-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, PcTBHMsVfWf5jrBX/Gz3l9No7EiE7VkNm879e/IruiDQwwFG+RtYM0c/lVQdP7q1 UVLu7QUXiPCx6t0Lw9Bn9g== 0001157523-05-002627.txt : 20050317 0001157523-05-002627.hdr.sgml : 20050317 20050317155331 ACCESSION NUMBER: 0001157523-05-002627 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20050131 FILED AS OF DATE: 20050317 DATE AS OF CHANGE: 20050317 FILER: COMPANY DATA: COMPANY CONFORMED NAME: COMPETITIVE TECHNOLOGIES INC CENTRAL INDEX KEY: 0000102198 STANDARD INDUSTRIAL CLASSIFICATION: PATENT OWNERS & LESSORS [6794] IRS NUMBER: 362664428 STATE OF INCORPORATION: DE FISCAL YEAR END: 0731 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-08696 FILM NUMBER: 05688867 BUSINESS ADDRESS: STREET 1: 1960 BRONSON ROAD STREET 2: BUILDING 1 CITY: FAIRFIELD STATE: CT ZIP: 06824 BUSINESS PHONE: 2032556044 MAIL ADDRESS: STREET 1: 1960 BRONSON ROAD STREET 2: BUILDING 1 CITY: FAIRFIELD STATE: CT ZIP: 06824 FORMER COMPANY: FORMER CONFORMED NAME: UNIVERSITY PATENTS INC DATE OF NAME CHANGE: 19920703 10-Q 1 a4844132.txt COMPETITIVE TECHNOLOGIES, INC. 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) [x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 for the quarterly period ended January 31, 2005 ----------------------------------------------- OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission file number 1-8696 ------ COMPETITIVE TECHNOLOGIES, INC. (Exact name of registrant as specified in its charter) Delaware 36-2664428 - ------------------------------------ ------------------------------------ (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 1960 Bronson Road Fairfield, Connecticut 06824 - --------------------------- ------------------------------------ (Address of principal executive (Zip Code) offices) (203) 255-6044 - -------------------------------------------------------------------------------- (Registrant's telephone number, including area code) N/A - -------------------------------------------------------------------------------- (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [x] No [ ] Indicate by check mark whether the registrant is an accelerated filer (as defined in rule 12b-2 of the Exchange Act). Yes[ ] No[x] The number of shares of the registrant's common stock outstanding as of March 1, 2005 was 6,821,648 shares. COMPETITIVE TECHNOLOGIES, INC. ------------------------------ INDEX TO QUARTERLY REPORT ON FORM 10-Q -------------------------------------- PART I. FINANCIAL INFORMATION Page No. -------- Item 1. Condensed Consolidated Financial Statements (Unaudited) Consolidated Balance Sheets at January 31, 2005 and July 31, 2004..............................3 Consolidated Statements of Operations for the three months ended January 31, 2005 and 2004................................................4 Consolidated Statements of Operations for the six months ended January 31, 2005 and 2004..................................................5 Consolidated Statement of Changes in Shareholders' Interest for the six months ended January 31, 2005...................................................6 Consolidated Statements of Cash Flows for the six months ended January 31, 2005 and 2004..................................................7 Notes to Consolidated Financial Statements................................................8 - 16 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.............................................................16 - 25 Item 3. Quantitative and Qualitative Disclosures About Market Risk....................................25 Item 4. Controls and Procedures.......................................................................25 PART II. OTHER INFORMATION Item 1. Legal Proceedings.............................................................................26 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds...................................26 Item 4. Submission of Matters to a Vote of Security Holders......................................26 - 27 Item 6. Exhibits......................................................................................27 Signatures...............................................................................................28
Page 2 PART I. FINANCIAL INFORMATION Item 1. Financial Statements COMPETITIVE TECHNOLOGIES, INC. Consolidated Balance Sheets January 31, July 31, 2005 2004 (Unaudited) * -------------------- ------------------- ASSETS Current assets: Cash and cash equivalents $ 14,136,402 $ 4,309,680 Receivables 2,069,981 829,996 Prepaid expenses and other current assets 813,704 209,154 -------------------- ------------------- Total current assets 17,020,087 5,348,830 Deferred equity financing costs, net 234,473 866,302 Non-current receivable, net - 394,133 Intangible assets acquired, net 45,360 52,150 Property and equipment, net 39,486 19,392 -------------------- ------------------- TOTAL ASSETS $ 17,339,406 $ 6,680,807 ==================== =================== LIABILITIES AND SHAREHOLDERS' INTEREST Current liabilities: Accounts payable $ 262,039 $ 162,913 Accrued expenses and other liabilities 5,781,344 1,579,376 -------------------- ------------------- Total current liabilities 6,043,383 1,742,289 -------------------- ------------------- Commitments and contingencies - - Shareholders' interest: 5% preferred stock, $25 par value, 35,920 60,675 60,675 shares authorized, 2,427 shares issued and outstanding Common stock, $.01 par value, 20,000,000 68,109 63,492 shares authorized, 6,810,896 and 6,349,189 shares issued, respectively Capital in excess of par value 29,031,369 27,560,312 Accumulated deficit (17,820,793) (22,745,961) Accumulated other comprehensive income 3,073 - -------------------- ------------------- 11,342,433 4,938,518 Treasury stock, at cost, 4,248 shares (46,410) - -------------------- ------------------- Total shareholders' interest 11,296,023 4,938,518 TOTAL LIABILITIES AND SHAREHOLDERS' INTEREST $ 17,339,406 $ 6,680,807 ==================== =================== See accompanying notes * Balances were derived from the July 31, 2004 audited balance sheet.
Page 3 PART I. FINANCIAL INFORMATION (Continued) ----------------------------------------- COMPETITIVE TECHNOLOGIES, INC. Consolidated Statements of Operations (Unaudited) Three months ended January 31, 2005 2004 ----------------- ----------------- Revenues Retained royalties $ 6,686,588 $ 698,055 Royalty settlements and awards - 231,986 Settlement with Unilens, net - 86,487 Interest income 64,287 21,175 Other income 32,512 - ----------------- ----------------- 6,783,387 1,037,703 ----------------- ----------------- Expenses Personnel and other direct expenses relating to revenues 2,095,467 588,085 General and administrative expenses 566,891 371,157 Patent enforcement expenses, net of reimbursements 113,711 14,174 ----------------- ----------------- 2,776,069 973,416 ----------------- ----------------- Income before income taxes 4,007,318 64,287 Provision for income taxes 49,975 - ----------------- ----------------- Net income $ 3,957,343 $ 64,287 ================= ================= Net income per common share: Basic $ 0.60 $ 0.01 ================= ================= Assuming dilution $ 0.54 $ 0.01 ================= ================= Weighted average number of common shares outstanding: Basic 6,633,440 6,207,631 Assuming dilution 7,352,821 6,398,726 See accompanying notes
Page 4 PART I. FINANCIAL INFORMATION (Continued) ----------------------------------------- COMPETITIVE TECHNOLOGIES, INC. Consolidated Statements of Operations (Unaudited) Six months ended January 31, 2005 2004 ----------------- ----------------- Revenues Retained royalties $ 7,442,357 $ 1,084,954 Royalty settlements and awards 815,492 1,067,773 Stock dividend 679,149 - Settlement with Unilens, net - 160,236 Interest income 212,845 87,849 Other income 64,561 - ----------------- ----------------- 9,214,404 2,400,812 ----------------- ----------------- Expenses Personnel and other direct expenses relating to revenues 3,119,206 1,146,894 General and administrative expenses 814,871 797,327 Patent enforcement expenses, net of reimbursements 284,424 47,011 ----------------- ----------------- 4,218,501 1,991,232 ----------------- ----------------- Income before income taxes 4,995,903 409,580 Provision for income taxes 70,735 - ----------------- ----------------- Net income $ 4,925,168 $ 409,580 ================= ================= Net income per common share: Basic $ 0.76 $ 0.07 ================= ================= Assuming dilution $ 0.70 $ 0.07 ================= ================= Weighted average number of common shares outstanding: Basic 6,516,872 6,204,488 Assuming dilution 7,027,121 6,300,036 See accompanying notes Page 5 PART I. FINANCIAL INFORMATION (Continued) ----------------------------------------- COMPETITIVE TECHNOLOGIES, INC. Consolidated Statement of Changes in Shareholders' Interest For the six months ended January 31, 2005 (Unaudited) Preferred Stock Common Stock -------------------- ------------------- Accumulated Shares Capital other Total issued and Shares in excess of Accumulated comprehensive Treasury Shareholders' outstanding Amount issued Amount par value Deficit income Subtotal Stock Interest ----------- -------- ---------- -------- ------------ ------------- ------------- ------------ --------- ------------- Balance - August 1, 2004 2,427 $60,675 6,349,189 $63,492 $27,560,312 $(22,745,961) $- $4,938,518 $- $4,938,518 Exercise of common stock options - - 109,699 1,097 566,890 - - 567,987 - 567,987 Common stock received on exercise of common stock options - - - - - - - - (46,410) (46,410) Exercise of common stock warrants - - 37,171 372 (372) - - - - - Stock issued under 401(k) Plan - - 25,056 251 99,722 - - 99,973 - 99,973 Stock issued to Directors - - 6,920 69 74,931 - - 75,000 - 75,000 Sales and issuances of stock in equity financing - - 282,861 2,828 1,409,711 - - 1,412,539 - 1,412,539 Amortization of deferred equity financing costs - - - - (679,825) - - (679,825) - (679,825) Net unrealized gain on securities - - - - - - 3,073 3,073 - 3,073 Net income - - - - - 4,925,168 - 4,925,168 - 4,925,168 ----------- -------- ---------- -------- ------------ ------------- ------------- ------------ --------- ------------- Balance - January 31, 2005 2,427 $60,675 6,810,896 $68,109 $29,031,369 $(17,820,793) $3,073 $11,342,433 $(46,410) $11,296,023 =========== ======== ========== ======== ============ ============= ============= ============ ========= ============= See accompanying notes
