UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended April 30, 2004
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission file number 1-8696
COMPETITIVE TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
Delaware 36-2664428
- ------------------------------------ ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1960 Bronson Road
Fairfield, Connecticut 06824
- ------------------------------------ ------------------------------------
(Address of principal executive (Zip Code)
offices)
(203) 255-6044
- --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
N/A
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if
changed since last report)
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]
Number of shares of common stock outstanding as of June 9, 2004: 6,314,883
COMPETITIVE TECHNOLOGIES, INC. AND SUBSIDIARIES
-----------------------------------------------
INDEX
-----
PART I. FINANCIAL INFORMATION Page No.
- ------------------------------ --------
Item 1. Consolidated Financial Statements (Unaudited)
Consolidated Balance Sheets at
April 30, 2004 and July 31, 2003 3
Consolidated Statements of Operations for the
three months ended April 30, 2004 and 2003 4
Consolidated Statements of Operations for the
nine months ended April 30, 2004 and 2003 5
Consolidated Statement of Changes in
Shareholders' Interest for the nine
months ended April 30, 2004 6
Consolidated Statements of Cash Flows for the
nine months ended April 30, 2004 and 2003 7
Notes to Consolidated Financial Statements 8-14
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 14-22
Item 3. Quantitative and Qualitative Disclosures
About Market Risk 22
Item 4. Controls and Procedures 23
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 23
Item 6. Exhibits and Reports on Form 8-K 23-24
Signatures 24
Page 2
PART I. FINANCIAL INFORMATION
-----------------------------
Item 1. Financial Statements
--------------------
COMPETITIVE TECHNOLOGIES, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
April 30, July 31,
2004 2003
(Unaudited) *
-------------------------- ------------------------
ASSETS
- ------
Current assets:
Cash and cash equivalents $ 4,383,664 $ 1,404,615
Short-term investments 100,205 99,680
Receivables 685,776 957,275
Prepaid expenses and other current assets 119,669 275,019
-------------------------- ------------------------
Total current assets 5,289,314 2,736,589
Property and equipment, net 16,711 29,834
Investments, at cost 40,993 43,356
Intangible assets acquired, net 60,826 142,722
Deferred financing costs 671,952 -
-------------------------- ------------------------
TOTAL ASSETS $ 6,079,796 $ 2,952,501
========================== ========================
LIABILITIES AND SHAREHOLDERS' INTEREST
- --------------------------------------
Current liabilities:
Accounts payable $ 136,748 $ 501,655
Accrued liabilities 1,062,812 1,281,419
-------------------------- ------------------------
Total current liabilities 1,199,560 1,783,074
-------------------------- ------------------------
Contingencies - -
Shareholders' interest:
5% preferred stock, $25 par value 60,675 60,675
Common stock, $.01 par value 62,968 62,013
Capital in excess of par value 27,380,392 26,747,229
Accumulated deficit (22,623,799) (25,700,490)
-------------------------- ------------------------
Total shareholders' interest 4,880,236 1,169,427
-------------------------- ------------------------
TOTAL LIABILITIES AND SHAREHOLDERS'
INTEREST $ 6,079,796 $ 2,952,501
========================== ========================
See accompanying notes
* Balances were derived from the July 31, 2003 audited balance sheet.
Page 3
PART I. FINANCIAL INFORMATION (Continued)
-----------------------------------------
COMPETITIVE TECHNOLOGIES, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
(Unaudited)
Three months ended
April 30,
2004 2003
------------- --------------
Revenues
Retained royalties $ 518,214 $ 659,455
Royalty settlements and awards 3,543,774 -
------------- --------------
4,061,988 659,455
------------- --------------
Personnel and other direct expenses
relating to revenues 1,082,987 707,358
General and administrative expenses 343,379 307,862
Patent enforcement expenses, net of
reimbursements 21,815 193,948
------------- --------------
1,448,181 1,209,168
------------- --------------
Operating income (loss) 2,613,807 (549,713)
Other income, net 92,612 -
Interest income, net 692 3,984
------------- --------------
Income (loss) before income taxes 2,707,111 (545,729)
Provision for income taxes 40,000 -
------------- --------------
Net income (loss) $ 2,667,111 $ (545,729)
============= ==============
Net income (loss) per common share:
Basic $ 0.43 $ (0.09)
============= ==============
Assuming dilution $ 0.42 $ (0.09)
============= ==============
Weighted average number of common
shares outstanding:
Basic 6,267,314 6,201,345
Assuming dilution 6,382,210 6,201,345
See accompanying notes
Page 4
PART I. FINANCIAL INFORMATION (Continued)
-----------------------------------------
COMPETITIVE TECHNOLOGIES, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
(Unaudited)
Nine months ended
April 30,
2004 2003
------------- -------------
Revenues
Retained royalties $ 1,603,168 $ 1,874,217
Royalty settlements and awards 4,693,774 -
------------- -------------
6,296,942 1,874,217
------------- -------------
Personnel and other direct expenses
relating to revenues 2,229,881 2,118,026
General and administrative expenses 1,140,706 1,247,643
Patent enforcement expenses, net of
reimbursements 68,826 347,453
Reversal of accounts payable exchanged
for contingent note payable - (1,583,445)
------------- -------------
3,439,413 2,129,677
------------- -------------
Operating income (loss) 2,857,529 (255,460)
Other income (expense), net 252,848 (311)
Interest income, net 6,314 22,926
Impairment loss on investment - (944,000)
------------- -------------
Income (loss) before income taxes 3,116,691 (1,176,845)
Provision for income taxes 40,000 -
------------- -------------
Net income (loss) $ 3,076,691 $(1,176,845)
============= =============
Net income (loss) per common share:
Basic $ 0.49 $ (0.19)
============= =============
Assuming dilution $ 0.48 $ (0.19)
============= =============
Weighted average number of common
shares outstanding:
Basic 6,225,124 6,176,359
Assuming dilution 6,404,183 6,176,359
See accompanying notes
Page 5
