SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR QUARTER ENDED SEPTEMBER 30, 1996 COMMISSION FILE NO. 0-20333
NOCOPI TECHNOLOGIES, INC.
------------------------------------------------------
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
MARYLAND 87-0406496
------------------------------- -------------------
(STATE OR OTHER JURISDICTION OF (IRS EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
230 SUGARTOWN ROAD, SUITE 100, WAYNE, PA 19087
----------------------------------------------
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: 610-687-2000
------------
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
--- ---
NUMBER OF SHARES OF COMMON STOCK OUTSTANDING:
TITLE OF EACH CLASS SHARES OUTSTANDING
----------------------- -------------------
COMMON STOCK, PAR VALUE AT NOVEMBER 1, 1996
$.01 PER SHARE 14,080,654
<PAGE>
NOCOPI TECHNOLOGIES, INC.
INDEX
PART I. FINANCIAL INFORMATION PAGE
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED STATEMENTS OF OPERATIONS 1
THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 1996
AND SEPTEMBER 30, 1995
CONSOLIDATED BALANCE SHEETS 2
SEPTEMBER 30, 1996 AND DECEMBER 31, 1995
CONSOLIDATED STATEMENTS OF CASH FLOWS 3
NINE MONTHS ENDED SEPTEMBER 30, 1996
AND SEPTEMBER 30, 1995
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 4
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 5 - 6
PART II. OTHER INFORMATION 7
SIGNATURES 8
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Nocopi Technologies, Inc.
Consolidated Statements of Operations
(unaudited)
<TABLE>
<CAPTION>
Three Months ended Nine Months ended
September 30 September 30
1996 1995 1996 1995
-------- -------- ---------- ----------
<S> <C> <C> <C> <C>
Revenues $951,200 $782,100 $2,762,900 $2,178,400
Cost of sales 346,900 71,400 779,400 260,800
--------- --------- ---------- ----------
Gross profit 604,300 710,700 1,983,500 1,917,600
Operating expenses
Research and development 199,700 214,500 596,400 605,400
Sales and marketing 386,400 334,900 1,109,800 1,158,600
General and administrative 286,800 263,600 808,100 732,800
--------- --------- ---------- ----------
872,900 813,000 2,514,300 2,496,800
--------- --------- ---------- ----------
Loss from operations (268,600) (102,300) (530,800) (579,200)
Other income (expenses)
Amortization (6,300) (6,800) (19,000) (22,300)
Interest income 27,000 48,900 92,100 123,400
Interest and bank charges (17,500) (18,400) (52,300) (59,900)
Ownership interest of others
in consolidated entity 102,000 56,400 301,200 286,200
--------- --------- ---------- ----------
105,200 80,100 322,000 327,400
--------- --------- ---------- ----------
Net loss ($163,400) ($ 22,200) ($ 208,800) ($ 251,800)
========= ========= ========== ==========
Loss per common share* ($ .01) ($ .00) ($ .01) ($ .02)
Average common shares outstanding* 14,080,654 14,015,918 14,063,257 13,995,134
</TABLE>
- ----------
*Restated to reflect one-for-five reverse stock split effective July 15, 1996.
See notes to consolidated financial statements.
1
<PAGE>
Nocopi Technologies, Inc.
Consolidated Balance Sheets
(unaudited)
<TABLE>
<CAPTION>
September 30 December 31
1996 1995
----------- -----------
Assets
Current assets
<S> <C> <C>
Cash and temporary cash investments $ 2,633,500 $ 2,982,100
Accounts receivable less allowance 644,700 667,700
Inventory 8,000 22,200
Prepaid and other 87,000 93,900
----------- -----------
Total current assets 3,373,200 3,765,900
Fixed assets
Leasehold improvements 43,300 55,300
Furniture, fixtures and equipment 424,800 381,100
----------- -----------
468,100 436,400
Less: accumulated depreciation 277,100 231,600
----------- -----------
191,000 204,800
Other assets
Patents, net of accumulated amortization 427,800 419,800
Debt issue costs, net of accumulated amortization 38,000 56,900
Other 15,100 17,800
----------- -----------
480,900 494,500
----------- -----------
Total assets $ 4,045,100 $ 4,465,200
=========== ===========
Liabilities and Shareholders' Equity
Current liabilities
Accounts payable $ 589,200 $ 398,100
Accrued expenses 179,300 258,700
Accrued commissions 136,900 182,500
Deferred revenue 276,600 280,100
----------- -----------
Total current liabilities 1,182,000 1,119,400
Long-term notes payable 950,000 950,000
Ownership interest of others in consolidated entity 1,521,900 1,823,100
Shareholders' equity
Common stock, $.01 par value
Authorized - 50,000,000 shares
Issued and outstanding
1996 - 14,080,654; 1995 - 14,044,166 shares 140,800 140,400
Paid-in capital 7,651,000 7,522,900
Currency translation adjustment 76,600 177,800
Accumulated deficit (7,477,200) (7,268,400)
----------- -----------
391,200 572,700
----------- -----------
Total liabilities and shareholders' equity $ 4,045,100 $ 4,465,200
=========== ===========
</TABLE>
See notes to consolidated financial statements.