Page 6 PART I. FINANCIAL INFORMATION (Continued) ----------------------------------------- COMPETITIVE TECHNOLOGIES, INC. Consolidated Statements of Cash Flows (Unaudited) Six months ended January 31, 2005 2004 --------------- -------------- Cash flows from operating activities: Net income $4,925,168 $409,580 Noncash and other expenses (income) included in net income: Depreciation and amortization 17,874 30,875 Stock compensation accrued 87,500 33,266 Stock dividend (679,149) - Other (33,085) (154,070) (Increase) decrease in current assets: Receivables (1,146,814) 59,994 Prepaid expenses and other current assets 77,672 122,885 Increase (decrease) in current liabilities: Accounts payable and accrued expenses and other liabilities 4,339,492 (599,072) --------------- -------------- Net cash provided by (used in) operating activities 7,588,658 (96,542) --------------- -------------- Cash flows from investing activities: Purchases of property and equipment (31,178) - Collection on Unilens receivable, net 335,126 160,235 Other - 2,364 --------------- -------------- Net cash provided by investing activities 303,948 162,599 --------------- -------------- Cash flows from financing activities: Proceeds from exercises of stock options 521,577 26,958 Proceeds from sales of common stock 1,412,539 - --------------- -------------- Net cash provided by financing activities 1,934,116 26,958 --------------- -------------- Net increase in cash and cash equivalents 9,826,722 93,015 Cash and cash equivalents at beginning of year 4,309,680 1,504,295 --------------- -------------- Cash and cash equivalents at end of period $14,136,402 $1,597,310 =============== ============== See accompanying notes
Page 7 PART I. FINANCIAL INFORMATION (Continued) COMPETITIVE TECHNOLOGIES, INC. Notes to Consolidated Financial Statements (Unaudited) 1. Basis of Presentation --------------------- The interim consolidated financial information presented in the accompanying condensed consolidated financial statements and notes hereto is unaudited. Competitive Technologies, Inc. ("CTT") and its majority owned subsidiary (collectively, "we" or "us") provide patent and technology licensing and commercialization services throughout the world (with concentrations in the U.S.A. and Asia) with respect to a broad range of life, electronic, physical, and nano (microscopic particles) science technologies originally invented by various individuals, corporations and universities. We are compensated for our services primarily by sharing in the license and royalty fees generated from our successful licensing of our clients' technologies. The consolidated financial statements include the accounts of CTT and its subsidiary. Intercompany accounts and transactions have been eliminated in consolidation. Certain amounts in the prior year accompanying unaudited consolidated financial statements have been reclassified to conform to the current year's presentation. We believe we have made all adjustments, primarily normal and recurring adjustments, which are necessary to present the unaudited consolidated financial statements fairly in conformity with accounting principles generally accepted in the United States of America. The results for the three and six months ended January 31, 2005, are not necessarily indicative of the results that can be expected for the full year. You should read the interim unaudited consolidated financial statements and notes thereto, as well as the accompanying Management's Discussion and Analysis of Financial Condition and Results of Operations, in conjunction with our Annual Report on Form 10-K for the year ended July 31, 2004. This report is available on our website at www.competitivetech.net. 2. Legal Settlements and New Licenses Granted ------------------------------------------ Abbott Laboratories, Inc. In December 2004, we granted Abbott Laboratories, Inc. ("Abbott") a license to sell tests used to measure homocysteine levels. The license settled litigation we filed previously against Abbott in the U.S. District Court for the District of Colorado, alleging infringement of our patents covering homocysteine assays. (The litigation was dismissed with prejudice on December 20, 2004, after the license was signed.) The license relieves Abbott's customers from their obligation to pay us royalties on tests performed using the Abbott assay. The license also releases Abbott's customers of any obligation to pay royalties to us for homocysteine tests performed using Abbott assays in the past, but does not entitle them to any refund of any royalties previously paid to us. The term of the license is through July 2007, the expiration date of the patent, with certain limited exceptions. Pursuant to the license, Abbott agreed to pay us an upfront license fee, certain "Milestone Fees" (as defined in the license), and per test royalties on homocysteine assay sales in the U.S. after January 1, 2006. In January 2005, upon receipt, we recorded $5.2 million in retained royalties, representing our share of the upfront license fee. This fee is non-refundable and is not creditable against future royalties. Milestone Fees, our share of which is $800,000 each, will be paid to us on January 31, 2006 and 2007, as long as our patent is valid and enforceable. We are accruing the present value of the aggregate of the Milestone Fees in retained royalties in calendar 2005. No per test royalties are payable in calendar 2005. Page 8 Diagnostic Products Corporation Effective November 1, 2004, we granted Diagnostic Products Corporation ("DPC") a license to sell tests used to measure homocysteine levels. The license relieves DPC's customers from their obligation to pay us royalties on tests performed using DPC's products. The license also releases DPC's customers of any obligation to pay royalties to us for homocysteine tests performed using DPC's assays in the past, but does not entitle them to any refund of any royalties previously paid to us. Pursuant to the license, DPC paid us an upfront gross license fee of $1,375,000. This fee is non-refundable and is not creditable against future royalties. In addition, DPC is paying per test royalties on sales of homocysteine assays from November 1, 2004. We recorded our share of the upfront license fee and accrued royalties during the quarter ended January 31, 2005. The term of the license is through July 2007, the expiration date of the patent, with certain limited exceptions. Bayer Corporation On October 21, 2004, we granted Bayer Corporation, et al, ("Bayer") a license under which Bayer agreed to pay us an upfront license fee and royalties on sales of homocysteine assays beginning July 1, 2004. This fee is non-refundable and is not creditable against future royalties. This license settled a complaint we filed previously against Bayer alleging infringement of our patent covering homocysteine assays. (The litigation was dismissed with prejudice after the license was signed.) We recorded our share of the license fee in the quarter ended October 31, 2004, and have recorded royalties when they were earned. Other New licenses signed in the current fiscal year relating to homocysteine testing generally provide for a royalty to be paid to us based on a fixed fee per test. The amount of the fixed fee is determined based on estimated volume. Federal Insurance Company Effective October 13, 2004, Federal Insurance Company ("Federal") agreed to pay us $167,500 and acknowledged that the deductible under our insurance policy was deemed satisfied for purposes of a civil suit filed against CTT by the Securities and Exchange Commission ("SEC"). We recorded the payment as a reduction of litigation expenses, which are included in general and administrative expenses, in the quarter ended October 31, 2004. In addition, on September 15, 2004, the Chubb Group of Insurance Companies, on behalf of Federal, agreed to accept coverage for losses, including defense costs, as a result of the SEC's civil suit, according to the terms of the policy. Accordingly, we have not recorded any significant costs in the current fiscal year relating to the SEC civil suit. Page 9 3. Royalty Settlements and Awards ------------------------------ On August 5, 2004, the U.S. Court of Appeals for the Federal Circuit ("CAFC") denied the petition of Laboratory Corporation of America Holdings d/b/a LabCorp ("LabCorp") for a rehearing or a rehearing en banc (rehearing by the full CAFC) of a June 8, 2004 decision affirming a November 2002 decision in favor of Metabolite Laboratories, Inc. and us (collectively, the "Plaintiffs"). As a result of this decision, on August 16, 2004, the Plaintiffs received approximately $6.7 million. Our share of the $6.7 million payment was $920,552, and we recorded $815,492 in royalty settlements and awards and $105,060 in interest income during the quarter ended October 31, 2004. The payment did not include attorneys' fees or court costs previously awarded to the Plaintiffs that were under appeal with the court. On January 24, 2005, the CAFC issued a summary dismissal of LabCorp's appeal of the court's award of attorneys' fees and court costs from the original case; however, we have not yet received payment. Our claim for additional attorneys' fees and court costs related to the appeals process is still pending. On November 3, 2004, LabCorp filed a petition for a writ of certiorari with the U.S. Supreme Court (the "Court") relating to the November 2002 decision. (A writ of certiorari is a petition requesting the Court to hear an appeal.) On February 28, 2005, we announced that the Court had invited the Solicitor General's Office (the "SGO") to file a brief in this case expressing its views on the question of the patentability of method patents of this type. The SGO's decision is not expected for several months. They may elect to file a brief or may opt not to file a brief. If the Court denies LabCorp's petition, then LabCorp will have no