PART I. FINANCIAL INFORMATION (Continued)
-----------------------------------------
COMPETITIVE TECHNOLOGIES, INC. AND SUBSIDIARIES
Consolidated Statement of Changes in Shareholders' Interest
For the nine months ended April 30, 2004
(Unaudited)
Preferred Stock Common Stock
------------------------- -------------------------
Shares Shares Capital
issued and issued and in excess of Accumulated
outstanding Amount outstanding Amount par value Deficit
-------------- ---------- -------------- ---------- --------------- ---------------
Balance - July 31, 2003 2,427 $60,675 6,201,345 $62,013 $26,747,229 $(25,700,490)
Exercise of common stock options 12,850 129 26,829
Stock issued under 1996 Directors'
Stock Participation Plan 12,500 125 31,125
Stock issued under 401(k) Plan 17,002 170 99,802
Stock issued in equity financing 53,138 531 315,640
Warrants granted to advisor as fee
for equity financing 159,767
Net income 3,076,691
-------------- ---------- -------------- ---------- --------------- ---------------
Balance - April 30, 2004 2,427 $60,675 6,296,835 $62,968 $27,380,392 $(22,623,799)
============== ========== ============== ========== =============== ===============
See accompanying notes
Page 6
PART I. FINANCIAL INFORMATION (Continued)
-----------------------------------------
COMPETITIVE TECHNOLOGIES, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Unaudited)
Nine months ended
April 30,
2004 2003
-------------- -------------
Cash flows from operating activities:
Net income (loss) $ 3,076,691 $(1,176,845)
Noncash and other expenses (income)
included in net income (loss):
Depreciation and amortization 45,051 141,971
Stock compensation 82,870 81,099
Reversal of accounts payable exchanged
for contingent note payable - (1,583,445)
Impairment charges 51,978 944,000
Collection on Unilens receivable, net (252,847) -
Other (1) 311
(Increase) decrease in current assets:
Receivables 271,499 267,115
Prepaid expenses and other current
assets 155,350 (23,116)
Increase (decrease) in current liabilities:
Accounts payable and accrued liabilities (535,162) (222,747)
-------------- -------------
Net cash provided by (used in)
operating activities 2,895,429 (1,571,657)
-------------- -------------
Cash flows from investing activities:
Purchases of property and equipment (2,010) (16,467)
Purchase of intangible assets - (50,000)
Collection on Unilens receivable, net 252,847 -
Proceeds from short-term investments (525) 1,033,704
Proceeds from sales of investments 2,364 288,377
-------------- -------------
Net cash provided by investing activities 252,676 1,255,614
-------------- -------------
Cash flows from financing activities:
Proceeds from exercise of stock options 26,958 -
Deferred financing costs paid (196,014) -
-------------- -------------
Net cash used in financing activities (169,056) -
-------------- -------------
Net increase (decrease) in cash and cash
equivalents 2,979,049 (316,043)
Cash and cash equivalents, beginning
of period 1,404,615 750,421
-------------- -------------
Cash and cash equivalents, end of period $ 4,383,664 $ 434,378
============== =============
See accompanying notes
Page 7
PART I. FINANCIAL INFORMATION (Continued)
-----------------------------------------
COMPETITIVE TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
1. Basis of Presentation
---------------------
The interim consolidated financial information presented in the
accompanying consolidated financial statements and notes hereto is unaudited.
In our opinion, all adjustments that are necessary to present the
unaudited consolidated financial statements fairly in conformity with accounting
principles generally accepted in the United States of America, consisting only
of normal and recurring adjustments, have been made. The results for the three
and nine months ended April 30, 2004, are not necessarily indicative of the
results that can be expected for the full year.
You should read the interim unaudited consolidated financial statements
and notes thereto, as well as the accompanying Management's Discussion and
Analysis of Financial Condition and Results of Operations, in conjunction with
our Annual Report on Form 10-K for the year ended July 31, 2003.
We have taken and continue to take actions to improve our results.
These actions include aggressively pursuing new license agreements, structuring
certain payment obligations contingent upon revenues, and collecting certain
amounts previously written off. During the three months ended April 30, 2004, as
described in Note 2, we received cash and recorded revenue related to the final
resolution of certain litigation. In addition, as described in Note 3, we
entered into an agreement with Fusion Capital Fund II, LLC ("Fusion Capital"),
to sell to them up to $5 million of our common stock.
2. Final Resolution of Materna(TM) Litigation and Revenue Recognition
------------------------------------------------------------------
On April 19, 2004, the U.S. Supreme Court denied the defendant's
petition for certiorari in the Materna litigation, and the judgment in favor of
the plaintiffs became final and unappealable. On that day, we received cash of
approximately $3,858,000, which was our agreed upon portion of the court award.
In connection with our previous non-recourse sale and assignment of a
portion of this court award to one of our shareholders for cash, we paid the
shareholder $312,500 out of our proceeds, plus a nominal amount for interest. We
recorded the net remaining proceeds, approximately $3,544,000, as revenue in our
third quarter ended April 30, 2004, consistent with our policy for recognizing
royalty settlements and awards.
Page 8
3. Equity Financing
----------------
On February 25, 2004, we entered into an agreement with Fusion Capital
in which Fusion Capital agreed to purchase up to $5 million of our common stock
over a 20-month period (the "Stock Sale Agreement"). We have the right to
determine the timing and the amount of stock sold, if any, to Fusion Capital. We
also have the right, in our sole discretion, to extend the term of the Stock
Sale Agreement by six months. In addition, at our option and at any time until
20 days after completion of the Stock Sale Agreement, we may elect to enter into
a second agreement with Fusion Capital for the sale of an additional $5 million
of common stock on the same terms and conditions as the Stock Sale Agreement.
