Axogen, Inc. - Annual Report: 2010 (Form 10-K)
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
(Mark One)
| þ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended DECEMBER 31, 2010
or
| o | 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.) |
| 1407 South Kings Highway, Texarkana, TX | 75501 | |
| (Address of principal executive offices) | (Zip Code) | |
| Registrant’s telephone number, including area code: | (903) 832-0993 | |
| Securities registered pursuant to Section 12(b) of the Act: | None | |
| Securities registered pursuant to Section 12(g) of the Act: | Common Stock, par value $0.01 per share | |
| (Title of class) |
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of
the Securities Act.
Yes o No þ
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or
Section 15(d) of the Act.
Yes o No þ
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 þ No o
Indicate by check mark whether the registrant has submitted electronically and posted in its
corporate website, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post such files).
Yes o No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K
(§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of
registrant’s knowledge, in definitive proxy or information statements incorporated by reference
in Part III of this Form 10-K or any amendment to this Form 10-K. o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer,
a non-accelerated filer, or a smaller reporting company. See the definitions of “large
accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act.
| Large accelerated filer o | Accelerated filer o | Non-accelerated filer o (Do not check if a smaller reporting company) |
Smaller reporting company þ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Act). Yes o No þ
As of June 30, 2010, the value of the voting and non-voting common equity held by non-affiliates
of the registrant was approximately $12,526,683 based upon the last reported sale price of the
Common Stock at that date by the Over-the-Counter Bulletin Board.
The number of shares outstanding of the registrant’s Common Stock as of March 30, 2011 was
4,305,026 shares.
DOCUMENTS INCORPORATED BY REFERENCE
None.
TABLE OF CONTENTS
FORWARD-LOOKING STATEMENTS
From time to time, in reports filed with the Securities and Exchange Commission (including
this Form 10-K), 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,” “wants,” “expects,” “anticipates,” “intends,” “will,” “may,” “should,” or similar
expressions. Such forward-looking statements are subject to risks and uncertainties which could
cause results or developments to differ materially from those indicated in the forward-looking
statements. Such risks and uncertainties include, but are not limited to, the outcome of pending
patent infringement litigation against Prince of Peace Enterprises, Inc., pursuit of, and
competition for, business opportunities, desired outcome of merger and acquisition strategy,
dilutive transactions, the Company’s receipt of royalty payments from Novartis Consumer Health,
Inc., which is selling an adult vapor patch licensed by the Company, the Company’s dependence on
key personnel and Board of Director members, the success or failure of any attempt by the Company
to protect or enforce its patents and territories of coverage, the issuance of new accounting
pronouncements, the availability of opportunities for license, sale or strategic partner
agreements related to patents that the Company holds, volatility in the price of our common stock
and other risks and uncertainties as described in “Risk Factors” included in Item 1A of this Form
10-K.
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PART I
ITEM 1. BUSINESS
GENERAL
LecTec Corporation (the “Company” or “LecTec”) is an intellectual property (“IP”) licensing
and holding company with $9,036,400 in cash, including FDIC insured investments, as of December 31,
2010. LecTec is pursuing a merger and acquisition strategy which is intended to leverage its cash
asset and improve shareholder value and liquidity. LecTec holds multiple domestic and
international patents based on its original hydrogel patch technology and has filed patent
applications on a hand sanitizer patch. LecTec also has a licensing agreement (“Novartis
Agreement”) with Novartis Consumer Health, Inc., under which LecTec receives royalties from time to
time based upon a percentage of Novartis’ net sales of licensed products. LecTec takes legal
action as necessary to protect its intellectual property and is currently involved in one patent
infringement action against Prince of Peace Enterprises which is scheduled for trial in April 2011,
with court ordered mediation to occur on March 30, 2011. LecTec in March, 2011 settled its patent
infringement lawsuit against Chattem, Inc. for a one-time payment of $3,600,000. Such settlement
proceeds are before paying contingent legal fees and prior to any tax effect. The LecTec hydrogel
patch technology allows for a number of potential applications, while its anti-microbial hand
sanitizer patch is intended to be dry, thereby rendering the patch harmless in the event that it is
licked, chewed, or exposed to the eye. An initial prototype of the hand sanitizer patch has been
developed and LecTec is exploring the engagement of a strategic partner to complete its hand
sanitizer patch development. An effort to monetize products from LecTec’s intellectual property is
also ongoing.
The Company was organized in 1977 as a Minnesota corporation and went public in December 1986.
The Company’s principal executive office is located at 1407 South Kings Highway, Texarkana, Texas
75501, its telephone number is (903) 832-0993, its corporate internet Website is www.lectec.com,
and the Company’s stock trades on the Over the Counter (“OTC”) Bulletin Board under the symbol
LECT.OB.
NOVARTIS SUPPLY AND LICENSE AGREEMENT
In 2004, the Company entered into a supply and licensing agreement with Novartis. Under the
Agreement, the Company granted Novartis an exclusive license (the “License”) to all of the
intellectual property of the Company to the extent that it is used or is useful in the production
of the vapor patches that Novartis is selling under the Agreement. The License will continue in
effect for the duration of the patents’ life permitted under applicable law. Upon the expiration
of the patents included in the licensed intellectual property, Novartis will have a non-revocable,
perpetual, fully paid-up license to the intellectual property used or useful in the production of
vapor patches for the pediatric and the adult cough/cold market. Novartis is required by the
Agreement to pay royalties to the Company at an agreed upon percentage based on net sales of vapor
patches by Novartis for each year the License is in effect.
During the years ended December 31, 2010 and 2009, the Company recorded revenue of $91,273 and
$111,376, respectively, for royalties covered under the Agreement it has with Novartis. Year over
year such royalties have declined and we anticipate that this trend will continue.
PATENT INFRINGEMENT LITIGATION
For the years ended December 31, 2010 and 2009, the Company recorded $0 and $24,800,000,
respectively, in revenue related to the settlement of litigation against five defendants for patent
infringement. The Company settled with three defendants during 2009, one defendant in March 2011,
and will be going to trial against the remaining defendant in April 2011. See PART I, ITEM 3 of
this Form 10-K for additional information.
STRATEGY AND BUSINESS PLAN
The Company’s strategy is focused on four major areas: (1) pursue merger/acquisition
opportunities; (2) support our current litigation strategy; (3) engage a strategic partner to
complete development of the hand sanitizer patch and pursue manufacturing and
marketing/co-marketing arrangements; and (4) further monetization, if possible, of our IP
portfolio, excluding our hand sanitizer patch, through licensing, selling or engaging strategic
partners for all or a portion of our hydrogel IP. It is currently management’s intent to fund
operations with royalty income from licensing agreements or from other income derived from
protection of rights pertaining to the Company’s intellectual property in conjunction with reducing
operational costs.
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PATENTS AND TRADEMARKS
The Company’s policy is to protect its proprietary position by securing U.S. and foreign
patents that cover the technology, inventions and improvements related to its business. The
Company has 3 pending and 13 granted U.S. patents, multiple international
pending and granted patents and a foreign application through the Patent Cooperation Treaty
(“PCT”) related to its patch technologies. The Company’s issued U.S. patents have a remaining
legal duration ranging from one to 11 years. Issued patents can later be held invalid by the
patent office issuing the patent or by a court. The Company cannot be certain that its patents
will not be challenged, invalidated or circumvented or that the rights granted under the Company’s
patents will provide a competitive advantage.
The Company uses both patents and trade secrets to protect its proprietary property and
information, but there can be no assurance that other parties will not independently develop the
same or similar information to our detriment.
On July 25, 2008, the Company filed a complaint for patent infringement against five
companies, alleging that those companies have infringed upon two of the Company’s patents relating
to its medicated patch technology. The Company has subsequently settled with four of the parties
for the Patents-In-Suit, as defined in Item 3 hereof. See PART I, ITEM 3 of this Form 10-K for
additional information.
EMPLOYEES AND CONSULTANTS
At December 31, 2010, the Company had two full time employees and a five-member Board of
Directors. On January 1, 2010, Mr. Judd Berlin, who was the Company’s former CEO and CFO, and Dr.
Daniel Sigg, who was serving in the capacity as CSO, became full time employees of the Company.
The Company also has a full time controller. Effective June 1, 2010 the Company entered into an
Advisory Services Agreement with Mr. Berlin at which point he ceased to be an employee of the
Company. Concurrently on June 1, 2010, Mr. Greg Freitag was employed by the Company to serve in
the positions of Chief Executive Officer and Chief Financial Officer of the Company. Effective
October 1, 2010 the Company entered into a Consulting Agreement with Dr. Sigg at which point he
ceased to be an employee of the Company. Both Mr. Berlin and Dr. Sigg continue to serve the
Company in a consulting capacity, however, Mr. Berlin has been provided notice of termination of
his Advisor contract.
ITEM 1A. RISK FACTORS
Patent litigation is expensive and requires substantial amounts of management attention.
The eventual outcome of patent litigation is uncertain and involves substantial risks. We are
expending significant amounts of time, money and management resources on intellectual property
litigation, which could negatively affect our results of operations. Litigation against the last
defendant is scheduled for April 2011, with court ordered mediation to occur on March 30, 2011. We
cannot give any assurance to the outcome of our litigation efforts as there are many variables
related to a jury trial. The anticipated monetary rewards and damages, if any, are uncertain.
The pursuit of merger and acquisition transactions is competitive and completion of such
transaction may not have the desired outcome.
We are pursuing a merger and acquisition strategy which is intended to leverage our cash asset
and improve shareholder value and liquidity. Competition for companies to merge with or acquire is
extensive and include, but are not limited to, private equity firms, hedge funds, and operating
entities. There can be no assurance that we will be able to complete such a transaction or be
positioned to negotiate the most advantageous terms. Completion of a transaction will not assure
that a liquid market for the Company’s stock will develop or the company will perform as
anticipated to provide increased value to Company shareholders.
Our business plan may be dilutive to our existing shareholders.
We are considering business opportunities that, if completed, although intended to increase
aggregate shareholder value, would result in existing shareholders experiencing dilution in their
ownership interest. Also, additional dilution could result if funds are raised pursuant to such
activity, or otherwise in the future, by the issuance of convertible debt or equity securities. If
additional funds are raised by the issuance of debt or certain equity instruments, such as
preferred stock, we may become subject to certain operational limitations, and such securities may
have rights senior to those of existing holders of common stock. There can be no assurance that we
will be successful in completing any transaction or in obtaining additional financing if necessary.
Patents and other proprietary rights provide uncertain protection of our proprietary information
and our inability to protect a patent or other proprietary rights may adversely affect our
business.
The patent and other proprietary rights position of companies such as ours is uncertain and
involves complex legal and factual questions. Issued patents can later be held invalid by the
patent office issuing the patent or by a court. We cannot assure you that our patents will not be
challenged, invalidated or circumvented, or that the rights granted thereunder will provide us
value. Many other organizations, with substantially greater resources than ours, are engaged in
research and development of technologies and products.
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Such organizations may currently have, or may obtain in the future, legally blocking proprietary
rights, including patent rights, in one or more technologies, products or methods which we
currently consider proprietary to us. The Company has taken steps and incurred expenses to protect
and evaluate its patent portfolio in an effort to verify and determine the validity of the
Company’s patent rights. The outcome of this evaluation is uncertain and could be challenged.
Moreover, we can provide no assurance that confidentiality agreements, trade secrecy agreements or
similar agreements intended to protect unpatented technology will provide the intended protection.
Intellectual property litigation is extremely expensive and time-consuming, and it is often
difficult, if not impossible, to predict the outcome of such litigation. Adverse outcomes
regarding our intellectual property, including claimed infringement of the rights of others, could
have a materially adverse effect on our business.
Expiration of our patents.
Our patents have a limited life and finite expiration period. Although we have new patents
pending approval, including for the hand sanitizer patch, our Patents—In—Suit, as defined in Item
3 hereof, will expire in 2014.
We have limited staffing.
Our success is dependent upon the efforts of our Board of Directors and full time employees of
the Company. As of December 31, 2010, the Company had two full-time employees’ whose efforts are
focused on our external reporting requirements, maintaining our day-to-day operations, reducing
costs, monitoring litigation activity and pursuing merger and acquisition opportunities. We are
considered a small business issuer as defined under the rules of the Securities and Exchange
Commission (“SEC”). Current legislation related to the Sarbanes-Oxley Act of 2002 (“SOX”) and the
Company’s efforts to become compliant thereunder, have been and are expected to be costly to the
Company despite the internal controls the Company has in place. If our full-time employees’ or
members of our Board of Directors decide to depart from the Company, we could be adversely affected
if suitable replacement personnel or directors are not quickly retained. The current financial
condition and associated risks of the Company may make it difficult to retain and attract, if
necessary, qualified personnel. We currently have a key man life insurance policy on our CEO, Greg
Freitag in the amount of $2,000,000.
The price of our common stock could be highly volatile due to a number of factors.
The trading price of our common stock may fluctuate widely as a result of a number of factors,
including:
| • | trading of our common stock on the OTC Bulletin Board; | ||
| • | limited daily trading volume resulting in the lack of a liquid market; | ||
| • | fluctuations in price and volume due to investor speculation, internet message postings, and other factors that may not be tied to the financial performance by the Company; | ||
| • | outcomes related to the Company’s efforts to protect its patent portfolio; | ||
| • | performance by the Company in the execution of its business plan; | ||
| • | regulatory developments in both the United States and foreign countries; | ||
| • | performance of products sold and advertised by licensees in the marketplace; | ||
| • | economic and other external factors; and | ||
| • | period-to-period fluctuations in financial results. |
We do not meet the criteria to list our securities on an exchange such as The NASDAQ Stock Market
and our common stock is illiquid and may be difficult to sell.
Trading of our common stock is conducted on the Over-The-Counter Bulletin Board (“OTCBB”).
Generally, securities that are quoted on the OTCBB lack liquidity and analyst coverage. This may
result in lower prices for our common stock than might otherwise be obtained if we met the criteria
to list our securities on a larger or more established exchange, such as The NASDAQ Capital Market
and could also result in a larger spread between the bid and asked prices for our common stock.
In addition, there has been only limited trading activity in our common stock. The relatively
small trading volume will likely make it difficult for our shareholders to sell their common stock
as, and when, they choose. As a result, investors may not always be able to resell shares of our
common stock publicly at the time and prices that they feel are fair or appropriate.
The Company has one licensing agreement that provides an ongoing royalty stream.
The Company currently receives royalty income pursuant to a licensing Agreement it has with
Novartis related to the sales of an adult vapor patch. Royalties resulting from such license
provides very limited funds to continuing operations and are uncertain because of the acceptance of
the product in the market place, severity of the cough, cold and flu seasons, marketing efforts by
Novartis and other factors that the Company is unable to control. Year over year the Novartis
royalties have declined and we anticipate that this trend will continue. Currently, the Company
has no other licensing arrangements in place.
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If licensees of our patents do not comply with regulatory requirements when marketing products
which rely on our patents, our royalties could be negatively affected.
The research, development, manufacture, labeling, distribution, marketing and advertising of
products that are sold by licensees in reliance on our patents are subject to extensive regulation
by governmental regulatory authorities in the United States and other countries. Failure by such
licensees to comply with regulatory requirements for marketing their products could subject them to
regulatory or judicial enforcement actions, including, but not limited to, product recalls or
seizures, injunctions, civil penalties, criminal prosecution, refusals to approve new products and
suspensions and withdrawals of existing approvals. This in turn could decrease the revenues
generated by such patent licensees and thereby decrease our royalty income.
If products relying on our patents are no longer regulated as over-the-counter products, our
royalties could be negatively affected.
Currently, many of the therapeutic consumer products that are or could be sold in reliance on
our patents are regulated as over-the-counter products. We cannot assure you that the FDA will
continue to regulate these products as over-the-counter products. If the FDA changed its approach
to regulating such therapeutic consumer products, the licensees would be faced with significant
additional costs and may be unable to sell some or all of the products. Any such change could have
a negative affect on the licensee’s revenues, which in turn could decrease our royalty income.
The issuance of new accounting pronouncements may have an impact on financial results.
The issuance of accounting pronouncements may affect the Company’s results from time to time
depending on specific issues relevant to our Company, adoption dates, and alternatives the Company
may choose with respect to the particular pronouncement.
ITEM 1B. UNRESOLVED STAFF COMMENTS
Not applicable.
ITEM 2. PROPERTIES
The Company currently has one leased facility in Texas and two record storage locations in
Minnesota as of December 31, 2010.
In July 2008, the Company moved its corporate headquarter facilities (principal executive
office) from Edina, Minnesota to Texarkana, Texas. In connection with this relocation, the Company
entered into a Lease Agreement with Lockaway Storage, Inc. on July 23, 2008 (the “Texas Lease”),
pursuant to which the Company agreed to lease approximately 1,200 square feet of space located at
1407 South Kings Highway, Texarkana, Texas 75501. In February 2010, the Company renewed the Texas
Lease until March 1, 2011 at a monthly lease rate of $750 per month and has subsequently renewed
the Texas lease until March 1, 2012 at a monthly lease rate of $750 per month. The Texas Lease
contains customary representations, warranties, and covenants on the part of the Company and the
landlord. In addition to the Texas Lease, the Company currently maintains two storage locations in
Minnesota for record retention purposes at a cost of approximately $4,153 per year.
