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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 MARCH 31, 2003.
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
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes No X
The number of shares outstanding of the registrant's common stock as of May 13,
2003 was 3,966,395 shares.
LECTEC CORPORATION
FORM 10-Q FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2003
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-9
Item 3. Quantitative and Qualitative Disclosures About Market Risk I-11
Item 4. Controls and Procedures 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
Certification - Sarbanes-Oxley Section 302 Certification of Principal Executive Officer II-3
Certification - Sarbanes-Oxley Section 302 Certification of Principal Financial Officer II-4
PART I - FINANCIAL INFORMATION
ITEM 1- CONDENSED FINANCIAL STATEMENTS AND NOTES TO CONDENSED
FINANCIAL STATEMENTS
LECTEC CORPORATION
CONDENSED BALANCE SHEETS
(UNAUDITED)
March 31, December 31,
2003 2002
---------- ----------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 397,191 $ 671,588
Trade receivables and other, net of allowances of $86,839
and $80,655 at March 31, 2003 and December 31, 2002 187,126 318,896
Inventories
Raw materials 619,663 716,957
Work-in-process 24,550 24,294
Finished goods 525,665 269,538
---------- ----------
1,169,878 1,010,789
Prepaid expenses and other 332,759 112,831
---------- ----------
Total current assets 2,086,954 2,114,104
PROPERTY, PLANT AND EQUIPMENT - AT COST, NET 680,059 1,750,241
OTHER ASSETS
Patents and trademarks, less accumulated amortization of $1,344,660
and $1,319,840 at March 31, 2003 and December 31, 2002 291,720 285,862
---------- ----------
$3,058,733 $4,150,207
========== ==========
See accompanying notes to the condensed financial statements
I-1
LECTEC CORPORATION
CONDENSED BALANCE SHEETS - Continued
(Unaudited)
March 31, December 31,
2003 2002
------------ ------------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Current maturities of long-term obligations 305,570 1,154,404
Accounts payable 760,287 587,650
Accrued expenses 415,787 468,133
Reserve for sales returns and credits 190,079 312,378
Customer deposits 612,970 650,073
------------ ------------
Total current liabilities 2,284,693 3,172,638
LONG-TERM OBLIGATIONS, LESS CURRENT MATURITIES 8,727 10,770
COMMITMENTS AND CONTINGENCIES -- --
SHAREHOLDERS' EQUITY
Common stock, $.01 par value: 15,000,000 shares authorized;
3,966,395 shares issued and outstanding at
March 31, 2003 and December 31, 2002 39,664 39,664
Additional paid-in capital 11,547,678 11,389,678
Accumulated deficit (10,822,029) (10,462,543)
------------ ------------
765,313 966,799
------------ ------------
$ 3,058,733 $ 4,150,207
============ ============
See accompanying notes to the condensed financial statements
I-2
LECTEC CORPORATION
CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
Three months ended
March 31,
------------------------------
2003 2002
----------- -----------
Net sales $ 1,645,690 $ 1,514,495
Cost of goods sold 1,154,391 1,049,637
----------- -----------
Gross profit 491,299 464,858
Operating expenses
Sales and marketing 198,077 468,577
General and administrative 482,365 595,411
Research and development 101,532 169,138
----------- -----------
781,974 1,233,126
----------- -----------
Loss from operations (290,675) (768,268)
Other income (expenses)
Interest expense (18,932) (38,766)
Loss on sale of building (52,375) --
Other, net 2,496 53
----------- -----------
Loss before income taxes (359,486) (806,981)
Income taxes -- --
----------- -----------
Net loss $ (359,486) $ (806,981)
=========== ===========
Net loss per share-basic and diluted $ (0.09) $ (0.20)
=========== ===========
Weighted average shares outstanding - basic and diluted 3,966,395 3,950,343
=========== ===========
See accompanying notes to the condensed financial statements.
