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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 MARCH 31, 1997 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
----------------------- AT MAY 1, 1997
COMMON STOCK, PAR VALUE ------------------
$.01 PER SHARE 14,080,654
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<PAGE>
NOCOPI TECHNOLOGIES, INC.
-------------------------
INDEX
PART I. FINANCIAL INFORMATION PAGE
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED STATEMENTS OF OPERATIONS 1
THREE MONTHS ENDED MARCH 31, 1997
AND MARCH 31, 1996
CONSOLIDATED BALANCE SHEETS 2
MARCH 31, 1997 AND DECEMBER 31, 1996
CONSOLIDATED STATEMENTS OF CASH FLOWS 3
THREE MONTHS ENDED MARCH 31, 1997
AND MARCH 31, 1996.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 4
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 5 - 7
PART II. OTHER INFORMATION 8
SIGNATURES 9
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Nocopi Technologies, Inc.
Consolidated Statements of Operations
(unaudited)
Three Months ended March 31
1997 1996
------------ ------------
Revenues
Licenses, royalties and fees $803,600 $832,600
Product and other sales 29,300 42,900
------------ ------------
832,900 875,500
Cost of sales
Licenses, royalties and fees 203,600 131,000
Product and other sales 26,600 39,200
------------ ------------
230,200 170,200
------------ ------------
Gross profit 602,700 705,300
Operating expenses
Research and development 220,100 205,000
Sales and marketing 335,100 371,900
General and administrative 255,200 239,600
------------ ------------
810,400 816,500
------------ ------------
Loss from operations (207,700) (111,200)
Other income (expenses)
Amortization of debt issuance costs (6,300) (6,300)
Interest income 14,400 37,100
Interest and bank charges (18,000) (17,500)
Ownership interest of others in
loss of consolidated entity 95,800 87,100
------------ ------------
85,900 100,400
------------ ------------
Net loss ($121,800) ($10,800)
============ ============
Loss per common share ($.01) ($.00)
Average common shares outstanding 14,080,654 14,044,166
See notes to consolidated financial statements.
1
<PAGE>
Nocopi Technologies, Inc.
Consolidated Balance Sheets
(unaudited)
<TABLE>
<CAPTION>
March 31 December 31
1997 1996
----------- -----------
Assets
<S> <C> <C>
Current assets
Cash and cash equivalents $2,029,200 $2,229,200
Accounts receivable less allowances 445,100 513,400
Inventory 8,300 5,100
Prepaid and other 83,000 105,300
----------- -----------
Total current assets 2,565,600 2,853,000
Fixed assets
Leasehold improvements 46,300 43,200
Furniture, fixtures and equipment 436,800 435,000
----------- -----------
483,100 478,200
Less: accumulated depreciation 319,300 296,600
----------- -----------
163,800 181,600
Other assets
Patents, net of accumulated amortization 474,100 452,000
Debt issue costs, net of accumulated amortization 25,300 31,600
Other 13,300 14,300
----------- -----------
512,700 497,900
----------- -----------
Total assets $3,242,100 $3,532,500
=========== ===========
Liabilities and Shareholders' Equity (Deficit)
Current liabilities
Current debt obligations $950,000
Accounts payable 439,400 $539,800
Accrued expenses 237,300 139,900
Accrued commissions 169,100 118,100
Deferred revenue 131,100 164,200
----------- -----------
Total current liabilities 1,926,900 962,000
Long-term notes payable 950,000
Ownership interest of others in consolidated entity 1,352,500 1,448,300
Shareholders' equity
Common stock, $.01 par value
Authorized - 50,000,000 shares
Issued and outstanding
14,080,654 shares 140,800 140,800
Paid-in capital 7,651,000 7,651,000
Currency translation adjustment (30,600) 57,100
Accumulated deficit (7,798,500) (7,676,700)
----------- -----------
(37,300) 172,200
----------- -----------
Total liabilities and shareholders' equity (deficit) $3,242,100 $3,532,500
=========== ===========
</TABLE>
See notes to consolidated financial statements.
2
<PAGE>
Nocopi Technologies, Inc.
Consolidated Statements of Cash Flows
(unaudited)
Three Months ended March 31
1997 1996
----------- -----------
Operating Activities
Net loss ($121,800) ($10,800)
Adjustments to reconcile net loss to
cash from operating activities
Depreciation 23,800 20,200
Amortization 20,800 19,500
Allowance for doubtful accounts 6,300 3,000
Ownership interest of others in
loss of consolidated entity (95,800) (87,100)
----------- -----------
(166,700) (55,200)
Changes in working capital
Accounts receivable 49,800 150,900
Inventory (3,200) 14,500
Prepaid and other 18,100 (10,600)
Accounts payable and accrued expenses 71,100 (256,700)
Deferred revenue (26,000) 96,100
----------- -----------
109,800 (5,800)
----------- -----------
Cash used by operating activities (56,900) (61,000)
Investing Activities
Additions to fixed assets (6,400) (14,100)
Additions to patents (35,600) (6,700)
----------- -----------
Cash used by investing activities (42,000) (20,800)
Effect of exchange rate changes on cash (101,100) (64,500)
----------- -----------
Decrease in cash and cash equivalents (200,000) (146,300)
Cash and cash equivalents - beginning of period 2,229,200 2,982,100
----------- -----------
Cash and cash equivalents - end of period $2,029,200 $2,835,800
=========== ===========
See notes to consolidated financial statements.