Under the terms of the Stock Sale Agreement, we issued 53,138 shares of
our common stock to Fusion Capital for its initial commitment (the "Initial
Shares"), and agreed to issue 35,425 additional commitment shares to Fusion
Capital on a pro-rata basis as the $5 million of stock is sold (collectively,
the "Commitment Shares"). Commencement of sales of common stock under the Stock
Sale Agreement was contingent upon certain conditions, principally the
Securities and Exchange Commission ("SEC") declaring effective our Registration
Statement filed with the SEC to register 1,248,115 shares of common stock
potentially to be issued under the Stock Sale Agreement. On May 6, 2004, the SEC
declared our registration statement effective.
Subject to our right to suspend sales of our common stock at any time
and to terminate the Stock Sale Agreement at any time, Fusion Capital is
obligated to purchase up to $12,500 of our common stock each trading day (the
"Daily Commitment Amount"). The Daily Commitment Amount may increase upon each
$0.25 increase in our stock price above $4.50 per share up to a maximum of
$22,500 if our stock price reaches or exceeds $5.50 per share. The Daily
Commitment Amount also may decrease if our stock price drops below a "floor"
price. The floor price initially was set at $3.00 per share and may be increased
or decreased by us from time to time, except that in no case shall it be less
than $1.00 per share. The sale price per share will be the lower of the lowest
sales price on the sale date or an average of the three lowest closing prices
during the 12 consecutive trading days prior to the sale date.
Fusion Capital may not purchase shares of our common stock under the
Stock Sale Agreement if Fusion Capital would beneficially own in excess of 9.9%
of our common stock outstanding at the time of purchase by Fusion Capital.
However, Fusion Capital still is obligated to pay the Daily Commitment Amount
even though they may not receive additional shares until their beneficial
ownership is less than the 9.9% limitation. Fusion Capital is free to sell its
purchased shares at any time, and this would allow them to avoid the 9.9%
limitation; however, Fusion Capital has agreed not to sell the Commitment Shares
until the earlier of October 25, 2006, (20 months from February 25, 2004) or
termination of the Stock Sale Agreement. In accordance with the American Stock
Exchange rules, we cannot issue more than 1,248,115 (including the Commitment
Shares) shares of our common stock to Fusion Capital under the Stock Sale
Agreement without the prior approval of our shareholders. Until the termination
Page 9
of the Stock Sale Agreement, we have agreed that we will not, without the prior
written consent of Fusion Capital, contract for any equity financing (including
any debt financing with an equity component), or issue any floating conversion
rate or variable priced equity or floating conversion rate or variable priced
equity-like securities.
Subsequent to April 30, 2004, and through June 8, 2004, we sold 17,667
shares (and issued 381 Commitment Shares) of our common stock to Fusion Capital,
netting approximately $52,000 in cash. We will use the proceeds for general
working capital needs.
In consideration for assisting us in arranging the transaction with
Fusion Capital, we paid our financial advisor a cash success fee of $50,000 and
agreed to pay up to an additional $200,000 on a pro-rata basis as we sell stock
to Fusion Capital. In addition, we granted the advisor five-year warrants to
purchase 57,537 shares of our common stock (approximately 5% of 1,159,552
shares, the estimated maximum number of shares that may be sold to Fusion
Capital, excluding the Commitment Shares) at an exercise price of $4.345 per
share (which was 110% of the $3.95 average closing price of our common stock for
the 10-day trading period ended January 21, 2004, and that was used to determine
the number of Commitment Shares).
In addition to the $50,000 cash paid to our financial advisor, we
incurred other cash costs relating to the completion of the Stock Sale
Agreement, including professional fees, listing fees and due diligence costs. We
also incurred noncash costs for the estimated fair value of the Initial Shares
($316,171) and the warrants issued to our financial advisor ($159,767). We have
capitalized all of these costs, aggregating approximately $672,000, as deferred
financing costs, and will charge them against capital in excess of par value on
a pro-rata basis as we sell shares to Fusion Capital.
4. Net Income (Loss) Per Common Share
----------------------------------
The following table sets forth our computations of basic and diluted
net income (loss) per common share.
Three months Nine months
ended April 30, ended April 30,
------------------------ ------------------------
2004 2003 2004 2003
----------- ----------- ----------- -----------
Numerator:
Net income (loss) applicable to common stock $ 2,667,111 $ (545,729) $ 3,076,691 $(1,176,845)
=========== =========== =========== ===========
Denominator:
Weighted average number of common
shares outstanding 6,267,314 6,201,345 6,225,124 6,176,359
Effect of dilutive stock options
and warrants 114,896 -- 179,059 --
----------- ----------- ----------- -----------
Weighted average number of common
shares outstanding and assumed dilutive
securities 6,382,210 6,201,345 6,404,183 6,176,359
=========== =========== =========== ===========
Net income (loss) per share of common stock:
Basic $ 0.43 $ (0.09) $ 0.49 $ (0.19)
=========== =========== =========== ===========
Assuming dilution $ 0.42 $ (0.09) $ 0.48 $ (0.19)
=========== =========== =========== ===========
Page 10
At April 30, 2004, and 2003, respectively, options and warrants to
purchase 482,689 and 955,767 shares of common stock were outstanding but were
not included in the computation of earnings per share because they were
anti-dilutive (of total options and warrants outstanding of 1,181,254 and
955,767, respectively).
5. Stock-Based Compensation
------------------------
We account for grants of stock options using the intrinsic value method
under Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued
to Employees," and related Interpretations. Accordingly, since the exercise
price of stock options granted under our stock option plans for employees and
directors was at least equal to the market value of the underlying common stock
on the grant date, we have not recorded compensation expense for options granted
under those plans.
