UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2001.
/ / TRANSITION REPORT PURSUANT TO 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
(Exact name of Registrant as specified in its charter)
Minnesota 41-1301878
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
10701 Red Circle Drive, Minnetonka, Minnesota 55343
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (952) 933-2291
Former Fiscal Year: June 30
New Fiscal Year: December 31
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 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 / /
The number of shares outstanding of the registrant's common stock as of November
13, 2001 was 3,922,384 shares.
LECTEC CORPORATION
FORM 10-Q FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2001
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 of Financial Condition and Results of Operations ................... I-8
Item 3. Quantitative and Qualitative Disclosures About Market Risk .............................................. I-11
PART II - OTHER INFORMATION
Item 1. Legal Proceedings ....................................................................................... II-1
Item 2. Changes in 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 and Reports on Form 8-K ........................................................................ II-1
Signature Page .......................................................................................... II-2
PART I - FINANCIAL INFORMATION
ITEM 1 - CONDENSED FINANCIAL STATEMENTS AND NOTES TO CONDENSED FINANCIAL
STATEMENTS
LECTEC CORPORATION
CONDENSED BALANCE SHEETS
September 30, June 30,
2001 2001
---------- ----------
(Unaudited)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $1,943,465 $3,376,723
Trade receivables and other, net of allowances of $117,500
and $108,500 at September 30, 2001 and June 30, 2001 1,185,661 1,132,736
Inventories
Raw materials 1,292,344 1,517,167
Work-in-process 25,681 4,851
Finished goods 676,363 529,920
---------- ----------
1,994,388 2,051,938
Prepaid expenses and other 357,006 294,437
---------- ----------
Total current assets 5,480,520 6,855,834
PROPERTY, PLANT AND EQUIPMENT - AT COST, NET 2,340,962 2,422,494
OTHER ASSETS
Patents and trademarks, less accumulated amortization of $1,207,722
and $1,189,787 at September 30, 2001 and June 30, 2001 265,023 243,949
---------- ----------
$8,086,505 $9,522,277
========== ==========
See accompanying notes to the condensed financial statements.
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LECTEC CORPORATION
CONDENSED BALANCE SHEETS - CONTINUED
September 30, June 30,
2001 2001
------------ ------------
(Unaudited)
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Current maturities of long-term obligations 35,550 38,311
Accounts payable 912,042 1,175,728
Accrued expenses 1,099,747 1,012,369
Customer deposits 75,000 75,000
Restructuring charges 216,075 274,698
------------ ------------
Total current liabilities 2,338,414 2,576,106
LONG-TERM OBLIGATIONS, LESS CURRENT MATURITIES 851,667 859,623
COMMITMENTS AND CONTINGENCIES -- --
SHAREHOLDERS' EQUITY
Common stock, $.01 par value: 15,000,000 shares authorized;
3,922,384 shares issued and outstanding at
September 30, 2001 and June 30, 2001 39,224 39,224
Additional paid-in capital 11,344,166 11,344,166
Accumulated deficit (6,486,966) (5,296,842)
------------ ------------
4,896,424 6,086,548
------------ ------------
$ 8,086,505 $ 9,522,277
============ ============
See accompanying notes to the condensed financial statements.
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LECTEC CORPORATION
CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
Three months ended
September 30,
-------------------------------
2001 2000
----------- -----------
Net sales $ 2,725,261 $ 4,188,894
Cost of goods sold 1,784,580 2,554,863
----------- -----------
Gross profit 940,681 1,634,031
Operating expenses
Sales and marketing 1,264,802 1,202,339
General and administrative 653,395 778,698
Research and development 217,548 215,866
----------- -----------
2,135,745 2,196,903
----------- -----------
Loss from operations (1,195,064) (562,872)
Other income (expenses)
Interest expense (30,540) (32,791)
Other, net 35,480 (2,238)
----------- -----------
Loss before income taxes (1,190,124) (597,901)
Income taxes -- --
----------- -----------
Net loss $(1,190,124) $ (597,901)
=========== ===========
Net loss per share - basic and diluted $ (0.30) $ (0.15)
=========== ===========
Weighted average shares outstanding - basic and diluted 3,922,384 3,904,465
=========== ===========
See accompanying notes to the condensed financial statements.