In January 2009, the Company entered into a lease amendment (the “Lease Amendment”) amending
its lease dated May 23, 2003, between the Company and SMD Lincoln Investments (the “Minnesota
Lease”), regarding the Company’s previous headquarters located at 5610 Lincoln Drive, Edina,
Minnesota (the “Leased Premises”). The Lease Amendment renewed for successive one-month periods
until the Minnesota Lease was terminated by the Company giving 30 days’ written notice to the
landlord of its intention to vacate the Leased Premises by December 31, 2010. The Company used the
space for liquidating saleable assets and managing an orderly wind down of operations at the Leased
Premises. The Company maintained approximately 3,300 square feet of space at the Leased Premises.
The Company has vacated the Leased Premises and terminated its obligations under the Lease
Amendment effective December 31, 2010.
In July 2008, the Company opened an office in India, which was located at Level 2, Connaught
Place, Bund Garden Road, Pune, India 411001, to explore research, development and manufacturing
opportunities for its advanced skin interface technologies and products. The Company has
terminated this lease and had no future obligations as of December 31, 2010.
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ITEM 3. LEGAL PROCEEDINGS
On July 25, 2008, we filed a complaint for patent infringement (the “Complaint”) against five
companies, including Chattem, Inc. (Ticker: CHTT), Endo Pharmaceuticals, Inc. (Ticker: ENDP),
Johnson & Johnson Consumer Company, Inc. (Ticker: JNJ), The
Mentholatum Company, Inc. (Division of Rohto Pharmaceuticals, Ticker RPHCF.PK), and Prince of
Peace Enterprises, Inc. (Private Company) (collectively, the “Defendants”) in the U.S. District
Court for the Eastern District of Texas. The Complaint alleges, among other things, that the
Defendants infringed upon two of our patents (the “Patents—In—Suit”), which relate to our
medicated patch technology. We sought to enjoin the Defendants from infringing the
Patents—In—Suit and to recover monetary damages related to such infringement, as well as interest
and litigation costs.
In October 2008, all five of the Defendants filed answers (the “Answers”) in response to the
Complaint denying our claims therein, and asserting certain affirmative defenses and counterclaims
against us, including assertions that the Patents—In—Suit are invalid and unenforceable, and
claims for attorneys’ fees and costs. On October 20, 2008, we filed our replies to the Answers,
denying such counterclaims and affirmative defenses, including the claims that the
Patents—In—Suit are invalid and unenforceable.
On December 3, 2008, our counsel in the litigation, Rader, Fishman & Grauer PLLC (the
“Counsel”), participated in a scheduling conference in this case. As a result of that conference,
the Court scheduled a Markman hearing for May 6, 2010 and a final pretrial conference for January
3, 2011 to address any final matters before the start of trial on January 4, 2011.
In February 2009, Counsel filed with the Court a motion to preliminarily enjoin the five
defendants from infringing the Patents-In Suit pending the trial.
On May 29, 2009, we entered into a Settlement Agreement and Mutual Release (the “Mentholatum
Settlement Agreement”) with The Mentholatum Company (“Mentholatum”) to settle our claims against
Mentholatum that Mentholatum infringed the Patents—In—Suit. Pursuant to the Mentholatum
Settlement Agreement, Mentholatum paid us an aggregate of $600,000 in $100,000 monthly installments
from May through October 2009. In addition, under the Mentholatum Settlement Agreement (a) we
agreed to dismiss the litigation against Mentholatum with prejudice, (b) the parties agreed to
mutual general releases of all claims other than their prospective obligations under the
Mentholatum Settlement Agreement and claims arising after the date of the Mentholatum Settlement
Agreement, (c) we agreed not to sue Mentholatum or Rohto Pharmaceutical Co., Ltd., the parent
company of Mentholatum, for any infringement of the Patents—In—Suit, any patent that claims
priority, directly or indirectly, from the Patents—In—Suit, or any foreign counterparts of the
Patents—In—Suit, and (d) we agreed not to transfer any such patents unless the transferee agrees
to be bound by the covenant not to sue. Mentholatum and Rohto agreed not to challenge the validity
or enforceability of such patents. The proceeds received from this settlement were reduced by the
amounts due to the Rader firm per our contingent fee arrangement, out of pocket expenses, and other
costs incurred related to depositions of parties in the infringement lawsuits, travel expenses, and
other related costs. We received approximately $350,000 in net cash proceeds from the Mentholatum
settlement.
On November 11, 2009, we entered into a Settlement and License Agreement (the “Endo Settlement
Agreement”) with Endo Pharmaceuticals Inc. (“Endo”). Pursuant to the Endo Settlement Agreement,
Endo agreed to pay us a one—time license fee of $23,000,000 and we granted to Endo an exclusive
license to the Patents—In—Suit for use in the field of prescription pain medicines and treatment.
In addition, under the Endo Settlement Agreement: (a) the parties agreed to the dismissal of the
litigation with prejudice and without costs; (b) we agreed to release all claims against Endo that
were asserted by or could have been asserted by us against Endo in the litigation or that relate
to, arise from or are in any manner connected to the Patents—In—Suit; (c) Endo agreed to release
all claims against us that were asserted by or could have been asserted by Endo against us in the
litigation; (d) we agreed not to sue Endo for any infringement of any U.S. or foreign patents or
patent applications owned or controlled by us as of November 11, 2009, any continuation,
continuation—in—part or divisional of any such patent, any U.S. patent resulting from the reissue
or reexamination of any such patents and any U.S. or foreign patent or patent application claiming
common priority with any of such patents; and (e) we agreed not to transfer either of the
Patents—In—Suit or any other such patent unless the transferee agrees in writing to the terms and
conditions of the Endo Settlement Agreement. We received approximately $16,000,000 in net cash
proceeds from this settlement in December 2009. From these proceeds, we replenished the trust fund
we have with the Rader Firm with $1,000,000 dollars to fund ongoing patent litigation. The trust
fund balance at December 31, 2010 was $432,344 compared to a balance of $931,954 at December 31,
2009. If funds are not completely expended, then the remaining cash balance in the trust fund will
revert to us.
On December 18, 2009, we entered into a Settlement Agreement and Mutual Release (the “JJCC
Settlement Agreement”) with Johnson & Johnson Consumer Companies, Inc. (“JJCC”) to settle our
claims against JJCC that JJCC infringed our Patents—In—Suit. Pursuant to the JJCC Settlement
Agreement, JJCC paid us a one—time sum of $1,200,000 and we granted to JJCC a fully paid—up,
world—wide, non—exclusive and irrevocable license to (a) the Patents—In—Suit, (b) any patent
that claims priority, directly or indirectly, from the Patents—In—Suit (the “Family Patents”),
including, without limitation, U.S. Patent Nos. 6,096,333, 6,096,334 and 6,361,790, (c) any foreign
counterparts of the Patents—In—Suit or any of the Family Patents to make, have made, sell, offer
for sale, use, import, export or otherwise dispose of any apparatus, method, product, component,
service, product by process or any device associated with JJCC or its subsidiaries, affiliates or
other controlled entities, for the past, present and future until the expiration of the last patent
described above and (d) any patents that we own or currently have an interest in to make, have
made, sell, offer for sale, use, import, export or otherwise dispose of any non—prescription,
non—occlusive medicated hydrogel patch products that are used to alleviate pain associated with
JJCC (collectively, the License Grant”); provided, however, that the License Grant under clauses
(a), (b) and (c) above excludes over—the—counter vapor patches which emit vapors that provide
cough and cold relief when inhaled, and prescription, non—occlusive, medicated hydrogel patch products that are used to alleviate pain. The proceeds
received from this settlement were reduced by the amounts due to the Rader firm per our contingent
fee arrangement, out of pocket expenses, and other costs incurred related to depositions of parties
in the infringement lawsuits, travel expenses, and other related costs. After these expenses we
received net cash proceeds of approximately $720,000.
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On May 6, 2010 a Markman hearing occurred in Texarkana, Texas and the US District Court for
the Eastern District of Texas issued Orders concerning it on May 20, 2010. The first Order was
based on our motion to strike an exhibit from Chattem, Inc.’s Opposition Brief, and our motion to
strike was granted by the Court. The second Order issued by the court denied Defendant’s motion
request for leave to file for summary judgment as to non-infringement, but granted the request for
leave to file for summary judgment as to invalidity of patents. The Court also issued its Markman
ruling interpreting the terms “cured” and “non-occlusive” contained in our patents.
We engaged in voluntary mediation with Chattem, Inc. in July 2010. A Report of Mediation by
the Hon. Harlan A. Martin was filed stating that the parties were unable to reach settlement. On
September 28, 2010 the United States District Court for the Eastern District of Texas issued an
Order regarding Prince of Peace’s and Chattem’s (“Defendants”) requests to file motions for summary
judgment: (1) of invalidity due to the on-sale bar of 35 U.S.C. § 102(b); and (2) regarding
Defendants’ defenses of equitable estoppels and laches and our motions: (3) on, and to preclude
testimony related to, Defendants’ 35 U.S.C. § 102(b) defense based on the Aqua-Patch; and (4) on
infringement by Defendants. The Order granted Defendants’ the right to file a summary judgment
motion regarding on-sale bar, but denied them the opportunity regarding the equitable defenses of
estoppel and laches. With regard to the equitable issues, the Court stated that the custom in
patent cases is to hold a separate bench proceeding after the jury trial on such issues. The Order
granted us the right to file summary judgment motions on infringement and to preclude Defendants
Aqua-Patch defense. The court denied all summary judgments motions.
On March 23, 2011, the Company entered into a Confidential Settlement Agreement and Mutual
Release (the “Chattem Settlement Agreement”) with Chattem to settle the Company’s claims against
Chattem that Chattem infringed the Patents-In-Suit. Pursuant to the Settlement Agreement, Chattem
will pay the Company a one—time sum of $3,600,000 and the Company will grant to Chattem a fully
paid—up, world—wide, non—exclusive and irrevocable license to (a) the Patents—In—Suit, (b) any
patent that claims priority, directly or indirectly, from the Patents—In—Suit (the “Family
Patents”) and (c) any foreign counterparts of the Family Patents, for use in connection with any
product or process sold or used by Chattem, other than products covered by exclusive licenses
previously granted to other companies. Such settlement proceeds are before paying contingent legal
fees and prior to any tax effect. In addition, under the Settlement Agreement the Company and
Chattem entered into mutual releases of all claims.
We are diligent in pursuing our patent infringement lawsuit against the remaining defendant
Prince of Peace Enterprises, Inc. and we are preparing for trial which is scheduled for April 2011,
with court ordered mediation to occur on March 30, 2011. We are unable to determine, based on
current information available, whether we will be successful in our legal pursuits against the
remaining defendant. We give no assurance as to the outcome of the ongoing lawsuit or whether our
Patents—In—Suit and claims asserted in the related patents could be deemed invalid by a court of
law.
ITEM 4. (REMOVED AND RESERVED)
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PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
PURCHASES OF EQUITY SECURITIES
The Company’s common stock trades on the Over the Counter (“OTC”) Bulletin Board under the
symbol LECT.OB.
The following table sets forth, for each of the calendar periods indicated, the quarterly high
and low closing prices for the Company’s common stock quoted on the OTC Bulletin Board. The prices
in the table represent prices between dealers and do not include adjustments for retail mark-up,
markdown or commission and may not represent actual transactions.
| Year Ended | Year Ended | |||||||||||||||
| December 31, 2010 | December 31, 2009 | |||||||||||||||
| High | Low | High | Low | |||||||||||||
Quarter ended March 31 |
$ | 6.31 | $ | 2.90 | $ | 8.00 | $ | 2.00 | ||||||||
Quarter ended June 30 |
3.75 | 2.70 | 4.75 | 2.00 | ||||||||||||
Quarter ended Sept. 30 |
4.25 | 2.90 | 6.49 | 2.15 | ||||||||||||
Quarter ended Dec. 31 |
3.50 | 3.00 | 5.90 | 3.30 | ||||||||||||
As of March 30, 2011, the Company had 4,305,026 shares of common stock outstanding, and
approximately 229 common shareholders of record, based upon information received from our stock
transfer agent. However, this number does not include beneficial owners whose shares were held of
record by nominees or broker dealers. The Company estimates that there are approximately less than
850 individual owners.
At a Board of Directors meeting held on December 21, 2009, the Board declared a cash dividend
of $1.00 per share to shareholders of record at January 29, 2010 that was payable on February 12,
2010. The Company distributed $4,298,350 on February 12, 2010 to its shareholders. The Company
may pay future dividends based upon excess cash the Company may have from litigation income or
royalty and licensing income that exceeds operating expenses that the Company is likely to incur.
However, there can be no assurance that the Company will pay any future dividends. The Company did
not declare or make any dividend distributions in 2010.
We did not repurchase any of our securities during the fourth quarter of 2010. We had no
sales of unregistered securities during 2010 that have not been previously disclosed in a Current
Report on Form 8-K or Quarterly Reports on Form 10-Q.
See Item 12 of Part III of this annual report on Form 10-K for disclosure regarding our
compensation plans under which our equity securities are authorized for issuance.
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
OVERVIEW
Our business plan is focused on four major areas: (1) pursue merger/acquisition opportunities;
(2) support our current litigation strategy; (3) engage a strategic partner to complete development
of the hand sanitizer patch and pursue manufacturing and marketing/co-marketing arrangements; and
(4) further monetization, if possible, of our IP portfolio, excluding our hand sanitizer patch,
through licensing, selling or engaging strategic partners for all or a portion of our hydrogel IP.
It is currently management’s intent to fund operations with royalty income from licensing
agreements or from other income derived from protection of rights pertaining to the Company’s
intellectual property in conjunction with reducing operational costs.
Merger/Acquisition Opportunities. We believe that our cash balance and public company status
provide the potential for merger/acquisition opportunities. In evaluating any such opportunities,
primary consideration will be given to companies generating revenue and addressing sizable markets
which we believe may attract significant investment interest. Any transaction under consideration
should also be expected to provide increased liquidity for our shareholders. Our current intention
is not to seek multiple investments, but to focus our efforts on identifying a single transaction
in which to apply our cash balance and public company status. Although opportunities related to
our current business areas will be of greatest interest, we will evaluate situations in other areas
in which we have the capability to make an appropriate and informed review.
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Litigation. In April 2007, we were granted a re-examination certificate related to a patent
that we hold. During 2008, we retained a legal firm on a contingency fee basis to assist us in
enforcing our rights related to potential patent infringement claims by the Company. As a result,
we sued five parties and, during 2009, we settled our claims with three of such parties and in
March, 2011 settled with a fourth. We remain diligent in pursuing our patent infringement claims
against the remaining party, with trial set for April 2011. See PART I, ITEM 3 of this Form 10-K
for additional information.
Hand Sanitizer Patch. Due to the growing worldwide concern regarding the spread of germs
through hand contact, we filed patents for, and screened, identified and tested technologies
suitable for, an anti-microbial hand sanitizer patch. This activity has lead to the development of
a prototype that is ready to begin efficacy and other testing to determine its market viability.
We will seek to engage a strategic partner to complete the development of our hand sanitizer patch
and pursue manufacturing and marketing/co-marketing arrangements. Because the hand sanitizer patch
is a consumer product, we believe that engaging an established strategic partner is the best
go-to-market strategy because we will be able to leverage any such partner’s competencies regarding
the development and manufacturing of products, customer requirements and marketing and distribution
strategies. We expect that Asian entities will provide the greatest opportunities because the
Asian topical patch market represents the most significant portion of the worldwide market. If we
are not able to engage an acceptable strategic partner, we will evaluate how, or if, to proceed
with our hand sanitizer patch in light of progress made in our other strategic initiatives.
IP Portfolio, Excluding Hand Sanitizer Patch. We completed an evaluation of our IP portfolio,
which included conducting both a current analysis of our portfolio and referring to our 2007
extensive market research and intellectual property report. Based on this evaluation, we believe
that the best strategy to derive further value, if any, from our IP portfolio, other than our hand
sanitizer patch, is to pursue licensing of this IP, and to engage strategic partners to help us
further develop, if necessary, manufacture and/or market this IP, or sell all or a portion of this
IP. At this time, we do not intend to conduct any further research and development with respect to
our hydrogel IP. We will begin to identify those parties that we believe may have interest in this
IP and approach them. If we are not able to identify suitable alternatives regarding the
licensing, sale or strategic partnering of our hydrogel IP, we will reevaluate our position with
respect to the foregoing in light of progress made in our other strategic initiatives.
Our strategy described above will remain fluid as we pursue each area of it. Although we
believe that our strategy will result in increased value for our shareholders, there can be no
assurance that our strategy, or any component thereof, will be successful.