2
<PAGE>
Nocopi Technologies, Inc.
Consolidated Statements of Cash Flows
(unaudited)
<TABLE>
<CAPTION>
Nine Months ended September 30
1996 1995
----------- -----------
Operating Activities
<S> <C> <C>
Net loss ($ 208,800) ($ 251,800)
Adjustments to reconcile net loss to
cash from operating activities
Depreciation 64,600 51,600
Amortization 58,500 60,900
Allowance for doubtful accounts 12,400 7,200
Ownership interest of others in
consolidated entity (301,200) (286,200)
Other 4,700
----------- -----------
(374,500) (413,600)
Changes in working capital
Accounts receivable 6,600 157,400
Inventory 14,200 4,400
Prepaid and other 4,700 (26,000)
Accounts payable and accrued expenses 75,600 240,500
Deferred revenue (1,000) 174,300
----------- -----------
100,100 550,600
----------- -----------
Cash provided (used) by operating activities (274,400) 137,000
Investing Activities
Additions to fixed assets (51,400) (33,600)
Additions to patents (44,900) (95,000)
----------- -----------
Cash used by investing activities (96,300) (128,600)
Financing Activities
Exercise of stock options 128,500 6,500
----------- -----------
Cash provided by financing activities 128,500 6,500
Effect of exchange rate changes on cash (106,400) 197,300
----------- -----------
Increase (decrease) in cash and temporary cash investments (348,600) 212,200
Cash and temporary cash investments - beginning of period 2,982,100 3,137,600
----------- -----------
Cash and temporary cash investments - end of period $ 2,633,500 $ 3,349,800
=========== ===========
</TABLE>
See notes to consolidated financial statements.
3
<PAGE>
NOCOPI TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Note 1. Financial Statements
The accompanying interim financial statements have been
prepared by the Company without audit. These statements
include all adjustments (consisting only of normal recurring
adjustments) which management believes necessary for a fair
presentation of the statements and have been prepared on a
consistent basis using the accounting policies described in
the summary of Accounting Policies included in the Company's
1995 Annual Report. Certain information and footnote
disclosures normally included in financial statements prepared
in accordance with generally accepted accounting principles
have been condensed or omitted. The Notes to Financial
Statements included in the 1995 Annual Report should be read
in conjunction with the accompanying interim financial
statements. The interim operating results are not necessarily
indicative of the operating results expected for the full
year.
Note 2. Reverse Stock Split
The Company, on July 15, 1996, amended its Articles of
Incorporation to effect a one-for-five reverse split of its
common stock, to increase the par value of its common stock
from $.002 to $.01 and to decrease the number of shares of
common stock authorized under its Articles of Incorporation
from 90,000,000 to 50,000,000. All applicable share and per
share data have been adjusted for the reverse stock split.
Note 3. Accounting Changes
Effective January 1, 1996, the Company adopted the provisions
of Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed" (SFAS 121). SFAS 121
requires that long-lived assets and certain identifiable
intangibles be reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of
the asset may not be recoverable. The adoption of SFAS 121 did
not have a material effect on the Company's financial
position.
Effective January 1, 1996, the Company adopted the
disclosure-only approach of Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation"
(SFAS 123). SFAS 123 encourages employers to account for stock
compensation awards based on their fair value on their date of
grant. Entities may choose not to apply the new accounting
method but instead, disclose in the notes to the financial
statements the pro forma effects on net income and earnings
per share as if the new method had been applied.
4
<PAGE>
Item 2.
NOCOPI TECHNOLOGIES, INC.