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LECTEC CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Three Months Ended September 30,
--------------------------------
2001 2000
----------- -----------
Cash flows from operating activities:
Net loss $(1,190,124) $ (597,901)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization 149,254 164,330
Changes in operating assets and liabilities:
Trade and other receivables (52,925) 410,529
Inventories 57,550 (156,991)
Prepaid expenses and other (62,569) (56,086)
Accounts payable (263,686) 542,013
Accrued expenses and other 87,378 (50,459)
Restructuring charge (58,623) --
----------- -----------
Net cash provided by (used in) operating activities (1,333,745) 255,435
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of equipment (49,788) (135,556)
Investment in patents and trademarks (39,008) (15,449)
----------- -----------
Net cash used in investing activities (88,796) (151,005)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net repayments of line of credit -- (128,845)
Repayment of long-term obligations (10,717) (5,361)
----------- -----------
Net cash used in financing activities (10,717) (134,206)
----------- -----------
Net decrease in cash and cash equivalents (1,433,258) (29,776)
Cash and cash equivalents at beginning of period 3,376,723 100,171
----------- -----------
Cash and cash equivalents at end of period $ 1,943,465 $ 70,395
=========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest expense $ 26,860 $ 31,916
Income taxes $ 56,000 $ 2,000
See accompanying notes to the condensed financial statements.
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LECTEC CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
(1) GENERAL
The accompanying condensed financial statements include the
accounts of LecTec Corporation (the "Company") as of and for the three months
ended September 30, 2001 and 2000. 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 its
Annual Report on Form 10-K for the fiscal year ended June 30, 2001. 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 year.
(2) NET LOSS PER SHARE
The Company's basic net loss per share amounts have been computed
by dividing net loss by the weighted average number of outstanding common
shares. The Company's diluted net loss per share amounts have been computed by
dividing net loss by the weighted average number of outstanding common shares
and common share equivalents, when dilutive. Options and warrants to purchase
1,177,085 and 995,780 shares of common stock with a weighted average exercise
price of $4.82 and $5.75 were outstanding during the three months ended
September 30, 2001 and 2000, but were excluded because they were antidilutive.
(3) COMPREHENSIVE LOSS
For the three months ended September 30, 2001 there were no items
which the Company is required to recognize as components of comprehensive loss,
therefore comprehensive loss was the same as net loss.
(4) SEGMENTS
The Company operates its business in one reportable segment - the
manufacture and sale of products based on advanced skin interface technologies.
Each of the Company's major product lines has similar economic characteristics,
technology, manufacturing processes, and regulatory environments. Customers and
distribution and marketing strategies vary within major product lines as well as
overlap between major product lines. The Company's executive decision makers
evaluate sales performance based on the total sales of each major product line
and profitability on a total company basis, due to shared infrastructures, to
make operating and strategic decisions. The Company sold the conductive and
medical tape product lines during the fiscal year ended June 30, 2001. Net sales
by major product line were as follows:
Three months ended September 30,
2001 2000
---------- ----------
Therapeutic consumer products $2,058,446 $2,484,483
Conductive products 666,815 1,550,645
Medical tape products -- 153,766
---------- ----------
$2,725,261 $4,188,894
========== ==========
(5) NOTE PAYABLE TO BANK
In November 1999, the Company entered into a secured line of
credit with a maximum borrowing of $2,000,000. In September 2000, the line of
credit was increased to allow borrowing of up to
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$2,800,000. The credit agreement expires in November 2001 and includes interest
computed at the prime rate plus three percentage points (effective rate of 9% at
September 30, 2001). The Company is in the process of extending the secured line
of credit with a maximum borrowing of $2,000,000 and similar terms for an
additional two years. There were no borrowings outstanding on the line of credit
at September 30, 2001. Borrowings under the credit agreement are collateralized
by substantially all of the Company's assets. The Company was in compliance with
all covenants as of September 30, 2001.
