[LecTec Corporation Letterhead]
August 29, 2005
VIA EDGAR SUBMISSION
Mr. Jay Webb
Securities and Exchange Commission
Division of Corporation Finance
100 F Street, NE
Washington DC, 20549
Re: LecTec Corporation
Form 10-KSB for the Fiscal Year Ended December 31, 2004
Form 10-QSB for the Fiscal Quarter Ended March 31, 2005
File No. 000-16159
Dear Mr. Webb:
Under cover of this letter, Dorsey & Whitney LLP, counsel to LecTec
Corporation (the "Company"), is transmitting a letter responding to the comments
received by the Company from you on behalf of the Division of Corporation
Finance of the Securities and Exchange Commission (the "Commission"), in a
letter dated July 29, 2005 (the "Comment Letter"). As requested in the Comment
Letter, the Company hereby acknowledges the following statements:
o The Company is responsible for the adequacy and accuracy of
the disclosure in its filings;
o Staff comments, and changes made to the Company's disclosure
in its filings in response to staff comments, do not foreclose
the Commission from taking any action with respect to the
Company's filings; and
o The Company may not assert staff comments as a defense in any
proceeding initiated by the Commission or any person under the
federal securities laws of the United States.
If you have any questions regarding the above, please contact the
undersigned at (952) 942-5351 or by fax at (952) 933-4808.
Very truly yours,
/s/ Alan C. Hymes
Alan C. Hymes, M.D.
Chief Executive Officer
[Dorsey & Whitney Letterhead]
TIMOTHY S. HEARN
Partner
(612) 340-7802
FAX (612) 340-8738
hearn.tim@dorsey.com
August 29, 2005
VIA EDGAR SUBMISSION
Mr. Jay Webb
Securities and Exchange Commission
Division of Corporation Finance
100 F Street, NE
Washington DC, 20549
Re: LecTec Corporation
Form 10-KSB for the Fiscal Year Ended December 31, 2004
Form 10-QSB for the Fiscal Quarter Ended March 31, 2005
File No. 000-16159
Dear Mr. Webb:
On behalf of LecTec Corporation, a Minnesota corporation (the
"Company"), this letter responds to the comments received from you on behalf of
the Division of Corporation Finance of the Securities and Exchange Commission
(the "Commission"), in a letter dated July 29, 2005 (the "Comment Letter"). For
ease of reference in this letter, the Commission's comments contained in the
Comment Letter appear directly above the Company's response.
FORM 10-KSB FOR THE YEAR ENDED DECEMBER 31, 2004
Report of Independent Registered Public Accounting Firm, page 12
1. Comment:
We see that Grant Thornton LLP, as predecessor auditor, reissued their
audit report for the year-ended December 31, 2003. However, we noted that the
audit report originally issued for the year-ended December 31, 2003 included an
explanatory paragraph disclosing that the financial statements had been prepared
assuming you would continue as a going concern. Since the report contents
changed from its original issuance, please have your predecessor auditor tell us
what consideration was given to the need to include a more currently dated audit
report. Please tell us how the predecessors audit report, including the date
thereof, complies with applicable auditing standards. Provide us with references
to the authoritative auditing literature that supports your conclusions.
Securities and Exchange Commission
August 29, 2005
Page 2
RESPONSE:
Grant Thornton LLP, the Company's former auditor, reviewed Comment No.
1 above and provided the following response:
As a result of the updating procedures performed related to
the Company's discontinued operations in 2004, as well as the Company's
improved financial condition, new financing obtained, and cost cutting
measures taken, the Company requested that Grant Thornton LLP revise
its audit report to remove the going concern discussion. The guidance
and procedures performed for the revision of the audit report were as
indicated in AU 341. Based upon the procedures performed, the audit
report should have been dated April 14, 2005.
The Company will file an amended Form 10-KSB to include Grant Thornton
LLP's revised audit report dated as of April 14, 2005 as soon as the comment
letter process is complete.
Note A - Summary of Significant Accounting Policies, page 19
Revenue Recognition, page 20
2. Comment:
We note that you recognize royalty and license income "when earned
under the terms of the agreements with customers and collection is reasonable
assured." We also note that on page 25, you disclose that Novartis is only
required to pay royalties based upon "semi-annual sales." Please tell us and
revise future filings to disclose how you determine the amount of revenue to
record on a quarterly basis and the terms of your license agreement governing
the payment of royalties, including your rights to audit or inspect the accuracy
and completeness of the royalty payments.
RESPONSE:
The Supply and Licensing Agreement (the "Agreement") the Company has
with Novartis Consumer Health, Inc. ("Novartis") specifies that the calculation
of royalty payments is based upon a specified percentage of Novartis semi-annual
sales, with payment due within 90 days after the end of each six month
semi-annual period. The Company has a very good relationship with Novartis,
which, although not required to do so under the Agreement, is providing the
Company with monthly sales numbers covering products sold under the Agreement.