COMPARISON OF THE YEARS ENDED DECEMBER 31, 2010 AND 2009
Results of Operations
The Company recorded revenue of $91,273 and $24,911,376 for the year ended December 31, 2010
and 2009, respectively. The decrease in revenue for the year ended December 31, 2010 from 2009 was
primarily due to the lack of infringement revenue of $24.8 million as a result of no
litigation being settled or concluded during 2010. Royalty income also decreased $20,103 for the
year ended December 31, 2010, from the comparable period in 2009. The decrease in royalty income
for 2010 from the comparable period in 2009 was due to a declining trend of sales by Novartis of
its patch products using our licensed IP. The royalty income recorded during the year ended
December 31, 2010 and 2009 was based on information provided by Novartis.
Our operating expenses decreased $7,015,797 to $1,939,798 for the year ended December 31,
2010, from operating expenses of $8,955,595 for the comparable period in 2009. The decrease in
operating expenses for 2010 resulted primarily from a decrease in legal expenses of approximately
$7.3 million due to the lack of infringement income and related contingent settlement fees for
2010, partially offset with increases in salaries, management and director transition costs,
consulting, litigation expenses and travel expenses. Actions to reduce our operating expenses
beginning in the second half of the year are being realized in a number of areas including
compensation, rent, consulting fees, and professional services. However, operating expenses
relating to litigation, IP and M&A activity will continue to fluctuate based upon activity going
forward.
The Company recorded a net loss of $(1.32) million, or $(0.31) per basic and diluted share for
the year ended December 31, 2010, compared to net income of $15.0 million, or $3.51 and $3.49 per
basic and diluted share, respectively, for the same period in 2009.
Income Taxes
The Company recorded an income tax benefit of $509,047 for the year ended December 31, 2010,
compared to income tax expense for the year ended December 31, 2009 of $1.04 million. For 2009,
the provision was principally the result of the income derived from infringement revenue. In 2009,
the Company also reversed its valuation allowance on the net operating loss carry forwards as they
were significantly utilized in 2009.
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Effect of Inflation
Inflation has not had a significant impact on the Company’s operations or cash flows.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents decreased $8,689,280 for the year ended December 31, 2010, to
$7,076,827, from cash and cash equivalents of $15,766,107 at December 31, 2009. In addition to
cash and cash equivalents, the Company had investments in certificates of deposits that were
insured by the Federal Deposit Insurance Corporation (“FDIC”) of 1,959,573 with maturities of less
than six months at December 31, 2010. The decrease in cash and cash equivalents resulted primarily
from a cash dividend payment of $4,298,350 and from our current operating expenses. Our litigation
escrow account and other prepaid expenses decreased $499,610 for the twelve month period ended
December 31, 2010 to $432,344 as a result of expenses for preparation of our April 2011 trial.
The Company had no material commitments for capital expenditures at December 31, 2010 or 2009.
The Company had working capital of $9,972,819 and a current ratio of 88.21 at December 31,
2010 compared to working capital of $11,025,789 and a current ratio of 2.92 at December 31, 2009.
The decrease in working capital and increase in the current ratio at December 31, 2010, compared to
December 31, 2009, was primarily due to our payment of a cash dividend of $4,298,350, our payment
of income taxes of approximately $1.1 million, coupled with our net loss of $1,316,299.
Shareholders’ equity decreased $1,032,041 to $10,029,128 at December 31, 2010 from $11,061,169
at December 31, 2009, due to the net loss we incurred during the year ended December 31, 2010,
offset with stock options exercised and compensation expense related to the grant of a stock
options during 2010.
The Company entered into a contingency fee agreement with Rader, Fishman & Grauer PLLC, who is
our legal counsel in the pending patent infringement litigation. See Part I, Item 3 of this Form
10-K for additional information concerning this litigation. Under this agreement, the Rader firm
will receive a percentage of any recovery in the litigation or other proceeds resulting from a
settlement of the litigation as its primary compensation for representing the Company in this
matter. The Company is also obligated (i) to reimburse the Rader firm for its out-of-pocket
expenses in connection with the litigation through an up front advance of $50,000 and monthly
advances of $10,000, and (ii) to engage and pay for expert services needed in the litigation,
provided that the Company’s obligation to advance such funds and pay such expert expenses will be
suspended if the Company’s cash levels fall below certain thresholds. Thereafter, if the Company’s
cash levels exceed such thresholds, or there is a recovery in or other proceeds from the
litigation, then the Rader firm will be reimbursed for any expenses it has covered while such
advances and payments were suspended. To date the Company has expended approximately $8.5 million
(in aggregate) under the agreement for advances to the Rader firm and payments for expert services.
Interest income of $16,239 (0.20% average annual interest) for the year ended December 31,
2010, compared to interest income for the year ended December 31, 2009 of $1,954 (1.0% average
annual interest), was higher due to greater cash assets being available in fiscal 2010. Interest
rates continue to be at historical lows and we continue to weigh risks against returns, taking a
conservative approach to our cash investment strategy. Certain action has been, and will continue
to be, taken to try to increase interest returns, however, we do not believe there will be a
significant positive change in our interest returns for the foreseeable future. However, we have
been able to receive slighter higher rates on part of our cash assets in accounts that are FDIC
insured.
The Company currently estimates that it will receive less than $75,000 per year in royalty
income based upon historical royalty income and cash receipt activity from Novartis, coupled with
the downward trending of this income. Royalty income is uncertain because it is subject to factors
that the Company cannot control. There can be no assurance that the anticipated revenue stream or
anticipated expenses will be as planned, or that the Company will be successful in negotiating new
licensing opportunities with Novartis or other companies, or having success in our business plan,
due to the uncertainties and risks described in “Risk Factors” in Item 1A. of this Form 10-K.
CRITICAL ACCOUNTING POLICIES
Management believes that the Company has not adopted any critical accounting policies, which,
if changed, would result in a material change in financial estimates, financial condition, results
of operations or cash flows for the years ended December 31, 2010 and 2009. Critical accounting
policies are as follows:
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Revenue Recognition
Royalty and licensing fees are recognized when earned under the terms of the Novartis
Agreement, based upon sales information of licensed products provided by Novartis, and when
collection is reasonably assured. Infringement income is recognized when settlement agreements have
been signed and collection is reasonably assured.
Patent Costs
The carrying value of patent costs is reviewed periodically or when factors indicating
impairment are present. The amount of impairment loss is measured as the amount by which the
carrying value of the assets exceeds the fair value of the assets. The Company believes that no
impairment existed at December 31, 2010 or 2009.
Royalty Receivable
The Company grants credit to its only customer, Novartis, in the normal course of business and
under the terms contained in the Agreement. Pursuant to the Agreement, Novartis pays royalty
income within the terms defined in the Agreement and management believes, based upon past payment
experience, that any and all amounts outstanding are fully collectible. At December 31, 2010, the
Company had a royalty receivable due to the Company of $42,117 which was collected in January 2011.
At December 31, 2009, the Company had a royalty receivable due to the Company of $31,525, which
was collected in January 2010.
Use of Estimates
In preparing financial statements in conformity with accounting principles generally accepted
in the United States of America, management is required to make estimates and assumptions that
affect certain reported amounts of assets and liabilities and the disclosure of contingent assets
and liabilities at the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those estimates.
Share-Based Compensation
The Company accounts for share-based compensation in accordance with ASC Topic 718,
Compensation-Stock Compensation, which requires that compensation cost relating to share-based
payment transactions (including the cost of all employee stock options) be recognized in the
financial statements. That cost is measured based on the estimated fair value of the equity or
liability instruments issued. The Company recorded share-based compensation expense of $245,258
during the year ended December 31, 2010. The Company did not record any share-based compensation
expense during the year ended December 31, 2009.
OFF-BALANCE SHEET ARRANGEMENTS
The Company does not have any “off-balance sheet arrangements” (as such term is defined in Item 303
of Regulation S-K) that are reasonably likely to have a current or future effect on our financial
condition, changes in financial condition, revenues or expenses, operating results, liquidity,
capital expenditures or capital resources.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
CONTENTS
| Page | ||||
| 14 | ||||
FINANCIAL STATEMENTS |
||||
| 15 | ||||
| 16 | ||||
| 17 | ||||
| 18 | ||||
| 19 | ||||
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and
Board of Directors of
LecTec Corporation
Board of Directors of
LecTec Corporation
We have audited the accompanying balance sheets of LecTec Corporation as of December 31, 2010
and 2009, and the related statements of operations, shareholders’ equity, and cash flows for the
years then ended. These financial statements are the responsibility of the Company’s management.
Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of material
misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its
internal control over financial reporting. Our audits included consideration of internal control
over financial reporting as a basis for designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion on the effectiveness of the
Company’s internal control over financial reporting. Accordingly, we express no such opinion. An
audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material
respects, the financial position of LecTec Corporation as of December 31, 2010 and 2009, and the
results of its operations and its cash flows for the years then ended in conformity with accounting
principles generally accepted in the United States of America.
/s/ LURIE BESIKOF LAPIDUS & COMPANY, LLP
Minneapolis, Minnesota
March 30, 2011
March 30, 2011
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LecTec Corporation
BALANCE SHEETS
December 31, 2010 and 2009
BALANCE SHEETS
December 31, 2010 and 2009
| 2010 | 2009 | |||||||
| ASSETS |
||||||||
CURRENT ASSETS: |
||||||||
Cash and cash equivalents |
$ | 7,076,827 | $ | 15,766,107 | ||||
Certificates of deposit |
1,959,573 | — | ||||||
Royalty receivable |
42,117 | 31,525 | ||||||
Prepaid expenses and other |
470,651 | 975,423 | ||||||
Deferred tax asset |
538,000 | — | ||||||
Total current assets |
10,087,168 | 16,773,055 | ||||||
FIXED ASSETS: |
||||||||
Office equipment |
9,847 | 8,590 | ||||||
Accumulated depreciation |
(6,199 | ) | (3,021 | ) | ||||
| 3,648 | 5,569 | |||||||
OTHER ASSETS: |
||||||||
Patent costs |
52,661 | 29,811 | ||||||
TOTAL ASSETS |
$ | 10,143,477 | $ | 16,808,435 | ||||
| LIABILITIES AND SHAREHOLDERS’ EQUITY |
||||||||
CURRENT LIABILITIES: |
||||||||
Accounts payable |
$ | 62,305 | $ | 84,659 | ||||
Accrued expenses |
52,044 | 322,854 | ||||||
Dividend payable |
— | 4,298,350 | ||||||
Income tax payable |
— | 993,403 | ||||||
Deferred tax liability |
— | 48,000 | ||||||
Total current liabilities |
114,349 | 5,747,266 | ||||||
COMMITMENTS AND CONTINGENCIES |
||||||||
SHAREHOLDERS’ EQUITY: |
||||||||
Common stock, $.01 par value; 15,000,000 shares authorized;
4,305,026 and 4,290,026 shares issued and outstanding
at December 31, 2010 and 2009, respectively |
43,050 | 42,900 | ||||||
Additional contributed capital |
12,936,327 | 12,652,219 | ||||||
Accumulated deficit |
(2,950,249 | ) | (1,633,950 | ) | ||||
| 10,029,128 | 11,061,169 | |||||||
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY |
$ | 10,143,477 | $ | 16,808,435 | ||||
The accompanying notes are an integral part of these financial statements.
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LecTec Corporation
STATEMENTS OF OPERATIONS
Years ended December 31, 2010 and 2009
STATEMENTS OF OPERATIONS
Years ended December 31, 2010 and 2009
| 2010 | 2009 | |||||||
CONTINUING OPERATIONS: |
||||||||
REVENUE |
||||||||
Infringement income |
$ | — | $ | 24,800,000 | ||||
Royalty and licensing fees |
91,273 | 111,376 | ||||||
Total revenue |
91,273 | 24,911,376 | ||||||
OPERATING EXPENSES |
1,939,798 | 8,955,595 | ||||||
Operating income (loss) from continuing operations |
(1,848,525 | ) | 15,955,781 | |||||
INTEREST AND MISCELLANEOUS INCOME |
23,179 | 1,954 | ||||||
Income (loss) from continuing operations
before income taxes |
(1,825,346 | ) | 15,957,735 | |||||
INCOME TAX BENEFIT (EXPENSE) |
509,047 | (1,041,403 | ) | |||||
Income (loss) from continuing operations |
(1,316,299 | ) | 14,916,332 | |||||
DISCONTINUED OPERATIONS: |
||||||||
Reversal of sales returns allowance |
— | 130,000 | ||||||
NET INCOME (LOSS) |
$ | (1,316,299 | ) | $ | 15,046,332 | |||
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING: |
||||||||
Basic |
4,304,204 | 4,290,026 | ||||||
Diluted |
4,304,204 | 4,309,258 | ||||||
INCOME (LOSS) PER COMMON SHARE: |
||||||||
Basic — |
||||||||
Continuing operations |
$ | (0.31 | ) | $ | 3.48 | |||
Discontinued operations |
— | 0.03 | ||||||
| $ | (0.31 | ) | $ | 3.51 | ||||
Diluted — |
||||||||
Continuing operations |
$ | (0.31 | ) | $ | 3.46 | |||
Discontinued operations |
— | 0.03 | ||||||
| $ | (0.31 | ) | $ | 3.49 | ||||
DIVIDEND DECLARED PER COMMON SHARE |
$ | — | $ | 1.00 | ||||
The accompanying notes are an integral part of these financial statements.
16
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LecTec Corporation
STATEMENTS OF SHAREHOLDERS’ EQUITY
Years ended December 31, 2010 and 2009
STATEMENTS OF SHAREHOLDERS’ EQUITY
Years ended December 31, 2010 and 2009
| Additional | ||||||||||||||||||||
| Common stock | contributed | Accumulated | ||||||||||||||||||
| Shares | Amount | capital | deficit | Total | ||||||||||||||||
Balance at December 31, 2008 |
4,290,026 | $ | 42,900 | $ | 12,652,219 | $ | (12,381,932 | ) | $ | 313,187 | ||||||||||
Cash dividend |
— | — | — | (4,298,350 | ) | (4,298,350 | ) | |||||||||||||
Net income |
— | — | — | 15,046,332 | 15,046,332 | |||||||||||||||
Balance at December 31, 2009 |
4,290,026 | $ | 42,900 | $ | 12,652,219 | $ | (1,633,950 | ) | $ | 11,061,169 | ||||||||||
Stock compensation
expense |
— | — | 245,258 | — | 245,258 | |||||||||||||||
Exercise of stock options |
15,000 | 150 | 38,850 | 39,000 | ||||||||||||||||
Net loss |
— | — | — | (1,316,299 | ) | (1,316,299 | ) | |||||||||||||
Balance at December 31, 2010 |
4,305,026 | $ | 43,050 | $ | 12,936,327 | $ | (2,950,249 | ) | $ | 10,029,128 | ||||||||||
The accompanying notes are an integral part of these financial statements.
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Table of Contents
LecTec Corporation
STATEMENTS OF CASH FLOWS
Years ended December 31, 2010 and 2009
STATEMENTS OF CASH FLOWS
Years ended December 31, 2010 and 2009
| 2010 | 2009 | |||||||
Cash flows from operating activities: |
||||||||
Net income (loss) |
$ | (1,316,299 | ) | $ | 15,046,332 | |||
Adjustments to reconcile net income (loss) to net cash provided
(used) by operating activities: |
||||||||
Reversal of sales return allowance — discontinued operations |
— | (130,000 | ) | |||||
Compensation expense related to issuance of stock options |
245,258 | — | ||||||
Amortization of patent costs |
16,589 | 20,689 | ||||||
Depreciation expense |
3,178 | 2,320 | ||||||
Deferred income tax |
(586,000 | ) | 48,000 | |||||
Changes in operating assets and liabilities: |
||||||||
Infringement and royalty receivable |
(10,592 | ) | 1,061 | |||||
Prepaid expenses and other |
504,772 | (866,321 | ) | |||||
Accounts payable |
(22,354 | ) | 58,504 | |||||
Income tax payable |
(993,403 | ) | 993,403 | |||||
Accrued expenses |
(270,810 | ) | 267,953 | |||||
Net cash provided (used) by operating activities |
(2,429,661 | ) | 15,441,941 | |||||
Cash flows from investing activities: |
||||||||
Purchase of certificates of deposit |
(1,959,573 | ) | (1,957 | ) | ||||
Purchase of office equipment |
(1,257 | ) | (1,957 | ) | ||||
Investment in patents |
(39,439 | ) | (6,725 | ) | ||||
Net cash used in investing activities |
(2,000,269 | ) | (8,682 | ) | ||||
Cash flows from financing activities: |
||||||||
Payment of dividend |
(4,298,350 | ) | — | |||||
Stock option exercised |
39,000 | — | ||||||
Net cash used in investing activities |
(4,259,350 | ) | — | |||||
Net increase (decrease) in cash and cash equivalents |
(8,689,280 | ) | 15,433,259 | |||||
Cash and cash equivalents — beginning of year |
15,766,107 | 332,848 | ||||||
Cash and cash equivalents — end of year |
$ | 7,076,827 | $ | 15,766,107 | ||||
Noncash operating and financing activities: |
||||||||
Dividend payable |
$ | — | $ | 4,298,350 | ||||
The accompanying notes are an integral part of these financial statements.
