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, 2000.
[ ] 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
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, 2000 was 3,904,465 shares.
<PAGE>
LECTEC CORPORATION
FORM 10-Q FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2000
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements and Notes to Consolidated
Financial Statements. . . . . . . . . . . . . . . . . . . . . . . I-1
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations . . . . . . . . . . . . . . . . . . . . I-7
Item 3. Quantitative and Qualitative Disclosure About Market Risk . . . . I-9
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
Exhibit Index . . . . . . . . . . . . . . . . . . . . . . . . . . II-3
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS AND NOTES TO FINANCIAL STATEMENTS
LECTEC CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, June 30,
2000 2000
------------ ------------
(Unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 70,395 $ 100,171
Receivables
Trade, net of allowances of $136,991 and $127,125 at
September 30, 2000 and June 30, 2000 2,221,181 2,642,880
Other 14,001 2,830
------------ ------------
2,235,182 2,645,710
Inventories
Raw materials 1,816,920 1,649,544
Work-in-process 22,980 23,201
Finished goods 564,777 574,941
------------ ------------
2,404,677 2,247,686
Prepaid expenses and other 276,600 220,514
Investments 22,029 22,029
------------ ------------
Total current assets 5,008,883 5,236,110
PROPERTY, PLANT AND EQUIPMENT - AT COST
Land 247,731 247,731
Building and improvements 1,882,506 1,879,006
Equipment 5,212,236 5,080,180
Furniture and fixtures 414,857 414,857
------------ ------------
7,757,330 7,621,774
Less accumulated depreciation 4,730,019 4,582,686
------------ ------------
3,027,311 3,039,088
OTHER ASSETS
Patents and trademarks, less accumulated amortization of $1,310,868
and $1,293,871 at September 30, 2000 and June 30, 2000 197,803 199,351
------------ ------------
$ 8,233,997 $ 8,474,549
============ ============
</TABLE>
See accompanying notes to the consolidated financial statements.
I - 1
<PAGE>
LECTEC CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS - CONTINUED
<TABLE>
<CAPTION>
September 30, June 30,
2000 2000
------------ ------------
(Unaudited)
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Note payable to bank $ 708,697 $ 837,542
Current maturities of long-term obligations 23,330 22,562
Accounts payable 2,452,564 1,910,551
Accrued expenses
Payroll related 433,644 371,405
Retail support programs 309,001 421,489
Other 9,790 --
Customer deposits 150,000 160,000
------------ ------------
Total current liabilities 4,087,026 3,723,549
LONG-TERM OBLIGATIONS, LESS CURRENT MATURITIES 25,055 31,184
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY
Common stock, $.01 par value: 15,000,000 shares authorized;
3,904,465 shares and 3,904,465 shares issued
and outstanding at September 30, 2000 and June 30, 2000 39,045 39,045
Additional paid-in capital 11,316,260 11,316,260
Accumulated other comprehensive loss 4,845 4,845
Deficit in retained earnings (7,238,234) (6,640,334)
------------ ------------
4,121,916 4,719,816
------------ ------------
$ 8,233,997 $ 8,474,549
============ ============
</TABLE>
See accompanying notes to the consolidated financial statements.
I - 2
<PAGE>
LECTEC CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three months ended
September 30,
-----------------------------
2000 1999
------------ ------------
<S> <C> <C>
Net sales $ 4,188,894 $ 3,008,752
Cost of goods sold 2,554,863 2,069,471
------------ ------------
Gross profit 1,634,031 939,281
Operating expenses
Sales and marketing 1,202,339 735,045
General and administrative 778,698 559,090
Research and development 215,866 269,762
------------ ------------
2,196,903 1,563,897
------------ ------------
Loss from operations (562,872) (624,616)
Other income (expenses)
Interest expense (32,791) (1,084)
Other, net (2,238) 22,418
------------ ------------
Loss before income taxes (597,901) (603,282)
Income tax expense -- --
------------ ------------
Net loss $ (597,901) $ (603,282)
============ ============
Net loss per share - basic and diluted $ (0.15) $ (0.16)
============ ============
Weighted average shares outstanding - basic and diluted 3,904,465 3,876,476
============ ============
</TABLE>
See accompanying notes to the consolidated financial statements.
I - 3
<PAGE>
LECTEC CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended September 30,
--------------------------------
2000 1999
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (597,901) $ (603,282)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization 164,330 234,580
Changes in operating assets and liabilities:
Trade and other receivables 410,529 157,330
Inventories (156,991) (151,808)
Prepaid expenses and other (56,086) (66,897)
Accounts payable 542,013 73,601
Accrued expenses and other (50,459) 4,253
------------ ------------
Net cash provided by (used in) operating activities 255,435 (352,223)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, plant and equipment (135,556) (122,380)
Investment in patents and trademarks (15,449) (4,855)
------------ ------------
Net cash used in investing activities (151,005) (127,235)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net repayments of line of credit (128,845) --
Repayment of long-term obligations (5,361) --
------------ ------------
Net cash used in financing activities (134,206) --
------------ ------------
Net decrease in cash and cash equivalents (29,776) (479,458)
Cash and cash equivalents at beginning of period 100,171 1,022,025
------------ ------------
Cash and cash equivalents at end of period $ 70,395 $ 542,567
============ ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest expense $ 31,916 $ 1,114
Income taxes $ 2,000 $ --
</TABLE>
See accompanying notes to the consolidated financial statements.