further avenues of appeal. If the Court agrees to hear LabCorp's appeal, and remands the case to the District Court, and then if the original judgment is subsequently reversed, LabCorp may attempt to recover amounts paid to the Plaintiffs, including royalties paid to us as part of a January 2003 stipulated court order (the "Stipulated Order"). (Pursuant to the Stipulated Order, the court had stayed execution of a monetary judgment and a permanent injunction that prevented LabCorp from performing homocysteine assays, and LabCorp had agreed to pay us a percentage of their homocysteine assay sales during their appeals process.) LabCorp's ability to recover any amounts paid to the Plaintiffs would depend on the extent and reason for the reversal. From January 2003 through January 31, 2005, LabCorp paid us an aggregate of $1,909,276 under the Stipulated Order, including both our retained amounts and amounts paid or payable to our clients. We believe that the probability that LabCorp will recover any amounts paid is remote. In the prior year, effective November 17, 2003, we sold $312,500 plus subsequent interest of a patent infringement judgment award to a shareholder for $250,000 in cash. As a result of this transaction, we recorded $231,986 in royalty settlements and awards and $18,014 in interest income in November 2003. Effective October 30, 2003, we sold $1,125,000 plus subsequent interest of the same patent infringement judgment award to an outside party for $900,000 in cash. As a result of this transaction, we recorded $835,787 in royalty settlements and awards and $64,213 in interest income in October 2003. 4. Stock Dividend -------------- In October 2004, our investee, Melanotan Corporation ("MelanoTan"), in which we have a 20.9% ownership, paid its shareholders a dividend in the form of shares of common stock of EpiTan Limited (Australia) ("EpiTan"), MelanoTan's investee. As a result, we received 1,252,346 shares of EpiTan common stock. We previously licensed our rights to a sunless tanning technology to MelanoTan and MelanoTan sublicensed the rights to EpiTan (MelanoTan has no operations of its own). MelanoTan also received shares of EpiTan. The technology may prevent or lessen skin cancer caused by unprotected sun exposure, and EpiTan is in the process of testing and evaluating the technology for future commercialization. EpiTan common stock is traded on the Australian Stock Exchange (quoted in Australian dollars) under the symbol EPT. As a condition to receiving the dividend, we agreed not to sell, transfer or otherwise dispose of the shares before October 21, 2005. Page 10 We estimated the fair value of the EpiTan stock dividend using the closing price of the shares ($0.93 per share, Australian dollars) and the exchange rate for converting Australian dollars to U.S. dollars ($0.7289 Australian dollars to $1.00 U.S. dollar) on the date that MelanoTan's board of directors approved the dividend. We then discounted the value of the shares using a 20% discount factor to recognize the estimated impact of the sale restriction and the high risk associated with an investment in EpiTan stock, since EpiTan has minimal revenues and has incurred substantial current and accumulated net losses. We recorded the estimated value of the shares, $679,149, as dividend income and included the asset in prepaid expenses and other current assets, since we are restricted from trading the shares. Unrealized market price and foreign exchange gains or losses relating to the shares have been included in other comprehensive income in shareholders' interest. Other comprehensive income (loss) was ($13,603) and $3,073, respectively, for the three and six months ended January 31, 2005, and comprehensive income was $3,943,740 and $4,928,241, respectively, for the three and six months ended January 31, 2005. 5. Net Income Per Common Share --------------------------- The following sets forth our computations of basic and diluted net income per common share. Three months ended Six months ended January 31, January 31, ----------------------------- ----------------------------- 2005 2004 2005 2004 ------------ ------------ ------------ ------------ Denominator for basic net income per common share, weighted average common shares outstanding 6,633,440 6,207,631 6,516,872 6,204,488 Dilutive effect of warrants and employees' and directors' common stock options 719,381 191,095 510,249 95,548 ------------ ------------ ------------ ------------ Denominator for net income per common share, assuming dilution 7,352,821 6,398,726 7,027,121 6,300,036 ============ ============ ============ ============
At January 31, 2005 and 2004, respectively, stock options and warrants to purchase 114,500 and 573,428 shares of common stock were outstanding but were not included in the computation of earnings per share because the exercise prices were greater than the weighted average share prices for the quarters, making them anti-dilutive (total options and warrants outstanding were 1,278,096 and 1,113,717, respectively). Page 11 6. Stock-Based Compensation ------------------------ We account for grants of stock options using the intrinsic value method pursuant to Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," and related interpretations. Accordingly, since the exercise price of the stock options granted under our stock option plans to employees and directors was at least equal to the market value of the underlying common stock on the grant date, we have not recorded any compensation expense for stock options granted. Under the provisions of Financial Accounting Standards Board Statement No. 123, "Accounting for Stock-Based Compensation," we are required to disclose the impact on net income if we had used a fair value method, as defined, to account for grants of stock options. Using the fair value method, as defined, our results would have been: Three months ended Six months ended January 31, January 31, -------------------------------------- -------------------------------------- 2005 2004 2005 2004 ----------------- ---------------- ---------------- ---------------- Net income, as reported $ 3,957,343 $ 64,287 $ 4,925,168 $ 409,580 Deduct: Pro forma compensation expense for stock options granted using a fair value method (92,422) (125,206) (189,147) (224,405) ----------------- ---------------- ----------------- ---------------- Pro forma net income (loss) $ 3,864,921 $ (60,919) $ 4,736,021 $ 185,175 ================= ================ ================= ================ Basic income (loss) per common share: As reported $ 0.60 $ 0.01 $ 0.76 $ 0.07 ================= ================ ================= ================ Pro forma $ 0.58 $ (0.01) $ 0.73 $ 0.03 ================= ================ ================= ================ Income (loss) per common share, assuming dilution: As reported $ 0.54 $ 0.01 $ 0.70 $ 0.07 ================= ================ ================= ================ Pro forma $ 0.53 $ (0.01) $ 0.67 $ 0.03 ================= ================ ================= ================
We estimated the fair value of stock options at the grant date using the Black-Scholes option-pricing model. The Black-Scholes option-pricing model was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. In addition, option valuation models require highly subjective input assumptions, including expected stock price volatility and expected stock option lives. Because our stock options are not publicly traded and have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions affect the fair value estimate, we do not believe that option valuation models necessarily provide a reliable single measure of the fair value of our stock options. The pro forma information shown above may not be representative of pro forma fair value compensation effects in future periods. Page 12 7. Common Stock Sales Pursuant to Equity Financing ----------------------------------------------- Pursuant to our equity financing agreement with Fusion Capital Fund II ("Fusion Capital"), we sold and issued the following shares to Fusion Capital since July 31, 2004: Cash Shares Shares Total Received Sold Issued Shares --------------- ----------- --------- ---------- Three months ended October 31, 2004 $ 350,007 94,558 2,480 97,038 Three months ended January 31, 2005 1,062,532 178,296 7,527 185,823 --------------- ----------- --------- ---------- Six months ended January 31, 2005 $1,412,539 272,854 10,007 282,861 =============== =========== ========= ==========
We are using the proceeds for general working capital needs. The aggregate proceeds through January 31, 2005 from sales to Fusion Capital pursuant to the equity financing agreement are approximately $1,613,000. In addition, we amortized $511,374 and $679,825, respectively, for the three and six months ended January 31, 2005, of deferred equity financing costs against capital in excess of par value. (During the three months ended January 31, 2005, we also increased deferred equity financing costs by $47,996.) We will amortize the remaining net balance of deferred equity financing costs of $234,473 against capital in excess of par value as we sell common stock to Fusion Capital in the future. On January 20, 2005, our advisor for the Fusion Capital financing exercised their warrant to acquire 57,537 shares of our common stock. We had issued the warrant to them on February 25, 2004 as part of their consideration for their assistance in arranging the transaction with Fusion Capital. Our advisor elected a cashless exercise pursuant to the terms of the warrant, and we issued 37,171 shares of common stock to them, after withholding 20,366 shares tendered as payment for the exercise price of the warrant. We determined the number of shares to withhold based on a per share price of $12.275 (the average per share price on January 20, 2005, the exercise date), as provided in the warrant. These shares are restricted for resale since they have not been registered under the Securities Act of 1933, and have been appropriately legended. 