Under the provisions of Financial Accounting Standards Board Statement
No. 123, "Accounting for Stock-Based Compensation," we are required to disclose
the impact on net income if we had used the fair value method, as defined, to
account for issuances of stock options. Using the fair value method, as defined,
our operating results would have been:
Three months Nine months
ended April 30, ended April 30,
------------------------ ------------------------
2004 2003 2004 2003
----------- ----------- ----------- -----------
Net income (loss), as reported $ 2,667,111 $ (545,729) $ 3,076,691 $(1,176,845)
Deduct: pro forma stock-based compensation
expense determined under the
fair value method (32,742) (41,672) (202,298) (190,701)
----------- ----------- ----------- -----------
Pro forma net income (loss) $ 2,634,369 $ (587,401) $ 2,874,393 $(1,367,546)
=========== =========== =========== ===========
Net income per share:
Basic - as reported $ 0.43 $ (0.09) $ 0.49 $ (0.19)
=========== =========== =========== ===========
Basic - pro forma $ 0.42 $ (0.09) $ 0.46 $ (0.22)
=========== =========== =========== ===========
Assuming dilution - as reported $ 0.42 $ (0.09) $ 0.48 $ (0.19)
=========== =========== =========== ===========
Assuming dilution - pro forma $ 0.41 $ (0.09) $ 0.45 $ (0.22)
=========== =========== =========== ===========
We estimated the fair value of stock options at the grant date using
the Black-Scholes option-pricing model. The Black-Scholes option-pricing model
was developed for use in estimating the fair value of traded options that have
no vesting restrictions and are fully transferable. In addition, option
valuation models require highly subjective input assumptions, including expected
stock price volatility and expected stock option lives. Because our stock
options are not publicly traded and have characteristics significantly different
from those of traded options, and because changes in the subjective input
assumptions affect the fair value estimate, we do not believe option valuation
models necessarily provide a reliable single measure of the fair value of our
stock options.
The pro forma information shown above may not be representative of pro
forma fair value compensation effects in future periods.
Page 11
6. Collection of Unilens Receivable
--------------------------------
In 1989 we sold substantially all the assets of our subsidiary,
University Optical Products Co. ("UOP"), to Unilens Corp. USA ("Unilens") for $6
million, including a $5.5 million installment receivable. Due to uncertainties
related to collection of the installment receivable, we previously wrote off the
entire installment receivable.
In July 2003 we resumed collection efforts with respect to the
installment receivable. In October 2003 Unilens agreed to pay us an aggregate of
$1,250,000 in quarterly installments, and Unilens and we agreed to settle any
and all prior claims and to terminate any and all prior agreements between us.
Quarterly payments are the greater of $100,000 or an amount equal to 50% of the
royalties received by Unilens from a certain licensee. Unilens paid the first
installment in October 2003, and subsequent payments are due on the last day of
each calendar quarter thereafter (March 31, June 30, September 30 and December
31). As collateral for payment of the settlement, Unilens granted us a
subordinate security interest in all Unilens' real and personal property.
We record income from this settlement as we are assured of collection.
During the three and nine months ended April 30, 2004, respectively, we received
gross cash from Unilens of approximately $103,000 and $306,000, and we recorded
income thereupon net of certain related expenses and other obligations. Since
UOP previously was discontinued, we record this income as other income and
related cash flows as investing activities.
7. Intangible Assets Acquired
--------------------------
For the nine months ended April 30, 2004, and 2003, respectively, we
recorded amortization expense of $29,918 and $118,533. We expect to record
annual amortization expense of $39,000, $35,000, and $17,000 for fiscal 2004,
2005, and 2006, respectively. Our intangible assets acquired were:
April 30, July 31,
2004 2003
------------- -------------
Intangible assets acquired,
principally licenses and
patented technologies,
at adjusted cost $ 1,204,820 $ 1,687,067
Impairment charges (51,978) (482,247)
Accumulated amortization (1,092,016) (1,062,098)
------------ ------------
Intangible assets acquired, net $ 60,826 $ 142,722
============ ============
Adjusted cost includes the effect of prior impairment charges. During
the three and nine months ended April 30, 2004, respectively, we recorded
impairment charges of $45,812 and $51,978.
Page 12
8. Accrued Liabilities
Accrued liabilities were:
April 30, July 31,
2004 2003
------------- -------------
Royalties payable $ 721,319 $ 854,616
Accrued compensation 200,046 217,952
Accrued professional fees 42,100 156,840
Accrued income taxes payable 76,789 36,789
Other 22,558 15,222
------------ -------------
$ 1,062,812 $ 1,281,419
============ =============
Upon receipt of the Materna award in April 2004, we paid bonuses of
$50,000 that were included in accrued compensation at July 31, 2003.
9. Contingencies
-------------
On June 8, 2004, the U.S. Court of Appeals for the Federal Circuit
affirmed the November 2002 decision in our favor in the LabCorp litigation. In
that decision, the court awarded us approximately $1,100,000, plus post-judgment
interest at the statutory rate. LabCorp now has limited legal options available
to them; they may accept the court's decision, request a rehearing en banc, or
file a petition to appeal this decision to the U.S. Supreme Court. We do not
know what course of action LabCorp will take; however, ultimately we expect that
the decision of the court will continue to be upheld in our favor. We have not
received any cash nor have we recorded any revenue related to the damages
awarded in this decision. We will record any revenue from this decision when
this decision is final and unappealable.
Under a January 2003 stipulated court order, LabCorp posted a bond for
the amount of the judgment and agreed to pay us a percentage of their sales of
homocysteine assays performed through the final disposition of the case. We have
recorded and will continue to record cash received under the stipulated order as
retained royalty revenues. If the November 2002 court judgment in our favor is
reversed on appeal, LabCorp's ability to recover amounts paid to us under the
stipulated order will depend on the extent and reason for the reversal. From
January 2003 through April 30, 2004, LabCorp paid us an aggregate of $1,170,000
under this stipulated order, including both our retained amounts and amounts
paid or payable to our clients. We believe that the probability that LabCorp
will recover such amounts is very unlikely, even if the judgment is reversed.
Page 13
We are a party to several legal actions and proceedings, primarily as a
plaintiff, for which we cannot predict the final outcomes. In addition,
previously we were notified by the SEC that we were under investigation for
trading in our stock during the period from October 28, 1998, to March 22, 2001,
relating to our stock repurchase program. An unfavorable resolution of any or
all matters where we are a defendant, and/or our incurrence of significant legal
fees and other costs to defend or prosecute any of these actions and proceedings
may, depending upon the amount and timing, have a material adverse effect on our
consolidated financial position, results of operations or cash flows in a
particular period. These matters have been detailed in prior filings with the
SEC.