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LecTec Corporation
NOTES TO FINANCIAL STATEMENTS
December 31, 2010 and 2009
NOTES TO FINANCIAL STATEMENTS
December 31, 2010 and 2009
NOTE A — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
LecTec is an intellectual property (“IP”) licensing and holding company with approximately $9
million in cash, cash equivalents, and Federal Deposit Insurance Corporation (“FDIC”) insured
certificates of deposit at December 31, 2010. LecTec is pursuing a merger and acquisition strategy
which is intended to leverage its cash asset and improve shareholder value and liquidity. LecTec
holds multiple domestic and international patents based on its original hydrogel patch technology
and has filed patent applications on a hand sanitizer patch. LecTec also has a licensing agreement
(“Novartis Agreement”) with Novartis Consumer Health, Inc., under which LecTec receives royalties
from time to time based upon a percentage of Novartis’ net sales of licensed products. LecTec
takes legal action as necessary to protect its intellectual property and is currently involved in
one patent infringement action. The LecTec hydrogel patch technology allows for a number of
potential applications, while its anti-microbial hand sanitizer patch is intended to be dry,
thereby rendering the patch harmless in the event that it is licked, chewed, or exposed to the eye.
An initial prototype of the hand sanitizer patch has been developed and LecTec is exploring the
engagement of a strategic partner to complete its hand sanitizer patch development. An effort to
monetize products from LecTec’s intellectual property is also ongoing. A summary of the Company’s
significant accounting policies consistently applied in the preparation of the accompanying
financial statements follows:
Use of Estimates |
In preparing financial statements in conformity with accounting principles generally accepted
in the United States of America, management is required to make estimates and assumptions that
affect certain reported amounts of assets and liabilities and the disclosure of contingent assets
and liabilities at the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those estimates.
Credit Risk |
A significant amount of cash was deposited in one financial institution. Certain amounts of
the Company’s cash exceed federally insured limits. The Company has not experienced any losses and
does not believe it is exposed to any significant credit risk on cash and cash equivalents.
Cash and Cash Equivalents |
The Company considers all highly liquid temporary investments purchased with original
maturities of three months or less to be cash equivalents. Cash and cash equivalents includes cash
on hand of $52,532 and a money market account with a balance of $7,024,295 at December 31, 2010,
which is not insured by the FDIC.
Certificates of Deposit |
During 2010, the Company purchased certificates of deposit which matured in January and
February 2011. The certificates earned interest at 0.15% to 0.25% primarily because of their short
term maturities of six months or less. These certificates of deposit were recorded at fair
market value at December 31, 2010. All the certificates of deposit were fully insured by the FDIC.
Royalty Receivable |
The Company grants credit to its only customer, Novartis, in the normal course of business and
under the terms contained in the Novartis Agreement. Pursuant to the Novartis Agreement, Novartis
pays the royalty income within the terms defined in the Novartis Agreement.
Patent Costs
Patent costs consist primarily of the cost of applying for patents and are amortized on a
straight-line basis over the estimated useful life of the asset, which is generally five years.
Patent maintenance costs are expensed as incurred.
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The carrying value of patent costs is reviewed periodically or when factors indicating
impairment are present. The impairment loss is measured as the amount by which the carrying value
of the assets exceeds the fair value of the assets. The Company believes that no impairment
existed at December 31, 2010 and 2009.
Revenue Recognition
Royalty and licensing fees are recognized when earned under the terms of the Novartis
Agreement based upon sales information of licensed products provided by Novartis, and when
collection is reasonably assured. Infringement income is recognized when settlement agreements have
been signed and collection is reasonably assured.
Income Taxes |
Deferred income taxes are provided for temporary differences between the financial reporting
and tax basis of assets and liabilities. Deferred taxes are reduced by a valuation allowance when,
in the opinion of management, it is more likely than not that some portion or all of the deferred
tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects
of changes in tax laws and rates on the date of the enactment.
In evaluating the ultimate realization of deferred income tax assets, management considers
whether it is more likely than not that the deferred income tax assets will be realized.
Management establishes a valuation allowance if it is more likely than not that all or a portion of
the deferred income tax assets will not be utilized. The ultimate realization of deferred income
tax assets is dependent on the generation of future taxable income, which must occur prior to the
expiration of the net operating loss carryforwards.
Income (Loss) Per Common Share |
Basic income (loss) per common share is computed by dividing net income (loss) by the weighted
average number of common shares outstanding. Diluted income (loss) per common share is computed by
dividing net income (loss) by the weighted average number of common shares outstanding and common
share equivalents related to stock options and warrants when dilutive.
Common stock options to purchase 454,000 shares of common stock with a weighted average
exercise price of $3.79 were outstanding at December 31, 2010. As the Company had a loss from
operations in 2010, those shares were excluded from the loss per common share computations because
they were antidilutive.
Diluted net loss per common share for the year ended December 31, 2009 was computed as
follows:
Net income for per share computation |
$ | 15,046,332 | ||
Weighted-average common shares outstanding |
4,290,026 | |||
Incremental shares from assumed exercise
of dilutive instruments: |
||||
Options and warrants |
19,232 | |||
Shares outstanding — diluted |
4,309,258 | |||
Share-Based Compensation |
The Company accounts for share-based compensation in accordance with ASC Topic 718,
Compensation-Stock Compensation, which requires that compensation cost relating to share-based
payment transactions (including the cost of all employee stock options) be recognized in the
financial statements. That cost is measured based on the estimated fair value of the equity or
liability instruments issued. Share-based payment accounting covers a wide range of share-based
compensation arrangements including share options, restricted share plans, performance-based
awards, share appreciation rights, and employee share purchase plans.
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Fair Value of Financial Instruments |
The carrying value of current financial assets and liabilities approximates their fair values
due to their short-term nature.
Recent Accounting Pronouncements
In
December 2010, the Financial Accounting Standards Board (FASB) issued Accounting
Standards Update (ASU) No. 2010-29 “Business Combinations (Topic 805) — Disclosure of
Supplementary Pro Forma Information for Business Combinations.” If a public entity presents
comparative financial statements, the entity should disclose revenue and earnings of the combined
entity as though the business combination that occurred during the current year had occurred as of
the beginning of the comparable prior annual reporting period only. ASU 2010-29 also expands the
supplementary pro forma disclosures. ASU 2010-29 is effective prospectively for business
combinations for which the acquisition date is on or after the beginning of the first annual
reporting period beginning on or after December 15, 2010. ASU 2010-29 will only affect the Company
if there are future business combinations.
In October 2009, FASB issued an update to the accounting and reporting guidance for
multiple-deliverable revenue arrangements. The new accounting guidance removes the separation
criterion that objective and reliable evidence of the fair value of the undelivered item must exist
for the delivered items to be considered a separate unit or separate units of accounting. This
FASB-issued update requires an entity to determine the selling price of qualifying deliverables
based on a hierarchy of evidence. In considering the hierarchy of evidence, the entity must first
determine the selling prices by using vendor-specific objective evidence (“VSOE”), if it exists;
otherwise, third-party evidence (“TPE”) of selling price must be used. If neither VSOE nor TPE of
selling price exists for a deliverable, an entity must use its best estimate of the selling price
for that deliverable in allocating consideration among deliverables in an arrangement. This update
is effective for arrangements entered into in the fiscal years beginning on or after June 15, 2010,
unless the vendor elects early application. The adoption of this standard did not have a material
impact on our financial position and results of operations.
In January 2010, FASB issued an update to the existing disclosure requirements related to fair
value measurements which requires entities to make new disclosures about recurring or nonrecurring
fair value measurements including significant transfers into and out of Level 1 and Level 2 fair
value measurements and information on purchases, sales, issuances, and settlements on a gross basis
in the reconciliation of Level 3 fair value measurements. This update is effective for annual and
interim periods beginning after December 15, 2009, except for Level 3 reconciliation disclosures
which are effective for annual periods beginning after December 15, 2010. The adoption of the
required portion of this standard did not have a material impact on our financial position or
results of operations.
In April 2010, FASB issued new accounting guidance to provide clarification on the
classification of a share-based payment award as either equity or a liability. Under ASC 718,
Compensation-Stock Compensation, a share-based payment award that contains a condition that is not
a market, performance, or service condition is required to be classified as a liability. The
amendments clarify that a share-based payment award with an exercise price denominated in the
currency of a market in which a substantial portion of the entity’s equity securities trades should
not be considered to contain a condition that is not a market, performance, or service condition.
Therefore, such an award should not be classified as a liability if it otherwise qualifies as
equity. The amendments are effective for fiscal years, and interim periods within those fiscal
years, beginning on or after December 15, 2010. Earlier application is permitted. Adoption of this
standard did not have a material impact on our financial position or results of operations.
In May 2010, FASB issued new guidance on the use of the milestone method of recognizing
revenue for research and development arrangements under which consideration to be received by the
vendor is contingent upon the achievement of certain milestones. The update provides guidance on
the criteria that should be met for determining whether the milestone method of revenue recognition
is appropriate. A vendor can recognize consideration in its entirety as revenue in the period in
which the milestone is achieved only if the milestone meets all criteria to be considered
substantive. Additional disclosures describing the consideration arrangement and the entity’s
accounting policy for recognition of such milestone payments are also required. The new guidance
is effective for fiscal years, and interim periods within such fiscal years, beginning on or after
June 15, 2010, with early adoption permitted. The guidance may be applied prospectively to
milestones achieved during the period of adoption or retrospectively
for all prior periods. Adoption of this standard did not have a material impact on our
financial position or results of operations.
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NOTE B — INFRINGEMENT INCOME
On May 29, 2009, the Company entered into a Settlement Agreement and Mutual Release (the
“Mentholatum Settlement Agreement”) with the Mentholatum Company (“Mentholatum”) to settle the
Company’s claims against Mentholatum that Mentholatum infringed two of the Company’s patents
(“Patents—In—Suit”) related to the Company’s medicated patch technology (the “Litigation”).
Pursuant to the Mentholatum Settlement Agreement, Mentholatum paid the Company an aggregate of
$600,000 in $100,000 monthly installments from May through October 2009. In addition, under the
Mentholatum Settlement Agreement (a) the Company agreed to dismiss the Litigation against
Mentholatum with prejudice, (b) the parties agreed to mutual general releases of all claims other
than their prospective obligations under the Mentholatum Settlement Agreement and claims arising
after the date of the Mentholatum Settlement Agreement, (c) the Company agreed not to sue
Mentholatum or Rohto Pharmaceutical Co., Ltd., the parent company of Mentholatum, for any
infringement of the Patents—In—Suit, any patent that claims priority, directly or indirectly,
from the Patents—In—Suit, or any foreign counterparts of the Patents—In—Suit, (d) the Company
agreed not to transfer any such patents unless the transferee agrees to be bound by the covenant
not to sue described above in clause (c), and (e). Mentholatum and Rohto agreed not to challenge
the validity or enforceability of such patents.
As of December 31, 2009, Mentholatum had paid the Company $600,000 pursuant to the terms of
the Mentholatum Settlement Agreement. The proceeds received from this settlement were reduced by
the amounts due to the Rader firm per the Company’s contingent fee arrangement, out of pocket
expenses, and other costs incurred related to depositions of parties in the infringement lawsuits,
travel expenses, and other related costs. After these expenses the Company received net cash
proceeds of approximately $350,000.
On November 6, 2009, the Company and Endo Pharmaceuticals Inc. (“Endo”) executed a Term Sheet
that set forth the terms of a settlement and license agreement pursuant to which the parties would
settle the Company’s claims against Endo that Endo infringed the Patents—In—Suit. On November
11, 2009, the Company entered into such Settlement and License Agreement (the “Endo Settlement
Agreement”) with Endo and issued a press release announcing its entry into the Endo Settlement
Agreement. On November 12, 2009 the Company filed a Form 8-K with the Securities and Exchange
Commission disclosing this event. Pursuant to the Endo Settlement Agreement, Endo agreed to pay
the Company a one—time license fee of $23,000,000 and the Company agreed to grant to Endo an
exclusive license to the Patents—In—Suit for use in the field of prescription pain medicines and
treatment. In addition, under the Endo Settlement Agreement: (a) the parties agreed to the
dismissal of the Litigation with prejudice and without costs; (b) the Company agreed to release all
claims against Endo that were asserted by or could have been asserted by the Company against Endo
in the Litigation or that relate to, arise from or are in any manner connected to the
Patents—In—Suit; (c) Endo agreed to release all claims against the Company that were asserted by
or could have been asserted by Endo against the Company in the Litigation; (d) the Company agreed
not to sue Endo for any infringement of any U.S. or foreign patents or patent applications owned or
controlled by the Company as of November 11, 2009, any continuation, continuation—in—part or
divisional of any such patent, any U.S. patent resulting from the reissue or reexamination of any
such patents and any U.S. or foreign patent or patent application claiming common priority with any
of such patents; and (e) the Company agreed not to transfer either of the Patents—In—Suit or any
other such patent unless the transferee agrees in writing to the terms and conditions of the Endo
Settlement Agreement. The Company received approximately $16,000,000 in net cash proceeds from
this settlement in December 2009. From these proceeds, the Company replenished the trust fund it
has with the Rader Firm with $1,000,000 to fund ongoing patent litigation. The Trust fund balance
at December 31, 2010 was $432,344 compared to a balance of $931,954 at December 31, 2009. If funds
are not completely expended, then the remaining cash balance in the trust fund will revert to the
Company.
On December 18, 2009, the Company entered into a Settlement Agreement and Mutual Release (the
“JJCC Settlement Agreement”) with Johnson & Johnson Consumer Companies, Inc. (“JJCC”) to settle the
Company’s claims against JJCC that JJCC infringed the Patents—In—Suit. Pursuant to the JJCC
Settlement Agreement, JJCC paid the Company a one—time sum of $1,200,000 and the Company granted
to JJCC a fully paid—up, world—wide, non—exclusive and irrevocable license to (a) the
Patents—In—Suit, (b) any patent that claims priority, directly or indirectly, from the
Patents—In—Suit (the “Family Patents”), including, without limitation, U.S. Patent Nos.
6,096,333, 6,096,334 and 6,361,790, (c) any foreign counterparts of the Patents—In—Suit or any of
the Family Patents to make, have made, sell, offer for sale, use, import, export or otherwise
dispose of any apparatus, method, product, component, service, product by process or any device
associated with JJCC or its subsidiaries, affiliates or other
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controlled entities, for the past, present and future until the expiration of the last patent
described above and (d) any patents that the Company owns or currently has an interest in to make,
have made, sell, offer for sale, use, import, export or otherwise dispose of any non—prescription,
non—occlusive medicated hydrogel patch products that are used to alleviate pain (a “Patch
Product”) associated with JJCC (collectively, the License Grant”); provided, however, that the
License Grant under clauses (a), (b) and (c) above excludes over—the—counter vapor patches which
emit vapors that provide cough and cold relief when inhaled, and prescription, non—occlusive,
medicated hydrogel patch products that are used to alleviate pain. As of December 31, 2009, JJCC
had paid the Company $1,200,000 pursuant to the terms of the Settlement Agreement. The proceeds
received from this settlement were reduced by the amounts due to the Rader firm per the Company’s
contingent fee arrangement, out of pocket expenses, and other costs incurred related to depositions
of parties in the infringement lawsuits, travel expenses, and other related costs. After these
expenses the Company received net cash proceeds of approximately $720,000.
In addition, under the JJCC Settlement Agreement: (w) the Company agreed to release, acquit
and discharge JJCC and its direct and indirect customers and distributors from all claims, duties,
obligations and causes of action relating to any matters of any kind, including those related to
JJCC’s making, using, importing, selling or offering to sell Patch Products and the matters alleged
in the Litigation; (x) JJCC agreed to release, acquit and discharge the Company and its direct and
indirect customers and distributors from all claims, duties, obligations and causes of action
relating to any matters of any kind, including any matters connected in any way with Patch Products
sold by JJCC and the matters alleged in the Litigation; (y) the Company agreed not to assign or
otherwise transfer the patents described above in the License Grant until the transferee agrees in
writing to be bound by such licenses; and (z) JJCC agreed not to challenge or assist in any way in
challenging the validity or enforceability of the Patents—In—Suit, any Family Patent or any
foreign counterparts of the Patents—In—Suit or any of the Family Patents.
On March 23, 2011, the Company entered into a Confidential Settlement Agreement and Mutual
Release (the “Chattem Settlement Agreement”) with Chattem to settle the Company’s claims against
Chattem that Chattem infringed two of the Company’s patents related to the Company’s medicated
patch technology. Pursuant to the Chattem Settlement Agreement, Chattem will pay the Company a
one—time sum of $3,600,000 and the Company will grant to Chattem a fully paid—up, world—wide,
non—exclusive and irrevocable license to (a) the Patents—In—Suit, (b) the Family Patents and (c)
any foreign counterparts of the Family Patents, for use in connection with any product or process
sold or used by Chattem, other than products covered by exclusive licenses previously granted to
other companies. In addition, under the Chattem Settlement Agreement the Company and Chattem
entered into mutual releases of all claims. The proceeds received from this settlement will be
reduced by the amounts due to the Rader firm per the Company’s contingent fee arrangement.