8. Receivables ----------- Receivables consist of the following: January 31, July 31, 2005 2004 --------------------- --------------------- Royalties $ 1,431,852 $ 453,138 Unilens receivable, net 450,236 357,064 Other 187,893 19,794 --------------------- --------------------- Receivables $ 2,069,981 $ 829,996 ===================== ===================== Page 13 9. Accrued expenses and other liabilities -------------------------------------- Accrued expenses and other liabilities consist of the following: January 31, July 31, 2005 2004 ----------------- ----------------- Accrued royalties payable $ 3,881,669 $ 625,908 Accrued compensation 1,497,101 534,945 Accrued professional fees 283,795 294,100 Accrued other 118,779 124,423 ----------------- ----------------- Accrued expenses and other liabilities $ 5,781,344 $ 1,579,376 ================= ================= The increase in royalties payable since July 31, 2004 is the result of increased royalties from new homocysteine licenses collected on behalf of our clients. In February 2005, we paid approximately $2,700,000 of accrued royalties payable to our clients at January 31, 2005. 10. Contingencies ------------- Occupational Safety and Health Administration ("OSHA") On February 2, 2005, OSHA issued a finding that there was probable cause to believe that CTT had violated Section 806 of the Corporate and Criminal Fraud Accountability Act of 2002, 18 U.S.C. 1514A, by terminating Wil Jacques and Scott Bechtel in June 2003. Jacques and Bechtel contend that they were improperly terminated for raising concerns about financial reporting. CTT contends that Jacques and Bechtel did not raise protected concerns and were terminated for lawful, non-discriminatory reasons, that OSHA failed to fairly investigate and consider all relevant facts, and that the conclusions drawn by OSHA are legally erroneous. Based on the finding, OSHA ordered that the complainants be reinstated and that CTT pay damages totaling approximately $827,000. CTT denies that it is liable to the complainants in any amount. The OSHA finding does not constitute a final agency order. In accordance with law and regulation, on February 11, 2005, we filed timely objections and requested a de novo hearing before an Administrative Law Judge of the U.S. Department of Labor. The hearing preliminarily is scheduled to begin in mid April 2005. We welcome the opportunity to conduct full discovery of the complainants' claims and alleged damages, and to vigorously present our case before a neutral fact finder. We cannot predict the amount of legal fees or other expenses that we will incur relating to this matter. Axis-Shield On February 1, 2005, we filed a complaint alleging infringement of our patent covering homocysteine assays against Axis-Shield plc and Axis-Shield, ASA, (collectively, "Axis-Shield"), in the U.S. District Court for the District of Colorado, seeking monetary damages, punitive damages, attorneys fees, court costs and other remuneration at the option of the court. Axis-Shield was served notice of our complaint on February 7, 2005. Also on February 7, 2005, we were served notice that Axis-Shield had filed a complaint against CTT on November 10, 2004, in the U.S. District Court for the District of Connecticut seeking declaratory relief that our patent covering homocysteine assays was invalid and that Axis-Shield has not infringed and is not infringing on our patent covering homocysteine assays. In addition, Axis-Shield alleges that CTT has engaged in unfair competition by threats of and actual litigation in the health industry, and seeks general, compensatory and exemplary damages, and attorneys fees, court costs and other remuneration at the option of the court. We do not believe that the Axis-Shield complaint has any merit. Further action in these cases is pending. Page 14 Bio-Rad Laboratories, Inc. On December 23, 2004, we filed a complaint alleging infringement of our patent covering homocysteine assays against Bio-Rad Laboratories, Inc., ("BioRad"), in the U.S. District Court for the District of Colorado, seeking monetary damages, punitive damages, attorneys fees, court costs and other remuneration at the option of the court. BioRad was served notice of our complaint in January 2005. Further action in this case is pending. Palatin Technologies, Inc. On October 27, 2004, we notified Palatin Technologies, Inc. ("Palatin") that we were demanding arbitration as a result of our belief that Palatin was in material breach of their license agreement with us for their exclusive use of our technology in developing their experimental therapeutic treatment for male and female sexual dysfunction. Under the terms of our license agreement with Palatin, we are entitled to receive 20% of any sublicense fee that Palatin receives. On August 13, 2004, Palatin announced that they had granted a co-exclusive license to King Pharmaceuticals, Inc. ("King"), included in a $20 million Collaborative Development and Marketing Agreement between Palatin and King. On August 18, 2004, Palatin announced that they had received the $20 million from King, but we have not received any funds from Palatin relating to this sublicense. Our license with Palatin provides for binding arbitration of disputes. The arbitration hearing tentatively is scheduled to begin in June 2005. Fujitsu On March 1, 2005, the University of Illinois appealed the summary judgment that was granted on July 1, 2004, in favor of Fujitsu. On September 20, 2004, the judge in the Fujitsu litigation entered a stipulated order staying certain issues relating to the case, including the counterclaims, pending resolution of the appeal of the summary judgment. Further action in this case is pending. We cannot predict the final outcomes to our legal actions and proceedings, nor are we able to estimate the legal expenses or potential losses we may incur, or possible damages we may recover in any of these legal actions and proceedings, if any. We have not recorded any potential losses or income in our financial statements to date. We record expenses in connection with these matters as they are incurred. An unfavorable resolution of any or all matters where we are a defendant, and/or our incurrence of significant legal fees and other costs to defend or prosecute any of these actions and proceedings may, depending upon the amount and timing, have a material adverse effect on our consolidated financial position, results of operations or cash flows in a particular period. We believe that we carry adequate liability insurance, directors' and officers' insurance, casualty insurance (for owned or leased tangible assets), and other insurance to cover us against potential claims that occur in the normal course of our business. Page 15 11. Recently Issued Accounting Pronouncements ----------------------------------------- In December 2004, the Financial Accounting Standards Board issued Statement No. 123 (revised 2004), "Share-Based Payment." This Statement established standards for accounting for transactions in which an entity exchanges its equity instruments for goods or services, focusing primarily on employee services exchanged for share-based payments. It requires entities to expense the estimated fair value of employee stock options and similar awards over the requisite service period (generally the vesting period). We will adopt the provisions of this statement beginning August 1, 2005, and are currently evaluating the transition method to use and considering the effects that adopting this statement will have on our financial statements. Upon adoption beginning August 1, 2005, we will recognize compensation expense for the estimated fair value of new awards and of any awards modified, repurchased or cancelled after June 15, 2005, over their respective requisite service periods. We also will recognize compensation expense for awards previously issued and outstanding but vesting after August 1, 2005, over their respective remaining vesting periods. For outstanding but unvested awards at January 31, 2005, we expect to record compensation expense of $172,000 and $76,000, respectively, in fiscal 2006 and 2007. Recognizing compensation expense for share-based payments awarded on or after August 1, 2005, will reduce our net income in the future, but we cannot estimate the amount of that reduction, which will depend on the number of stock options awarded, option vesting periods, and other factors used in estimating the fair value of awards granted in the future. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Forward-Looking Statements - -------------------------- Certain statements about our future expectations, including development and regulatory plans, and all other statements in this Quarterly Report on Form 10-Q, other than historical facts, are "forward-looking statements" within the meaning of applicable Federal Securities Laws, and are not guarantees of future performance. When used in this Form 10-Q, the words "anticipate," "believe," "intend," "plan," "expect," "estimate," "approximate," and similar expressions, as they relate to us or our business or management, are intended to identify such forward-looking statements. These statements involve risks and uncertainties related to market acceptance of and competition for our licensed technologies, growth strategies, operating performance, industry trends, and other risks and uncertainties inherent in our business, including those set forth in Item 7 under the caption "Risk Factors," in our Annual Report on Form 10-K for the year ended July 31, 2004, filed with the Securities and Exchange Commission ("SEC") on October 29, 2004, and other factors that may be described in our other filings with the SEC, and are subject to change at any time. Our actual results could differ materially from these forward-looking statements. We undertake no obligation to update publicly any forward-looking statement. Overview - -------- We are a full service technology transfer and licensing provider focused on the technology needs of our customers and transforming those requirements into commercially viable solutions. We develop relationships with universities, companies, inventors and patent or intellectual property holders to obtain the rights or a license to their technologies, and they become our clients, for whom we find markets for the technologies. We also develop relationships with those who have