We believe that we carry adequate liability insurance, directors and
officers insurance, casualty insurance (for owned or leased tangible assets),
and other insurance as needed to cover us against potential claims that occur in
the course of our business.
10. Related Party Transactions
--------------------------
During the three months ended April 30, 2004, we incurred $5,900 of
charges (reported in personnel and other direct expenses relating to revenues)
related to consulting services provided by one of our directors. During the nine
months ended April 30, 2004, and 2003, respectively, we incurred $11,200 and
$6,000 of such charges.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
- --------------------------------------------------------------------------------
of Operations
- -------------
Forward-Looking Statements
- --------------------------
Certain statements about our future expectations, including development
and regulatory plans, and all other statements in this Quarterly Report on Form
10-Q, other than historical facts, are "forward-looking statements" within the
meaning of applicable Federal Securities Laws, and are not guarantees of future
performance. When used in this Form 10-Q, the words "anticipate," "believe,"
"intend," "plan," "expect," "estimate" and similar expressions as they relate to
us or our business or management are intended to identify such forward-looking
statements. These statements involve risks and uncertainties related to market
acceptance of and competition for our licensed technologies, and other risks and
uncertainties inherent in our business, including those set forth under the
caption "Risk Factors," in our Prospectus filed with the Securities and Exchange
Commission ("SEC") on May 6, 2004, under Rule 424(b)(3) of the Securities Act of
1933, and other factors that may be described in our other filings with the SEC,
and are subject to change at any time. Our actual results could differ
materially from these forward-looking statements. We undertake no obligation to
update publicly any forward-looking statement.
Overview
- --------
We are a full service technology transfer and licensing provider focused
on the technology needs of our customers and transforming those requirements
into commercially viable solutions. We develop relationships with universities,
companies, inventors and patent or intellectual property holders to obtain the
rights or a license to their technologies, and they become our clients, for whom
we find markets for the technology. We also develop relationships with those who
have a need or use for technologies, and they become our customers, usually
through a license or sublicense. We identify and commercialize innovative
technologies in life, digital, nano, and physical sciences developed by
Page 14
universities, companies and inventors. Our goal is to maximize the value of
intellectual assets for the benefit of our clients, customers and shareholders.
We earn revenues primarily from licensing our clients' and our
intellectual property rights, principally patents and technologies, to our
customers (licensees). Currently we have a concentration of revenues derived
from up to five technologies.
We have rounded all amounts in this Item 2 to the nearest thousand
dollars. In addition, all periods discussed in this Item 2 relate to our fiscal
year ending July 31 (first, second, third and fourth quarters ending October 31,
January 31, April 30 and July 31, respectively).
Results of Operations - Three Months Ended April 30, 2004 (Third Quarter 2004)
- ------------------------------------------------------------------------------
vs. Three Months Ended April 30, 2003 (Third Quarter 2003)
- ----------------------------------------------------------
Summary of Results
- ------------------
Net income for the third quarter 2004 was $2,667,000, or $0.42 per
share, compared to a net loss of $546,000, or $0.09 per share, for the third
quarter 2003, an improvement of $3,213,000, or $0.51 per share.
Revenues
In the third quarter 2004, total revenues were $4,062,000, compared to
$659,000 for the third quarter 2003.
In the third quarter 2004, we received $3,544,000, net, (87% of our
total revenues) from the resolution of the Materna(TM) litigation that became
final and unappealable in April 2004. We reported this revenue in royalty
settlements and awards. This litigation involved a patent for an improved
formulation of Materna (a prenatal vitamin compound) that has expired.
Retained royalties for the third quarter 2004 were $518,000, which was
$141,000, or 21% lower than in the third quarter 2003, principally because the
third quarter 2003 included non-recurring revenue from a license termination
fee. Higher retained royalties from new licenses and timing differences were
substantially offset by declines due to expiring licenses.
Approximately 77% of the third quarter 2004 retained royalties were
from licenses of three technologies, including $200,000 from Ethyol(TM),
$110,000 from homocysteine assays and $87,000 from gallium arsenide. We have
reached our annual calendar year limit of $500,000 of Ethyol royalties, so we
will not receive any further Ethyol royalties until the second quarter of fiscal
2005. The gallium arsenide license has expired so we do not expect any future
royalties from this license.
Page 15
Operating expenses
Personnel and other direct expenses relating to revenues were
$1,083,000 for the third quarter 2004, which was $376,000, or 53% higher than
the $707,000 reported in the third quarter 2003. Upon receipt of our award in
the Materna litigation in April 2004, we incurred and paid severance of $112,500
to our former chief financial officer. Other increases included recruiting
expenses and salaries and benefits in connection with new personnel added to our
technology commercialization team. Also in the third quarter 2004, we incurred
direct expenses related to entering a patent in the MPEG-4 licensing pool and
for an impairment charge against intangible assets (no such charges were
incurred in the third quarter 2003).
General and administrative expenses for the third quarter 2004 were
$343,000, which was $35,000, or 11% higher than the $308,000 for the third
quarter 2003. In the third quarter 2004 we incurred higher expenses for
marketing and travel, due to increased efforts to obtain new licenses, and
financial advisory fees.
Patent enforcement expenses, net of reimbursements, of $22,000 in the
third quarter 2004, were $172,000, or 89% lower than for the third quarter 2003.
The level of patent enforcement expenses relates to our legal strategy and
varies depending on the stage of the litigation. Both the Fujitsu and LabCorp
cases were less active in the third quarter 2004.
Other income, net
Other income, net, for the third quarter 2004 included net cash
received from Unilens. There was no such income in the prior year.
