UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2006.
[ ] 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
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(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
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(Address of principal executive offices) (Zip Code)
(952) 933-2291
---------------------------
(Issuer's 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 [X] No [ ]
Indicate by check mark whether registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
Yes [ ] No [X]
The number of shares outstanding of the issuer's common stock as of August 14,
2006 was 4,148,998 shares.
Transitional Small Business Disclosure Format (Check one):
Yes [ ] No [X]
LECTEC CORPORATION
REPORT ON FORM 10-QSB FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2006
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
Item 1. Condensed Financial Statements and Notes to Condensed Financial Statements (unaudited) I-1
Item 2. Management's Discussion and Analysis or Plan of Operation............................. I-8
Item 3. Controls and Procedures............................................................... I-10
PART II - OTHER INFORMATION
Item 1. Legal Proceedings..................................................................... II-1
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds........................... II-1
Item 3. Defaults Upon Senior Securities....................................................... II-1
Item 4. Submission of Matters to a Vote of Security Holders................................... II-1
Item 5. Other Information..................................................................... II-1
Item 6. Exhibits.............................................................................. II-1
Signature Page........................................................................ II-2
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," "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 Company's dependence on
royalty payments from Novartis Consumer Health, Inc. ("Novartis"), which is not
currently selling the Company's licensed product, the Company's dependence on
key personnel, the success or failure of any attempt by the Company to protect
or enforce its patents, the issuance of new accounting pronouncements, the
availability of opportunities for licensing agreements related to patents that
the Company holds, limitations on market expansion opportunities, and other
risks and uncertainties as described in the "Cautionary Statements" filed as
Exhibit 99.01 to Form 10-KSB for the year ended December 31, 2005.
PART 1 - FINANCIAL INFORMATION
ITEM 1 - CONDENSED FINANCIAL STATEMENTS AND NOTES TO CONDENSED FINANCIAL
STATEMENTS
LECTEC CORPORATION
CONDENSED BALANCE SHEETS
June 30, December 31,
2006 2005
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(Unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 1,445,630 $ 1,310,578
Royalty receivable - 214,906
Prepaid expenses and other 56,594 66,735
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Total current assets 1,502,224 1,592,219
OTHER ASSETS:
Patent costs 77,530 90,651
Prepaid insurance - director and officer 121,676 141,955
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199,206 232,606
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$ 1,701,430 $ 1,824,825
============= ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 28,145 $ 10,495
Accrued expenses 68,605 52,015
Discontinued operations 98,350 98,350
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Total current liabilities 195,100 160,860
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COMMITMENTS AND CONTINGENCIES - -
SHAREHOLDERS' EQUITY:
Common stock, $.01 par value; 15,000,000 shares
authorized; 4,148,998 shares
issued and outstanding at June 30, 2006
and December 31, 2005 41,490 41,490
Additional contributed capital 11,847,536 11,847,536
Accumulated deficit (10,382,696) (10,225,061)
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1,506,330 1,663,965
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$ 1,701,430 $ 1,824,825
============= ==============
The accompanying notes are an integral part of these condensed financial
statements.
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LECTEC CORPORATION
CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended June 30, Six Months Ended June 30,
2006 2005 2006 2005
----------- ----------- ---------- ----------
CONTINUING OPERATIONS:
Revenue - royalty and licensing income $ - $ 39,182 $ 92,277 $ 120,478
Operating expenses 106,062 105,835 249,912 565,442
----------- ----------- ---------- ----------
Loss from continuing operations (106,062) (66,653) (157,635) (444,964)
----------- ----------- ---------- ----------
DISCONTINUED OPERATIONS:
Loss from discontinued operations - (15,666) - (225,602)
----------- ----------- ---------- ----------
Net loss $ (106,062) $ (82,319) $ (157,635) $ (670,566)
=========== =========== ========== ==========
Weighted average common shares outstanding:
Basic and diluted 4,148,998 4,148,723 4,148,998 4,119,228
=========== =========== ========== ==========
Loss per common share - basic and diluted:
Continuing operations $ (0.03) $ (0.02) $ (0.04) $ (0.11)
Discontinued operations 0.00 0.00 0.00 (0.05)
----------- ----------- ---------- ----------
Total $ (0.03) $ (0.02) $ (0.04) $ (0.16)
=========== =========== ========== ==========
The accompanying notes are an integral part of these condensed financial
statements.
