UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
|
|
|
þ |
|
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended MARCH 31, 2008.
|
|
|
o |
|
TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT |
For the transition period from to
Commission file number: 0-16159
LECTEC CORPORATION
(Exact name of small business issuer as specified in its charter)
|
|
|
|
|
Minnesota
|
|
|
|
41-1301878 |
|
|
|
|
|
(State or other jurisdiction of
|
|
|
|
(I.R.S. Employer |
incorporation or organization)
|
|
|
|
Identification No.) |
|
|
|
|
|
5610 Lincoln Drive, Edina, Minnesota
|
|
|
|
55436 |
|
|
|
|
|
(Address of principal executive offices)
|
|
|
|
(Zip Code) |
(952) 933-2291
(Issuers telephone number)
Not Applicable
(Former name, former address and former fiscal year, if changed since last report)
Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the
Exchange Act during the past 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes þ No o
Indicate by check mark whether registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act).
Yes o No þ
The number of shares outstanding of the issuers common stock as of May 14, 2008 was 4,290,026
shares.
Transitional Small Business Disclosure Format (Check one).
Yes o No þ
LECTEC CORPORATION
REPORT ON FORM 10-QSB FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2008
Table of Contents
Forward-Looking Statements
From time to time, in reports filed with the Securities and Exchange Commission (including
this Form 10-QSB), in press releases, and in other communications to shareholders or the
investment community, the Company may provide forward-looking statements concerning possible or
anticipated future results of operations or business developments which are typically preceded by
the words believes, wants, expects, anticipates, intends, will, may, should, or
similar expressions. Such forward-looking statements are subject to risks and uncertainties,
which could cause results or developments to differ materially from those indicated in the
forward-looking statements. Such risks and uncertainties include, but are not limited to, the
Companys dependence on royalty payments from Novartis Consumer Health, Inc., which is selling 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 the Companys Form 10-KSB for the year ended
December 31, 2007 and Form 10-QSB for the quarter ended March 31, 2008.
PART 1 FINANCIAL INFORMATION
ITEM 1 CONDENSED FINANCIAL STATEMENTS AND NOTES TO CONDENSED FINANCIAL STATEMENTS
LECTEC CORPORATION
CONDENSED BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
|
December 31, |
|
|
|
2008 |
|
|
2007 |
|
|
|
(Unaudited) |
|
|
|
|
|
ASSETS |
|
|
|
|
|
|
|
|
CURRENT ASSETS: |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
808,877 |
|
|
$ |
832,925 |
|
Royalty receivable |
|
|
23,929 |
|
|
|
100,431 |
|
Prepaid expenses and other |
|
|
55,666 |
|
|
|
62,877 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets |
|
|
888,472 |
|
|
|
996,233 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER ASSETS: |
|
|
|
|
|
|
|
|
Patent costs |
|
|
46,989 |
|
|
|
42,918 |
|
Prepaid insurance director and officer |
|
|
50,698 |
|
|
|
60,838 |
|
|
|
|
|
|
|
|
|
|
|
97,687 |
|
|
|
103,756 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL ASSETS |
|
$ |
986,159 |
|
|
$ |
1,099,989 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS EQUITY |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CURRENT LIABILITIES: |
|
|
|
|
|
|
|
|
Accounts payable |
|
$ |
57,733 |
|
|
$ |
13,407 |
|
Accrued expenses |
|
|
59,313 |
|
|
|
57,767 |
|
Discontinued operations |
|
|
130,000 |
|
|
|
130,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
247,046 |
|
|
|
201,174 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
COMMITMENTS AND CONTINGENCIES |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SHAREHOLDERS EQUITY: |
|
|
|
|
|
|
|
|
Common stock, $.01 par value; 15,000,000 shares
authorized; 4,290,026 and 4,176,048 shares
issued and outstanding at March 31, 2008
and December 31, 2007, respectively |
|
|
42,900 |
|
|
|
41,760 |
|
Additional contributed capital |
|
|
12,197,138 |
|
|
|
12,198,278 |
|
Accumulated deficit |
|
|
(11,500,925 |
) |
|
|
(11,341,223 |
) |
|
|
|
|
|
|
|
|
|
|
739,113 |
|
|
|
898,815 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL LIABILITES AND SHAREHOLDERS EQUITY |
|
$ |
986,159 |
|
|
$ |
1,099,989 |
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these condensed financial statements.