Provision for income taxes
In the third quarter 2004 we provided $40,000 for our estimated federal
alternative minimum tax liability. We have federal and state income tax loss
carryforwards to utilize against our regular taxable income.
Results of Operations - Nine Months Ended April 30, 2004 (Nine Months of 2004)
- ------------------------------------------------------------------------------
vs. Nine Months Ended April 30, 2003 (Nine Months of 2003)
- ----------------------------------------------------------
Summary of Results
Net income for the nine months of 2004 was $3,077,000, or $0.48 per
share, compared to a loss of $1,177,000, or $0.19 per share, for the nine months
of 2003, an improvement of $4,254,000, or $0.67 per share.
Page 16
Revenues
For the nine months of 2004 total revenues were $6,297,000, compared to
$1,874,000 for the nine months of 2003.
In the nine months of 2004 we received $3,544,000, net, from the final
resolution of the Materna litigation and $1,150,000 from our non-recourse sales
and assignments of portions of this judgment. We reported the aggregate
$4,694,000 of revenue as royalty settlements and awards.
Retained royalties for the nine months ended April 30, 2004, were
$1,603,000, which was $271,000, or 14% lower than for the nine months of 2003.
The decrease was due to a $100,000 decrease in non-recurring revenues and
decreases relating to several expired licenses, including gallium arsenide,
vitamin B12 and Retin A, that were only partially offset by increased royalties
from homocysteine and Ethyol licenses.
Approximately 63% of our retained royalties for the nine months ended
April 30, 2004, were from two technologies: homocysteine assays and Ethyol.
Operating expenses
Personnel and other direct expenses relating to revenues were
$2,230,000 for the nine months of 2004, which was $112,000, or 5% higher than
the $2,118,000 for the nine months of 2003. The increase was due principally to
a severance payment of $112,500 paid to our former chief financial officer. In
the nine months of 2004 we also incurred increased expenses relating to entering
a patent in the MPEG-4 licensing pool, recruiting expenses for new personnel,
and an impairment charge against intangible assets, offset by decreases in
amortization and other personnel expenses.
General and administrative expenses for the nine months of 2004 were
$1,141,000, which was $107,000, or 9% less than the $1,248,000 for the nine
months of 2003. We reduced costs for our proxy, annual report, investor
relations, and professional services. These reductions were partially offset by
financial advisory fees.
Patent enforcement expenses, net of reimbursements, of $69,000 for the
nine months of 2004 were $279,000, or 80% lower than for the nine months of
2003. The level of patent enforcement expenses relates to our legal strategy and
varies depending on the stage of the litigation, and we experienced less overall
activity in the current year compared to the prior year.
Reversal of accounts payable exchanged for contingent note payable
In the quarter ended October 31, 2003, we recorded $1,583,000 of
operating income for a one-time reversal of accounts payable that had been
accrued at July 31, 2002.
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Other income, net, and Impairment loss on investment
Other income, net, for the nine months of 2004 included net cash
received from Unilens. There was no such income in the prior year.
In the prior year we recorded an impairment charge of $944,000 to write
down our investment in NTRU Cryptosystems, Inc.
Provision for income taxes
In the third quarter 2004 we provided $40,000 for our estimated federal
alternative minimum tax liability. We have federal and state income tax loss
carryforwards to utilize against regular taxable income.
Financial Condition and Liquidity
- ---------------------------------
During the three months ended April 30, 2004, our financial condition
improved considerably as a result of receiving approximately $3.5 million of net
cash from the final resolution of the Materna litigation. In addition, we
entered into an agreement with Fusion Capital to sell up to $5 million of our
common stock to them. (Both transactions are described below.) We have taken and
continue to take actions to improve our results and financial condition. These
actions include aggressively pursuing new license agreements, structuring
certain payment obligations contingent upon revenues, and collecting certain
amounts previously written off.
At April 30, 2004, we had cash of $4,384,000 and net working capital of
$4,090,000 (which were $2,979,000 and $3,136,000, respectively, more than at
July 31, 2003). Cash provided by operating activities during the nine months
ended April 30, 2004, was $2,895,000, compared to a use of cash of $1,572,000
during the same period of the prior year. The cash provided in the current year
was the result of receiving a net total of $4,694,000 from the Materna
litigation. Cash provided by investing activities was $253,000, compared to
$1,256,000 in the same period of the prior year. In the current year we
collected cash on a receivable from Unilens. We used cash in financing
activities of $169,000, principally to pay costs relating to our equity
financing with Fusion Capital (see below).
In addition to fluctuations in the amounts of retained royalties
revenues reported, changes in royalties receivable and payable reflect the
Company's normal cycle of royalty collections and payments.
Funding and capital requirements
We have the ability to sell up to $5 million of our common stock to
Fusion Capital (see below). Subsequent to April 30, 2004, and through June 8,
2004, we sold 17,667 shares (and issued 381 Commitment Shares) of our common
stock to Fusion Capital, netting approximately $52,000 in cash. We will use the
Page 18
proceeds for general working capital needs. We do not have any outstanding debt
nor do we have a credit facility.
Materna litigation
On April 19, 2004, the U.S. Supreme Court denied the defendant's
petition for certiorari in the Materna litigation, and the judgment in favor of
the plaintiffs became final and unappealable. On that day, we received cash of
approximately $3,858,000, which was our agreed upon portion of the court award.
In connection with our previous non-recourse sale and assignment of a
portion of this court award to one of our shareholders for cash, we paid the
shareholder $312,500 out of our proceeds, plus a nominal amount for interest. We
recorded the net remaining proceeds, approximately $3,544,000, as revenue in our
third quarter ended April 30, 2004, consistent with our policy for recognizing
royalty settlements and awards.
Equity financing
On February 25, 2004, we entered into an agreement with Fusion Capital
in which Fusion Capital agreed to purchase up to $5 million of our common stock
over a 20-month period (the "Stock Sale Agreement"). We have the right to
determine the timing and the amount of stock sold, if any, to Fusion Capital. We
also have the right, in our sole discretion, to extend the term of the Stock
Sale Agreement by six months. In addition, at our option and at any time until
20 days after completion of the Stock Sale Agreement, we may elect to enter into
a second agreement with Fusion Capital for the sale of an additional $5 million
of common stock on the same terms and conditions as the Stock Sale Agreement.