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LECTEC CORPORATION
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months ended June 30,
2006 2005
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Revised (1)
Cash flows from operating activities:
Net loss $ (157,635) $ (670,566)
Discontinued operations, net of tax - 225,602
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Loss from continuing operations, net of tax (157,635) (444,964)
Adjustments to reconcile net loss from continuing operations to net
cash provided by (used in) operating activities:
Compensation expense related to stock options - 38,200
Amortization 13,121 8,926
Changes in operating assets and liabilities of continuing operations:
Royalty receivable 214,906 (39,182)
Prepaid expenses and other 30,420 95,000
Accounts payable 17,650 4,377
Accrued expenses 16,590 (162,633)
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Net cash provided by (used in) operating activities from
continuing operations 135,052 (500,276)
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Cash flows from financing activities from continuing operations:
Payment of cash dividend - (246,824)
Proceeds from exercises of stock options - 6,447
Repayment of long-term obligations - (2,525)
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Net cash used in financing activities from
continuing operations - (242,902)
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Discontinued operations:
Used in operating activities - (169,697)
Provided by investing activities - 67,352
Provided by financing activities - 83,780
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Net cash used in discontinued operations - (18,565)
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Net increase (decrease) in cash and cash equivalents 135,052 (761,743)
Cash and cash equivalents - beginning of period 1,310,578 2,239,318
------------- -------------
Cash and cash equivalents - end of period $ 1,445,630 $ 1,477,575
============= =============
(1) The Company revised the statement of cash flows for the six months ended
June 30, 2005 to present cash flows from discontinued operations for each
of the operating, investing and financing activities. Previously, the
components were not broken out separately.
The accompanying notes are an integral part of these condensed financial
statements.
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LECTEC CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS
JUNE 30, 2006 AND 2005
(UNAUDITED)
(1) GENERAL
The accompanying condensed financial statements include the accounts
of LecTec Corporation (the "Company") as of June 30, 2006 and December 31, 2005
and for the three and six month periods ended June 30, 2006 and 2005. The
Company's 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 Company's Annual Report on Form 10-KSB
for the year ended December 31, 2005. 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 receives royalties and licensing fees from licensing
agreements pertaining to the Company's patents. The Company has one licensing
agreement ("Novartis Agreement" or "Agreement") with Novartis, which pays
royalties to the Company from time to time (usually quarterly), based upon a
percentage of Novartis net sales of licensed products. Previously, the Company
was a contract manufacturer of hydrogel topical patches which were sold to major
pharmaceutical customers until the Company ceased its manufacturing operations
in December 2004. See the discussion under "Novartis Licensing and Supply
Agreement" in Note 5.
In June 2006, Novartis issued a recall of all of its Triaminic(R)
vapor patch product in the United States. See "Novartis Product Recall" (Note
6).
CRITICAL ACCOUNTING POLICIES
Some of the Company's most critical accounting policies include:
Revenue Recognition. Royalty and licensing income is recognized when
earned under the terms of the agreements with customers 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 impairment existed at June
30, 2006.
Royalty Receivable (Continuing Operations). The Company grants
credit to its only customer, Novartis, in the normal course of business and
under the terms contained in the Agreement. Pursuant to the Agreement, Novartis
pays royalty income within the terms defined in the Agreement. At June 30, 2006,
the Company did not have an outstanding royalty receivable with Novartis due to
a voluntary recall of licensed products of the Company by Novartis. The Company
believes it has earned a royalty for the second quarter ended June 30, 2006
irrespective of the recall but has not recorded the royalties given the
uncertainty related to its collectibility as a result of the recall.
Accounting for Discontinued Operations. The Company exited from
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 Company's
manufacturing operations have been classified as discontinued operations due to
the sale of the manufacturing assets by December 31, 2004. The operations and
cash flows of the contract manufacturing operations have been eliminated from
the ongoing operations as a result of the sale transaction. The Company does not
have any significant involvement in the operations of the previously sold
manufacturing operations. It is therefore management's position that the
conditions for reporting the Company's balance sheets, statements of operations,
and cash flows under the requirements of Statement of Financial Accounting
Standard ("SFAS") No. 144 as discontinued operations are appropriate.