NOTE C — NOVARTIS SUPPLY AND LICENSE AGREEMENT
In 2004, the Company entered into a supply and licensing agreement with Novartis (the Novartis
Agreement). By December 31, 2004, the supply portion of the Novartis Agreement was completed and
the Company no longer manufactured any product. Under the Novartis Agreement, the Company granted
Novartis an exclusive license (the “License”) to all of the intellectual property of the Company to
the extent that it is used or useful in the production of the vapor patches that Novartis is
selling under the Novartis Agreement. The License will continue in effect for the duration of the
patents lives permitted under applicable law. Upon the expiration of the patents included in the
licensed intellectual property Novartis will have a non-revocable, perpetual, fully paid-up license
to the intellectual property used or useful in the production of vapor patches for the pediatric
and the adult cough/cold market. Novartis is required by the Novartis Agreement to pay royalties,
at an agreed upon percentage, to the Company based on net semi-annual sales of vapor patches by
Novartis for each year the License is in effect.
In June 2006, Novartis issued a nationwide recall of all of its Triaminic® vapor patch
products. In a press release issued by Novartis pertaining to the recall, Novartis explained that
the recall was “due to the serious adverse health effects that could result if the product is
ingested by a child removing the patch and chewing on it.” At the same time that Novartis
announced this voluntary recall, the U.S. Food and Drug Administration (“FDA”) issued a release
warning consumers “not to use the Triaminic Vapor Patch due to reports of serious adverse events
associated with accidental ingestion by children.” According to news reports, the recall resulted
from an adverse event experienced by a child who suffered a seizure after chewing on a Triaminic
Vapor Patch. Novartis confirmed to the Company that the patch involved in this incident was not
manufactured by the Company. As a result of this recall, the Company was proactive in assisting
Novartis to resolve the FDA issues surrounding the product recall and used its
resources to move the Company forward to revive its royalty income stream. The Company has
met with Novartis representatives to discuss how to prevent an incident where a child or pet chews
or ingests a patch.
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In July 2007, Novartis began shipping a new adult vapor patch product in the United States for
the cough and cold season. Novartis has not announced whether it will re-introduce a vapor patch
for the pediatric market.
During the years ended December 31, 2010 and 2009, the Company recorded revenue of $91,273 and
$111,376, respectively, for royalties covered under the Novartis Agreement. The Company does not
know the marketing intent of Novartis for the vapor patch product. Year to year royalties paid to
LecTec have declined and the Company expects this per annum downward trend to continue.
NOTE D — PATENT COSTS
Patent costs consisted of the following:
| December 31, 2010 | December 31, 2009 | |||||||||||||||
| Gross carrying | Accumulated | Gross carrying | Accumulated | |||||||||||||
| amount | amortization | amount | amortization | |||||||||||||
Patents costs |
$ | 361,366 | $ | 308,705 | $ | 321,927 | $ | 292,116 | ||||||||
Amortization expense is expected to be as follows:
| Years ending December 31, | ||||
2011 |
15,046 | |||
2012 |
13,889 | |||
2013 |
10,360 | |||
2014 |
8,224 | |||
2015 |
5,142 | |||
In April 2007, the Company was informed that the U.S. Patent and Trademark Office (the USPTO)
had completed a re-examination of a patent pertinent to the Novartis Agreement and the Company was
issued a re-examination certificate. The patent is entitled “Non-Occlusive Adhesive Patch for
Applying Medication to the Skin” and covers the design for adhesive patches, which contain a
reservoir of medication to be delivered through the inhalation of vapors.
NOTE E — DISCONTINUED OPERATIONS
The Company ceased manufacturing operations of topical patches in 2004 and reported these
activities as discontinued operations. There was not any cost for assets of discontinued
operations at December 31, 2010 or 2009. However, the Company has fully depreciated assets on hand
that may be sold from time to time. Liabilities of discontinued operations of $130,000 consisted
of a reserve for sales returns and credits for sales prior to the discontinuance of operations. At
December 31, 2009 the Company determined that the reserve for sales returns was no longer a
liability since the Company ceased its manufacturing operations in 2004. As a result, the Company
recorded a reversal of this reserve of $130,000 in 2009.
NOTE F — COMMITMENTS AND CONTINGENCIES
Corporate Office and Lease Obligations |
The Company relocated its principal executive office to a facility in Texarkana, Texas in
August 2008 where it leases approximately 1,200 square feet of warehouse and office space. The
lease expired in February 2010 and had been renewed for $750 per month through March 1, 2011, and
has been subsequently renewed until March 1, 2012. The Company is also obligated to pay pro rata
share of the costs and expenses incurred by the Lessor to operate the common areas of the office
and warehouse complex. The Texas Lease contains customary representations, warranties and
covenants on the part of the Company and the landlord.
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The Company previously secured a small office in Pune, India in July 2008 to explore research,
development and manufacturing opportunities for advanced skin interface technologies and products.
Having completed an evaluation of the Company’s IP portfolio, this lease was terminated effective
July 31, 2010.
At December 31, 2010, the Company had vacated its Edina, Minnesota facility. The Company used
the space for liquidating saleable assets, storage of current accounting records, and managing an
orderly wind down of operations at that facility. The Company maintained approximately 3,300
square feet of space at that facility. Notice was given by the Company to the landlord of its
intention to vacate this facility by December 31, 2010.
Rent expense was $34,650 and $38,606 for 2010 and 2009, respectively.
The Company currently pays approximately $346 per month to provide storage and record
retention services at two facilities located in Minnesota.
Employee Benefit Plan
The Company has a contributory 401(k) profit sharing benefit plan covering its employees. The
Plan allows for discretionary contributions by the Company. No discretionary contributions were
made for 2010 or 2009.
Contingency Fee Arrangement
The Company has entered into a contingency fee agreement with Rader, Fishman & Grauer PLLC,
its legal counsel in the pending patent infringement litigation. Under this agreement, the Rader
firm will receive a percentage of any recovery in the litigation or other proceeds resulting from a
settlement of the litigation as its primary compensation for representing the Company in this
matter. The Company is also obligated (i) to reimburse the Rader firm for its out-of-pocket
expenses in connection with the litigation through an up front advance of $50,000 and monthly
advances of $10,000, and (ii) to engage and pay for expert services needed in the litigation,
provided that the Company’s obligation to advance such funds and pay such expert expenses will be
suspended if the Company’s cash levels fall below certain thresholds. Thereafter, if the Company’s
cash levels exceed such thresholds, or there is a recovery in or other proceeds from the
litigation, then the Rader firm will be reimbursed for any expenses it has covered while such
advances and payments were suspended. At December 31, 2010 the Company has expended approximately
$8,500,000 (in aggregate) under the agreement for advances to the Rader firm and payments for
expert services.
Legal Proceedings |
On July 25, 2008, the Company filed a complaint for patent infringement (the “Complaint”)
against five companies, including Chattem, Inc. (Ticker: CHTT), Endo Pharmaceuticals, Inc. (Ticker:
ENDP), Johnson & Johnson Consumer Company, Inc. (Ticker: JNJ), The Mentholatum Company, Inc
(Division of Rohto Pharmaceuticals, Ticker RPHCF.PK), and Prince of Peace Enterprises, Inc.
(Private Company) (collectively, the “Defendants”) in the U.S. District Court for the Eastern
District of Texas. The Complaint alleged, among other things, that the Defendants infringed two of
the Company’s patents (the “Patents—In—Suit”), which relate to the Company’s medicated patch
technology. The Company sought to enjoin the Defendants from infringing the Patents—In—Suit and
to recover monetary damages related to such infringement, as well as interest and litigation costs.
In October 2008, all five of the Defendants filed answers (the “Answers”) in response to the
Complaint denying the Company’s claims therein, and asserting certain affirmative defenses and
counterclaims against the Company, including assertions that the Patents—In—Suit are invalid and
unenforceable, and claims for attorneys’ fees and costs. On October 20, 2008, the Company filed
its replies to the Answers, denying such counterclaims and affirmative defenses, including the
claims that the Patents—In—Suit are invalid and unenforceable.
On December 3, 2008, the Company’s counsel in the litigation, Rader, Fishman & Grauer PLLC
(the “Counsel”), participated in a scheduling conference in this case. As a result of that
conference, the Court scheduled a Markman hearing for May 6, 2010 and a final pretrial conference
for January 3, 2011. On May 6, 2010 a Markman hearing occurred in Texarkana, Texas and the US
District Court for the Eastern District of Texas issued Orders concerning it on May 20, 2010. The
first Order was based on the Company’s motion to strike an exhibit from Chattem, Inc.’s Opposition
Brief, and the Company’s motion to strike was granted by the Court. The second Order issued by the
court denied Defendant’s motion request for leave to file for summary judgment as to non-infringement, but granted the request for leave to file for summary judgment as to invalidity
of patents. The Court also issued its Markman ruling interpreting the terms “cured” and
“non-occlusive” contained in the Company’s patents.
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The Company engaged in voluntary mediation with Chattem, Inc. in July 2010. A Report of
Mediation by the Hon. Harlan A. Martin was filed stating that the parties were unable to reach
settlement. On September 28, 2010 the United States District Court for the Eastern District of
Texas issued an Order regarding Prince of Peace’s and Chattem’s requests to file motions for
summary judgment: (1) of invalidity due to the on-sale bar of 35 U.S.C. § 102(b); and (2) regarding
such parties defenses of equitable estoppels and laches and the Company’s motions: (3) on, and to
preclude testimony related to, Defendants’ 35 U.S.C. § 102(b) defense based on the Aqua-Patch; and
(4) on infringement by Chattem and Prince of Peace. The Order granted Chattem and Prince of Peace
the right to file a summary judgment motion regarding on-sale bar, but denied them the opportunity
regarding the equitable defenses of estoppels and laches. With regard to the equitable issues, the
Court stated that the custom in patent cases is to hold a separate bench proceeding after the jury
trial on such issues. The Order granted the right to file summary judgment motions on infringement
and to preclude Chattem’s and Prince of Peace’s Aqua-Patch defense. The court denied all summary
judgment motions.
The Company reached settlements with Mentholatum, Endo and JJCC during 2009 (Note B). Prior
to trial beginning with respect to Chattem and Prince of Peace in January 2011, the trial date was
postponed until April 11, 2011. In March 2011 the Company reached settlement with Chattem (Note
B).
The Company is diligent in pursuing its patent infringement lawsuit against the remaining
defendant Prince of Peace and the Company’s legal counsel is preparing for trial.
The Company is unable to determine based on current information available whether it will be
successful in its legal pursuits against the remaining defendant. The Company gives no assurance
as to the outcome of the ongoing lawsuit or whether the Company’s Patents-In-Suit and claims
asserted in the related patents could be deemed invalid by a court of law.
NOTE G — INCOME TAXES
The components of income tax expense (benefit) are as follows:
| Years ended December 31, | ||||||||
| 2010 | 2009 | |||||||
Current |
$ | 76,953 | $ | $993,403 | ||||
Deferred |
(586,000 | ) | 48,000 | |||||
| $ | (509,047 | ) | $ | 1,041,403 | ||||
Effective tax rates differ from statutory income tax rates in the years ended December 31,
2010 and 2009 as follows:
| Years ended December 31, | ||||||||
| 2010 | 2009 | |||||||
Federal statutory income tax rate |
34.0 | % | 34.0 | % | ||||
State income taxes, net of federal effect |
— | 0.7 | ||||||
Incentive stock option compensation |
— | — | ||||||
Utilization of net operating loss
carryforwards |
— | (26.0 | ) | |||||
Valuation allowance for deferred taxes |
(4.7 | ) | — | |||||
Utilization of prior period credits |
— | (2.0 | ) | |||||
Other |
(1.4 | ) | (0.2 | ) | ||||
| 27.9 | % | 6.5 | % | |||||
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Deferred tax asset (liability) as of December 31, 2010 and 2009 consist of the following:
| December 31, | ||||||||
| 2010 | 2009 | |||||||
Current assets: |
||||||||
Accrued expenses |
$ | (51,000 | ) | $ | (49,300 | ) | ||
Long-term assets (liabilities): |
||||||||
Net operating loss carryforwards |
866,000 | 292,000 | ||||||
Nonqualified option compensation |
314,000 | 230,000 | ||||||
Other |
17,000 | 1,300 | ||||||
Net long-term assets |
1,197,000 | 523,300 | ||||||
Net deferred tax assets |
1,146,000 | 474,000 | ||||||
Less valuation allowance |
(608,000 | ) | (522,000 | ) | ||||
Net deferred income tax liability |
$ | 538,000 | $ | (48,000 | ) | |||
In 2010, the Company incurred a federal net operating loss in the amount of $1,678,000. As of
December 31, 2010, the Company had Federal and Minnesota net operating loss carryforwards of
$1,678,000 and $4,537,000, respectively. A valuation allowance has been recorded for the State net
operating loss carryforward. The Company has moved its operations to the state of Texas in 2009
and therefore management believes the Minnesota net operating losses will not be utilized.
During 2009 the Company utilized all of its federal loss carryforwards to reduce income tax
payable.
The Company continually reviews the adequacy of the valuation allowance and recognizes those
benefits only as the Company’s assessment indicates that it is more likely than not that future tax
benefits will be realized. The valuation allowance increased (decreased) by approximately $86,000
and ($4,505,700) for 2010 and 2009, respectively.
It is the Company’s practice to recognize penalties and/or interest related to income tax
matters in interest and penalties expense. As of December 31, 2010, the amount of accrued interest
and penalties is not material.
The Company is subject to income taxes in the U.S. federal jurisdiction and various states and
local jurisdictions. Tax regulations within each jurisdiction are subject to the interpretation of
the related tax laws and regulations and require significant judgment to apply. With few
exceptions, the Company is no longer subject to U.S. federal, state, or local income tax
examinations by tax authorities for the years before 2007. The Company is not currently under
examination by any taxing jurisdiction.
NOTE H — EQUITY TRANSACTIONS
Stock Options
In September 2010, LecTec shareholders approved the LecTec Corporation 2010 Stock Incentive
Plan (the “Stock Incentive Plan”). The Stock Incentive Plan replaced the existing LecTec
Corporation 2001 Stock Incentive Plan (the “2001 Stock Incentive Plan”), which is scheduled to
expire by its terms on July 1, 2011. The Stock Incentive Plan and 2001 Stock Incentive Plan
(collectively the “Plans”) are for the benefit of officers, employees, and directors of the
Company. Although there were 659,279 shares as of December 31, 2010 available for grant under the
2001 Stock Incentive Plan, no additional options can be granted under it because it was replaced by
the Stock Incentive Plan. A total of 370,000 shares of common stock are available for grants under
the Plans at December 31, 2010. An option not granted under the Plans to the Company’s CEO for
125,000 shares, subject to certain vesting requirements, were available for grant, at December 31,
2010. Options under the Company’s Plans are granted at fair market value on the date of grant and
generally expire ten years from the grant date. Options given to directors,
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officers, and employees are exercisable at such times as set forth in their individual option
agreements. All options that have been granted and outstanding are fully vested and exercisable as
of December 31, 2010, except for options for 125,000 shares granted to LecTec’s CEO for which
50,000 shares had vested and options for an aggregate of 80,000 shares granted to directors for
which 20,000 shares, had vested as of December 31, 2010. Subsequent to December 31, 2010, one
director retired and was replaced by a new Board member but had 10,000 vested shares of a
previously issued option as of December 31, 2010, and 10,000 unvested shares that will continue to
vest until the options expiration date of November 1, 2017.
Stock option activity during 2010 is summarized below:
| Weighted | ||||||||||||
| Weighted | Average | |||||||||||
| Average | Remaining | |||||||||||
| Options | Exercise Price | Contractual Life | ||||||||||
| Outstanding | per Share | ( in years) | ||||||||||
Outstanding on December 31, 2009 |
264,000 | $ | 3.94 | |||||||||
Granted |
205,000 | 3.50 | ||||||||||
Exercised |
(15,000 | ) | (2.60 | ) | ||||||||
Outstanding on December 31, 2010 |
454,000 | 3.79 | 7.7 | |||||||||
Exercisable on December 31, 2010 |
319,000 | $ | 3.91 | 7.5 | ||||||||
Changes in nonvested unit options were as follows for 2010:
| Weighted- | ||||||||
| Number of | Average Grant | |||||||
| Options | Date Fair Value | |||||||
Outstanding on December 31, 2009 |
— | — | ||||||
Granted |
205,000 | $ | 3.12 | |||||
Vested |
(70,000 | ) | ($3.13 | ) | ||||
Outstanding on December 31, 2010 |
135,000 | $ | 3.12 | |||||
As of December 31, 2010, there was $395,121 of total unrecognized compensation cost related to
non-vested share-based compensation arrangements granted under the Company’s 2010 Stock Incentive
Plan. This unrecognized compensation cost will be recognized through August, 2011.
There were no options granted or exercised during fiscal 2009. Options granted during fiscal
2010 had a weighted-average fair value of $3.12 per option. One option was partially exercised for
15,000 shares at $2.60 per share during 2010.