I-3
LECTEC CORPORATION
STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended March 31,
------------------------------
2003 2002
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (359,486) $ (806,981)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Loss on sale of building 52,375 --
Depreciation and amortization 138,285 157,294
Common stock issued for consulting services -- 19,009
Changes in operating assets and liabilities:
Trade and other receivables 131,770 (385,751)
Inventories (159,089) (86,864)
Prepaid expenses and other 8,584 19,130
Accounts payable 172,637 112,690
Accrued expenses and other (179,888) (1,867)
Customer deposits (37,103) --
----------- -----------
Net cash used in operating activities (231,915) (973,340)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, plant and equipment (5,927) (10,177)
Investment in patents and trademarks (30,678) (23,147)
----------- -----------
Net cash used in investing activities (36,605) (33,324)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sale of building 845,000 --
Payoff of buliding mortgage loan (820,000) --
Repayment of long-term obligations (30,877) (29,471)
----------- -----------
Net cash used in financing activities (5,877) (29,471)
----------- -----------
Net decrease in cash and cash equivalents (274,397) (1,036,135)
Cash and cash equivalents at beginning of period 671,588 1,425,205
----------- -----------
Cash and cash equivalents at end of period $ 397,191 $ 389,070
=========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest expense $ 17,168 $ 38,815
Income taxes $ 1,500 $ --
See accompanying notes to the condensed financial statements.
I-4
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 month periods ended
March 31, 2003 and 2002. 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-K for the year ended December 31, 2002. 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) LIQUIDITY AND GOING CONCERN
The accompanying financial statements have been prepared in conformity
with generally accepted accounting principles, which contemplate continuation of
the Company as a going concern. However, the Company has experienced recurring
negative cash flows from operations and net losses resulting in an accumulated
deficit of $10,822,029 as of March 31, 2003 and, as of that date, the Company's
current liabilities exceeded its current assets by $197,739.
In view of the matters described in the preceding paragraph,
recoverability of a major portion of the recorded asset amounts shown in the
accompanying balance sheet is dependent upon profitable operations of the
Company and access to working capital financing. The financial statements do not
include any adjustments relating to the recoverability and classification of
recorded asset amounts or amounts and classification of liabilities that might
be necessary should the Company be unable to continue in existence. Management
expects to continue to operate at a net loss and experience negative cash flow
from operating activities through the foreseeable future.
At March 31, 2003, the Company's cash resources and available
borrowings are insufficient to fund operations for the next 12 months without
additional borrowings or equity capital. These factors raise substantial doubt
about its ability to continue as a going concern.
Management currently is exploring available options for additional
capital including borrowings secured by otherwise unencumbered assets or private
issuances of common stock. However, there is no assurance that such funds will
be available on terms acceptable to the Company. If the Company is not
successful in obtaining additional funding it may not be able to continue as a
going concern.
(3) 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 1,189,415 and
1,258,557 shares of common stock with a weighted average exercise price of $2.00
and $4.62 were outstanding during the three months ended March 31, 2003 and
2002, but were excluded from the calculation because they were antidilutive.
I-5
(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's initial sales of skin care
products occurred during the three months ended March 31, 2002. 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
March 31,
2003 2002
---------- ----------
Therapeutic consumer products $1,641,614 $ 897,207
Skin care products 4,076 292,072
Conductive products -- 325,216
---------- ----------
$1,645,690 $1,514,495
========== ==========
(5) NOTE PAYABLE TO BANK
The Company maintained a secured line of credit with maximum borrowings
of $2,000,000 which was terminated in August 2002 due to the Company's default
of covenants relating to the minimum net worth and the maximum loss before
income taxes. Interest was computed at the prime rate plus 3% and included an
annual interest charge for each year of the agreement. There were no borrowings
outstanding on the line of credit at March 31, 2002.
(6) LONG-TERM OBLIGATIONS AND SALE OF CORPORATE FACILITY
The Company had a mortgage note payable to a bank. The principal
balance of $820,000 was due in December 2002 and was extended until April 2003.
Monthly interest payments were computed at the prime rate plus 5.0% (effective
rate of 9.25% at December 31, 2002). The mortgage was collateralized by the
Company's real property. On February 25, 2003, the Company sold its corporate
facility in Minnetonka, Minnesota for an aggregate purchase price of $910,270,
repaid the mortgage note payable, and recorded a loss on sale of $52,375 during
the quarter ended March 31, 2003. In connection with the sale, the Company
entered into a lease of its corporate facility which grants the Company free
rent for the 12 months following the sale/leaseback transaction and thereafter
extends the lease at costs based on current market conditions. Also in
connection with the sale, the purchaser received a warrant to purchase 200,000
shares of common stock at $0.90 per share.
In May 2002, the Company entered into a $220,000 promissory note with a
major customer related to the costs incurred by the customer associated with
resolving a packaging issue that previously had been recorded as a sales credit
by the Company. The principal balance of the note is due in December 2003.