I-4
The Company used reasonable judgment combined with quantitative
analysis in determining the amounts of assets, liabilities, revenues and
expenses that are allocated between continuing operations and discontinued
operations.
Stock-Based Compensation. In January 2005, the Company extended the
exercise period for options held by two former executive officers of the Company
and one former employee by two years from the date of their respective
termination dates (but not longer than the options normal expiration date, if
earlier). There were 222,667 options with a weighted average exercise price of
$0.83 per share subject to this modification to the exercise period. Normally
these options would have expired 90 days from the employee's termination date.
Because of this modification to the exercise period of these options for those
former employees, the Company recorded compensation expense of $99,957 for the
first quarter ended March 31, 2005.
Prior to January 1, 2006, the Company utilized the intrinsic value
method of accounting for stock-based employee compensation plans. All options
granted had an exercise price equal to the market value of the underlying common
stock on the date of grant, and no compensation cost related to stock option
grants was reflected in the net loss for the three and six months ended June 30,
2006 and 2005.
Had the Company applied the fair value recognition provisions of
SFAS No. 123, "Accounting for Stock Based Compensation," the net loss and net
loss per common share for the three and six months ended June 30, 2005 would not
be materially different.
In December 2004, the Financial Accounting Standards Board issued
SFAS No. 123(R), "Share-Based Payment," which requires that compensation cost
relating to share-based payment transactions (including the cost of all employee
stock options) be recognized in the financial statements. That cost is measured
based on the estimated fair value of the equity or liability instruments issued.
SFAS No. 123(R) covers a wide range of share-based compensation arrangements
including share options, restricted share plans, performance-based awards, share
appreciation rights, and employee share purchase plans. SFAS No. 123(R) replaces
SFAS No. 123, "Accounting for Stock-Based Compensation," and supersedes
Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued
to Employees". The Company was required to apply SFAS No. 123(R) effective
January 1, 2006. Thus, the Company's 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 Company's options were fully vested as of December 31,
2005 and there were no new grants, or modifications to existing grants, during
the three and six months ended June 30, 2006. Therefore, the adoption of SFAS
No, 123(R) had no impact on the Company's financial statements.
(3) NET LOSS PER COMMON SHARE
Basic net loss per common share is computed by dividing the net loss
by the weighted average number of common shares outstanding. Diluted net loss
per common 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 421,250 and 446,250
shares of common stock with a weighted average exercise price of $2.02 and $2.02
were outstanding during the three and six months ended June 30, 2006,
respectively. Common stock options and warrants to purchase 598,250 and 615,500
shares of common stock with a weighted average exercise price of $1.95 and $1.97
were outstanding during the three and six months ended June 30, 2005,
respectively. Because the Company had a loss from continuing operations during
the three and six months ended June 30, 2006 and 2005, those options and
warrants were excluded from the net loss per share computations because they
were antidilutive.
I-5
(4) INCOME TAXES
The provision for income tax benefits for the three and six months
ended June 30, 2006 and 2005, was offset principally by a valuation allowance
for deferred taxes. No federal or state income tax benefit was provided for the
three and six months ended June 30, 2006 and 2005, as the realization of such
benefits is not reasonably assured.
(5) NOVARTIS LICENSING AND SUPPLY AGREEMENT
On July 19, 2004, the Company entered into the Novartis Agreement,
effective as of January 1, 2004. The Agreement replaced the Company's prior
licensing and supply agreement with Novartis dated May 8, 2002. The Agreement
required the Company to manufacture, sell and deliver to Novartis vapor patches
for sale to the pediatric market in the United States, Canada and Mexico. In
order to provide the Company with working capital funds necessary to enable it
to manufacture and deliver vapor patches to Novartis in accordance with the
Agreement, Novartis advanced up to $2,000,000 for use by the Company to pay
current accounts payable and expenses incurred exclusively for the manufacture
and delivery of vapor patches. In consideration of any advanced funds, the
Company executed and delivered to Novartis a promissory note of $2,000,000 and a
security agreement. Under the security agreement, the Company pledged
substantially all of its assets. The note was repaid by the Company by the
delivery to Novartis of vapor patches under the Agreement. All amounts owed were
repaid as of December 31, 2004. Under the Agreement, Novartis had the option
until March 31, 2005, to extend the use of vapor patches to the adult cough/cold
category in the United States, Canada and Mexico at no additional cost and under
the same terms and conditions as set forth in the Agreement. On March 31, 2005,
Novartis notified the Company of its intention to enter the adult market
pursuant to the Agreement. However, there can be no assurance that Novartis is
obligated or will enter the adult market under the terms of the Agreement.