I-1
LECTEC CORPORATION
CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
|
2008 |
|
|
2007 |
|
|
|
|
|
|
|
|
REVENUE ROYALTY AND LICENSING FEES |
|
$ |
21,029 |
|
|
$ |
|
|
OPERATING EXPENSES |
|
|
187,912 |
|
|
|
129,202 |
|
|
|
|
|
|
|
|
Loss from operations |
|
|
(166,883 |
) |
|
|
(129,202 |
) |
|
|
|
|
|
|
|
|
|
INTEREST INCOME |
|
|
7,181 |
|
|
|
14,876 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET LOSS |
|
$ |
(159,702 |
) |
|
$ |
(114,326 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING: |
|
|
|
|
|
|
|
|
Basic and diluted |
|
|
4,227,401 |
|
|
|
4,153,831 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LOSS PER COMMON SHARE: |
|
|
|
|
|
|
|
|
Basic and diluted |
|
$ |
(0.04 |
) |
|
$ |
(0.03 |
) |
|
|
|
|
|
|
|
The accompanying notes are an integral part of these condensed financial statements.
I-2
LECTEC CORPORATION
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
Three Months ended March 31, |
|
|
|
2008 |
|
|
2007 |
|
|
|
|
|
|
|
|
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(159,702 |
) |
|
$ |
(114,326 |
) |
Adjustments to reconcile net loss to net
cash used in operating activities: |
|
|
|
|
|
|
|
|
Amortization of patent costs |
|
|
4,951 |
|
|
|
5,853 |
|
Changes in operating assets and liabilities: |
|
|
|
|
|
|
|
|
Royalty receivable |
|
|
76,502 |
|
|
|
|
|
Prepaid expenses and other |
|
|
17,351 |
|
|
|
19,054 |
|
Accounts payable |
|
|
44,326 |
|
|
|
39,045 |
|
Accrued expenses |
|
|
1,546 |
|
|
|
(4,570 |
) |
|
|
|
|
|
|
|
Net cash used in operating activities |
|
|
(15,026 |
) |
|
|
(54,944 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activity: |
|
|
|
|
|
|
|
|
Investment in patents |
|
|
(9,022 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activity |
|
|
(9,022 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activity: |
|
|
|
|
|
|
|
|
Proceeds from the exercise of stock options |
|
|
|
|
|
|
1,550 |
|
|
|
|
|
|
|
|
|
Net cash provided by financing activity |
|
|
|
|
|
|
1,550 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net decrease in cash and cash equivalents |
|
|
(24,048 |
) |
|
|
(53,394 |
) |
|
|
|
|
|
|
|
|
|
Cash and cash equivalents beginning of period |
|
|
832,925 |
|
|
|
1,281,785 |
|
|
|
|
|
|
|
|
|
Cash and cash equivalents end of period |
|
$ |
808,877 |
|
|
$ |
1,228,391 |
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these condensed financial statements.
I-3
LECTEC CORPORATION
Notes to Condensed Financial Statements
March 31, 2008 and 2007
(Unaudited)
(1) General
The accompanying condensed financial statements include the accounts of LecTec Corporation
(the Company) as of March 31, 2008 and December 31, 2007 and for the three month periods ended
March 31, 2008 and 2007. The Companys condensed financial statements have been prepared in
accordance with accounting principles generally accepted in the United States of America and should
be read in conjunction with the Companys Annual Report on Form 10-KSB for the year ended December
31, 2007. The interim condensed financial statements are unaudited and in the opinion of
management, reflect all adjustments necessary for a fair presentation of results for the periods
presented. Results for interim periods are not necessarily indicative of results for the full
year.