I - 4
<PAGE>
LECTEC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2000 AND 1999
(UNAUDITED)
(1) GENERAL
The accompanying consolidated financial statements include the
accounts of LecTec Corporation (the "Company") and LecTec International
Corporation, a wholly-owned subsidiary which was dissolved and merged into
LecTec Corporation on December 31, 1999. All significant intercompany balances
and transactions have been eliminated in consolidation. The Company's financial
statements for the three months ended September 30, 2000 should be read in
conjunction with its Annual Report on Form 10-K and its Annual Report to
Shareholders for the fiscal year ended June 30, 2000. The interim 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
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
995,780 and 1,142,883 shares of common stock with a weighted average exercise
price of $5.75 and $6.48 were outstanding during the three months ended
September 30, 2000 and 1999, but were excluded because they were antidilutive.
(3) COMPREHENSIVE LOSS
For the quarter ended September 30, 2000 there were no items which
the Company is required to recognize as components of comprehensive income
(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. Net sales by major product line were as
follows:
Three months ended September 30,
2000 1999
---------- ----------
Therapeutic consumer products $2,484,483 $ 863,179
Conductive products 1,550,645 1,576,783
Medical tape products 153,766 568,790
---------- ----------
$4,188,894 $3,008,752
========== ==========
I - 5
<PAGE>
(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 $2,800,000. The credit
agreement expires in November 2001 and includes interest computed at the prime
rate plus three percentage points. The line of credit is secured by the
Company's receivables, inventory and equipment. Borrowings outstanding on the
line of credit as of September 30, 2000, were $708,697. The credit agreement
contains certain restrictive covenants which require the Company to maintain,
among other things, specified levels of net worth and not to exceed specified
cumulative losses. The Company was in compliance with all covenants as of
September 30, 2000.
(6) STOCK REPURCHASE PROGRAM
In April 1998, the Company's Board of Directors authorized a stock
repurchase program pursuant to which up to 500,000 shares, or approximately
12.9% of the Company's outstanding common stock, may be repurchased. The shares
may be purchased from time to time through open market transactions, block
purchases, tender offers, or in privately negotiated transactions. The total
consideration for all shares repurchased under this program cannot exceed
$2,000,000. During the quarters ended September 30, 2000 and September 30, 1999
no shares were repurchased.
(7) INCOME TAXES
The provision for income tax expense for the three months ended
September 30, 2000, has been offset principally by a valuation allowance for
deferred taxes.
I - 6
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
QUARTERS ENDED SEPTEMBER 30, 2000 AND 1999
RESULTS OF OPERATIONS
Net sales for the first quarter of fiscal 2001 were $4,188,894 compared to
net sales of $3,008,752 for the first quarter of fiscal 2000, an increase of
39.2%. The increase was primarily the result of increased therapeutic consumer
product sales which more than offset decreased medical tape sales. Therapeutic
consumer product sales increased by 187.8% from $863,179 to $2,484,483 while
conductive product sales decreased by 1.7% and medical tape product sales
decreased by 73.0%. The therapeutic consumer product sales increase was
primarily the result of sales of the new acne product to Johnson & Johnson
Consumer Products Worldwide as well as initial sales of the new vapor product to
Novartis Consumer Health, Inc. The decrease in medical tape product sales was
primarily due to a plan adopted by the Company at the end of fiscal 2000 to exit
the medical tape business. The Company expects minimal tape sales in the
remainder of fiscal 2001 as remaining inventories are liquidated.
Gross profit for the first quarter of fiscal 2001 was $1,634,031
compared to $939,281 for the first quarter of fiscal 2000, an increase of 74.0%.
Gross profit as a percent of net sales for the first quarter of fiscal 2001 was
39.0% compared to 31.2% for the first quarter of fiscal 2000. The increase in
gross profit for the quarter resulted primarily from increased sales volume, the
favorable impact of a change in the sales mix toward higher-margin therapeutic
consumer products, and the decrease in tape sales related to the Company's plan
to exit the medical tape business. These items more than offset increased labor
costs in the current quarter caused primarily by increased staffing levels,
increased contract and temporary labor, and increased overtime related to the
production of therapeutic patch products.
Sales and marketing expenses were $1,202,339 and $735,045 during the
first quarters of fiscal 2001 and 2000, and as a percentage of net sales, were
28.7% and 24.4%. The increase in sales and marketing expenses for the quarter
was primarily due to increased media advertising expenses related to a TV ad
campaign for a TheraPatch product. The Company anticipates that sales and
marketing expenses as a percent of sales for the remainder of fiscal 2001 will
be comparable to the first quarter of fiscal 2001 due to marketing programs
associated with the TheraPatch product line.