On May 26, 2010, the Board of Directors of the Company approved the grant as of June 1, 2010
of a Non-Qualified Stock Option, outside of the Plans or any plan approved by LecTec shareholders,
to Gregory Freitag pursuant to his becoming CEO of the Company. The option to Mr. Freitag was for
the purchase of 125,000 shares of the Company’s common stock at $3.50 per share, vests as to 20% of
the shares every 90 days from the grant date and will expire on June 1, 2020. On November 1, 2010,
the Board of Directors of the Company granted to each of the four non-employee members of the Board
of Directors of the Company, non-incentive stock options pursuant to the Stock Incentive Plan.
Messrs. Tim Heaney, Robert Rudelius, Sanford Brink and Kevin Lynch each received an option to
purchase 20,000 shares of the Company’s common stock at $3.50 per share. All of the options vested
as to 5,000 shares immediately and then vest as to an additional 5,000 shares every 90 days until
fully vested and will expire on November 1, 2017. The exercise price for all options issued was at
a price equal to, or greater than, the fair market value of the Company’s common stock on the date
of grant. All such options provide that termination of service as a Director or employee of the
Company in the event of a change in control will result in all shares being immediately vested and
will not cause a change in the terms of the option or cause the option to terminate. All
options do have provisions that alter the terms of the option in the event there is
termination of service as a Director or employee other than as a result of a change in control of
the Company.
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The Company did not record any share-based compensation expense for the year ended December
31, 2009 as no options were granted. For the year ended December 31, 2010 the Company recorded
share-based compensation expense of $245,258, using the Black-Scholes-Merton option pricing model
with the following assumptions:
Risk-free interest rate |
2.75 | % | ||
Expected dividend yield |
0.00 | % | ||
Expected stock price volatility (1) |
188.70 | % | ||
Expected life of options in years (2) |
8.83 |
| (1) | Volatility was based on the historical volatility of the Company’s common stock. | |
| (2) | Expected life of options was based on expected turnover and other averaging methods. |
In January and February 2011, the Company granted options to purchase 20,000 shares of common
stock each to two directors of the Company. The options have an exercise price of $3.50 per share,
vest as to 5,000 shares immediately and then additional 5,000 shares each of the following three
quarters and will expire seven years from the grant date.
In February, 2011 a director resigned and his previously granted option of 20,000 shares was
cancelled.
Cash Dividends |
On December 21, 2009, the Board of Directors declared a cash dividend of $1.00 per share to
shareholders of record at January 29, 2010 that was payable on February 12, 2010. The Company
distributed $4,298,350 on February 12, 2010 to its shareholders.
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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
The Company maintains “disclosure controls and procedures” as defined in Rules 13a-15(e) and
15d-15(e) under the Securities Exchange Act of 1934, (the “Exchange Act”), that are designed to
ensure that information required to be disclosed by us in reports we file or submit under the
Exchange Act is recorded, processed, summarized and reported within the time periods specified in
the SEC’s rules and forms, and that such information is accumulated and communicated to our
management, including our principal executive officer and principal financial officer, and Board of
Directors, as appropriate, to allow timely decisions regarding required disclosure. In designing
and evaluating our disclosure controls and procedures, management recognizes that disclosure
controls and procedures, no matter how well conceived and operated, can provide only reasonable
assurance of achieving the desired objectives, and we necessarily are required to apply our
judgment in evaluating the cost-benefit relationship of possible disclosure controls and
procedures.
Our management, including our principal executive officer and principal financial officer,
evaluated the effectiveness of the design and operation of our disclosure controls and procedures
as of December 31, 2010 and concluded that our disclosure controls and procedures were effective as
of December 31, 2010.
MANAGEMENT’S ANNUAL REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Our management is responsible for establishing and maintaining internal control over financial
reporting, as such term is defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act. The
Company’s internal control system is designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements for external
purposes, in accordance with generally accepted accounting principles. Because of inherent
limitations, a system of internal control over financial reporting may not prevent or detect
misstatements. Also, projections of any evaluation of effectiveness to future periods are subject
to the risk that controls may become inadequate due to change in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.
Our management, including our Chief Executive Officer and Chief Financial Officer, conducted
an evaluation of the effectiveness of our internal control over financial reporting using the
criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO)
in Internal Control-Integrated Framework. Based on its evaluation, our management concluded that
our internal control over financial reporting was effective as of December 31, 2010.
This Form 10-K does not include an attestation report of the Company’s registered public
accounting firm regarding internal control over financial reporting. Management’s report was not
subject to attestation by the Company’s registered public accounting firm pursuant to temporary
rules of the SEC that permit the Company to provide only management’s report in this annual report.
CHANGES IN INTERNAL CONTROLS OVER FINANCIAL REPORTING
During the quarter ended December 31, 2010, there were no changes in the Company’s internal
control over financial reporting (as defined in Rule 13a-15(f) and 15d—15(f) under the Exchange
Act) that has materially affected, or is reasonably likely to materially affect, the Company’s
internal control over financial reporting.
ITEM 9B. OTHER INFORMATION
On March 29, 2011, the Company sent notice to Judd Berlin that the Company is terminating the Advisory Services
Agreement, dated June 1, 2010, between the Company and Mr. Berlin, in accordance with the terms of the Advisory
Services Agreement. The termination of the Advisory Services Agreement will be effective on April 28, 2011.
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PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.
Executive Officers and Directors
| Name | Age | Title | ||||
Gregory Freitag
|
49 | Chief Executive Officer, Chief Financial Officer, | ||||
Robert Rudelius
|
55 | Director, Chairman of the Board of Directors | ||||
Timothy Heaney
|
64 | Director | ||||
Lowell Hellervik, Ph.D.
|
76 | Director | ||||
Elmer Salovich
|
74 | Director | ||||
Gregory G. Freitag, J.D., CPA, 49 years old, has been our Chief Executive, Chief Financial
Officer and a member of our Board of Directors since June 2010. From May 2009 to the present, Mr.
Freitag has worked for FreiMc, LLC, a consulting and advisory firm founded by Mr. Freitag that
provides strategic guidance and business development advisory services. Mr. Freitag also founded
and currently works for EmployRx. Inc., a business that provides services to self—insured
employers relating to prescription drug benefits. Prior to founding FreiMc, LLC and EmployRx,
Inc., Mr. Freitag was the Director of Business Development at Pfizer Health Solutions, a former
subsidiary of Pfizer, Inc., from January 2006 to May 2009. From July 2005 to January 2006, Mr.
Freitag worked for Guidant Corporation in their business development group. Prior to Guidant
Corporation, Mr. Freitag was the Chief Executive Officer of HTS Biosystems, a biotechnology tools
start—up company, from March 2000 until its sale in early 2005. Mr. Freitag was the Chief
Operating Officer, Chief Financial Officer and General Counsel of Quantech, Ltd., a public point of
care diagnostic company, from December 1995 to March 2000. Prior to that time, Mr. Freitag
practiced corporate law in Minneapolis, Minnesota. Mr. Freitag is also a director of Pressure
BioSciences, Inc. (NASDAQ: PBIO) a publicly traded life sciences company focused on the development
of a novel, enabling technology called Pressure Cycling Technology. Mr. Freitag brings to our
Board of Directors nearly 15 years of senior level executive life science and healthcare
experience. His proven leadership and experience as a senior level executive and his finance
management and legal expertise add significant value to our Board of Directors.
Robert J. Rudelius, MBA, 55 years old, has been a director since September 2010, Chairman of
the Board since February 2011, is Chairman of the Nominating and Governance Committee and serves on
the Audit Committee. Since 2003, Mr. Rudelius has been the Managing Director and Chief Executive
Officer of Noble Ventures, LLC, a company he founded that provides advisory and consulting services
to early—stage companies in the information technology, renewable energy and loyalty marketing
fields. Mr. Rudelius is also the Managing Director and Chief Executive Officer of Noble Logistics,
LLC, a holding company he founded in 2002 to create, acquire and grow a variety of businesses in
the freight management, logistics and information technology industries. From April 1999 through
May 2001, when it was acquired by StarNet L.P., Mr. Rudelius was the founder and Chief Executive
Officer of Media DVX, Inc., a start—up business that provided a satellite—based, IP—multicasting
alternative to transmitting television commercials via analog videotapes to television stations,
networks and cable television operators throughout North America. Mr. Rudelius assisted StarNet
L.P. with the transition and integration of the Media DVX, Inc. business through January 2002.
From April 1998 to April 1999, Mr. Rudelius was the President and Chief Operating Officer of
Control Data Systems, Inc., during which time Mr. Rudelius reorganized and repositioned the
software company as a professional services company, which resulted in the successful sale of
Control Data Systems, Inc. to Syntegra, British Telecom’s systems integration subsidiary. From
October 1995 through April 1998, Mr. Rudelius was the founding Managing Partner of AT&T Solution’s
Media, Entertainment & Communications industry group. From January 1990 through September 1995,
Mr. Rudelius was a partner in McKinsey & Company’s Information, Technology and Systems practice
group, during which time he headed the practice group in Tokyo and co—led the practice group in
London. Mr. Rudelius is currently a member of the Board of Directors of ProUroCare Medical, Inc.,
a publicly—held medical device company that develops and markets prostate imaging systems. Mr.
Rudelius brings to our Board of Directors extensive executive level experience, including
experience in business growth. This experience, in addition to his experience as a director of a
publicly traded company, adds significant value to our Board of Directors.
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Timothy M. Heaney, J.D., 64 years old, has been a director of the Company since September
2010, is Chairman of the Audit Committee and serves on the Nominating and Governance Committee.
Mr. Heaney is a retired attorney, and since October 2002 has been a private investor and volunteer. From September
1999 through September 2002, Mr. Heaney was a Vice President and General Counsel and a member of
the Board of Directors of Techne Corporation and continued thereafter in a part—time
non—director, non—officer role through September 2004. Techne Corporation is a NASDAQ listed
company, with a market capitalization of over $2 billion that conducts its principal operations
through its subsidiary, R&D Systems, a biotechnology company involved in the manufacture and
world—wide sales of research and hematology products. From August 1972 through September 1999,
Mr. Heaney practiced corporate law in Minneapolis, Minnesota and represented small and growing
businesses and assisted clients with the preparation and execution of business plans, obtaining
initial and follow—on financings, establishing supplier relationships and negotiating domestic and
international distribution agreements, employment agreements and commercial contracts. Mr. Heaney
also has extensive experience in government regulation compliance matters relating to securities,
environment and labor issues and has served by court appointment under the Securities Investor
Protection Act as a trustee for the liquidation of bankrupt brokerage firms. He has lectured in
continuing legal education programs in the areas of securities law and venture capital. Mr. Heaney
brings to our Board of Directors extensive experience in assisting companies with their financing,
merger and acquisition matters. This experience, in addition to his legal perspective and
experience as a director of a publicly traded company, adds significant value to our Board of
Directors.
Lowell Hellervik, 76, has been a director since January 2011 is Chairman of the Compensation
Committee and serves on the Nominating and Governance Committee. Dr. Hellervik is Chairman of the
Board of Personnel Decisions International (“PDI”), the business where he started his career in
1967, was named President in 1975 and was CEO from 1989 until 2010. Under Dr. Hellervik’s
direction, PDI has grown from a small, local consulting firm to a premier, international,
management consulting firm, with headquarters in Minneapolis, Minnesota and has over 30 operating
offices around the world. Dr. Hellervik is also on the adjunct staff at the University of
Minnesota with the title of Clinical Associate Professor, has endowed several academic chairs at
the U of M and is an original author of the Successful Manager’s Handbook. Dr. Hellervik brings to
our Board of Directors extensive executive level experience, the successful growth of PDI reflects
his business capabilities and as an industrial physiologist he is able to provide unique due
diligence insights. Dr. Hellervik is well-suited to serve as a member of our Board of Directors
Elmer Salovich, M.D., 74, has been a director since February 2011 and serves on the
Compensation and Nominating and Governance Committees. Dr. Salovich is an orthopedic surgeon,
having received his Doctor of Medicine, and completed his orthopedic surgery residency, at the
University of Minnesota School of Medicine. In addition to his medical credentials, Dr. Salovich
has a Bachelor’s Degree in Business Administration, with a Major in Corporate Finance and a Minor
in Accounting and a Master’s Degree in Healthcare Administration. He is affiliated with Abbott
Northwestern Hospital and Centennial Lakes Surgery Center and is a contract practitioner with Twin
Cities Orthopedics. Dr. Salovich has a unique understanding of both the practice and business of
health care that adds significant value to our Board of Directors.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934 requires our executive officers and
directors and persons who beneficially own more than 10% of our common stock to file initial
reports of ownership and reports of changes in ownership with the Securities and Exchange
Commission. Such executive officers, directors, and greater than 10% beneficial owners are
required by the regulations of the Securities and Exchange Commission to furnish us with copies of
all Section 16(a) reports they file.
Based solely on a review of the copies of such reports furnished to us and representations
from the executive officers and directors, we believe that all Section 16(a) filing requirements
applicable to our executive officers, directors and greater than 10% beneficial owners during 2010
have been satisfied.
Code of Ethics
We have adopted a Code of Business Ethics applicable to all of our employees, including our
principal executive officer, principal financial officer, and principal accounting officer. Our
Code of Business Ethics is required to be read and signed upon the commencement of employment with
the Company. A copy of our Code of Business Ethics is available free of charge from the acting
Secretary of the Company.
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Audit Committee
Timothy Heaney (Chairman) and Robert Rudelius comprise the Audit Committee of our Board of
Directors pursuant to the rules of the Securities and Exchange Commission. Both members qualify as
an “audit committee financial expert” under the definition promulgated by the Securities and
Exchange Commission.
ITEM 11. EXECUTIVE COMPENSATION.
Executive Compensation
The
following table sets forth the cash and non—cash compensation for the last two
fiscal years awarded to or earned by Judd A. Berlin, who was our Chief Executive Officer and Chief
Financial Officer during 2009 and through June 1, 2010, by Gregory G. Freitag, who has been our
Chief Executive Officer and Chief Financial Officer since June 1, 2010, and by Dr. Daniel C. Sigg,
who served as our Chief Scientific Officer until October 1, 2010. There were no other executive
officers or individuals who earned more than $100,000 during 2010.
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Summary Compensation Table
| Option | All Other | |||||||||||||||||||||||
| Name and Principal | Salary | Bonus | Awards | Compensation | Total | |||||||||||||||||||
| Position | Year | ($) | ($) | ($)(1) | ($) | ($) | ||||||||||||||||||
Judd A. Berlin(2) |
2010 | 165,000 | — | — | 80,500 | 245,500 | ||||||||||||||||||
Chief Executive
Officer, Chief Financial Officer and Director |
2009 | — | 200,000 | (3) | — | — | 200,000 | |||||||||||||||||
Gregory G. Freitag(4) |
2010 | 87,500 | — | 393,060 | 6,000 | 486,560 | ||||||||||||||||||
Chief Executive
Officer, Chief Financial Officer and Director |
2009 | — | — | — | — | — | ||||||||||||||||||
Dr. Daniel C. Sigg(5) |
2010 | 87,083 | — | — | 15,000 | 102,083 | ||||||||||||||||||
Chief Scientific
Officer |
2009 | — | 60,000 | (5) | — | — | 60,000 | |||||||||||||||||
| (1) | The amounts in this column are calculated based on the aggregate grant date fair value computed in accordance with Accounting Standards Codification (ASC) Topic 718. The amount of option awards for the year ended December 31, 2010 were calculated based on ASC Topic 718 and $183,428 has been recognized in the financial statements as compensation expense for stock option awards as reported in our statements of operations as of December 31, 2010. The remaining $209,632 of compensation expense will be recognized in the financial statements by August 2011. The recorded expense is based on the fair value of the stock option grants as estimated using the Black—Scholes—Merton option—pricing model. The assumptions used to arrive at the Black—Scholes—Merton value are disclosed in Note H to our financial statements included in this Form 10—K. The full grant date ASC Topic 718 value of the option awards granted in 2010 to Mr. Freitag was $393,060. There were no other option grants made to either Mr. Berlin or Mr. Freitag during 2009 or 2010. | |
| (2) | Mr. Berlin served as our Chief Executive Officer during 2009 and from January 1, 2010 to June 1, 2010, at which time Mr. Berlin stepped down as our Chief Executive Officer and Chief Financial Officer, but continued as an advisor to the Company. The Summary Compensation Table reflects $165,000 in compensation received by Mr. Berlin in his capacity as our Chief Executive Officer and Chief Financial Officer in 2010 and $80,500 in compensation received by Mr. Berlin in his capacity as an advisor to the Company in 2010. | |
| (3) | On December 21, 2009, our Board of Directors granted to Mr. Berlin a one—time payment of $200,000 in recognition of Mr. Berlin’s long service to the Company without compensation. | |
| (4) | Mr. Gregory G. Freitag is our current Chief Executive Officer and Chief Financial Officer and has been serving in such capacity since June 1, 2010, and, prior to such time, served as a consultant to the Company in 2010. The Summary Compensation Table reflects $87,500 in compensation received by Mr. Freitag in his capacity as our Chief Executive Officer and Chief Financial Officer in 2010 and $6,000 in compensation received by Mr. Freitag in his capacity as a consultant to the Company in 2010. | |
| (5) | Dr. Sigg served as our Chief Scientific Officer during 2010 and from January 1, 2010 to October 1, 2010, at which time Dr. Sigg stepped down as our Chief Scientific Officer, but continued as an advisor to the Company. The Summary Compensation Table reflects $87,083 in compensation received by Dr. Sigg in his capacity as our Chief Scientific Officer in 2010 and $15,000 in compensation received by Dr. Sigg in his capacity as an advisor to the Company in 2010. On December 21, 2009, our Board of Directors granted to Dr. Sigg a bonus payment of $60,000. |
The following table summarizes the unexercised stock options held at the end of fiscal year
2010 by the executive officers named in the Summary Compensation Table.