3
<PAGE>
<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
1996 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 1996 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. Recently Issued Accounting Standards
In March 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards (SFAS) No. 128
"Earnings per share." This Statement establishes standards for
computing and presenting earnings per share (EPS) and applies
to entities with publicly held common stock or potential
common stock. This Statement is effective for financial
statements issued for periods ending after December 15, 1997
(earlier application is not permitted). This Statement
requires restatement of all prior-period EPS data presented.
The Company is currently evaluating the impact, if any,
adoption of SFAS No. 128 will have on its financial
statements.
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 first quarter of 1997 declined 5% to $832,900 from
$875,500 in the first quarter of 1996. The decline relates primarily to the
re-negotiation of the Georgia-Pacific license in the second half of 1996. The
loss of these revenues in the first quarter of 1997 were not sufficiently offset
by revenue gains from new and existing customers.
The Company's gross profit declined to $602,700, or 72% of revenues in the
first quarter of 1996, from $705,300 or 81% of revenues in the first quarter of
1996. The decline in gross profit, in both absolute dollars and as a percentage
of revenues, is due to the lower level of revenues in the first quarter of 1997
and a change in revenue mix in the first quarter of 1997 toward certain services
carrying a higher level of direct costs than in the first quarter of 1996.
Research and development expenses increased to $220,100 in the first
quarter of 1997 from $205,000 in the first quarter of 1996. The increase results
primarily from travel costs associated with both domestic and European
operations.
Sales and marketing expenses declined in the first quarter of 1997 to
$335,100 from $371,900 in the first quarter of 1996. The decrease relates to
lower commission and sales promotion expenses incurred in the first quarter of
1997 compared to the first quarter of 1996.
General and administrative expenses increased to $255,200 in the first
quarter of 1997 from $239,600 in the first quarter of 1996. The increase is
attributable to increases in legal and other professional expenses both in the
United States and Europe as well as costs associated with the Company's
international patent activities.
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 the Notes. Interest income includes interest on funds invested
in the U.S. as well as the investment of funds held by Euro-Nocopi.
Ownership interest of other in consolidated entity represents the
proportionate share in the loss of Euro-Nocopi attributable to the 82% ownership
interest of the outside shareholders of that company.
The consolidated net loss increased in the first quarter of 1997 to
$121,800 from $10,800 in the first quarter of 1996. The increase in the net loss
is attributable primarily to lower revenues realized in the first quarter of
1997 from Georgia-Pacific compared to the first quarter of 1996 and increased
direct costs resulting from the revenue mix.
5
<PAGE>
Liquidity and Capital Resources
The Company's consolidated cash and cash equivalents decreased to
$2,029,200 at March 31, 1997 from $2,229,200 at December 31, 1996. Included in
the March 31, 1997 balance is $1,419,100 held by Euro-Nocopi. This amount is
available primarily to support Euro-Nocopi's operations. At December 31, 1996,
the Euro-Nocopi cash balance was $1,641,200. The decrease during the quarter is
attributable to funds required to support Euro-Nocopi's operations as well as
the decline in the value of the French Franc versus the dollar at March 31,
1997.
The Company's domestic cash position increased marginally to $610,100 at
March 31, 1997 from $588,000 at December 31, 1996.
Current debt obligations represent the classification of the Company's
$950,000 Series B 7% Subordinated Convertible Promissory Notes due March 31,
1998 into current liabilities.
The Company believes that it has sufficient working capital and available
credit to support its consolidated operations and debt service requirements over
the next twelve months.
The foregoing statement is or may be a forward looking statement under the
Private Securities Litigation Reform Act of 1995, and represents managements
belief. This statement involves risks and uncertainties and is based on a number
of assumptions, the validity of which is subject to a number of factors beyond
the Company's control. These include:
Growth in Company Revenues. The adequacy of the Company's cash resources is
dependent on the Company's revenues continuing to grow. The Company's revenues
are dependent on many factors outside the Company's control including those
identified below under the heading "Factors that May Affect the Company's Growth
and Stock Price."