(6) LONG-TERM OBLIGATION
In December 2000, the Company entered into a mortgage agreement
with gross proceeds of $820,000. The principal balance of the mortgage is due in
December 2002. Monthly payments of interest are computed at the prime rate plus
five percentage points (effective rate of 11% at September 30, 2001). The
mortgage is collateralized by the Company's real property.
(7) DISPOSITION OF MEDICAL TAPE ASSETS
In March 2001, the Company sold its medical tape manufacturing
equipment and other related assets. The sale of the medical tape equipment
finalized the Company's plan to exit the medical tape business which was adopted
at the end of fiscal year 2000.
(8) SALE OF CONDUCTIVE BUSINESS ASSETS AND RESTRUCTURING
In April 2001, the Company sold its diagnostic electrode and
electrically conductive adhesive hydrogel business assets which were used to
produce the Company's conductive products. Under a manufacturing and supply
agreement between the Company and the buyer, the Company will continue to
manufacture, and supply to the buyer, certain conductive products through
January 31, 2002. The Company will supply the products at its cost of production
through October 31, 2001 and at its cost of production plus 10% thereafter.
A non-recurring restructuring charge of $303,759 was incurred in
the fourth quarter of fiscal 2001 relating to the sale of the Company's
conductive business assets. The restructuring charge consists primarily of
future rental payments for a leased facility, separation costs, and other costs
associated with the wind-down of conductive business activity. The restructuring
accrual at September 30, 2001 was $216,075. The Company expects to complete the
restructuring by June 30, 2002.
(9) CHANGE IN FISCAL YEAR END
On September 5, 2001, the Company's Board of Directors approved a
change in the Company's fiscal year end from June 30 to December 31. The change
is effective immediately. The Company will file a Transition Report on Form 10-K
for the six months ended December 31, 2001.
(10) INCOME TAXES
The provision for income taxes for the three months ended
September 30, 2001, has been offset principally by a valuation allowance for
deferred taxes.
(11) NEW ACCOUNTING PRONOUNCEMENTS
On July 20, 2001, the Financial Accounting Standards Board (FASB)
issued Statement of Financial Accounting Standards (SFAS) 141, Business
Combinations, and SFAS 142, Goodwill and Intangible Assets. SFAS 141 is
effective for all business combinations completed after June 30, 2001. SFAS 142
is effective for fiscal years beginning after December 15, 2001; however,
certain provisions of this Statement apply to goodwill and other intangible
assets acquired between July 1, 2001 and the effective date of SFAS 142. Major
provisions of these Statements and their effective dates for the Company are as
follows:
I-6
- - Intangible assets acquired in a business combination must be recorded
separately from goodwill if they arise from contractual or other legal
rights or are separable from the acquired entity and can be sold,
transferred, licensed, rented or exchanged, either individually or as part
of a related contract, asset or liability.
- - Goodwill, as well as intangible assets with indefinite lives, acquired
after June 30, 2001, will not be amortized. Effective January 1, 2002, all
previously recognized goodwill and intangible assets with indefinite lives
will no longer be subject to amortization.
- - Effective January 1, 2002, goodwill and intangible assets with indefinite
lives will be tested for impairment annually and whenever there is an
impairment indicator.
The Company is currently reviewing the effect of these Statements on its
financial statements.