a need or use for specific technologies, and they become our customers, usually through a license or sublicense. We identify and commercialize innovative technologies in life, electronic, nano, and physical sciences developed by universities, companies and inventors, and match our customers' needs with our clients' technologies. Our goal is to maximize the value of intellectual assets for the benefit of our clients, customers and shareholders. Page 16 We earn revenues primarily from licensing our clients' and our intellectual property rights, principally patents and inventions (collectively, the "Technology"), to our customers (licensees). Our customers pay us royalties based on their use of the Technology, and we share those royalties with our clients. We determine the amount of royalty revenue to record when we can estimate the amount of royalties we have earned for a period, which occurs when we receive periodic royalty reports from our customers listing their sales of licensed products and the royalties we earned in the period. We receive these reports monthly, quarterly, or semi-annually. Since reports are not received on the same frequency, revenues will fluctuate from one quarter to another. For the three and six months ended January 31, 2005, we had a concentration of revenues derived from homocysteine assays, on which the patent expires in July 2007. Revenues relating to licenses for the homocysteine assay, excluding upfront license fees, continue to grow, and we believe that this trend will continue, but we cannot predict the magnitude of growth or if or when we will succeed in closing additional license agreements and enforcing our patent rights. In December 2004, we filed a complaint alleging infringement of our homocysteine assay patent against Bio-Rad Laboratories, Inc. ("BioRad") in the U.S. District Court for the District of Colorado. In February 2005, we also filed a complaint alleging infringement of our homocysteine assay patent against Axis-Shield plc and Axis-Shield, ASA, (collectively "Axis-Shield") in the U.S. District Court for the District of Colorado. Also in February 2005, we were served notice that Axis-Shield had filed a complaint against us on November 10, 2004, in the U.S. District Court for the District of Connecticut claiming that our homocysteine assay patent is invalid, that Axis-Shield has not infringed and does not infringe our homocysteine assay patent, and that we have engaged in unfair competition by threats of and actual litigation in the health industry. We do not believe that the Axis-Shield complaint has any merit. Further action in these cases is pending. Because we have rounded all amounts in this Item 2 to the nearest thousand dollars, certain amounts may not total precisely. In addition, all periods discussed in this Item 2 relate to our fiscal year ending July 31 (first, second, third and fourth quarters ending October 31, January 31, April 30 and July 31, respectively). Results of Operations - Three Months Ended January 31, 2005 (Second Quarter 2005) vs. Three Months Ended January 31, 2004 (Second Quarter 2004) - --------------------------------------------------------------------------- Summary of Results Net income for the second quarter 2005 was $3,957,000, or $0.54 per diluted share, compared to net income of $64,000, or $0.01 per diluted share, for the second quarter 2004, an improvement of $3,893,000, or $0.53 per diluted share. Revenues -------- In the second quarter 2005, total revenues were $6,783,000, compared to $1,038,000 for the second quarter 2004, an increase of $5,745,000, or 554%. Retained royalties for the second quarter 2005 were $6,687,000, which was $5,989,000, or 858% higher than the $698,000 reported in the second quarter 2004. The following compares retained royalty revenues by Technology in the second quarter 2005 with the second quarter 2004. For the three months ended January 31, ---------------------------------------------------------------------- Increase % Increase 2005 2004 (Decrease) (Decrease) ------------------ ----------------- ---------------- -------------- Homocysteine assay $ 6,359,000 $ 135,000 $ 6,224,000 4,610% Gallium arsenide 133,000 105,000 28,000 27% Ethyol -- 300,000 (300,000) (100%) All other Technologies 195,000 158,000 37,000 23% ------------------ ----------------- ---------------- Total retained royalties $ 6,687,000 $ 698,000 $ 5,989,000 858% ================== ================= ================
Page 17 The increase in revenues from the homocysteine assay was due principally to our $5.2 million share of an upfront license fee received in January 2005 from the license we granted to Abbott Laboratories, Inc. ("Abbott") in December 2004, and an upfront license fee from the license we granted to Diagnostic Products Corporation ("DPC") in November 2004. In addition, revenues increased from royalties earned on those licenses and the license we granted to Bayer Corporation ("Bayer") in October 2004. We expect to report Ethyol royalties in the third and fourth quarters 2005 rather than the second and third quarters, as in 2004. The increase in gallium arsenide revenues resulted principally from a decrease in the Japanese tax withholding rate pursuant to a change in the tax treaty between the U.S.A. and Japan. For revenues from all other technologies, higher royalties from a recently producing license more than offset royalty reductions due to expired licenses. Approximately 95% of our retained royalties for second quarter 2005 was from the homocysteine assay Technology, on which the patent expires in July 2007. In addition, a significant portion of these homocysteine royalties was from nonrecurring, upfront license fees. We continue to seek licenses to new Technologies to mitigate this concentration of revenues, to replace revenues from expiring licenses and to provide future revenues. Royalty settlements and awards in the second quarter 2004 were from our sale of a portion of the pending Materna(TM) litigation award to generate $250,000 of cash, including $18,000 in interest income. There were no settlements and awards in the second quarter 2005. Settlement with Unilens, net, in the second quarter 2004, was from the second installment from Unilens Corp. USA ("Unilens") under our October 2003 settlement of an old receivable from Unilens. Due to Unilens' financial condition and the uncertainty of collecting the installments due from the settlement, we recorded revenue, net of related expenses, in fiscal 2004 when we received payments from Unilens. At July 31, 2004, we reviewed Unilens' financial condition and determined that the entire remaining balance of the receivable was collectible, and recorded the net present value of the receivable and related settlement income at July 31, 2004. Thus, in fiscal 2005 we will record only minimal interest income related to the settlement. Interest income in the second quarter 2005 was higher than in the second quarter 2004 principally due to significantly higher cash balances. In the second quarter 2004, interest income included $18,000 in connection with our sale of a portion of the pending Materna litigation award, and interest earned on our invested cash and cash equivalents. Expenses -------- For the three months ended January 31, --------------------------------------------------------------------- Increase % Increase 2005 2004 (Decrease) (Decrease) -------------- ------------- --------------- -------------- Personnel and other direct expenses relating to revenues $ 2,095,000 $ 588,000 $ 1,507,000 256% General and administrative expenses 567,000 371,000 196,000 53% Patent enforcement expenses, net of reimbursements 114,000 14,000 100,000 714% -------------- ------------- --------------- Total expenses $ 2,776,000 $ 973,000 $ 1,803,000 185% ============== ============= ===============
Page 18 Personnel and other direct expenses relating to revenues increased due to several factors. Personnel expenses for the second quarter 2005 increased $1,419,000 over the prior year. The increase was due principally to estimated bonus and commission accruals recorded pursuant to our Incentive Compensation Plan that increased $1,166,000 compared with the second quarter 2004. Our personnel expenses also increased because we have more employees, and for certain salary increases. In addition, other direct expenses increased $88,000 due to costs incurred in connection with efforts to collect disputed royalties determined by a royalty audit, costs related to licensing our homocysteine assay to others and other costs to maintain certain technologies. General and administrative expenses increased principally due to increases of $62,000 in public company expenses, $57,000 in directors' fees and expenses, and $40,000 in travel expenses. Public company expenses include costs relating to our annual report, proxy, and annual meeting, all of which increased in the current year compared to the prior year. In addition, we incurred increased costs for investor relations and travel to present CTT to current and potential investors across the country. The principal reason for the increase in directors' fees and expenses was the reversal of a $44,000 overaccrual in the prior year that we did not have in the current year. We accrue the estimated stock compensation expense relating to our 1996 Directors' Stock Participation Plan during the calendar year. In January we record the difference between the estimated expense and the actual expense when we issue the shares to the directors. The estimate will differ from the actual if our share price on the first business day of January is less than $6.00 per share. Patent enforcement expenses, net of reimbursements, increased principally due to our lawsuits against Laboratory Corporation of America Holdings d/b/a LabCorp ("LabCorp"), Abbott, BioRad and Axis-Shield to enforce our homocysteine assay patent rights, and our demand for arbitration of our dispute with Palatin Technologies, Inc. ("Palatin"). The level of patent enforcement expenses relates to our legal strategy and varies depending on the stage of the litigation. Activity related to homocysteine assay patent rights was higher in the second quarter 2005 compared to 2004, and