(2) Business Summary and Critical Accounting Policies
Business Summary
The Company is an intellectual property licensing and holding company. The Company earns
royalties and licensing fees from licensing agreements pertaining to patents that the Company has
been granted. The Company 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, retail, and individual 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.
Critical Accounting Policies
The Companys most critical accounting policies include:
Revenue Recognition. Royalty and licensing fees are recognized when earned under the terms of
the Agreement with Novartis, based upon sales information of licensed products sold by Novartis,
and collection is reasonably assured.
Patent Costs. The carrying value of patent costs is reviewed periodically or when factors
indicating impairment are present. Any impairment loss is measured as the amount by which the
carrying value of the assets exceeds the fair value of the assets. The Company believes no such
impairment currently exists.
Royalty Receivable. The Company grants credit to its only customer, Novartis, in the normal
course of business and under the terms contained in the Agreement. Pursuant to the Agreement,
Novartis pays royalty income within the terms defined in the Agreement. At March 31, 2008, the
Company had an outstanding royalty receivable with Novartis of $23,929. Management believes, based
upon past collection experience, that any and all amounts outstanding from time to time are fully
collectible.
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.
I-4
Share-Based Compensation.
In December 2004, the Financial Accounting Standards Board (FASB) issued Statement of
Financial Accounting Standards (SFAS) No. 123(R), Share-Based Payment, which requires that
compensation cost relating to share-based payment transactions (including the cost of all employee
stock options) be recognized in the financial statements. That cost is measured based on the
estimated fair value of the equity or liability instruments issued. SFAS No. 123(R) covers a wide
range of share-based compensation arrangements including share options, restricted share plans,
performance-based awards, share appreciation rights, and employee share purchase plans. SFAS No.
123(R) replaces SFAS No. 123, Accounting for Stock-Based Compensation, and supersedes Accounting
Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees. The Company was
required to apply SFAS No. 123(R) effective January 1, 2006. Thus, the Companys financial
statements reflect the cost for (a) all share-based compensation arrangements granted after
December 31, 2005 and for any such arrangements that are modified, cancelled, or repurchased after
that date, and (b) the portion of previous share-based awards for which the requisite service had
not been rendered as of that date, based on the grant date estimated fair value.
All of the Companys options were fully vested as of March 31, 2008 and there were no new
grants, or modifications to existing grants, during the quarters ended March 31, 2008 or 2007.
Recent Accounting Pronouncements:
In December 2007, the FASB issued SFAS No. 141R (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 160 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 of SFAS 159 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 adopted SFAS No. 159 on January 1, 2008, and did not elect the fair value option for
eligible items that existed at the date of adoption.
Effective January 1, 2008, the Company adopted SFAS No. 157, Fair Value Measurements. SFAS
No. 157 defines fair value, establishes a framework for using fair value to measure assets and
liabilities, and expands disclosure about fair value measurements. SFAS No. 157 applies whenever
other statements require or permit assets to be measured at fair value. The adoption of SFAS No.
157 did not have an impact on the Companys financial statements.
In February 2008, the FASB issued FASB Staff Position (FSP) FAS 157-2, Effective Date of
FASB Statement No. 157, (FSP FAS 157-2), which delays the effective date of SFAS No. 157 for all
nonrecurring fair value measurements of non-financial assets and liabilities until fiscal years
beginning after November 15, 2008. The Company has elected to defer the adoption of the
nonrecurring fair value measurements disclosures of non-financial assets and liabilities. The
adoption of FSP FAS 157-2 is not expected to have a material impact on the Companys financial
statements.