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
being supplied under the Agreement for a fee of $1,065,000, which was paid to
the Company by Novartis as follows: (1) release of $250,000 in promissory note
debt as of the date of the Agreement, (2) payment of $407,500 in cash in July
2004, and (3) payment of $407,500 in cash in September 2004. The License began
on July 19, 2004, and will continue for the duration of any patents included in
the licensed intellectual property and, with respect to all other elements of
the licensed intellectual property, for the maximum duration permitted under
applicable law (14 years). Upon the expiration of the patents included in the
licensed intellectual property, Novartis will have a non-revocable, perpetual,
fully paid-up license to the intellectual property used or useful in the
production of vapor patches for the pediatric market and the adult cough/cold
market. Commencing on January 1, 2005, Novartis was required by the Agreement to
pay royalties, at an agreed upon percentage, to the Company, based upon the net
semi-annual or quarterly sales of vapor patches by Novartis for each year the
License is in effect.
The supply portion of the Agreement continued in effect until
February 5, 2005, except that the provisions relating to the License will
continue in effect until the conclusion of the term of the License. The Company
may not assign or otherwise transfer the Agreement (other than to an affiliate)
without the prior written consent of Novartis, except that the Company may
assign the Agreement in connection with the transfer or sale of all or
substantially all of its assets or business or its merger or consolidation with
another company, so long as (1) such acquirer or successor in interest agrees in
writing to be bound by all conditions of the Agreement, and (2) the Company
gives Novartis written notice of any such assignment and 15 days to object.
Novartis may object to an assignment only if such acquirer or successor is a
direct competitor of Novartis.
(6) NOVARTIS PRODUCT RECALL
On June 21, 2006, the Company issued a press release noting that
Novartis had issued a recall of all of its Triaminic(R) Vapor Patch product in
the United States. Royalties received by the Company from Novartis based on
sales of this patch represented substantially all of the Company's revenues in
fiscal year 2005 and the first quarter of 2006. As a result of this development,
unless and until Novartis reintroduces this patch product or the Company
develops another source of revenue, the Company will have no immediate source of
revenue.
In a press release issued by Novartis, Novartis explained that the
recall was "due to the serious adverse health effects that could result if the
product is ingested by the child removing the patch and chewing on it." At the
same
I-6
time that Novartis announced this voluntary recall, the U. S. Food and Drug
Administration 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 was triggered by 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. A representative of Novartis also
indicated that no decision had yet been made whether to reintroduce the product
in certain markets, although the vapor patches would not be reintroduced for use
with young children.
The Board of Directors and management of the Company are currently
assessing the Company's position and strategy in light of this new development.
(7) DISCONTINUED OPERATIONS
There were no assets of discontinued operations at June 30, 2006 or
December 31, 2005. However, the Company has immaterial fully depreciated assets
on hand that may be sold from time to time. Liabilities of discontinued
operations at June 30, 2006 and December 31, 2005, consisted of a $98,350
reserve for sales returns and credits related to previous sales to customers of
products that the Company produced before the Company ceased its manufacturing
operations. Included in the loss from discontinued operations for the three and
six months ended June 30, 2005 was a gain of $2,730 and $67,352, respectively,
on the sale of fully depreciated property and equipment related to discontinued
operations.
I-7
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
RESULTS OF OPERATIONS
In July 2004, management determined that the Company would wind down and
cease its contract manufacturing operations by December 31, 2004. Because of
this, the past and future financial results related to contract manufacturing
have been treated as discontinued operations for financial reporting purposes.