we initiated the Palatin arbitration in early fiscal 2005. Provision for income taxes -------------------------- In prior years, we generated significant federal and state income tax losses, and these net operating losses ("NOLs") were carried forward for income tax purposes. Due to our current year income before income taxes, we will utilize a portion of our NOLs against our current year regular federal and state taxable income, effectively eliminating our regular income tax liabilities for fiscal 2005. However, since we expect to be subject to the federal alternative minimum income tax ("AMT"), we provided $50,000 in the second quarter of 2005 principally for our estimated federal AMT liability. The NOLs are an asset to us since we can use them to offset or reduce future taxable income and therefore reduce the amount of both federal and state income taxes to be paid in future years. Previously, since we were incurring losses and could not be sure that we would have future taxable income to be able to use the benefit of our NOLs, we recorded a valuation allowance against the asset, reducing its book value to zero. As a result of the income we earned for the six months ended January 31, 2005, we reversed $1,814,000 of the valuation allowance in the second quarter of 2005 and recorded a provision for income taxes of the same amount. The effective tax rate of the provision for the second quarter of 2005 was 45.3%. We expect our effective tax rate for fiscal year 2005 will be approximately 36.3%. The difference between the actual rate and the effective rate for the second quarter of 2005 was due principally to intraperiod tax allocation. Page 19 Results of Operations - Six Months Ended January 31, 2005 (First Half of 2005) vs. Six Months Ended January 31, 2004 (First Half of 2004) - ------------------------------------------------------------------------------ Summary of Results Net income for the first half 2005 was $4,925,000, or $0.76 per diluted share, compared to net income of $410,000, or $0.07 per diluted share, for the first half of 2004, an improvement of $4,515,000, or $0.69 per diluted share. Revenues -------- In the first half of 2005, total revenues were $9,214,000, compared to $2,401,000 for the first half of 2004, an increase of $6,814,000, or 284%. Retained royalties for the first half of 2005 were $7,442,000, which was $6,357,000, or 586% higher than the $1,085,000 reported in the first half of 2004. The following compares retained royalty revenues by Technology in the first half of 2005 with the first half of 2004. For the six months ended January 31, ------------------------------------------------------------------ Increase % Increase 2005 2004 (Decrease) (Decrease) ------------------ ----------------- ---------------- ------------ Homocysteine assay $ 7,035,000 $ 401,000 $ 6,634,000 1,654% Gallium arsenide 138,000 112,000 26,000 23% Ethyol -- 300,000 (300,000) (100%) All other Technologies 269,000 272,000 (3,000) (1%) ------------------ ----------------- ---------------- Total retained royalties $ 7,442,000 $ 1,085,000 $ 6,357,000 586% ================== ================= ================
The increase in revenues from the homocysteine assay was due principally to our $5.2 million share of the upfront license fee received in January 2005 from the license we granted to Abbott in December 2004, and upfront license fees from the licenses we granted to DPC and Bayer. Revenues also increased from royalties earned to date on those licenses. We expect to report Ethyol royalties in the third and fourth quarters of 2005 rather than the second and third quarters, as in 2004. The increase in gallium arsenide revenues resulted principally from a decrease in the Japanese tax withholding rate pursuant to a change in the tax treaty between the U.S.A. and Japan. For revenues from all other technologies, higher royalties from a recently producing license were offset by royalty reductions due to expired licenses. Approximately 95% of our retained royalties for first half of 2005 was from the homocysteine assay Technology, on which the patent expires in July 2007. In addition, a significant portion of these homocysteine royalties was from nonrecurring, upfront license fees. We continue to seek licenses to new Technologies to mitigate this concentration of revenues, to replace revenues from expiring licenses and to provide future revenues. Royalty settlements and awards of $815,000 in the first half of 2005 were from our share of an award received from LabCorp. (The LabCorp litigation confirmed the validity of our homocysteine assay patent rights.) In addition to the award, we received $105,000 of interest income. On November 3, 2004, LabCorp filed a petition for a writ of certiorari with the U.S. Supreme Court relating to this case, and on February 28, 2005, the Court invited the Solicitor General's Office to file a brief in this case expressing its views on the question of the patentability of method patents of this type. For further discussion, see Note 3 to the accompanying unaudited condensed consolidated financial statements. Page 20 In the first half of 2004 our royalty settlements and awards of $1,068,000 were from our sale of a portion of our share of the pending Materna litigation award to generate $1,150,000 of cash, including $82,000 recorded in interest income. Stock dividend of $679,000 in the first half of 2005 was from our receipt of a dividend from our investee, Melanotan Corporation ("MelanoTan"), in which we have a 20.9% ownership. In October 2004, Melanotan paid its shareholders a dividend in the form of shares of stock of EpiTan Limited (Australia) ("EpiTan"), MelanoTan's investee. As a result, we received 1,252,346 shares of EpiTan common stock. We previously licensed our rights to a sunless tanning technology to MelanoTan and MelanoTan sublicensed the rights to EpiTan (MelanoTan has no operations of its own). MelanoTan also received shares of EpiTan. The technology may prevent or lessen skin cancer caused by unprotected sun exposure, and EpiTan is in the process of testing and evaluating the technology for future commercialization. EpiTan common stock is traded on the Australian Stock Exchange (quoted in Australian dollars) under the symbol EPT. As a condition to receiving the dividend, we agreed not to sell, transfer or otherwise dispose of the shares before October 21, 2005. We estimated the fair value of our EpiTan stock dividend using the closing price of the shares ($0.93 per share, Australian dollars) and the exchange rate for converting Australian dollars to U.S. dollars ($0.7289 Australian dollars to $1.00 U.S. dollar) on the date MelanoTan's board of directors approved the dividend. We then discounted the value of the shares using a 20% discount factor to recognize the estimated impact of the sale restriction and the high risk associated with an investment in EpiTan stock, since EpiTan has minimal revenues and has incurred substantial current and accumulated net losses. Settlement with Unilens, net, in the first half of 2004, was from installments from Unilens under our October 2003 settlement of an old receivable from Unilens. Due to Unilens' financial condition and the uncertainty of collecting the installments due from the settlement, we recorded revenue, net of related expenses, in fiscal 2004 when we received payments from Unilens. At July 31, 2004, we reviewed Unilens' financial condition and determined that the entire remaining balance of the receivable was collectible, and recorded the net present value of the receivable and related settlement income at July 31, 2004. Thus, in fiscal 2005 we will record only minimal interest income related to the settlement. Interest income in the first half of 2005 includes $105,000 in connection with the LabCorp litigation award and interest earned on our invested cash and cash equivalents. In the first half of 2004, interest income included $82,000 in connection with our sales of portions of our share of the pending Materna litigation award, and interest earned on our invested cash and cash equivalents. The increase in interest income earned from invested cash and cash equivalents in the current year compared to the prior year is due principally to significantly higher cash balances this year. Expenses -------- For the six months ended January 31, ------------------------------------------------------------------------ Increase % Increase 2005 2004 (Decrease) (Decrease) ---------------- ---------------- ------------- -------------- Personnel and other direct expenses relating to revenues $ 3,119,000 $ 1,147,000 $ 1,972,000 172% General and administrative expenses 815,000 797,000 18,000 2% Patent enforcement expenses, net of reimbursements 284,000 47,000 237,000 504% ---------------- ---------------- ------------- Total expenses $ 4,218,000 $ 1,991,000 $ 2,227,000 112% ================ ================ =============