Under the terms of the Stock Sale Agreement, we issued 53,138 shares of
our common stock to Fusion Capital for its initial commitment (the "Initial
Shares"), and agreed to issue 35,425 additional commitment shares to Fusion
Capital on a pro-rata basis as the $5 million of stock is sold (collectively,
the "Commitment Shares"). Commencement of sales of common stock under the Stock
Sale Agreement was contingent upon certain conditions, principally the
Securities and Exchange Commission ("SEC") declaring effective our Registration
Statement filed with the SEC to register 1,248,115 shares of common stock
potentially to be issued under the Stock Sale Agreement. On May 6, 2004, the SEC
declared our registration statement effective.
Subject to our right to suspend sales of our common stock at any time
and to terminate the Stock Sale Agreement at any time, Fusion Capital is
obligated to purchase up to $12,500 of our common stock each trading day (the
"Daily Commitment Amount"). The Daily Commitment Amount may increase upon each
$0.25 increase in our stock price above $4.50 per share up to a maximum of
$22,500 if our stock price reaches or exceeds $5.50 per share. The Daily
Commitment Amount also may decrease if our stock price drops below a "floor"
price. The floor price initially was set at $3.00 per share and may be increased
or decreased by us from time to time, except that in no case shall it be less
Page 19
than $1.00 per share. The sale price per share will be the lower of the lowest
sales price on the sale date or an average of the three lowest closing prices
during the 12 consecutive trading days prior to the sale date.
Fusion Capital may not purchase shares of our common stock under the
Stock Sale Agreement if Fusion Capital would beneficially own in excess of 9.9%
of our common stock outstanding at the time of purchase by Fusion Capital.
However, Fusion Capital still is obligated to pay the Daily Commitment Amount
even though they may not receive additional shares until their beneficial
ownership is less than the 9.9% limitation. Fusion Capital is free to sell its
purchased shares at any time, and this would allow them to avoid the 9.9%
limitation; however, Fusion Capital has agreed not to sell the Commitment Shares
until the earlier of October 25, 2006, (20 months from February 25, 2004) or
termination of the Stock Sale Agreement. In accordance with the American Stock
Exchange rules, we cannot issue more than 1,248,115 (including the Commitment
Shares) shares of our common stock to Fusion Capital under the Stock Sale
Agreement without the prior approval of our shareholders. Until the termination
of the Stock Sale Agreement, we have agreed that we will not, without the prior
written consent of Fusion Capital, contract for any equity financing (including
any debt financing with an equity component), or issue any floating conversion
rate or variable priced equity or floating conversion rate or variable priced
equity-like securities.
In consideration for assisting us in arranging the transaction with
Fusion Capital, we paid our financial advisor a cash success fee of $50,000 and
agreed to pay up to an additional $200,000 on a pro-rata basis as we sell stock
to Fusion Capital. In addition, we granted the advisor five-year warrants to
purchase 57,537 shares of our common stock (approximately 5% of 1,159,552
shares, the estimated maximum number of shares that may be sold to Fusion
Capital, excluding the Commitment Shares) at an exercise price of $4.345 per
share (which was 110% of the $3.95 average closing price of our common stock for
the 10-day trading period ended January 21, 2004, and that was used to determine
the number of Commitment Shares).
In addition to the $50,000 cash paid to our financial advisor, we
incurred other cash costs relating to the completion of the Stock Sale
Agreement, including professional fees, listing fees and due diligence costs. We
also incurred noncash costs for the estimated fair value of the Initial Shares
($316,171) and the warrants issued to our financial advisor ($159,767). We have
capitalized all of these costs, aggregating approximately $672,000, as deferred
financing costs, and will charge them against capital in excess of par value on
a pro-rata basis as we sell shares to Fusion Capital.
The amounts and timing of our future cash requirements will depend on
many factors, including the results of our operations and marketing efforts, the
results of and costs of legal proceedings, and our equity financing. To sustain
profitability, we must license technologies with sufficient current and
long-term revenue streams, and we must continually add new licenses. However,
obtaining rights to new technologies, granting rights to licensees, enforcing
intellectual property rights, and collecting royalty revenues are subject to
Page 20
many factors outside our control or that we cannot currently anticipate.
Although there can be no assurance that we will be successful in our efforts, we
believe that the combination of our cash on hand, the ability to raise funds
from sales of our common stock under the Stock Sale Agreement, and revenues from
executing our strategic plan will be sufficient to meet our current and
anticipated operating cash requirements at least through fiscal 2005.
Contingencies
On June 8, 2004, the U.S. Court of Appeals for the Federal Circuit
affirmed the November 2002 decision in our favor in the LabCorp litigation. In
that decision, the court awarded us approximately $1,100,000, plus post-judgment
interest at the statutory rate. LabCorp now has limited legal options available
to them; they may accept the court's decision, request a rehearing en banc, or
file a petition to appeal this decision to the U.S. Supreme Court. We do not
know what course of action LabCorp will take; however, ultimately we expect that
the decision of the court will continue to be upheld in our favor. We have not
received any cash nor have we recorded any revenue related to the damages
awarded in this decision. We will record any revenue from this decision when
this decision is final and unappealable.
Under a January 2003 stipulated court order, LabCorp posted a bond for
the amount of the judgment and agreed to pay us a percentage of their sales of
homocysteine assays performed through the final disposition of the case. We have
recorded and will continue to record cash received under the stipulated order as
retained royalty revenues. If the November 2002 court judgment in our favor is
reversed on appeal, LabCorp's ability to recover amounts paid to us under the
stipulated order will depend on the extent and reason for the reversal. From
January 2003 through April 30, 2004, LabCorp paid us an aggregate of $1,170,000
under this stipulated order, including both our retained amounts and amounts
paid or payable to our clients. We believe that the probability that LabCorp
will recover such amounts is very unlikely, even if the judgment is reversed.