The Company is using these monthly numbers as a basis for recognizing royalty
income each quarter. The Company has no reason to believe that the monthly sales
numbers provided by Novartis are inaccurate. Nevertheless, to protect its rights
under the Agreement, the Company has the right to audit or inspect the accuracy
and completeness of the royalty payments it receives from Novartis. The Company
recorded royalty income and receivable of $81,296 in the quarter ended March 31,
2005. Subsequently, in May 2005, the Company received full payment from
Novartis. As
Securities and Exchange Commission
August 29, 2005
Page 3
requested, the Company will expand its disclosures in future filings to disclose
how it determines the amount of revenue to record on a quarterly basis and the
terms of the Agreement governing payment of royalties including its audit or
inspection rights.
Note B - Licensing and Supply Agreement, page 25
3. Comment:
We see that on July 19, 2004, you entered into a new supply and license
agreement with Novartis. As part of the agreement, you granted Novartis the use
of all of your intellectual property for the maximum duration permitted under
applicable law. In consideration for these rights, you received a fee of
$1,065,000 and will receive semi-annual royalties based on Novartis' sales of
vapor patches. We note that you recorded the entire $1,065,000 fee as revenue in
the year-ended December 31, 2004. Please tell us your accounting basis for
recognizing the entire fee as revenue during fiscal 2004. Cite the authoritative
guidance upon which you relied. We may have further comments after reviewing
your response.
RESPONSE:
In determining that the entire $1,065,000 licensing fee should be
recorded in the year ended December 31, 2004, the Company relied primarily on
SEC Staff Accounting Bulletin: No. 101 - Revenue Recognition in Financial
Statements ("SAB 101"). In addition, the Company relied on accounting guidance
in documents issued by the Accounting Standards Executive Committee ("AcSEC"),
specifically Statement of Position 00-2 Accounting by Producers or Distributors
of Films ("SOP 00-2"). The Company was not able to find a specific example or
question in the aforementioned literature that directly related to the exact
facts and circumstances surrounding the transaction with Novartis. The Company
acknowledges that examples pertaining to nonrefundable, up-front fees, or
distributors of films do not directly fit the facts and circumstances of the
transaction the Company has with Novartis, but nevertheless, the Company
believes that, based on the requirements contained in SAB 101 and by analogy to
the guidance provided in SOP 00-2, the entire licensing fee was properly
recorded in 2004 as outlined below.
The Company believes revenue was realized and earned as it pertains to
the licensing fee based on the following criteria set forth in SAB 101:
o Persuasive evidence of an arrangement existed.
The Company signed a supply and licensing agreement with
Novartis on July 19, 2004.
Securities and Exchange Commission
August 29, 2005
Page 4
o Delivery occurred and all services were rendered.
The supply portion of the Agreement was completed before
December 31, 2004 and the Company had no further obligation to
produce or deliver product to Novartis. The licensing fee is
nonrefundable and was not tied to any future performance on
behalf of the Company. The entire licensing fee was paid prior
to December 31, 2004.
o The licensing fee to Novartis was fixed.
The Company negotiated the licensing fee in an arm's length
transaction and agreed that the licensing fee would not depend
upon (i) Novartis receiving any future benefits under the
Agreement, or (ii) any future performance by the Company under
the Agreement. The Company believes that the execution of the
Agreement and completion of the supply portion of the
Agreement was the culmination of the earnings process related
to the licensing fee. The Company believes that the royalty
income under the Agreement depends upon a separate earnings
process related to future sales of licensed products by
Novartis and is being accounted for appropriately per the
response to Comment No. 2 above.
o Collectibility of the licensing fee was reasonably assured.
Novartis was the Company's largest customer for several years
under previous agreements. The Company has always had a very
good relationship with Novartis and has always been paid
promptly by Novartis within the credit terms granted by the
Company. The Company had no reason to believe it would not be
paid by Novartis and in fact received full payment of the
licensing fee pursuant to the terms of the Agreement before
December 31, 2004.
For the reasons cited above, the Company believes its recognition of
the license fee income was appropriate.
Securities and Exchange Commission
August 29, 2005
Page 5
Note C - Discontinued Operations, page 26
4. Comment:
We see that in July 2004 you determined you would be winding down your
contract manufacturing operations before December 31, 2004 and also see your
past and future financial results related to contract manufacturing are treated
as discontinued operations for financial reporting purposes. Please revise
future filings to include ALL disclosures required by paragraph 47(b) and (c) of
Statement 144.
RESPONSE:
As requested, the Company will revise future filings to include all of
the disclosures required by paragraph 47(b) and (c) of Statement 144. At
December 31, 2004, the Company did not make any adjustments and had no reserves
adjusting the asset values to fair value, (property and equipment were
significantly depreciated at that time). In 2005, the Company recorded a gain on
sale of property and equipment, which was included in discontinued operations.
Please note that the Company's Form 10-QSB for the second quarter ended June 30,
2005 filed on August 15, 2005, specifically Note 6 of Notes to Condensed
Financial Statements in that filing, includes the additional disclosure
described above.
* * * *
For your convenience, we are sending to your attention three courtesy
copies of this letter. If you have any questions regarding this letter, please
feel free to contact me at (612) 340-7802, or in my absence, Amy Schneider at
(612) 340-2971.
Sincerely,
/s/ Timothy S. Hearn
Timothy S. Hearn
cc: Alan C. Hymes, M.D., LecTec Corporation