Monthly payments of interest are computed at the prime rate plus 2.0% (effective
rate of 6.25% at March 31, 2003). The promissory note is collateralized by
substantially all of the Company's assets.
I-6
(7) CUSTOMER DEPOSITS
In May 2002, the Company renegotiated its Supply Agreement with a major
customer. Pursuant to the revised agreement, the Company is receiving advance
payments from the customer for future product orders. The Company is also
receiving advance product payments from other customers. At March 31, 2003, the
Company had recorded customer deposits of $612,970 from these customers.
(8) SALE OF CONDUCTIVE BUSINESS ASSETS
In April 2001, the Company sold its diagnostic electrode and
electrically conductive adhesive hydrogel business assets that were used to
produce the Company's conductive products. The conductive products included
diagnostic electrodes and electrically conductive adhesive hydrogels. Under a
manufacturing and supply agreement between the Company and the buyer, the
Company continued to manufacture, and supply to the buyer, certain conductive
products through January 2002. The Company supplied the products at its cost of
production through October 2001, and at its cost of production plus ten percent
from November 2001 through January 2002. The Company continued to manufacture
and supply the buyer electrically conductive adhesive hydrogels, at margins of
approximately 30%, through September 2002. The Company anticipates no additional
sales to the buyer in 2003.
(9) STOCK BASED COMPENSATION
The Company utilizes 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 is reflected in net loss, for the three months ended
March 31, 2003 and 2002. The following table illustrates the effect on net loss
if the Company had applied the fair value recognition provisions of FASB
Statement No. 123, Accounting for Stock-based Compensation:
Three months ended
March 31,
2003 2002
---- ----
Net loss, as reported $(359,486) $(806,981)
Less: compensation expense
determined under the fair value
method (49,954) (64,772)
--------- ---------
Pro-forma net loss $(409,440) $(871,753)
========= =========
Net loss per share:
Basic, as reported $ (0.09) $ (0.20)
Basic, pro-forma $ (0.10) $ (0.22)
Diluted, as reported $ (0.09) $ (0.20)
Diluted, pro-forma $ (0.10) $ (0.22)
The pro-forma information above should be read in conjunction with the
related historical information.
The weighted average fair value of options granted during the three
months ended March 31, 2003 and 2002 was $0.56 and $0.63. The fair value of each
option grant is estimated on the date of grant using the Black-Scholes option
valuation model with the following weighted-average assumptions used for all
grants during the three months ended March 31, 2003 and 2002; zero dividend
yield, expected volatility of 144% and 121%, risk-free interest rates of 3.24%
and 3.13% and expected lives of 4.0 years.
I-7
Management believes the Black-Scholes option valuation model currently
provides the best estimate of fair value. However, the Black-Scholes option
valuation model was developed for use in estimating the fair value of traded
options which have no vesting restrictions and are fully transferable. In
addition, option valuation models require the input of several subjective
assumptions. The Company's employee and director stock options have
characteristics different from those of traded options, and changes in the
subjective input assumptions can materially affect the fair value estimate.
(10) INCOME TAXES
The provision for income tax benefits for the three months ended March
31, 2003 and 2002 has been offset by a valuation allowance for deferred taxes.
(11) RECENT ACCOUNTING PRONOUNCEMENTS
In January 2003, the Financial Accounting Standards Board issued
Financial Interpretations No. 46 (FIN 46), "Consolidation of Variable Interest
Entities." FIN 46 is an interpretation of Accounting Research Bulletin No. 51,
"Consolidated Financial Statements," and addresses consolidation by business
enterprises of variable interest entities. FIN 46 applies immediately to
variable interest entities created or obtained after January 31, 2003 and
applies in the first fiscal year or interim period beginning after June 15,
2003, to variable interest entities in which an enterprise holds a variable
interest that it acquired before February 1, 2003. This pronouncement is not
anticipated to have an impact on the Company's financial position or results of
operations.