We are a party to several legal actions and proceedings, primarily as a
plaintiff, for which we cannot predict the final outcomes. In addition,
previously we were notified by the SEC that we were under investigation for
trading in our stock during the period from October 28, 1998, to March 22, 2001,
relating to our stock repurchase program. An unfavorable resolution of any or
all matters where we are a defendant, and/or our incurrence of significant legal
fees and other costs to defend or prosecute any of these actions and proceedings
may, depending upon the amount and timing, have a material adverse effect on our
consolidated financial position, results of operations or cash flows in a
particular period. These matters have been detailed in prior filings with the
SEC.
Page 21
Other matters
We believe that we carry adequate liability insurance, directors and
officers insurance, casualty insurance (for owned or leased tangible assets),
and other insurance as needed to cover us against potential claims that occur in
the course of our business.
We are making progress on our plan to regain compliance with American
Stock Exchange ("AMEX") listing standards.
Critical Accounting Policies and Estimates
- ------------------------------------------
In April 2004, when the judgment under the Materna litigation became
final and unappealable, we recognized revenue from the judgment. We recorded
this revenue consistent with our revenue recognition policy for royalty
settlements and awards, whereby we recognize revenue from settlements and awards
only when our rights to the settlement or award become final and unappealable,
and we have assurance of collecting it.
Our revenue recognition policy for sales and assignments of litigation
awards is to recognize revenue when we sell our rights to another party without
recourse and we have no obligation, or we are very unlikely to be obligated to
repay such collected amounts. During the year we recognized revenue from our
non-recourse sales and assignments of portions of the Materna award to other
parties.
During the third quarter 2004 we took a charge of approximately $46,000
to reduce the carrying value of our intangible assets acquired. This charge was
based on our estimate of the deficiency of cash we expect to receive from the
intangible assets compared to our net cost. In addition, we provided $40,000 of
income tax expense for our estimated federal alternative minimum tax liability.
Related Party Transactions
- --------------------------
During the three months ended April 30, 2004, we incurred $5,900 of
charges (reported in personnel and other direct expenses relating to revenues)
related to consulting services provided by one of our directors. During the nine
months ended April 30, 2004, and 2003, respectively, we incurred $11,200 and
$6,000 of such charges.
Our board of directors has determined that when a director's services
are outside the normal duties of a director, we should compensate the director
at the rate of $1,000 per day, plus expenses (which is the same amount we pay a
director for attending a one-day Board meeting).
Item 3. Quantitative and Qualitative Disclosures About Market Risk
----------------------------------------------------------
Not applicable.
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Item 4. Controls and Procedures
-----------------------
(a) Evaluation of disclosure controls and procedures
------------------------------------------------
Our Chief Executive Officer and Chief Financial Officer have evaluated
the effectiveness of the design and operation of our disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of
April 30, 2004. Our disclosure controls and procedures are designed to ensure
that information required to be disclosed in reports filed under the Securities
Exchange Act of 1934 is recorded, processed, summarized, and reported within the
time periods specified in the Securities and Exchange Commission's rules and
forms. Based on this evaluation, our Chief Executive Officer and Chief Financial
Officer concluded that these controls were effective as of April 30, 2004.
(b) Change in Internal Controls
---------------------------
There have been no significant changes in our internal
controls or in other factors that could significantly affect these controls
subsequent to the date of our evaluation. There were no significant deficiencies
or material weaknesses in our internal controls.
PART II - OTHER INFORMATION
---------------------------
Item 1. Legal Proceedings
-----------------
See Note 9 to the accompanying unaudited consolidated financial
statements in Part I of this Quarterly Report on Form 10-Q.
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
A) Exhibits Page
------
31.1 Certification by the Principal Executive Officer of Competitive
Technologies, Inc. pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002 (Rule 13a-14(a) or Rule 15d-14(a)). 25-26
31.2 Certification by the Principal Financial Officer of Competitive
Technologies, Inc. pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002 (Rule 13a-14(a) or Rule 15d-14(a)). 27-28
32.1 Certification by the Principal Executive Officer of Competitive
Technologies, Inc. pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002 (18 U.S.C. 1350) (furnished herewith). 29
Page 23
32.2 Certification by the Principal Financial Officer of Competitive
Technologies, Inc. pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002 (18 U.S.C. 1350) (furnished herewith). 30
B) Reports on Form 8-K
We filed the following reports on Form 8-K during the period covered by this
report on Form 10-Q:
1) On April 20, 2004, we filed a report on Form 8-K (date of
earliest event reported April 19, 2004) under Items 5 and 7 to report
our receipt of approximately $3.5 million, the net remaining portion of
our share of the court award in the Materna litigation.
2) On February 27, 2004, we filed a report on Form 8-K (date
of earliest event reported February 25, 2004) under Items 5 and 7 to
report that we had entered into an agreement to obtain up to $5 million
in equity financing from Fusion Capital Fund II, LLC.
3) On February 12, 2004, we filed a report on Form 8-K under
Items 5 and 7 to report that we had been advised that Wyeth Holdings
Corporation (a subsidiary of Wyeth, formerly known as American Cyanamid
Company) filed an appeal to the United States Supreme Court in the
Materna litigation.
In addition, on March 17, 2004, in a report on Form
8-K under Item 12 we furnished the press release announcing results for our
second quarter ended January 31, 2004.
SIGNATURES
- ----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Company has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
COMPETITIVE TECHNOLOGIES, INC.
(the registrant)
By /s/ John B. Nano
-------------------------------
John B. Nano
President, Chief Executive
Officer and Authorized Signer
Date: June 14, 2004
COMPETITIVE TECHNOLOGIES, INC.
(the registrant)
By /s/ Michael D. Davidson
-------------------------------
Michael D. Davidson
Chief Financial Officer
Date: June 14, 2004
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