I-7
PART I - FINANCIAL INFORMATION
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000
RESULTS OF OPERATIONS
Net sales for the three month period ended September 30, 2001 were
$2,725,261 compared to net sales of $4,188,894 for the three month period ended
September 30, 2000, a decrease of 34.9%. The decrease was primarily the result
of decreased conductive product sales due to the sale of the assets of the
conductive products division in April 2001. Therapeutic consumer product sales
decreased by 17.1% from $2,484,483 to $2,058,446 while conductive product sales
decreased by 57.0% from $1,550,645 to $666,815 and medical tape product sales
decreased by 100.0% from $153,766 to $0. The therapeutic consumer product sales
decrease was primarily the result of decreased demand from consumer contract
therapeutic patch customers resulting from the absence in the most recent
quarter of two large contract customer's initial orders for pipeline inventory
fill made in the first quarter of the prior year, as well as, this year's
overall reluctance of retailers to build fall/winter inventories due to the
softening of the economy, which has been exacerbated by the uncertainties
resulting from the events on September 11, 2001. The Company expects decreased
conductive product sales to continue due to the sale of the assets used to
produce the conductive products. As part of this asset sale, the Company entered
into a Manufacturing and Supply Agreement with the buyer. Under the terms of
this Agreement, the Company will continue to produce conductive products for the
buyer for a period through January 31, 2002. The Company will supply the
products at its cost of production through October 31, 2001, and at its costs of
production plus 10% thereafter. The decrease in medical tape product sales was
due to the exit of the medical tape business.
Gross profit for the three month period ended September 30, 2001 was
$940,681, compared to $1,634,031 for the three month period ended September 30,
2000, a decrease of 42.4%. Gross profit as a percent of net sales for the three
month period ended September 30, 2001 was 34.5% compared to 39.0% for the three
month period ended September 30, 2000. The decrease in gross profit dollars for
the three months resulted primarily from decreased sales. The decrease in gross
profit percent for the three months resulted primarily from the Company entering
into the manufacturing and supply agreement noted above.
Sales and marketing expenses were $1,264,802 and $1,202,339 during the
three month periods ended September 30, 2001 and 2000, and as a percentage of
net sales, were 46.4% and 28.7% respectively. Sales and marketing expenses for
the current three month period were comparable to the prior year period
primarily due to continued sales and marketing support of TheraPatch products.
General and administrative expenses were $635,395 and $778,698 during
the three month periods ended September 30, 2001 and 2000, and as a percentage
of net sales, were 24.0% and 18.6% respectively. The decrease in general and
administrative expenses for the three months ended September 30, 2001 as
compared to the prior year period was primarily due to a decrease in consulting
expenses.
Research and development expenses for the three month periods ended
September 30, 2001 and 2000 were $217,548 and $215,866, and as a percentage of
net sales, were 8.0% and 5.2% respectively. Research and development expenses
for the current three month period were comparable to the prior year period
primarily due to the continued product development of TheraPatch products.
Interest expense decreased in the three month period ended September
30, 2001 to $30,540 from $32,791 in the three month period ended September 30,
2000. The slight decrease resulted primarily from the absence of borrowings
under the line of credit which was almost entirely offset by interest expense
associated with the mortgage. Other income (expense) increased in the three
month period
I-8
ended September 30, 2001 to other income of $35,480 from other expenses of
$2,238 in the three month period ended September 30, 2000. The current three
month period increase was primarily the result of increased interest income due
to higher cash and cash equivalent balances.
The Company recorded a loss before income taxes of $1,190,124 in the
three month period ended September 30, 2001 compared to a loss before income
taxes of $597,901 for the three month period ended September 30, 2000. The
increase in loss before income taxes for the current three months was primarily
the result of decreased gross profit that resulted from decreased sales volume
related to the sale of the assets of the conductive products division, decreased
demand from consumer contract therapeutic patch customers and the manufacturing
and supply agreement between the Company and the buyer of the assets of the
conductive products division. The decreased gross profit more than offset a
slight decrease in operating expenses.
The provision for income taxes in the three months ended September 30,
2001 and 2000 has been offset principally by a valuation allowance for deferred
taxes.
Inflation has not had a significant impact on the Company's operations
or cash flow.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents decreased by $1,433,258 to $1,943,465 during
the three months ended September 30, 2001. The decrease in cash and cash
equivalents was primarily due to a decrease in average days outstanding of
accounts payable and the net loss in the period. Accounts receivable increased
by $52,925 to $1,185,661 during the three months ended September 30, 2001.