Continuing operations consist of operations related to the surviving
intellectual property licensing and holding company. The Company accounts for
its discontinued operations under the provisions of SFAS No. 144, "Accounting
for the Impairment or Disposal of Long-Lived Assets." Accordingly, results of
operations and the related charges for discontinued operations have been
classified as "Loss from discontinued operations" in the accompanying Condensed
Statements of Operations. Assets and liabilities of the discontinued operations
have been classified and reflected on the accompanying Balance Sheets as
"Discontinued operations."
COMPARISON OF THE THREE AND SIX MONTHS ENDED JUNE 30, 2006 AND 2005
RESULTS OF CONTINUING OPERATIONS
The Company recorded royalty income of $0 and $92,637 during the three and
six months ended June 30, 2006, respectively, related to its licensing Agreement
with Novartis. The decrease in royalty income for the quarter ended June 30,
2006 from the comparable quarter of 2005 is attributable to Novartis' nationwide
voluntary recall of its Triaminic(R) Vapor Patch product in the United States
during June 2006. The Company decided not to record royalty income for the
second quarter of 2006 pending further discussion with Novartis regarding
whether the Agreement permits recalled product to be netted against royalty
income earned during the second quarter of 2006. The Company recorded royalty
income of $39,183 and $120,478 during the three and six months ended June 30,
2005, respectively.
For the second quarter ended June 30, 2006, the Company recorded a net
loss from continuing operations of $(106,062), or $(0.03) per basic and diluted
share, compared to a net loss from continuing operations of $(66,653), or
$(0.02) per basic and diluted share, for the same quarter in 2005. For the six
months ended June 30, 2006, the Company recorded a net loss from continuing
operations of $(157,635), or $(0.04) per basic and diluted share, compared to a
net loss from continuing operations of $(444,964), or $(0.11) per basic and
diluted share, for the same period in the 2005. The increase in net loss from
continuing operations for the three month period ended June 30, 2006 from the
comparable period in 2005 is due to the non-recognition of royalty income during
the second quarter of 2006 as a result of the Novartis recall. The decrease in
net loss from continuing operations for the six months ended June 30, 2006 from
the comparable period in 2005 is due primarily to reductions in general
operating expenses for 2006, partially offset by a reduction in royalty income
during the second quarter of 2006.
RESULTS OF DISCONTINUED OPERATIONS
There was no loss from discontinued operations for the three and six month
periods ended June 30, 2006. The loss from discontinued operations for the
second quarter ended June 30, 2005 was $(15,666), or $(0.00) per basic and
diluted share. For the six months ended June 30, 2005, the loss from
discontinued operations was $(225,602), or $(0.05) per basic and diluted share.
The loss from discontinued operations for the three and six month periods ended
June 30, 2005, was attributable to the wind down of the Company's manufacturing
operations.
NET RESULTS OF OPERATIONS
The net loss for the second quarter ended June 30, 2006 was $(106,062), or
$(0.03) per basic and diluted share, compared to a net loss of $(82,319), or
$(0.02) per basic and diluted share for the same period in 2005. The increase in
net loss is primarily attributable to the non-recognition of royalty income
during the second quarter ended June 30, 2006 compared to the same quarter of
2005. For the six months ended June 30, 2006, the net loss was $(157,635), or
$(0.04) per basic and diluted share, compared to a net loss of $(670,566), or
$(0.16) per basic and diluted share for the same period in 2005. The decline in
net loss for the six month period ended June 30, 2006 from the same period in
the prior year is primarily due to the reasons stated above.
I-8
INCOME TAXES
The provision for income tax benefits for the three and six months ended
June 30, 2006 and 2005 was offset principally by a valuation allowance for
deferred taxes. No federal or state income taxes were provided for the three and
six months ended June 30, 2006 and 2005, as the realization of such benefits is
not reasonably assured.
EFFECT OF INFLATION
Inflation has not had a significant impact on the Company's operations or
cash flow.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents increased by $135,052 during the first six
months of 2006 to $1,445,630 at June 30, 2006. The increase in cash and cash
equivalents during the six months ended June 30, 2006 from the end of 2005, was
due to cash generated from continuing operations, primarily related to cash
received under the Novartis Agreement, coupled with a general reduction in
operating expenses related to continuing operations.
During the first six months of 2006, the Company received $217,793 in
royalty income under the Novartis Agreement, compared to royalty income
collected of $81,296 during the comparable period of 2005, which was related to
fourth quarter and first quarter sales by Novartis of products covered under the
Agreement for 2006 and 2005, respectively. There were no material commitments
for capital expenditures at June 30, 2006.