General and administrative expenses were $778,698 and $559,090 during
the first quarters of fiscal 2001 and 2000, and as a percentage of net sales,
were 18.6% and 18.6%. The Company anticipates that general and administrative
expenses as a percent of sales for the remainder of fiscal 2001 will be
comparable to the first quarter of fiscal 2001.
Research and development expenses for the first quarters of fiscal 2001
and 2000 were $215,866 and $269,762, and as a percentage of net sales, were 5.2%
and 9.0%. The Company anticipates that research and development expenses as a
percent of sales for the remainder of fiscal 2001 will increase due to increased
costs associated with testing of products under development.
Interest expense for in the first quarters of fiscal 2001 and 2000 were
$32,791 and $1,084. The increase resulted primarily from interest expense
associated with increased borrowings under the line of credit. Other income
(expense), decreased in the first quarter of fiscal 2001 to net expense of
$2,238 from other income of $22,416 in the first quarter of fiscal 2000. The
decrease was primarily the result of decreased interest income due to lower cash
and cash equivalent balances.
The Company recorded a loss before income taxes of $597,901 in the
first quarter of fiscal 2001 compared to a loss before income taxes of $603,282
for the first quarter of fiscal 2000. The slight decrease in loss for the
current year first quarter was primarily the result of increased gross profit
that resulted from increased sales volume, a shift in the sales mix toward
higher-margin therapeutic consumer
I - 7
<PAGE>
products and the exit from the medical tape business. The increased gross profit
more than offset an increase in operating expenses related to advertising
expenses related to retail sales of the Company's TheraPatch products.
The Company recorded no income tax expense or benefit in the first
quarters of fiscal 2001 and 2000.
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 $29,776 to $70,395 at September
30, 2000. Accounts receivable decreased by $410,528 to $2,235,182 primarily due
to reduced sales for September 2000 as compared to June 2000. Inventories
increased by $156,991 to $2,404,677 primarily due to increased raw materials
inventory. Accounts payable of $2,452,564 at September 30, 2000 increased by
$542,013 during the first three months primarily due to increased payables
related to increased manufacturing production. Capital spending for
manufacturing equipment and plant improvements totaled $135,556 during the first
three months of fiscal 2001. The Company entered into a purchase commitment for
production machinery in the amount of $154,482 during the first quarter of
fiscal 2001. This purchase commitment will be fulfilled by the end of fiscal
year 2001.
The Company had working capital of $921,857 and a current ratio of 1.2
at September 30, 2000 compared to working capital of $1,512,561 and a current
ratio of 1.4 at June 30, 2000.
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. Borrowings outstanding on the line of credit were
$708,697 as of September 30, 2000. The Company was in compliance with all
covenants as of September 30, 2000.
Management believes that existing cash and cash equivalents,
internally-generated cash flow, the existing secured line of credit including
the line of credit increase, and expected additional fixed asset-based financing
will be sufficient to support anticipated operating and capital spending
requirements during the remainder of fiscal 2001. Management is also evaluating
additional sources of capital that may be appropriate for funding longer-term
growth and expansion of the business. 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.
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; and ability to satisfy funding requirements for
operating needs, expansion or capital expenditures.
I - 8
<PAGE>
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. These
Canadian sales have not been material. Additionally, the Company invests in
money market funds and short-term commercial paper, which experience minimal
volatility. Thus, the exposure to market risk is not material.
I - 9
<PAGE>
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
<TABLE>
<CAPTION>
Item No. Item Method of Filing
-------- ---- ----------------
<S> <C> <C>
10.01 Second Amendment to Credit and Security Agreement and
Waiver of Defaults By and Between LecTec Corporation and
Wells Fargo Business Credit, Inc. dated September 26, 2000. Filed herewith.
10.02 Credit and Security Agreement By and Between LecTec
Corporation and Wells Fargo Bank Minnesota, National
Association dated September 28, 2000. Filed herewith.
27 Financial data schedule. Filed herewith.
(b) REPORTS ON FORM 8-K
None.
</TABLE>
II - 1
<PAGE>
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 13, 2000 /s/ Rodney A. Young
----------------- ------------------------------------------
Rodney A. Young, Chief Executive
Officer & President
Date November 13, 2000 /s/ Douglas J. Nesbit
----------------- ------------------------------------------
Douglas J. Nesbit, Chief Financial Officer
II - 2
<PAGE>
EXHIBIT INDEX
Exhibits
--------
10.01 Second Amendment to Credit and Security Agreement and Waiver of
Defaults By and Between LecTec Corporation and Wells Fargo Business
Credit, Inc. dated September 26, 2000.
10.02 Credit and Security Agreement By and Between LecTec Corporation and
Wells Fargo Bank Minnesota, National Association dated September 28,
2000.
27 Financial Data Schedule
II - 3