Inventories decreased by $57,550 to $1,994,388. Accounts payable of $912,042 at
September 30, 2001 decreased by $263,686 during the three months ended September
30, 2001 due to decreased payables related to a decrease in average days
outstanding and decreased manufacturing production. Capital spending for
manufacturing equipment and plant improvements totaled $49,788 during the three
months ended September 30, 2001. The Company entered into a purchase commitment
for production machinery in the amount of $154,482 during fiscal 2001. This
purchase commitment will be fulfilled sometime in the three month period ended
December 31, 2001.
The Company had working capital of $3,142,106 and a current ratio of
2.3 at September 30, 2001 compared to working capital of $4,279,728 and a
current ratio of 2.4 at June 30, 2001.
The Company finalized a $2,000,000 asset-based line of credit in
November, 1999. In September 2000, the line of credit was increased to allow
borrowing of up to $2,800,000. The Company is in the process of extending the
collateralized line of credit with a maximum borrowing of $2,000,000 and similar
terms for an additional two years. There were no borrowings outstanding on the
line of credit as of September 30, 2001. The Company was in compliance with all
covenants as of September 30, 2001. During fiscal 2001, the Company entered into
a mortgage agreement with gross proceeds of $820,000.
Management believes that existing cash and cash equivalents,
internally-generated cash flow and the existing secured line of credit including
the extension of the line for an additional two years will be sufficient to
support anticipated operating and capital spending requirements through
September 30, 2002 and contribute to the funding of longer-term growth and
expansion of the business. Management is also in the process of evaluating
additional sources of capital that may be appropriate for funding longer-term
growth and expansion. Maintaining adequate levels of working capital depends in
part upon the success of the Company's products in the marketplace, the relative
profitability of those products and the Company's ability to control operating
expenses. Funding of the Company's operations in future periods may require
additional investments in the Company in the form of equity or debt. There can
be no assurance that the Company will achieve desired levels of sales or
profitability, or that future capital infusions will be available.
I-9
FORWARD-LOOKING STATEMENTS
From time to time, in reports filed with the Securities and Exchange
Commission (including this Form 10-Q), 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 buying patterns of major
customers; competitive forces including new products or pricing pressures; costs
associated with and acceptance of the Company's TheraPatch brand strategy;
impact of interruptions to production; dependence on key personnel; need for
regulatory approvals; changes in governmental regulatory requirements or
accounting pronouncements; ability to satisfy funding requirements for operating
needs, expansion or capital expenditures; and the matters discussed on our
"Cautionary Statements" filed as Exhibit 99.1 to form 10-K for the year ended
June 30, 2001.
I-10
PART I - FINANCIAL INFORMATION
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company has no history of, and does not anticipate in the future,
investing in derivative financial instruments, derivative commodity instruments
or other such financial instruments. Transactions with international customers
are entered into in U.S. dollars with the exception of TheraPatch sales to
Canadian customers, precluding the need for foreign currency hedges. Canadian
sales have not been material. Additionally, the Company invests in money market
funds which experience minimal volatility. Thus, the exposure to market risk is
not material.
I-11
PART II
OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
None.
Item 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Not applicable.
Item 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
Item 5. OTHER INFORMATION
None.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
None.
(b) REPORTS ON FORM 8-K
On September 19, 2001 the Company filed a report on
Form 8-K in connection with the approval by the
Company's Board of Directors of a change in the
Company's fiscal year end from June 30 to December 31.
II-1
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
LECTEC CORPORATION
Date November 14, 2001 /s/ Rodney A. Young
----------------- -------------------------------------------------
Rodney A. Young, Chief Executive Officer &
President
Date November 14, 2001 /s/ Douglas J. Nesbit
----------------- -------------------------------------------------
Douglas J. Nesbit, Chief Financial Officer &
Secretary
(Principal Financial Officer and Chief
Accounting Officer)
II-2