereto, and other documents in connection therewith, with the Securities and Exchange Commission,
granting unto said attorney-in-fact and agent full power and authority to do and perform each and
every act and thing requisite or necessary to be done in and about the premises, as fully to all
intents and purposes as he or she might or could do in person, hereby ratifying and confirming all
that said attorney-in-fact and agent, or their substitute or substitutes, lawfully do or cause to
be done by virtue hereof.
In accordance with the Exchange Act, this report has been signed below by the following
persons on behalf of the registrant and in the capacities and on the dates indicated.
|
|
|
|
|
/s/ Judd A. Berlin
Judd A. Berlin
|
|
|
|
April 11, 2008 |
Chief Executive Officer, Chief Financial Officer, and Director |
|
|
|
|
(Principal Executive Officer) |
|
|
|
|
(Principal Financial Officer) |
|
|
|
|
(Principal Accounting Officer) |
|
|
|
|
|
|
|
|
|
/s/ C. Andrew Rollwagen
C. Andrew Rollwagen
|
|
|
|
April 11, 2008 |
Director |
|
|
|
|
|
|
|
|
|
/s/ Daniel C. Sigg, M.D.
Daniel C. Sigg, M.D.
|
|
|
|
April 11, 2008 |
Director |
|
|
|
|
36
EXHIBIT INDEX
|
|
|
Exhibit No. |
|
|
3.01
|
|
Articles of Incorporation of Registrant, as amended (Note 1). |
|
|
|
3.02
|
|
Bylaws of Registrant (Note 1). |
|
|
|
** 10.01
|
|
LecTec Corporation 1989 Stock Option Plan (Note 2). |
|
|
|
** 10.02
|
|
LecTec Corporation 1991 Directors Stock Option Plan (Note 2). |
|
|
|
** 10.03
|
|
LecTec Corporation 1998 Stock Option Plan (Note 3). |
|
|
|
** 10.04
|
|
LecTec Corporation 1998 Directors Stock Option Plan (Note 3). |
|
|
|
** 10.05
|
|
LecTec Corporation 2001 Stock Option Plan (Note 4). |
|
|
|
10.06
|
|
Sale Leaseback Agreement By and Between LecTec Corporation and Larry Hopfenspirger,
dated February 25, 2003 (Note 5). |
|
|
|
10.07
|
|
Office/warehouse lease May 23, 2003, by and between SMD Lincoln Investments LLC and
LecTec Corporation (Note 6). |
|
|
|
*10.08
|
|
Supply and License Agreement By and Between LecTec Corporation and Novartis Consumer
Health, Inc. executed on July 19, 2004 and effective as of January 1, 2004 (Note 7). |
|
|
|
10.09
|
|
Promissory Note By and Between LecTec Corporation and Novartis Consumer Health, Inc.
executed on July 19, 2004 and effective as of January 1, 2004 (Note 7). |
|
|
|
10.10
|
|
Security Agreement By and Between LecTec Corporation and Novartis Consumer Health,
Inc. executed on July 19, 2004 and effective as of January 1, 2004 (Note 7). |
|
|
|
10.11
|
|
General Terms and Conditions for the Purchase of Capital Equipment dated as of
December 2, 2004 between Novartis Consumer Health, Inc. and LecTec Corporation (Note 8). |
|
|
|
** 10.12
|
|
Separation Agreement dated December 28, 2004 by and between LecTec Corporation and
Timothy P. Fitzgerald (Note 9). |
|
|
|
10.13
|
|
Sub-Lease Agreement by and between LecTec Corporation and The Furniture Source dated
May 10, 2006 (Note 10). |
|
|
|
10.14
|
|
Form of Non-Qualified Stock Option Agreement under the LecTec Corporation 1998
Directors Stock Option Plan (Note 11). |
|
|
|
10.15
|
|
Form of Employee Incentive Stock Option Agreement (Note 11). |
|
|
|
23.01
|
|
Consent of Lurie Besikof Lapidus & Company, LLP (Note 12). |
|
|
|
24.01
|
|
Power of Attorney (Note 13). |
|
|
|
31.01
|
|
Certification of Principal Executive Officer (Note 12). |
|
|
|
31.02
|
|
Certification of Principal Financial Officer (Note 12). |
|
|
|
32.01
|
|
Chief Executive Officer Certification Pursuant to 18 U.S.C.1350, as adopted pursuant
to section 906 of the Sarbanes-Oxley Act of 2002 (Note 12). |
|
|
|
99.01
|
|
Cautionary Statements (Note 12). |
37
|
|
|
Exhibit Notes: |
|
* |
|
Confidential treatment has been granted for portions of this Exhibit pursuant to Rule 24b-2
under the Securities Exchange Act of 1934 as amended. The confidential portions have been
deleted and filed separately with the United States Securities and Exchange Commission. |
|
** |
|
Management contract or compensatory plan or arrangement required to be filed as an exhibit to
this Form 10-KSB. |
|
(1) |
|
Incorporated herein by reference to the Companys Form S-18 Registration Statement (file
number 33-9774C) filed on October 31, 1986 and amended on December 12, 1986. |
|
(2) |
|
Incorporated herein by reference to the Companys Annual Report on Form 10-K for the year
ended June 30, 1997. |
|
(3) |
|
Incorporated herein by reference to the Companys Registration Statement on Form S-8 (file
number 333-72569) filed on February 18, 1999. |
|
(4) |
|
Incorporated herein by reference to the Companys Registration Statement on Form S-8 (file
number 333-68920) filed on September 4, 2001. |
|
(5) |
|
Incorporated herein by reference to the Companys Annual Report on Form 10-K for the year
ended December 31, 2002. |
|
(6) |
|
Incorporated herein by reference to the Companys Quarterly Report on Form 10-Q for the
quarter ended June 30, 2003. |
|
(7) |
|
Incorporated herein by reference to the Companys Quarterly Report on Form 10-QSB for the
quarter ended June 30, 2004. |
|
(8) |
|
Incorporated herein by reference to the Companys Current Report on Form 8-K filed on
December 30, 2004. |
|
(9) |
|
Incorporated herein by reference to the Companys Annual Report on Form 10-KSB for the year
ended December 31, 2004. |
|
(10) |
|
Incorporated herein by reference to the Companys Quarterly Report on Form 10-QSB for the
quarter ended March 31, 2006. |
|
(11) |
|
Incorporated by reference to the Companys Current Report on Form 8-K filed on September 26,
2007. |
|
(12) |
|
Filed herewith. |
|
(13) |
|
Included on signature page. |
38