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Outstanding Equity Awards at 2010 Fiscal Year—End Table
| Stock Awards | ||||||||||||||||||||||||||||||||
| Market | ||||||||||||||||||||||||||||||||
| Option Awards | Number | Value of | ||||||||||||||||||||||||||||||
| Number of | Number of | of Shares | Shares or | |||||||||||||||||||||||||||||
| Securities | Securities | or Units | Units of | |||||||||||||||||||||||||||||
| Underlying | Underlying | of Stock | Stock | |||||||||||||||||||||||||||||
| Unexercised | Unexercised | Option | Stock | That | That | |||||||||||||||||||||||||||
| Option | Options (#) | Options (#) | Exercise | Option Expiration | Award | Have Not | Have Not | |||||||||||||||||||||||||
| Name | Grant Date | Exercisable | Unexercisable | Price ($) | Date | Grant Date | Vested (#) | Vested ($) | ||||||||||||||||||||||||
Judd A. Berlin(1) |
September 26, 2008 | 66,000 | — | 4.00 | September 26, 2018 | — | — | — | ||||||||||||||||||||||||
Gregory G. Freitag(2) |
June 1, 2010 | 50,000 | 75,000 | 3.50 | June 1, 2020 | — | — | — | ||||||||||||||||||||||||
Dr. Daniel C. Sigg(3) |
September 20, 2007 | 25,000 | — | 2.60 | September 20, 2017 | — | — | — | ||||||||||||||||||||||||
Dr. Daniel C. Sigg(3) |
September 20, 2007 | 25,000 | — | 5.20 | September 20, 2017 | — | — | — | ||||||||||||||||||||||||
Dr. Daniel C. Sigg(4) |
September 26, 2008 | 16,000 | — | 4.00 | September 26, 2018 | — | — | — | ||||||||||||||||||||||||
| (1) | On September 26, 2008, Mr. Berlin received an option to purchase 66,000 shares of the Company’s common stock at $4.00 per share. These options were outstanding as of December 31, 2010. All of the options were fully vested and exercisable as of the date of grant and will expire on September 26, 2018. The option was granted under plans previously approved by the Company’s shareholders and the exercise price for the options were issued at a price equal to the fair market value of the Company’s common stock on the date of grant. All of the options provide that termination of service as a Director of the Company for any reason other than for cause will not affect the terms of the option or cause the option to terminate. | |
| (2) | On June 1, 2010, Mr. Freitag received an option to purchase 125,000 shares of the Company’s common stock at $3.50 per share. These options were outstanding as of December 31, 2010. The option becomes exercisable in five equal installments on September 3, 2010, December 2, 2010, March 2, 2011, May 31, 2011 and August 29, 2011. The option was granted outside of plans previously approved by the Company’s shareholders and the exercise price for the option was issued at a price equal to the fair market value of the Company’s common stock on the date of grant. If there is a Change in Control (as defined in the option agreement) of the Company and Mr. Freitag’s employment by the Company is terminated within 15 months following such change in control for any reason other than Mr. Freitag’s death, by the Company for Cause (as defined in the option agreement) or by Mr. Freitag other than for Good Reason (as defined in the option agreement), the entire option will vest and become immediately exercisable. | |
| (3) | On September 20, 2007, Dr. Sigg was awarded options to purchase 25,000 shares of the Company’s common stock at an exercise price of $2.60 per share and options to purchase 25,000 shares of the Company’s common stock at an exercise price of $5.20 per share. These options were immediately vested in full on the date of grant and will expire on September 20, 2017. The options provide that termination of service as a director of LecTec Corporation for any reason other than for cause will not affect the terms of the option or cause the option to terminate. | |
| (4) | On September 26, 2008, Dr. Sigg was awarded an option to purchase 16,000 shares of the Company’s common stock at an exercise price of $4.00 per share. The option was immediately vested in full on the date of grant and will expire on September 26, 2018. The options provide that termination of service as a director of LecTec Corporation for any reason other than for cause will not affect the terms of the option or cause the option to terminate. |
Director Compensation
Upon the election of our new Board of Directors, each non—employee member of our Board of
Directors will receive an annual cash payment of $12,000 for annual services to LecTec, which cash
payment will be paid in advance in quarterly installments of $3,000 before the beginning of each of
the quarters in which services will be performed. In addition, each member of our Board of
Directors will receive a 7 year option to purchase 20,000 shares of our common stock at an exercise
price equal to the fair market value of our common stock on the date of grant. The option will vest
immediately with respect to 5,000 shares of our common stock and will vest with respect to 5,000
shares of our common stock for each of the following three quarters. Each option will provide that
termination of service as a member of our Board of Directors for any reason other than for cause,
as defined in the option agreement, will not affect the terms of the option or cause the option to
terminate and the option will become fully vested in the event such director is terminated in
connection with an acquisition or merger.
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The following table shows the compensation earned by all persons serving as members of our
Board of Directors during 2010.
Director Compensation Table
| Fees | ||||||||||||||||
| Earned or | Stock | Option | ||||||||||||||
| Paid in | Awards | Awards | ||||||||||||||
| Name | Cash ($) | ($) | ($)(3) | Total ($) | ||||||||||||
Judd A. Berlin(1) |
— | — | — | — | ||||||||||||
Ramanathan
Periakaruppan(1) |
6,772 | — | — | 6,772 | ||||||||||||
C. Andrew Rollwagen(1) |
8,750 | — | — | 8,750 | ||||||||||||
Daniel C. Sigg M.D. PhD(1) |
— | — | — | — | ||||||||||||
Sanford M. Brink |
16,125 | — | 61,829 | 77,954 | ||||||||||||
Gregory G. Freitag(2) |
— | — | — | — | ||||||||||||
Timothy M. Heaney(2) |
6,000 | — | 61,830 | 67,830 | ||||||||||||
Kevin C. Lynch(2) |
6,000 | — | 61,830 | 67,830 | ||||||||||||
Robert J. Rudelius(2) |
6,000 | — | 61,830 | 67,830 | ||||||||||||
| (1) | Served as a member of our Board of Directors through September 22, 2010. | |
| (2) | Service as a member of our Board of Directors began on September 22, 2010. | |
| (3) | The amounts in this column are calculated based on the aggregate grant date fair value computed in accordance with Accounting Standards Codification (ASC) Topic 718. The amount of option awards for the year ended December 31, 2010 were calculated based on ASC Topic 718 and $61,830 has been recognized in the financial statements as compensation expense for stock option awards as reported in our statements of operations as of December 31, 2010. The remaining $185,489 of compensation expense will be recognized in the financial statements by July 2011. The recorded expense is based on the fair value of the stock option grants as estimated using the Black—Scholes—Merton option—pricing model. The assumptions used to arrive at the Black—Scholes—Merton value are disclosed in Note H to our financial statements included in this Form 10—K. The full grant date ASC Topic 718 value of the option awards granted in 2010 to four directors of the Company as of December 31, 2010 was $247,319. Service as a member of our Board of Directors began on September 22, 2010 with the exception of Sanford M. Brink whose service as a director began on July 19, 2009. |
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS
Securities Authorized for Issuance Under Equity Compensation Plans
The following table summarizes, with respect to the Company’s equity compensation plans, the
number of shares of the Company’s common stock to be issued upon exercise of outstanding options,
warrants and other rights to acquire shares, the weighted-average exercise price of these
outstanding options, warrants and rights and the number of shares remaining available for future
issuance under the Company’s equity compensation plans as of December 31, 2010.
| Number of Securities | ||||||||||||
| Weighted-Average | Remaining Available for | |||||||||||
| Number of Securities to be | Exercise Price of | Future Issuance Under | ||||||||||
| Issued Upon Exercise of | Outstanding | Equity Compensation Plans | ||||||||||
| Outstanding Options, | Options, Warrants | (Excluding Securities | ||||||||||
| Plan Category | Warrants and Rights | and Rights ($) | Reflected in the First Column) | |||||||||
Equity compensation
plans approved by
security holders |
329,000 | 3.90 | 370,000 | |||||||||
Equity compensation
plans not approved
by security holders |
125,000 | 3.50 | — | |||||||||
Total |
454,000 | 3.79 | 370,000 | |||||||||
36
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LecTec Corporation 2001 Stock Option Plan
The LecTec Corporation 2001 Stock Option Plan (the “2001 Stock Incentive Plan”) was designed
(i) to aid in maintaining and developing personnel capable of assuring the future success of the
Company and to offer such personnel additional incentives to put forth maximum efforts for the
success of the business, and (ii) to afford such personnel an opportunity to acquire a proprietary
interest in the Company through stock options. An aggregate of 750,000 shares are authorized for
issuance under the 2001 Stock Incentive Plan pursuant to the grant of stock options, stock
appreciation rights, restricted stock, restricted stock units or other stock grants (“Awards”).
The 2001 Stock Incentive Plan became effective on July 1, 2001 and terminates on July 1, 2011. No
additional options are to be granted under the 2001 Stock Incentive Plan.
The 2001 Stock Incentive Plan authorizes the grant of Awards to any employee, consultant, or
independent contractor providing services to the Company or any affiliate of the Company, except
that officers and directors of the Company or the Company’s affiliates are not eligible to
participate in the 2001 Stock Incentive Plan. A committee of directors designated by the Company’s
Board of Directors (the “Committee”) is responsible for administering the 2001 Stock Incentive
Plan.
The exercise price, option term, and time and method of exercise of the stock options granted
under the 2001 Stock Incentive Plan are determined by the Committee. Subject to the terms of the
2001 Stock Incentive Plan and any applicable agreement, the grant price, term, method of exercise,
date of exercise, method of settlement and any other term and condition of any stock appreciation
rights are determined by the Committee. The Committee may impose such conditions or restrictions
on the exercise of any stock appreciation right as it may deem appropriate. Shares of restricted
stock and restricted stock units are subject to such restrictions as the Committee may impose
(including, without limitation, a waiver by participants of the right to vote or to receive any
dividend or other right or property with respect thereto), which restrictions may lapse separately
or in combination at such time or times, in such installments or otherwise as the Committee may
deem appropriate. Any restricted stock granted under the 2001 Stock Incentive Plan is evidenced by
issuance of a stock certificate or certificates, which certificate or certificates are held by the
Company. Except as otherwise determined by the Committee, upon a participant’s termination of
employment during the applicable restriction period, all shares of restricted stock and all
restricted stock units held by the participant at such time are forfeited and reacquired by the
Company. The Committee may, when it finds that a waiver would be in the best interest of the
Company, waive in whole or in part any or all-remaining restrictions with respect to shares of
restricted stock or restricted stock units. Finally, the Committee is authorized, subject to the
terms of the 2001 Stock Incentive Plan and any applicable award agreement, to grant to eligible
persons shares of common stock without restrictions thereon as are deemed by the Committee to be
consistent with the purpose of the 2001 Stock Incentive Plan.
LecTec Corporation 2010 Stock Incentive Plan
In September 2010 LecTec’s shareholders approved, the LecTec Corporation 2010 Stock Incentive
Plan (the “Stock Incentive Plan”). The purpose of the Stock Incentive Plan is to promote the
interests of LecTec and its shareholders by aiding LecTec in attracting and retaining employees,
officers, consultants, advisors and non—employee directors who the Company expects will contribute
to its success and to enable these individuals to participate in the Company’s long—term success
and growth by giving them a proprietary interest in LecTec. The aggregate number of shares of
LecTec common stock that may be issued under all stock—based awards made under the Stock Incentive
Plan is 450,000. The Stock Incentive Plan replaced the 2001 Stock Incentive Plan, which is
scheduled to expire by its terms on July 1, 2011.
The Compensation Committee of our Board of Directors (the “Compensation Committee”) will
administer the Stock Incentive Plan and will have full power and authority, along with the Board,
to determine when and to whom awards will be granted, and the type, amount, form of payment and
other terms and conditions of each award, consistent with the provisions of the Stock Incentive
Plan. In addition, the Compensation Committee can specify whether, and under what circumstances,
awards to be received under the Stock Incentive Plan or amounts payable under such awards may be
deferred automatically or at the election of either the holder of the award or the Compensation
Committee. Subject to the provisions of the Stock Incentive Plan, the Compensation Committee may
amend or waive the terms and conditions, or accelerate the exercisability, of an outstanding award.
The Compensation Committee has authority to interpret the Stock Incentive Plan and establish rules
and regulations for the administration of the Stock Incentive Plan.
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Any employee, officer, consultant, advisor or non—employee director providing services to
LecTec or any of its affiliates, who is selected by the Compensation Committee, is eligible to
receive an award under the Stock Incentive Plan, provided that, in the case of consultants and
advisors, such services are not in connection with the offer or sale of securities in a
capital—raising transaction and do not directly or indirectly promote or maintain a market for our
securities.
The Stock Incentive Plan permits grants of:
| • | stock options (including both incentive and non—qualified stock options); | ||
| • | stock appreciation rights (“SARs”); | ||
| • | restricted stock and restricted stock units; | ||
| • | dividend equivalents; | ||
| • | performance awards of cash, stock or property; | ||
| • | stock awards; and | ||
| • | other stock—based awards. |
Awards may be granted alone, in addition to, in combination with or in substitution for, any
other award granted under the Stock Incentive Plan or any other compensation plan. Awards can be
granted for no cash consideration or for any cash or other consideration as may be determined by
the Compensation Committee or as required by applicable law. Awards may provide that upon the
grant or exercise thereof, the holder will receive cash, shares of LecTec common stock, other
securities or property or any combination of these in a single payment, installments or on a
deferred basis. The exercise price per share under any stock option and the grant price of any SAR
may not be less than the fair market value of the Company’s common stock on the date of grant of
such option or SAR except to satisfy legal requirements of foreign jurisdictions or if the award is
in substitution for an award previously granted by an entity acquired by us. Determinations of
fair market value under the Stock Incentive Plan will be made in accordance with methods and
procedures established by the Compensation Committee. The term of awards may not be longer than
ten years from the date of grant. Awards will be adjusted by the Compensation Committee in the
case of a stock dividend or other distribution, recapitalization, stock split, reverse stock split,
reorganization, merger, consolidation, split—up, spin—off, combination, repurchase or exchange of
shares, issuance of warrants or other rights or other similar corporate transaction or event that
affects shares of our common stock in order to prevent dilution or enlargement of the benefits or
potential benefits intended to be provided under the Stock Incentive Plan.
If an award entitles the holder to receive or purchase shares of Company common stock, the
shares covered by such award or to which the award relates will be counted against the aggregate
number of shares available for awards under the Stock Incentive Plan. For SARs settled in shares
upon exercise, the aggregate number of shares with respect to which the SAR is exercised, rather
than the number of shares actually issued upon exercise, will be counted against the number of
shares available for awards under the Stock Incentive Plan. Awards that do not entitle the holder
to receive or purchase shares and awards that are settled in cash will not be counted against the
aggregate number of shares available for awards under the Stock Incentive Plan.
The Stock Incentive Plan provides that shares covered by an award made under the Stock
Incentive Plan (or to which such an award relates) that are not purchased, that are forfeited or
are reacquired by LecTec (including shares of restricted stock, whether or not dividends have been
paid on such shares), or that are subject to an award that otherwise terminates or is cancelled
without delivery of such shares, shall be available for award again under the Stock Incentive Plan
to the extent of any such forfeiture, reacquisition, termination or cancellation. Shares that are
withheld in full or partial payment of the purchase or exercise price of any award or in connection
with the satisfaction of tax obligations relating to an award will not be available again for grant
awards under the Stock Incentive Plan.
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Unless terminated by the Board of Directors, the Stock Incentive Plan will expire on
August 15, 2020. No awards may be made after that date. However, unless otherwise expressly
provided in an applicable award agreement, any award granted under the Stock Incentive Plan prior
to expiration may extend beyond the expiration
of the Stock Incentive Plan through the award’s normal expiration date. The Board of
Directors may amend, alter, suspend, discontinue or terminate the Stock Incentive Plan at any time,
although shareholder approval must be obtained for any amendment to the Stock Incentive Plan that
would: (1) increase the number of shares of our common stock available under the Stock Incentive
Plan, (2) increase the award limits under the Stock Incentive Plan, (3) permit awards of options or
SARs at a price less than fair market value, (4) permit repricing of options or SARs or (5) cause
Section 162(m) of the Internal Revenue Code to become unavailable with respect to the Stock
Incentive Plan. Shareholder approval is also required for any action that requires shareholder
approval under the rules and regulations of the Securities and Exchange Commission or any other
securities exchange that are applicable to us.