I-8
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2003 AND 2002
RESULTS OF OPERATIONS
Net sales for the first quarter of 2003 were $1,645,690 compared to net
sales of $1,514,495 for the first quarter of 2002, an increase of 8.7%. The
increase was the result of higher therapeutic consumer contract manufacturing
sales as the Company rebounded from soft contract manufacturing sales in the
prior year as well as shifted its strategic focus from retail consumer products
to contract manufacturing. Contract manufacturing net sales increased to
$1,333,538 for the first quarter of 2003 from $351,607 for the same period in
the prior year. Therapeutic retail consumer product sales decreased 63% in the
first quarter of 2003 to $312,152 from $837,672 for the same period in the prior
year. The retail consumer product sales decrease was primarily the result of a
planned reduction in the number of products offered and the discontinued active
promotion of the NeoSkin(R) line of skin care products due to the inability to
fund national advertising programs. The Neoskin product line was launched in the
first quarter of 2002 and includes pre-formed face masks and under eye gel
patches. Net sales of skin care products totaled $4,076 in the first quarter of
2003 compared to initial sales of $292,072 for the first quarter of 2002. Also
offsetting the contract manufacturing net sales increase was the absence of
conductive product sales in the first quarter of 2003 in connection with the
2001 sale of the assets of the conductive products division. The Company
supplied conductive products to the purchaser under the terms of the asset sale
agreement through September 2002. The Company expects no future conductive
product sales.
Gross profit for the first quarter of 2003 was $491,299, compared to
$464,858 for the first quarter of 2002, an increase of 5.7%. Gross profit as a
percent of net sales for the first quarter of 2003 was 29.9% compared to 30.7%
for the first quarter of the prior year. The increase in gross profit dollars
for the first quarter of 2003 resulted primarily from the increased sales and
lower manufacturing costs. The decrease in gross profit as a percentage of net
sales for the first quarter of 2003 resulted primarily from the shift in sales
mix to lower margin consumer contract manufacturing products.
Sales and marketing expenses were $198,077 and $468,577 during the
first quarters of 2003 and 2002, and as a percentage of net sales, were 12.0%
and 30.9%, respectively. The decrease in sales and marketing expenses was
primarily due to decreases in product promotional and compensation related
expenses. These decreases resulted from aggressive cost control/reduction
programs implemented by management.
General and administrative expenses were $482,365 and $595,411 during
the first quarters of 2003 and 2002, and as a percentage of net sales, were
29.3% and 39.3%, respectively. The decrease in general and administrative
expenses was primarily due to decreases in headcount and compensation related
expenses.
Research and development expenses for the first quarters of 2003 and
2002 were $101,532 and $169,138, and as a percentage of net sales, were 6.2% and
11.2%, respectively. The decrease in research and development expenses was
primarily due to decreases in headcount and compensation related expenses.
Interest expense declined in the first quarter of 2003 to $18,932 from
$38,766 in the first quarter of 2002. The decline resulted primarily from the
prior year payment of required minimum interest and penalties associated with a
line of credit and the absence of March 2003 mortgage interest in connection
with the sale of the Minnetonka, Minnesota corporate facility in February 2003.
Other income for the first quarter of 2003 was $2,496 compared to other income
of $53 for the first quarter of 2002. The increase was primarily the result of
higher foreign currency transaction losses in the prior year.
I-9
The Company recorded a loss before income taxes of $359,486 for the
first quarter of 2003 compared to a loss before income taxes of $806,981 for the
first quarter of 2002. The decrease in loss before income taxes was primarily
the result of a decrease in operating expenses resulting from aggressive cost
control and cost reduction programs implemented by management.
The provision for income tax benefits for the first quarters of fiscal
2003 and 2002 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 $274,397 to $397,191 during the
first quarter of 2003. The decrease in cash and cash equivalents was primarily
due to cash used in operating activities. Trade receivables decreased by
$131,770 during the first quarter of 2003 to $187,126 at March 31, 2003,
primarily due to retail sales deductions and returns processed during the
quarter and to product prepayment programs arranged with the Company's larger
customers. Inventories increased during the first quarter of 2003 by $159,089,
or 15.7%, to $1,169,878 at March 31, 2003, due to inventory builds for consumer
contract manufacturing customers that had not yet shipped at quarter-end.
Accounts payable of $760,287 at March 31, 2003 increased by $172,637 during the
first quarter of 2003 due to an increase in the number of days between vendor
invoice receipt and payment and to higher accounts receivable credit balances
for retail consumer patch accounts. Capital spending for manufacturing equipment
and plant improvements totaled $5,927 during the first quarter of 2003. There
were no material commitments for capital expenditures at March 31, 2003.