Page 21 Personnel and other direct expenses relating to revenues increased due to several factors. Personnel expenses for the first half of 2005 increased $1,828,000 from the prior year. This was due principally to estimated bonus and commission accruals recorded pursuant to our Incentive Compensation Plan that increased $1,280,000 compared to the first half 2004. Our personnel expenses also increased because we have more employees, and for certain salary increases. In addition, other direct expenses increased $144,000 due to costs incurred in connection with efforts to collect disputed royalties determined by a royalty audit, a one-time charge for technical services to support licensing a Technology (which costs are partially recoverable from future licensing revenues, if any), costs related to licensing our homocysteine assay to others and other costs to maintain certain technologies. General and administrative expenses increased slightly, with increases in public company and travel expenses substantially offset by a $168,000 payment received in October 2004 from our directors' and officers' liability insurance carrier as settlement of our claim for reimbursement of amounts incurred in connection with an investigation by the SEC. Costs related to the investigation previously were expensed as incurred. Our insurance carrier also acknowledged that we had met our deductible under our policy relating to this matter, and confirmed that they will provide coverage (in accordance with the terms of the policy) for losses incurred in the SEC civil suit filed in August 2004. Accordingly, we have not recorded any significant costs in the current fiscal year relating to the SEC civil suit. In addition, we incurred increased costs for investor relations and travel to present CTT to current and potential investors across the country. Patent enforcement expenses, net of reimbursements, increased principally due to our lawsuits against LabCorp, Abbott, Bayer, BioRad and Axis-Shield to enforce our homocysteine assay patent rights, and our demand for arbitration of our dispute with Palatin. The level of patent enforcement expenses relates to our legal strategy and varies depending on the stage of the litigation. Activity related to homocysteine assay patent rights was considerably higher in the first half of 2005 compared to 2004, and we initiated the Palatin arbitration in early fiscal 2005, but the Fujitsu case was less active in the first half of 2005. Provision for income taxes -------------------------- We provided $71,000 in the first half of 2005 principally for our estimated federal AMT liability. As a result of the income we earned for the six months ended January 31, 2005, we reversed $1,814,000 of the valuation allowance we recorded previously against the NOL asset and recorded a provision for income taxes of the same amount at an estimated effective combined federal and state tax rate of 36.3%, which is the rate we expect for the full fiscal year. Financial Condition and Liquidity - --------------------------------- Our liquidity requirements arise principally from our working capital needs, including funds needed to find, obtain and license new Technologies, and to protect and enforce our intellectual property rights, if necessary. We fund our liquidity requirements with a combination of cash flows from operations, including legal settlements and awards, and cash on hand. In addition, we have the ability to fund our requirements through sales of common stock under an equity financing arrangement (see below). At January 31, 2005, we had no outstanding debt or credit facility. Cash and cash equivalents consist of demand deposits and highly liquid, interest earning investments with maturities when purchased of three months or less, including overnight bank deposits and money market funds. We carry cash equivalents at cost, which approximates fair value. Page 22 At January 31, 2005, cash and cash equivalents were $14,136,000, compared to $4,310,000 at July 31, 2004. Cash provided by operating activities during the six months ended January 31, 2005, was $7,589,000, compared to a use of cash of $97,000 during the same period of the prior year. The increase in cash from operating activities in the current year compared to the prior year was due principally to significantly higher net income this year, as a result of receiving upfront license fees and royalties from the new Abbott, DPC and Bayer homocysteine licenses, our receipt of a total of $921,000 from the LabCorp litigation award, and higher royalties payable to our clients, partially offset by higher receivables. (In February 2005, we paid approximately $2,700,000 of accrued royalties payable to our clients at January 31, 2005.) Cash provided by investing activities in the current six months was $304,000, compared to $163,000 in the same period of the prior year. In the current year we collected more cash on our receivable from Unilens. Cash provided by financing activities in the current year was $1,934,000, from sales of our common stock to Fusion Capital Fund II, LLC ("Fusion Capital") (see below) and from exercises of stock options. In addition to fluctuations in the amounts of royalties and our clients' shares of royalty settlements and awards, changes in royalties receivable and payable reflect our normal cycle of royalty collections and payments, and fluctuate depending on when royalty receipts and payments are due under our agreements with clients and customers. Funding and capital requirements Equity Financing In February 2004, we entered into an equity financing agreement with Fusion Capital, pursuant to which we can sell to Fusion Capital up to $5 million of our common stock, at our option. During the six months ended January 31, 2005, we sold approximately $1,413,000 of common stock to Fusion Capital. We will use the proceeds for general working capital needs. The aggregate proceeds through January 31, 2005 from sales to Fusion Capital pursuant to the equity financing agreement are approximately $1,613,000. Although we have the ability to sell up to $5 million of our common stock to Fusion Capital, we currently estimate that we will sell $2 million in total to Fusion Capital pursuant to the equity financing agreement. However, this estimate could change at any time. In addition, we have the option of entering into another equity financing agreement with Fusion Capital for an additional $5 million upon termination of the current agreement. Income taxes We currently have the benefit of using a portion of our accumulated NOLs to eliminate our regular federal and state income tax liabilities for fiscal 2005. We expect that we will be liable to pay only the federal AMT for fiscal 2005. Our rate for the AMT liability is much less than if we had to pay income taxes at our estimated effective income tax rate of 36.3%. We will continue to receive this benefit until we have utilized all of our NOLs. We cannot determine when we will utilize the remainder of our NOLs. General The amounts and timing of our future cash requirements will depend on many factors, including the results of our operations and marketing efforts, the results and costs of legal proceedings, and our equity financing. To sustain profitability, we must license Technologies with sufficient current and long-term revenue streams, and continually add new licenses. However, obtaining rights to new Technologies, granting rights to licensees, enforcing intellectual property rights, and collecting royalty revenues are subject to many factors beyond our control or that we cannot currently anticipate. Although there can be no assurance that we will be successful in our efforts, we believe that the combination of our cash on hand, revenues from executing our strategic plan, and the ability to raise funds from sales of our common stock pursuant to our equity financing agreement will be sufficient to meet our current and anticipated operating cash requirements at least through our fiscal year ending July 31, 2006. Page 23 Contingencies We are a party to several legal actions and proceedings, both as a plaintiff and as a defendant, for which we cannot predict the final outcomes. These matters have been detailed herein and in prior filings with the SEC. Depending upon the amount and timing, an unfavorable resolution of any or all matters where we are a defendant and/or our incurrence of significant legal fees and other costs to defend or prosecute any of these actions and proceedings may have a material adverse effect on our consolidated financial position, results of operations or cash flows in a particular period. Other matters We believe that we carry adequate liability insurance, directors' and officers' insurance, casualty insurance (for owned or leased tangible assets), and other insurance to cover us against potential claims that occur in the normal course of our business. Critical Accounting Estimates - ----------------------------- There have been no significant changes in our accounting estimates described under the caption "Critical Accounting Estimates," included in Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations," in our Annual Report on Form 10-K for the year ended July 31, 2004. We estimated the fair value of our EpiTan stock dividend using the closing price of the shares and the exchange rate for converting Australian dollars to U.S. dollars on the date MelanoTan's board of directors approved the dividend. We then discounted the value of the shares using a 20% discount factor to recognize the estimated impact of the sale restriction and the high risk associated with an investment in EpiTan stock, since EpiTan has minimal revenues and has incurred substantial current and accumulated net losses. The bonus and commission compensation accruals were estimated based on our performance to date and the provisions of our Incentive Compensation Plan. Recently Issued Accounting Pronouncements - ----------------------------------------- In December 2004, the Financial Accounting Standards Board issued Statement No. 123 (revised 2004), "Share-Based Payment." This Statement established standards for accounting for transactions in which an entity exchanges its equity instruments for goods or services, focusing primarily on employee services exchanged for share-based payments. It requires entities to expense the estimated fair value of employee stock options and similar awards over the requisite service period (generally the vesting period). We will adopt the provisions of this statement beginning August 1, 2005, and are currently evaluating the transition method to use and considering the effects that adopting this statement will have on our financial statements. Upon adoption beginning August 1, 2005, we will recognize compensation expense for the estimated fair value of new awards and of any awards modified, repurchased or cancelled after June 15, 2005, over their respective requisite service periods. We also will recognize compensation expense for awards previously issued and outstanding but vesting after August 1, 2005, over their respective remaining vesting periods. For outstanding but unvested awards at January 31, 2005, we expect to record compensation expense of $172,000 and $76,000, respectively, in fiscal 2006 and 2007. Recognizing compensation expense for share-based payments awarded on or after August 1, 2005, will reduce our net income in the future, but we cannot estimate the amount of that reduction, which will depend on