No option or SAR may be amended to reduce its initial exercise or grant price, and no option
or SAR may be cancelled and replaced with awards having a lower exercise or grant price. However,
the Compensation Committee may adjust the exercise or grant price of, and the number of shares
subject to, any outstanding option or SAR in connection with a stock dividend or other
distribution, recapitalization, stock split, reverse stock split, reorganization, merger,
consolidation, split—up, spin—off, combination, repurchase or exchange of shares, issuance of
warrants or other rights or other similar corporate transaction or event that affects shares of our
common stock, in order to prevent dilution or enlargement of the benefits, or potential benefits
intended to be provided under the Stock Incentive Plan.
Table of Security Ownership of Certain Beneficial Owners and Management
The following table sets forth certain information with respect to the beneficial ownership of
our common stock as of March 30, 2011, by each person, or group of affiliated persons, who is known
by us to beneficially own more than 5% of our common stock, each of our directors, each of our
executive officers named in the Summary Compensation Table above and all of our directors and
executive officers as a group.
Beneficial ownership is determined in accordance with the rules of the Securities and Exchange
Commission. In computing the number of shares beneficially owned by a person and the percentage
ownership of that person, shares of common stock under options held by that person that are
currently exercisable or exercisable within 60 days of, March 30, 2011 are considered outstanding.
Each shareholder named in the table has sole voting and investment power for the shares shown as
beneficially owned by them, and such shares are not subject to any pledge. Percentage of ownership
is based on 4,305,026 shares of common stock outstanding on March 30, 2011.
| Number of | Percent of | |||||||||||
| Shares | Number of Shares | Shares | ||||||||||
| Beneficially | Underlying Options | Outstanding | ||||||||||
| Name of Beneficial Owner | Owned | Beneficially Owned | (%) | |||||||||
Larry C. Hopfenspirger(1) |
439,325 | — | 10.2 | |||||||||
2025 Nicollet Ave. S., #203 Minneapolis, Minnesota 55402 |
||||||||||||
Estate of Lee M. Berlin |
405,759 | — | 9.4 | |||||||||
c/o Helen Berlin, personal representative 9115 Strada Place Naples, FL 34106 |
||||||||||||
Judd A. Berlin |
203,145 | 66,000 | 6.2 | |||||||||
9115 Strada Place Naples, FL 34106 |
||||||||||||
Sanford M. Brink(2)(3) 1102 120th Street |
345,280 | 10,000 | 8.2 | |||||||||
Roberts, Wisconsin 54023 |
||||||||||||
Gregory Freitag |
75,000 | 1.7 | ||||||||||
Robert Rudelius(4) |
15,000 | 0.3 | ||||||||||
Timothy Heaney |
15,000 | 0.3 | ||||||||||
Lowell Hellervik, Ph. D.(3) |
15,500 | 10,000 | 0.6 | |||||||||
Dr. Elmer Salovich(4) |
100,000 | 10,000 | 2.4 | |||||||||
All
directors and executive officers as a group (5 persons) |
115,500 | 125,000 | 5.4 | |||||||||
| (1) | Based on a Schedule 13D filed with the Securities and Exchange Commission on April 3, 2009, by Mr. Hopfenspirger, he has sole voting and dispositive power over 406,066 shares and shared voting and dispositive power over 33,259 shares held by Mr. Hopfenspirger’s wife and children. |
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| (2) | Based on a Schedule 13D jointly filed July 7, 2009, Sanford M. Brink and Linda K. Brink, Mr. Brink has sole voting and dispositive power over 55,700 shares and Ms. Brink has sole voting and dispositive power over 6,085 shares. They have shared voting and dispositive over 283,495 shares. On September 15, 2010, Mr. Brink announced his intention to retire from LecTec’s Board of Directors after the Company’s Annual meeting that was held on September 22, 2010 Mr. Brink indicated that he would remain on the Board until his replacement is identified and ready to be appointed to his seat on the Board. | |
| (3) | On January 26, 2011, Lowell W. Hellervik, Ph.D., was appointed to fill Mr. Brink’s vacancy, and to serve as a member of the Compensation and Nominating & Governance Committees of the Board. Dr. Hellervik was granted an option to purchase 20,000 shares of LecTec common stock subject to certain vesting requirements at $3.50 per share. | |
| (4) | On February 22, 2011, LecTec announced that Kevin Lynch, Chairman of the Board of Directors of LecTec, had resigned from the Board and relinquished and terminated his previously issued 20,000 share option granted on September 22, 2010, and that Dr. Elmer Salovich has been appointed to fill the resulting vacancy, and to serve as a member of the Compensation and Nominating & Governance Committees of the Board. On February 18, 2011, Dr, Salovich was granted an option to purchase 20,000 shares of LecTec common stock subject to certain vesting requirements at $3.50 per share. Director Robert Rudelius will assume the position of Chairman of the Board. |
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
We are not a listed issuer and so are not subject to the director independence requirements of
any exchange or inter-dealer quotation system. Nevertheless, in determining whether our directors
and director nominees are independent, we use the definition of independence provided in Rule
4200(a) (15) of The NASDAQ Stock Market’s Marketplace Rules. Under this definition of
independence, directors Timothy Heaney, Robert Rudelius, Lowell Hellervik, Ph.D. and Dr. Elmer
Salovich would be considered independent directors. Gregory Freitag, a member of our Board of
Directors, would not be considered independent because he serves as our Chief Executive Officer and
Chief Financial Officer.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Audit Fees
Fees billed or expected to be billed to us for audit services by our independent registered
public accounting firm, Lurie Besikof Lapidus & Company, LLP (“Lurie Besikof”) for the audit of our
annual financial statements and for reviews of our financial statements included in our quarterly
reports on Form 10-Q for the fiscal years ended December 31, 2010 and 2009 were $60,600 and
$46,500, respectively.
Audit-Related Fees
No fees were billed or are expected to be billed to us by Lurie Besikof for audit-related
services provided during the fiscal years ended December 31, 2010 and 2009.
Tax Fees
Fees billed or expected to be billed to us by Lurie Besikof for tax compliance, tax advice,
and tax planning for the fiscal years ended December 31, 2010 or 2009 were $12,582 and $10,350,
respectively.
All Other Fees
No fees were billed or are expected to be billed to us by Lurie Besikof for other services not
included above during the fiscal years ended December 31, 2010 or 2009.
Pre-Approval Policies and Procedures
Because of our size, complexity, financial condition, and prospects, the Audit Committee is
apprised of and pre-approves all fees for services provided by our independent registered public
accounting firm. All fees paid to our independent registered public accounting firm for 2010 and
2009 were approved by our Audit Committee. The Audit Committee has considered whether non-audit
services provided by our independent registered public accounting firm during 2010 and 2009 were
compatible with maintaining the accounting firm’s independence.
Table of Contents
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Documents filed as part of this Report
(1) The following financial statements are filed herewith in Item 8 of Part II of this annual
report on Form 10-K:
| (i) | Balance Sheets | ||
| (ii) | Statement of Operations | ||
| (iii) | Statements of Shareholders’ Equity | ||
| (iv) | Statements of Cash Flows | ||
| (v) | Notes to Financial Statements |
(3) Exhibits
| Exhibit | ||
| Number | Description | |
3.01
|
Articles of Incorporation of LecTec Corporation, as amended (Incorporated herein by reference to the Company’s Form S-18 Registration Statement (file number 33-9774C) filed on October 31, 1986 and amended on December 12, 1986) | |
3.02
|
Bylaws of LecTec Corporation (Incorporated herein by reference to the Company’s Form S-18 Registration Statement (file number 33-9774C) filed on October 31, 1986 and amended on December 12, 1986) | |
**10.03
|
LecTec Corporation 1998 Stock Option Plan (Incorporated herein by reference to the Company’s Registration Statement on Form S-8 (file number 333-72569) filed on February 18, 1999) | |
**10.04
|
LecTec Corporation 1998 Directors’ Stock Option Plan (Incorporated herein by reference to the Company’s Registration Statement on Form S-8 (file number 333-72569) filed on February 18, 1999) | |
**10.05
|
LecTec Corporation 2001 Stock Option Plan (Incorporated herein by reference to the Company’s Registration Statement on Form S-8 (file number 333-68920) filed on September 4, 2001) | |
**10.14
|
Form of Non-Qualified Stock Option Agreement under the LecTec Corporation 1998 Directors’ Stock Option Plan (Incorporated by reference to the Company’s Current Report on Form 8-K filed on September 26, 2007) | |
**10.15
|
Form of Employee Incentive Stock Option Agreement (Incorporated by reference to the Company’s Current Report on Form 8-K filed on September 26, 2007) | |
10.16
|
Settlement Agreement and Mutual Release, dated May 29, 2009, by and between LecTec Corporation and The Mentholatum Company (Incorporated by reference to the Company’s Current Report on Form 8-K filed on June 6, 2009) | |
*10.17
|
Supply and License Agreement, entered into as of January 1, 2004, by and between Novartis Consumer Health, Inc. and LecTec Corporation (Incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2009) | |
10.18
|
Term Sheet between Endo Pharmaceuticals Inc. and LecTec Corporation (Incorporated by reference to the Company’s Current Report on Form 8-K filed on November 12, 2009) | |
10.19
|
Settlement and License Agreement, dated November 11, 2009, by and between LecTec Corporation and Endo Pharmaceuticals Inc. (Incorporated by reference to the Company’s Current Report on Form 8-K filed on November 12, 2009) | |
*10.20
|
Settlement Agreement and Mutual Release, dated December 18, 2009, by and between LecTec Corporation and Johnson & Johnson Consumer Companies, Inc. (Incorporated by reference to the Company’s Annual Report on Form 10-K for the year ended December 31, 2010) |
41
Table of Contents
| Exhibit | ||
| Number | Description | |
10.21
|
Advisory Services Agreement, dated June 1, 2010, by and between LecTec Corporation and Judd Berlin (incorporated by reference to the Company’s Current Report on Form 8-K filed on June 2, 2010) | |
**10.22
|
Non-Qualified Stock Option Agreement, dated June 1, 2010 by and between LecTec Corporation and Greg Freitag (incorporated by reference to the Company’s Current Report on Form 8-K filed on June 2, 2010) | |
**10.23
|
LecTec Corporation 2010 Stock Incentive Plan (incorporated by reference to Appendix A to the Company’s Definitive Proxy Statement on Schedule 14A filed on August 20, 2010) | |
**10.24
|
Form of Non-Incentive Stock Option Agreement under the LecTec Corporation 2010 Stock Incentive Plan (incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2010) | |
+23.01
|
Consent of Lurie Besikof Lapidus & Company, LLP | |
++24.01
|
Power of Attorney | |
+31.01
|
Certification of Principal Executive Officer | |
+31.02
|
Certification of Principal Financial Officer | |
+32.01
|
Chief Executive Officer Certification Pursuant to 18 U.S.C. 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002. |
Notes to Exhibits
| * | Confidential treatment has been granted for portions of this Exhibit pursuant to Rule 24b-2 under the Securities Exchange Act of 1934 as amended. The confidential portions have been deleted and filed separately with the United States Securities and Exchange Commission. | |
| ** | Management contract or compensatory plan or arrangement required to be filed as an exhibit to this Form 10-K. | |
| + | Filed herewith. | |
| ++ | Included on signature page. |
42
Table of Contents
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the 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 |
||||
| /s/ Gregory Freitag | ||||
| Gregory Freitag | ||||
| Chief Executive Officer | ||||
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes
and appoints Gregory G. Freitag (with full power to act alone), as his or her true and lawful
attorney-in-fact and agent, with full powers of substitution and re-substitution, for him or her
and in his or her name, place and stead, in any and all capacities, to sign any and all amendments
to the Annual Report on Form 10-K of LecTec Corporation, and to file the same, with all exhibits
thereto, and other documents in connection therewith, with the Securities and Exchange Commission,
granting unto said attorney-in-fact and agent full power and authority to do and perform each and
every act and thing requisite or necessary to be done in and about the premises, as fully to all
intents and purposes as he or she might or could do in person, hereby ratifying and confirming all
that said attorney-in-fact and agent, or their substitute or substitutes, lawfully do or cause to
be done by virtue hereof.
In accordance with the Exchange Act, this report has been signed below by the following
persons on behalf of the registrant and in the capacities and on the dates indicated.
/s/ Gregory Freitag
Chief Executive Officer, Chief Financial Officer, and Director (Principal Executive Officer) (Principal Financial Officer) (Principal Accounting Officer) |
March 30, 2011 | |
/s/ Timothy Heaney
Director |
March 30, 2011 | |
/s/ Robert Rudelius
Director |
March 30, 2011 | |
/s/ Lowell Hellervik
Director |
March 30, 2011 | |
/s/ Elmer Salovich, M.D.
Director |
March 30, 2011 |
43
Table of Contents
EXHIBIT INDEX
| Exhibit | ||
| Number | Description | |
3.01
|
Articles of Incorporation of LecTec Corporation, as amended (Incorporated herein by reference to the Company’s Form S-18 Registration Statement (file number 33-9774C) filed on October 31, 1986 and amended on December 12, 1986) | |
3.02
|
Bylaws of LecTec Corporation (Incorporated herein by reference to the Company’s Form S-18 Registration Statement (file number 33-9774C) filed on October 31, 1986 and amended on December 12, 1986 | |
**10.03
|
LecTec Corporation 1998 Stock Option Plan (Incorporated herein by reference to the Company’s Registration Statement on Form S-8 (file number 333-72569) filed on February 18, 1999) | |
**10.04
|
LecTec Corporation 1998 Directors’ Stock Option Plan (Incorporated herein by reference to the Company’s Registration Statement on Form S-8 (file number 333-72569) filed on February 18, 1999) | |
**10.05
|
LecTec Corporation 2001 Stock Option Plan (Incorporated herein by reference to the Company’s Registration Statement on Form S-8 (file number 333-68920) filed on September 4, 2001) | |
**10.14
|
Form of Non-Qualified Stock Option Agreement under the LecTec Corporation 1998 Directors’ Stock Option Plan (Incorporated by reference to the Company’s Current Report on Form 8-K filed on September 26, 2007) | |
**10.15
|
Form of Employee Incentive Stock Option Agreement (Incorporated by reference to the Company’s Current Report on Form 8-K filed on September 26, 2007) | |
10.16
|
Settlement Agreement and Mutual Release, dated May 29, 2009, by and between LecTec Corporation and The Mentholatum Company (Incorporated by reference to the Company’s Current Report on Form 8-K filed on June 6, 2009) | |
*10.17
|
Supply and License Agreement, entered into as of January 1, 2004, by and between Novartis Consumer Health, Inc. and LecTec Corporation (Incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2009) | |
10.18
|
Term Sheet between Endo Pharmaceuticals Inc. and LecTec Corporation (Incorporated by reference to the Company’s Current Report on Form 8-K filed on November 12, 2009) | |
10.19
|
Settlement and License Agreement, dated November 11, 2009, by and between LecTec Corporation and Endo Pharmaceuticals Inc. (Incorporated by reference to the Company’s Current Report on Form 8-K filed on November 12, 2009) | |
*10.20
|
Settlement Agreement and Mutual Release, dated December 18, 2009, by and between LecTec Corporation and Johnson & Johnson Consumer Companies, Inc. (Incorporated by reference to the Company’s Annual Report on Form 10-K for the year ended December 31, 2010) | |
10.21
|
Advisory Services Agreement, dated June 1, 2010, by and between LecTec Corporation and Judd Berlin (incorporated by reference to the Company’s Current Report on Form 8-K filed on June 2, 2010) | |
**10.22
|
Non-Qualified Stock Option Agreement, dated June 1, 2010 by and between LecTec Corporation and Greg Freitag (incorporated by reference to the Company’s Current Report on Form 8-K filed on June 2, 2010) | |
**10.23
|
LecTec Corporation 2010 Stock Incentive Plan (incorporated by reference to Appendix A to the Company’s Definitive Proxy Statement on Schedule 14A filed on August 20, 2010) | |
**10.24
|
Form of Non-Incentive Stock Option Agreement under the LecTec Corporation 2010 Stock Incentive Plan (incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2010) | |
+23.01
|
Consent of Lurie Besikof Lapidus & Company, LLP | |
++24.01
|
Power of Attorney | |
+31.01
|
Certification of Principal Executive Officer | |
+31.02
|
Certification of Principal Financial Officer | |
+32.01
|
Chief Executive Officer Certification Pursuant to 18 U.S.C. 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002. |
44
Table of Contents
Notes to Exhibits
| * | Confidential treatment has been granted for portions of this Exhibit pursuant to Rule 24b-2 under the Securities Exchange Act of 1934 as amended. The confidential portions have been deleted and filed separately with the United States Securities and Exchange Commission. | |
| ** | Management contract or compensatory plan or arrangement required to be filed as an exhibit to this Form 10-K. | |
| + | Filed herewith. | |
| ++ | Included on signature page. |
45