The Company had a deficit in working capital of $197,739 and a current
ratio of 0.91 at March 31, 2003 compared to a deficit in working capital of
$1,058,534 and a current ratio of 0.67 at December 31, 2002. The improvement in
current ratio during the first quarter of 2003 is attributable to the payoff of
the $820,000 mortgage payable related to the sale and leaseback of the Company's
Minnetonka, Minnesota corporate facility during the first quarter, offset in
part by the decline in cash and cash equivalent balances. See Note 6 of Notes to
Condensed Financial Statements on page I-6 of this report for additional
information on the corporate facility sale.
In August 2002, the Company and its bank mutually agreed to terminate a
two-year, $2,000,000 asset-based line of credit financing arrangement due to the
Company's default of covenants relating to the minimum net worth and the maximum
loss before income taxes.
Management expects the Company to continue to operate at a net loss and
experience negative cash flow from operating activities for the foreseeable
future. Management is exploring other options for additional capital to fund the
Company's operations. In 2002, the Company renegotiated its Supply Agreement
with a major customer and is receiving advance payments from the customer for
future product orders. The Company is also receiving advance product payments
from other customers. 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, the continuation of advance product payments
and the Company's ability to control operating expenses. Funding of the
Company's operations for the balance of 2003 and in future years will require
additional investments in the Company in the form of equity or debt either by
outside investors or as part of a business combination transaction. The Company
is currently pursuing various potential sources of capital and business
combination transactions. There can be no assurance that the Company will
achieve desired levels of sales or profitability, or that a future capital
infusion or business combination transaction will be available. If such desired
levels of sales and profitability are not reached, and infusions of capital or a
business combination transaction are not available, the Company may be forced to
cease operations in the near future.
I-10
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 that 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
December 31, 2002.
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 that experience minimal volatility. Thus, the exposure to market risk is
not material.
ITEM 4 - CONTROLS AND PROCEDURES
Under the supervision and with the participation of our management,
including our principal executive and financial officer, we have evaluated the
effectiveness of the design and operation of our disclosure controls and
procedures (as defined in Rule 13a-14(c) and 15d-14(c) under the Securities
Exchange Act of 1934) as of a date within 90 days prior to the filing date of
this report. Based upon this evaluation, the principal executive and financial
officer has concluded that, as of such date, our disclosure controls and
procedures were effective in making him aware on a timely basis of the material
information relating to the Company required to be included in our periodic
filings with the Securities and Exchange Commission.
There were no significant changes made in our internal controls during
the period covered by this report or, to our knowledge, in other factors that
could significantly affect these controls subsequent to the date of their
evaluation.
I-11
II-2
PART II - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
None.
ITEM 2(C) - CHANGES IN SECURITIES AND USE OF PROCEEDS
On February 25, 2003, in connection with the Company's sale of its
Minnetonka, Minnesota corporate facility and related real estate leaseback, the
Company granted warrants to Red Circle Drive LLC to purchase a total of 200,000
shares of common stock at an exercise price of $0.90 per share. The warrants
expire on February 25, 2008. The issuance of the warrants was exempt from
registration under the Securities Act of 1933 in reliance on Section 4(2)
thereof.
ITEM 3 - DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5 - OTHER INFORMATION
See information on the Company's sale of its Minnetonka, Minnesota
corporate facility in Note 6 of Notes to Condensed Financial Statements on page
I-6 of this report.
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS
Item No. Item
-------- ----
99.1 Cautionary Statements, incorporated herein by
reference to Exhibit 99.1 to the Company's Form 10-K
for the fiscal year ended December 31, 2002.
99.2 Chief Executive Officer Certification Pursuant t8
U.S.C.Section1350, as Adopted Pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.
(B) REPORTS ON FORM 8-K
None.
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 May 14, 2003 By /s/ Rodney A. Young
------------------------------------
Rodney A. Young
Chief Executive Officer & President
(principal financial officer)
II-2
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER
I, Rodney A. Young, certify that:
1. I have reviewed this quarterly report on Form 10-Q of LecTec Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which the quarterly report
is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
(c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
(a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
(b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: May 14, 2003
/s/ Rodney A. Young
------------------------------
Rodney A. Young
Chief Executive Officer & President
II-3
CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER
I, Rodney A. Young, certify that:
1. I have reviewed this quarterly report on Form 10-Q of LecTec Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which the quarterly report
is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
(c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
(a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
(b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: May 14, 2003
/s/ Rodney A. Young
-----------------------------------
Rodney A. Young
Chief Executive Officer & President
II-4