(3) Loss Per Common Share
Basic loss per common share is computed by dividing net loss by the weighted average number of
common shares outstanding. Diluted loss per common share is computed by dividing net loss by the
weighted average number of common shares outstanding and common share equivalents related to stock
options and warrants when dilutive. Common stock options and warrants to purchase 155,200 and
265,250 shares of common stock with a weighted average exercise price of
I-5
$3.88 and $1.52 were outstanding as of March 31, 2008 and 2007, respectively. Because the Company
had a net loss during the three months ended March 31, 2008 and 2007, those shares were excluded
from the loss per share computations because they were antidilutive.
(4) Income Taxes
The provision for income taxes for the three months ended March 31, 2008 and 2007, was offset
by a valuation allowance for deferred taxes. No federal or state income tax benefit was provided
for the three months ended March 31, 2008 and 2007, as the realization of such benefit is not
reasonably assured.
(5) Novartis Supply and License Agreement
In July, 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
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 five 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 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 thereby restore the
Companys 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 that 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 received a 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.
I-6
In July 2007, Novartis began shipping a new adult vapor patch product in the United States for
the 2007/2008 cough and cold season. Novartis has not announced whether it will re-introduce a
vapor patch for the pediatric market.
During the first quarter ended March 31, 2008, the Company recorded revenue of $21,029 based
upon information provided by Novartis related to royalties due to the Company from sales of the
adult vapor patch during this period. The Company did not record any revenue for the quarter ended
March 31, 2007 due to the product recall discussed above.
(6) Discontinued Operations
The liability for discontinued operations at March 31, 2008 and December 31, 2007 consisted of
a reserve for sales returns and credits of $130,000 for sales prior to the discontinuance of
operations in 2004.
(7) Equity Transactions
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 Form
10-QSB, the Company has no outstanding warrants.
I-7
ITEM 2 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 to assist domestic and foreign manufacturers in producing or selling topical
patch products. 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 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 the protection of its intellectual property rights. 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.
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 and 2008, 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 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.
COMPARISON OF THE THREE MONTHS ENDED MARCH 31, 2008 AND 2007
Results of Operations
The Company recorded royalty income of $21,029 during the first quarter ended March 31, 2008,
compared to no royalty income recorded during the same quarter of 2007 due to the previously
discussed product recall by Novartis. (See Note 5 of Notes to Condensed Financial Statements in
this Form 10-QSB). The amount of royalty income recorded during the first quarter ended March 31,
2008 was based on information provided by Novartis.
Operating expenses increased $58,710, to $187,912 for the first quarter ended March 31, 2008,
from operating expenses of $129,202 for the comparable quarter in 2007. The increase in operating
expenses resulted from increases in consulting, legal, and accounting costs related to efforts the
Company is undertaking to enhance its patent portfolio, gather valuation information with respect
to the Company, costs related to Sarbanes/Oxley compliance, and other miscellaneous outsourced
accounting related costs. The Company anticipates that it may reduce operating expenses through
reductions in facility costs and other general operating expenses. However, these savings may be
offset with costs related to actions the Company decides to take with respect to protecting its
intellectual property rights, including ongoing patent maintenance costs and additional costs
surrounding new patent prospects.
The Company recorded a net loss of $(159,702), or $(0.04) per basic and diluted share, for the
first quarter of 2008, compared to a net loss of $(114,326), or $(0.03) per basic and diluted
share, for the first quarter of 2007. The increase in net loss for the first quarter of 2008
compared to the same quarter of 2007 was primarily due to the increases in consulting, legal, and
accounting costs discussed above, partially offset by royalty income of $21,029 recorded during the
first quarter ended March 31, 2008.
I-8
Income Taxes
The provision for income tax benefits for the first quarter of 2008 and 2007 was offset
principally by a valuation allowance for deferred taxes. No federal or state income tax benefit
was provided for the first quarter of 2008 and 2007, as the realization of such benefits is not
reasonably assured.