The Company had working capital of $1,307,124 and a current ratio of 7.70
at June 30, 2006 compared to working capital of $1,431,359 and a current ratio
of 9.90 at December 31, 2005. The decrease in working capital of $124,235 during
the six months of 2006 was primarily due to the net loss of the Company during
the six months ended June 30, 2006.
Shareholders' equity decreased to $1,506,330 at June 30, 2006 from
$1,663,965 at December 31, 2005, due to the net loss for six months ended June
30, 2006.
The Company believes its existing cash and cash equivalents will be
sufficient to fund continuing operations through 2006. However, cash and cash
equivalents may not be sufficient to fund continuing operations beyond 2006. The
Company's working capital requirements are dependent upon adequate levels of
royalty and licensing income to fund continuing operations. Royalty income is
uncertain because it is subject to factors that the Company cannot control. Such
factors include, but are not limited to, seasonality of the product, marketing
efforts by Novartis, markets Novartis enters the product into, product recalls
and other factors which can cause fluctuations in the amount of royalty income
the Company earns. There can be no assurance because of these uncertainties that
future royalty income will be earned or sufficient to fund continuing
operations. The royalty income of $92,277 recorded during the six months ended
June 30, 2006 was based upon information provided by Novartis. Novartis has paid
all royalty obligations through the first quarter of 2006. The Company did not
record any royalty income for the second quarter of 2006 due to the product
recall situation that arose in June 2006. There can be no assurance current
results will be indicative of results for the full year. Furthermore, future
royalties and licensing income the Company anticipates earning is dependent on
the success of the product in the marketplace by Novartis and other firms or
individuals with whom the Company may enter into licensing agreements.
Additionally, the Company does not presently have any other financing resources
in place from which it can borrow or obtain additional working capital.
CRITICAL ACCOUNTING POLICIES
Management believes that the Company has not adopted any critical
accounting policies which, if changed, would result in a material change in
financial estimates, financial condition, results of operation or cash flows for
the three months ended June 30, 2006 and 2005. The critical accounting policies
appear in Note 2 of Notes to Condensed Financial Statements in this Form 10-QSB.
I-9
ITEM 3 - CONTROLS AND PROCEDURES
Under the supervision and with the participation of our management,
including our principal executive officer and principal financial officer, we
have evaluated the effectiveness of the design and operation of our disclosure
controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the
Securities Exchange Act of 1934 (the "Exchange Act")). Based upon this
evaluation, the principal executive officer and principal financial officer have
concluded that, as of the end of the period covered by this report, our
disclosure controls and procedures were effective.
During the three months ended June 30, 2006, there were no changes in the
Company's internal control over financial reporting (as defined in Rule
13a-15(f) and 15d - 15(f) under the Exchange Act) that has materially affected,
or is reasonably likely to materially affect, the Company's 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
None.
ITEM 3 - DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5 - OTHER INFORMATION
None.
ITEM 6 - EXHIBITS
Exhibit No. Description
- ----------- --------------------------------------------------------------
3.01 Articles of Incorporation of LecTec Corporation, as amended
(Incorporated herein by reference to the Company's 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 Company's 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. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002,
filed herewith.
99.01 Cautionary Statements (Incorporated herein by reference to
Exhibit 99.01 to the Company's Report on Form 10-KSB for the
fiscal year ended December 31, 2005).
II-1
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
LECTEC CORPORATION
Date August 14, 2006 By /s/ Alan C. Hymes, M.D.
----------------------------------------------------
Alan C. Hymes, M.D.
Chief Executive Officer, Chief Financial Officer, &
Director
(principal executive and financial officer and duly
authorized officer)
II-2
EXHIBIT INDEX
Exhibit No. Description
- ----------- --------------------------------------------------------------
3.01 Articles of Incorporation of LecTec Corporation, as amended
(Incorporated herein by reference to the Company's 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 Company's 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. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002,
filed herewith.
99.01 Cautionary Statements (Incorporated herein by reference to
Exhibit 99.01 to the Company's Report on Form 10-KSB for the
fiscal year ended December 31, 2005).