Management's Discussion and Analysis
of Financial Condition and Results of Operations
Results of Operations
Revenues for the third quarter of 1996 were $951,200 compared to $782,100 in the
third quarter of 1995, an increase of 22%. For the first nine months of 1996
revenues increased 27% to $2,762,900 from $2,178,400 in the first nine months of
1995. The increase is attributable to revenues from licensees and end-user
customers signed in late 1995 and the first nine months of 1996 as well as
increased revenues from those signed earlier. Revenues derived from the
production of pressure sensitive security labels under a license agreement
signed in 1995 increased in the third quarter of 1996. The Company recorded its
initial revenues from production of these labels in the second quarter. The
continuing financial losses from product counterfeiting and product diversion
experienced by domestic and international business and the ability to combat
these losses using technologies such as those offered by the Company continue to
provide the Company with opportunities to increase its revenue base.
The Company's gross profit declined to $604,300 or 64% of revenues from $710,700
or 91% of revenues in the third quarter of 1995. For the first nine months of
1996, the gross profit was $1,983,500 or 72% of revenues compared to $1,917,600
or 88% of revenues for the first nine months of 1995. The decline in gross
profit both in absolute dollars and as a percentage of revenues is due in part
to the inclusion in revenues of certain manufactured products which carry higher
direct costs than licensing and royalty revenues and the modification of an
exclusive licensing arrangement which will negatively impact the Company's third
and fourth quarter 1996 revenues from that licensee compared to the same
quarters of 1995.
Research and development expenses were $199,700 in the third quarter of 1996
compared to $214,500 in the third quarter of 1995. For the first nine months of
1996, research and development expenses of $596,400 in the first nine months of
1996 approximated the $605,400 incurred in the first nine months of 1995.
Sales and marketing expenses increased in the third quarter of 1996 to $386,400
from $334,900 in the third quarter of 1995. The increase is attributable in part
to the addition of sales staff both in the U.S. and Europe to market certain
newly developed technologies which the Company believes to be best handled by
its sales persons as compared to licensees. For the first nine months of 1996,
sales and marketing expenses declined to $1,109,800 from $1,158,900 in the same
period of 1995.
General and administrative expenses increased to $286,800 in the third quarter
of 1996 from $263,600 in the third quarter of 1995 and to $808,100 in the first
nine months of 1996 from $732,800 in the first nine months of 1995. The
increases result from legal costs associated with the Company's patent
activities and expenses incurred by Euro-Nocopi.
5
<PAGE>
Other income (expenses) include interest on the Series B 7% Subordinated
Convertible Promissory Notes issued in May 1993 and amortization of debt issue
costs related to these Notes. The decrease in interest expense and debt
amortization costs in the third quarter and first nine months of 1996 reflects
the conversion of some of these notes into common stock during 1995. Interest
income includes interest on funds invested in the U.S. as well as the investment
of funds remaining from those raised in the 1994 Euro-Nocopi S.A. private
placement.
Ownership interest of others in consolidated entity represents the proportionate
share in the assets and profits or losses of Euro-Nocopi S.A. attributable to
the 82% ownership interest of the outside shareholders of that company.
The consolidated net loss was $163,400 for the third quarter of 1996 compared to
$22,200 in the third quarter of 1995. For the first nine months of 1996, the
consolidated net loss was $208,800 compared to $251,800 in the first nine months
of 1995. The decline in the third quarter is attributable primarily to lower
licensing revenues and lower gross profit resulting from the change in revenue
mix.
Liquidity and Capital Resources
The Company's consolidated cash and temporary cash investment position decreased
to $2,633,500 at September 30, 1996 from $2,982,100 at December 31, 1995.
Included in the September 30, 1996 balance is $1,779,800 held by Euro-Nocopi
S.A. which is available only to fund Euro-Nocopi's operations. At December 31,
1995, the Euro-Nocopi S.A. cash balance was $2,075,000. The decrease in cash
held by Euro-Nocopi S.A. during the first nine months is principally
attributable to funds required to support Euro-Nocopi S.A.'s operations.
The Company's domestic cash position decreased to $853,700 at September 30, 1996
from $907,100 at December 31, 1995. The decrease results primarily from payments
related to the acquisition of ink production equipment in late 1995, incentive
compensation paid for the achievement of the 1995 U.S. business plan and funds
required to support domestic operations partially offset by proceeds of stock
option exercises in the first half of 1996.
The Company believes that it has sufficient working capital and available credit
to support its consolidated operations over the next twelve months.
The Company, on July 15, 1996, amended its Articles of Incorporation to effect a
one-for-five reverse split of its common stock, increased the par value of its
common stock from $.002 to $.01 and decreased the number of shares of common
stock authorized under its Articles of Incorporation from 90,000,000 to
50,000,000.
The Company's operations are subject to all of the risks inherent in a
developing business enterprise. The likelihood of success must be considered in
light of problems, difficulties, complications and delays frequently encountered
in connection with an emerging business and the development of new technologies.