Effect of Inflation
Inflation has not had a significant impact on the Companys operations or cash flow.
Liquidity and Capital Resources
Cash and cash equivalents decreased $24,048 during the first quarter ended March 31, 2008, to
$808,877, from cash and cash equivalents of $832,925 at December 31, 2007. The decrease in cash
and cash equivalents during the first quarter of 2008 from the end of 2007, was due to an increase
in operating expenditures for consulting, legal, and accounting costs which was partially offset by
the receipt of royalty receivable of $76,502 pertaining to 2007 sales of licensed products by
Novartis.
There were no material commitments for capital expenditures at March 31, 2008
The Company had working capital of $641,426 and a current ratio of 3.60% at March 31, 2008
compared to working capital of $795,059 and a current ratio of 4.95% at December 31, 2007. The
decline in working capital and the current ratio for the first quarter of 2008 compared to December
31, 2007, was primarily due to the net loss of ($159,702) that the Company incurred during the
first quarter ended March 31, 2008.
Shareholders equity decreased $159,702, to $739,113 at March 31, 2008 from $898,815 at
December 31, 2007, due to the net loss the Company incurred during the first quarter ended March
31, 2008.
The Company believes its existing cash and cash equivalents will be sufficient to fund
operations through 2008 and 2009 based upon its current cash on hand, and the anticipated operating
expenses the Company is likely to incur during 2008 and 2009. The Company earns interest on its
available cash. Interest income earned was $7,181 (3.5% average annual interest) and $14,876 (4.9%
average annual interest) for the quarters ended March 31, 2008 and 2007, respectively.
The Companys working capital requirements are dependent upon the receipt of adequate levels
of royalty and licensing income to fund operations. The Company currently estimates that it will
receive $100,000 to $200,000 per year in royalty income based upon revised royalty estimates
provided by Novartis. Royalty income is uncertain because it is subject to factors that the
Company cannot control. There can be no assurance that the anticipated revenue stream or the
anticipated expenses will be as planned, or that the Company will be successful in negotiating
other licensing opportunities with Novartis or other companies, due to the uncertainties and risks
described in the Cautionary Statements included as Exhibit 99.01 to the Companys annual report
on Form 10-KSB for the fiscal year ended December 31, 2007.
CRITICAL ACCOUNTING POLICIES
Management believes that the Company has not adopted any critical accounting policies which,
if changed, would result in a material change in financial estimates, financial condition, results
of operation or cash flows for the three months ended March 31, 2008 and 2007. The critical
accounting policies appear in Note 2 of Notes to Condensed Financial Statements in this Form
10-QSB.
I-9
ITEM 3A(T) CONTROLS AND PROCEDURES
Under the supervision and with the participation of our management, including our principal
executive officer and principal financial officer, we have evaluated the effectiveness of the
design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) and
15d-15(e) under the Securities Exchange Act of 1934 (the Exchange Act), 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 disclosures. Based upon
this evaluation, the principal executive officer and principal financial officer have concluded
that, as of the end of the period covered by this report, our disclosure controls and procedures
were effective
During the three months ended March 31, 2008, there were no changes in the Companys internal
control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) that has
materially affected, or is reasonably likely to materially affect, the Companys internal control
over financial reporting.
I-10
PART II OTHER INFORMATION
ITEM 1 LEGAL PROCEEDINGS
None.