the number of stock options awarded, option vesting periods, and other factors used in estimating the fair value of awards granted in the future. Page 24 Related Party Transactions - -------------------------- We previously disclosed that our board of directors had determined that when a director's services are outside the normal duties of a director, we should compensate the director at the rate of $1,000 per day, plus expenses (which is the same amount that we pay a director for attending a one-day Board meeting). We incurred $2,543 and $13,018, respectively, during the three and six months ended January 31, 2005, of costs, including expenses, (reported in personnel and other direct expenses relating to revenues) related to consulting services provided by one of our directors. At January 31, 2005, accounts payable included $1,399 due to related parties. Item 3. Quantitative and Qualitative Disclosures About Market Risk ---------------------------------------------------------- We do not have any significant market risk to the valuation of our assets other than risks related to our shares of EpiTan common stock. The value of the stock is subject to market fluctuations in the per share price of EpiTan stock as well as foreign currency fluctuations, since EpiTan common stock is traded on the Australian Stock Exchange and the price per share of the stock is quoted in Australian dollars. We received the shares during the quarter ended October 31, 2004, and the net unrealized gain from the date of receipt to January 31, 2005 has not been significant. Item 4. Controls and Procedures ----------------------- (a) Evaluation of Disclosure Controls and Procedures ------------------------------------------------ Our management, including our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of January 31, 2005. Our disclosure controls and procedures are designed to ensure that information required to be disclosed by us in reports filed under the Securities Exchange Act of 1934 is recorded, processed, summarized, and reported within the time periods specified in the Securities and Exchange Commission's rules and forms. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that the disclosure controls and procedures were effective as of January 31, 2005. (b) Change in Internal Controls --------------------------- There were no significant changes in our internal control over financial reporting during the quarter ended January 31, 2005, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. Page 25 PART II - OTHER INFORMATION Item 1. Legal Proceedings ----------------- See Notes 2, 3 and 10 to the accompanying unaudited condensed consolidated financial statements in Part I of this Quarterly Report on Form 10-Q. Item 2. Unregistered Sales of Equity Securities and Use of Proceeds ----------------------------------------------------------- The following table lists sales and issuances of our common stock to Fusion Capital during the three months ended January 31, 2005, pursuant to the $5 million equity financing arrangement with Fusion Capital as described in Part I, Item 2, "Management's Discussion and Analysis of Financial Condition and Results of Operations." We issued all of these securities without registration in reliance on an exemption under Section 4(2) of the Securities Act of 1933 because we made the offers and sales in private placements. Number of shares sold Total cash Month and issued received ----------------------- --------------- ------------------- November 2004 118,767 $ 575,012 December 2004 67,056 487,520 January 2005 -- -- --------------- ------------------- 185,823 $ 1,062,532 =============== =================== Item 4. Submission of Matters to a Vote of Security Holders --------------------------------------------------- At the Company's annual meeting of stockholders held January 14, 2005, stockholders elected the following directors: Name Votes For Votes Withheld ---- --------- -------------- Richard E. Carver 5,567,872 563,861 George W. Dunbar, Jr. 5,033,488 1,098,245 Dr. Donald J. Freed 5,831,349 300,384 Dr. Maria-Luisa Maccecchini 5,817,969 313,764 John B. Nano 5,866,861 264,872 Charles J. Philippin 5,539,463 592,270 John M. Sabin 5,107,140 1,024,593 There were no broker non-votes and no abstentions in respect of the election of directors. Stockholders also approved a proposal to increase the number of shares of common stock available for stock option grants under the 1997 Employees' Stock Option Plan by 500,000 shares. After this approval, an aggregate of 1,525,000 shares may be granted to employees under this Plan. There were 2,247,005 shares voted for and 1,032,346 shares voted against this proposal, and 121,569 shares abstained. There were 2,730,813 broker non-votes on this matter. Page 26 In addition, stockholders approved a proposal to extend the 1996 Directors' Stock Participation Plan by five (5) years and to increase the number of shares of common stock available for issuance under this Plan by 80,000 shares. After this approval, an aggregate of 180,000 shares may be issued to directors under this Plan through the first business day of 2011. There were 2,254,245 shares voted for and 1,012,941 shares voted against this proposal, and 133,734 shares abstained. There were also 2,730,813 broker non-votes on this matter. Item 6. Exhibits A) Exhibits Page ---- 3.1 By-laws of the registrant as amended effective January 14, 2005, filed as Exhibit 3.2 to registrant's Form 10-Q for the quarter ended October 31, 2004, and hereby incorporated by reference. 10.1 Registrant's 1997 Employees' Stock Option Plan as amended January 14, 2005, filed (on January 21, 2005) as Exhibit 10.1 to registrant's Current Report on Form 8-K dated January 14, 2005, and hereby incorporated by reference. 10.2 Registrant's 1996 Directors' Stock Participation Plan as amended January 14, 2005, filed (on January 21, 2005) as Exhibit 10.2 to registrant's Current Report on Form 8-K dated January 14, 2005, and hereby incorporated by reference. 31.1 Certification by the Principal Executive Officer of Competitive Technologies, Inc. pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (Rule 13a-14(a) or Rule 15d-14(a)). 29 31.2 Certification by the Principal Financial Officer of Competitive Technologies, Inc. pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (Rule 13a-14(a) or Rule 15d-14(a)). 30 32.1 Certification by the Principal Executive Officer of Competitive Technologies, Inc. pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350) (furnished herewith). 31 32.2 Certification by the Principal Financial Officer of Competitive Technologies, Inc. pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350) (furnished herewith). 32
[Signature page follows] Page 27 SIGNATURES ---------- Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. COMPETITIVE TECHNOLOGIES, INC. (the registrant) By /s/ John B. Nano ----------------------------------- John B. Nano President, Chief Executive Date: March 17, 2005 Officer and Authorized Signer COMPETITIVE TECHNOLOGIES, INC. (the registrant) By /s/ Michael D. Davidson ----------------------------------- Michael D. Davidson Chief Financial Officer, Chief Accounting Officer Date: March 17, 2005 and Authorized Signer Page 28 EX-31.1 2 a4844132ex31_1.txt EXHIBIT 31.1 Exhibit 31.1 ------------ CERTIFICATION I, John B. Nano, President and Chief Executive Officer of Competitive Technologies, Inc., certify that: 1. I have reviewed this Quarterly Report on Form 10-Q of Competitive Technologies, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: March 17, 2005 /s/ John B. Nano ------------------------------ John B. Nano President and Chief Executive Officer of Competitive Technologies, Inc. EX-31.2 3 a4844132ex31_2.txt EXHIBIT 31.2 Exhibit 31.2 ------------ CERTIFICATION I, Michael D. Davidson, Chief Financial Officer of Competitive Technologies, Inc., certify that: 1. I have reviewed this Quarterly Report on Form 10-Q of Competitive Technologies, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: March 17, 2005 /s/ Michael D. Davidson ------------------------------ Michael D. Davidson Chief Financial Officer of Competitive Technologies, Inc. EX-32.1 4 a4844132ex32_1.txt EXHIBIT 32.1 Exhibit 32.1 ------------ CERTIFICATION BY THE PRINCIPAL EXECUTIVE OFFICER OF COMPETITIVE TECHNOLOGIES, INC. PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 (18 U.S.C. 1350) I, John B. Nano, am President and Chief Executive Officer of Competitive Technologies, Inc. (the "Company"). This certification is being furnished pursuant to Rule 13a-14(b) under the Securities Exchange Act of 1934 (the "Exchange Act") and 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, in connection with the filing of the Company's Quarterly Report on Form 10-Q for the quarter ended January 31, 2005 (the "Report"). I hereby certify that to the best of my knowledge: 1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Exchange Act (15 U.S.C. 78m(a) or 78o(d)); and 2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Date: March 17, 2005 /s/ John B. Nano ------------------------------ John B. Nano President and Chief Executive Officer of Competitive Technologies, Inc. EX-32.2 5 a4844132ex32_2.txt EXHIBIT 32.2 Exhibit 32.2 ------------ CERTIFICATION BY THE PRINCIPAL FINANCIAL OFFICER OF COMPETITIVE TECHNOLOGIES, INC. PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 (18 U.S.C. 1350) I, Michael D. Davidson, am Chief Financial Officer of Competitive Technologies, Inc. (the "Company"). This certification is being furnished pursuant to Rule 13a-14(b) under the Securities Exchange Act of 1934 (the "Exchange Act") and 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, in connection with the filing of the Company's Quarterly Report on Form 10-Q for the quarter ended January 31, 2005 (the "Report"). I hereby certify that to the best of my knowledge: 1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Exchange Act (15 U.S.C. 78m(a) or 78o(d)); and 2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Date: March 17, 2005 /s/ Michael D. Davidson ------------------------------ Michael D. Davidson Chief Financial Officer of Competitive Technologies, Inc. -----END PRIVACY-ENHANCED MESSAGE-----