6
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Not Applicable
Item 2. Changes in Securities
Effective July 15, 1996, Registrant's Articles of
Incorporation were amended in order (a) to effect a
one-for-five reverse split of Registrant's common stock, par
value $.002 per share, (b) to increase the par value of
Registrant's common stock from $.002 per share to $.01 per
share, and (c) to decrease the number of shares of common
stock authorized under Registrant's Articles of Incorporation
from 90,000,000 to 50,000,000.
The amendment of Registrant's Articles of Incorporation did
not materially alter the voting and other rights of holders of
Registrant's common stock, or any other class of registrant's
securities.
Item 3. Defaults Upon Senior Securities
Not Applicable
Item 4. Submission of Matters to a Vote of Security Holders
Not Applicable
Item 5. Other Information
Not Applicable
Item 6. Exhibits and Reports on Form 8-K
(a). Exhibit 11 - Computation of loss per common share.
(b) No Current Reports on Form 8-K have been filed by the
Registrant during the quarter ended September 30, 1996.
7
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NOCOPI TECHNOLOGIES, INC.
DATE: November 12, 1996 /s/ Norman A. Gardner
----------------------------------------
Norman A. Gardner
President & Chief Executive Officer
DATE: November 12, 1996 /s/ Rudolph A. Lutterschmidt
----------------------------------------
Rudolph A. Lutterschmidt
Vice President & Chief Financial Officer
8
<PAGE>
NOCOPI TECHNOLOGIES, INC.
COMPUTATION OF LOSS PER COMMON SHARE
EXHIBIT 11
<TABLE>
<CAPTION>
Three Months ended September 30 Nine Months ended September 30
1996 1995 1996 1995
------------ ------------ ------------ ------------
Primary
<S> <C> <C> <C> <C>
Net loss applicable to common shares ($163,400) ($22,200) ($208,800) ($251,800)
========== ========== ========== ==========
Weighted average common shares
outstanding 14,080,654 14,015,918 14,063,257 13,995,134
Dilutive shares - based on the
treasury stock method using the
average market price (1) 20,094 51,867 57,615 72,537
---------- ---------- ---------- ----------
14,100,748 14,067,785 14,120,872 14,067,671
========== ========== ========== ==========
Per share amount applicable to
net loss ($ .01) ($ .00) ($ .01) ($ .02)
Three Months ended September 30 Nine Months ended September 30
1996 1995 1996 1995
------------ ------------ ------------ ------------
Fully diluted
Net loss ($163,400) ($22,200) ($208,800) ($251,800)
Add interest on Series B notes 16,700 17,700 49,900 57,800
Deduct ownership interest of
others in consolidated entity (102,000) (56,400) (301,200) (286,200)
---------- ---------- ---------- ----------
Net loss applicable to common shares ($248,700) ($60,900) ($460,100) ($480,200)
========== ========== ========== ==========
Weighted average common shares
outstanding 14,080,654 14,015,918 14,063,257 13,984,743
Dilutive shares - based on the
treasury stock method using the
greater of the period-end market
price or the average market price (2) 1,312,800 1,393,269 1,350,321 1,380,753
---------- ---------- ---------- ----------
15,393,454 15,409,187 15,413,578 15,365,496
========== ========== ========== ==========
Per share amount applicable to
net loss ($ .02) ($ .00) ($ .03) ($ .03)
</TABLE>
(1) represents shares resulting from stock options and warrants.
(2) represents shares resulting from stock options, warrants and the assumed
conversion of the convertible notes and Euro-Nocopi S.A. stock.
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> SEP-30-1996
<CASH> 2,633,500
<SECURITIES> 0
<RECEIVABLES> 678,000
<ALLOWANCES> 33,300
<INVENTORY> 8,000
<CURRENT-ASSETS> 3,373,200
<PP&E> 468,100
<DEPRECIATION> 277,100
<TOTAL-ASSETS> 4,045,100
<CURRENT-LIABILITIES> 182,000
<BONDS> 950,000
0
0
<COMMON> 140,800
<OTHER-SE> 250,400
<TOTAL-LIABILITY-AND-EQUITY> 4,045,100
<SALES> 2,763,400
<TOTAL-REVENUES> 2,763,400
<CGS> 779,900
<TOTAL-COSTS> 779,900
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 12,600
<INTEREST-EXPENSE> 52,300
<INCOME-PRETAX> (208,800)
<INCOME-TAX> 0
<INCOME-CONTINUING> (208,800)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (208,800)
<EPS-PRIMARY> (.01)
<EPS-DILUTED> (0.03)
</TABLE>