ITEM 2 UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
During the first quarter ended March 31, 2008, 10701 Red Circle Drive, LLC (Red Circle)
exercised its warrant dated February 25, 2003 to purchase 200,000 shares of our common stock with
an exercise price of $0.90 per share. In lieu of paying the aggregate exercise price under the
warrant, Red Circle elected to exercise its right under the warrant to effect a cashless net
exercise of the warrant. Accordingly, Red Circle forfeited a number of shares underlying the
warrant with a fair market value equal to the aggregate exercise price of the warrant and
received 113,978 shares of our common stock upon exercise of the warrant. As a result of the
cashless exercise, we did not receive any cash proceeds from the exercise. The following table
reflects these shares reacquired by the Company as payment of the exercise price of Red Circles
warrant:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maximum Number |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(or Approximate |
|
|
|
|
|
|
|
|
|
|
Total Number of |
|
Dollar Value) of |
|
|
|
|
|
|
|
|
|
|
Shares (or Units) |
|
Shares (or Units) |
|
|
|
|
|
|
|
|
|
|
Purchased as Part |
|
that May Yet Be |
|
|
Total Number of |
|
|
|
|
|
of Publicly |
|
Purchased Under |
|
|
Shares (or Units) |
|
Average Price Paid |
|
Announced Plans |
|
the Plans or |
Period |
|
Purchased |
|
per Share (Or Unit) |
|
or Programs |
|
Programs |
Month No. 1
(January 1 through
January 31, 2008) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Month No. 2
(February 1 through
February 29, 2008) |
|
|
86,022 |
|
|
$ |
2.09 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Month No. 3 (March
1 through March 31,
2008) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
86,022 |
|
|
$ |
2.09 |
|
|
|
|
|
|
|
|
|
ITEM 3 DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5 OTHER INFORMATION
None
II-1
ITEM 6 EXHIBITS
|
|
|
|
|
Exhibit No. |
|
Description |
|
|
|
|
|
|
3.01 |
|
|
Articles of Incorporation of LecTec Corporation, as amended
(Incorporated herein by reference to the Companys Form S-1 Registration
Statement (file number 33-9774C) filed on October 31, 1986 and amended on
December 12, 1986). |
|
|
|
|
|
|
3.02 |
|
|
Bylaws of LecTec Corporation (Incorporated herein by reference to
the Companys Form S-1 Registration Statement (file number 33-9774C) filed on
October 31, 1986 and amended on December 12, 1986). |
|
|
|
|
|
|
31.01 |
|
|
Certification of Principal Executive Officer Pursuant to Section 302
of the Sarbanes-Oxley Act of 2002, filed herewith. |
|
|
|
|
|
|
31.02 |
|
|
Certification of Principal Financial Officer Pursuant to Section 302
of the Sarbanes-Oxley Act of 2002, filed herewith. |
|
|
|
|
|
|
32.01 |
|
|
Certification Pursuant to 18 U.S.C. §1350, as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002, filed herewith. |
|
|
|
|
|
|
99.01 |
|
|
Cautionary Statements, filed herewith. |
II-2
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.
|
|
|
|
|
|
LECTEC CORPORATION
|
|
Date May 15, 2008 |
By |
/s/ Judd A. Berlin
|
|
|
|
Judd A. Berlin |
|
|
|
Chief Executive Officer, Chief Financial Officer, & Director
(principal financial officer and duly authorized officer) |
|
|
II-3
EXHIBIT INDEX
|
|
|
|
|
Exhibit No. |
|
Description |
|
|
|
|
|
|
3.01 |
|
|
Articles of Incorporation of LecTec Corporation, as amended (Incorporated herein by
reference to the Companys Form S-1 Registration Statement (file number 33-9774C) filed on
October 31, 1986 and amended on December 12, 1986). |
|
|
|
|
|
|
3.02 |
|
|
Bylaws of LecTec Corporation (Incorporated herein by reference to the Companys Form S-1
Registration Statement (file number 33-9774C) filed on October 31, 1986 and amended on
December 12, 1986). |
|
|
|
|
|
|
31.01 |
|
|
Certification of Principal Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002, filed herewith. |
|
|
|
|
|
|
31.02 |
|
|
Certification of Principle Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002, filed herewith. |
|
|
|
|
|
|
32.01 |
|
|
Certification Pursuant to 18 U.S.C. §1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, filed herewith. |
|
|
|
|
|
|
99.01 |
|
|
Cautionary Statements, filed herewith. |