Renegotiation or Conversion of Series B Notes. The Company currently has
outstanding $950,000 aggregate principal amount of Series B Promissory Notes
maturing March 31, 1998. The adequacy of the Company's cash resources is
dependent on securing a refinancing of such Notes. Such refinancing may consist
of an extension of the maturity of such Notes, the conversion of the principal
balance thereof into equity, or the refunding of such Notes with new
indebtedness. The Company has not secured any commitment from any party
providing for the refinancing of such Notes, and there can be no assurances that
such refinancing an be obtained.
Continued Availability of Line of Credit. The Company has a $1 million line
of credit with a bank, which is secured by a pledge of certain securities,
including equity securities, made by certain directors of the Company.
Borrowings under the line of credit may be limited based on the value of the
equity securities pledged. The adequacy of the Company's cash resources is
dependent on the continued availability of this line of credit. There can be no
assurances that such line of credit will continue to be available to its $1
million maximum. There have been no borrowings under this line of credit.
6
<PAGE>
Inter-Company Borrowings. The adequacy of the Company's cash resources may
be dependent on the Company's ability to borrow from its affiliate, Euro-Nocopi,
S.A. The Company currently has no agreement with its affiliate regarding such
borrowing. There can be no assurances that Euro-Nocopi will remain an affiliate
of the Company or that such inter-company borrowings will be made available to
the Company.
Factors That May Affect Future Growth and Stock Price
The Company's operating results and stock price are dependent upon a number
of factors, some of which are beyond the Company's control. These include:
Uneven Pattern of Quarterly and Annual Operating Results. The Company's
revenues, which are derived primarily from licensing and royalties, are
difficult to forecast due to the long sales cycle for the Company's
technologies, the potential for customer delay or deferral of implementation of
the Company's technologies, the size and timing of inception of individual
license agreements, the success of the Company's licensees and strategic
partners in exploiting the market for the licensed products, modifications of
customer budgets, and uneven patterns of royalty revenue and product orders. As
the Company's revenue base is not substantial, delays in finalizing license
contracts, implementing the technology to initiate the revenue stream and
customer ordering decisions can have a material adverse effect on the Company's
quarterly and annual revenue expectations and, as the Company's operating
expenses are substantially fixed, income expectations will be subject to a
similar adverse outcome.
New Business Opportunities. The Company, with limited research and development
resources, is compelled to develop new technologies which it believes will
enhance and expand its position in the anti-counterfeiting and anti-diversion
marketplace it serves. There can be no assurance that the resources expended in
this effort will generate significant revenues for the Company.
Intellectual Property. The Company relies on a combination of protections
provided under applicable international patent, trademark and trade secret laws.
It also relies on confidentially, non-analysis and licensing agreements to
establish and protect its rights in its proprietary technologies. While the
Company actively attempts to protect these rights, the Company's technologies
could possibly be compromised through reverse engineering or other means. There
can be no assurance that the Company will be able to protect the basis of its
technologies from discovery by unauthorized third parties, thus adversely
affecting its customer and licensee relationships.
Volatility of Stock Price. The market price for the Company's common stock has
historically experienced significant fluctuations and may continue to do so. The
Company has, since its inception, operated at a loss and has not produced
revenue levels traditionally associated with publicly traded companies. The
Company's common stock is not listed on a national or regional securities
exchange and, consequently, receives limited public notice regarding its
business achievements and prospects nor is it extensively followed by securities
analysts and traders. The market price may be affected by announcements of new
relationships or modifications to existing relationships. The stock prices of
many developing public companies, particularly those with small capitalizations
have experienced wide fluctuations not necessarily related to operating
performance. Such fluctuations may adversely affect the market price of the
Company's common stock.
7
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Not Applicable
Item 2. Changes in Securities
Not Applicable
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). Exhibit 27 - Financial Data Schedule
(c). No Current Reports on Form 8-K have been filed by the
Registrant during the quarter ended March 31, 1997.
8
<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: May 14, 1997 /s/ Norman A. Gardner
---------------------
Norman A. Gardner
President & Chief Executive Officer
DATE: May 14, 1997 /s/ Rudolph A. Lutterschmidt
----------------------------
Rudolph A. Lutterschmidt
Vice President & Chief Financial Officer
9
<PAGE>
NOCOPI TECHNOLOGIES, INC.
-------------------------
COMPUTATION OF LOSS PER COMMON SHARE
------------------------------------
EXHIBIT 11
Three Months ended March 31
1997 1996
---------- ----------
Primary
Net loss applicable to common shares ($121,800) ($10,800)
========== ==========
Weighted average common shares
outstanding 14,080,654 14,044,166
Dilutive shares - based on the
treasury stock method using the
average market price (1) 308 33,271
---------- ----------
14,080,962 14,077,437
========== ==========
Per share amount applicable to
net loss ($.01) ($.00)
Three Months ended March 31
1997 1996
---------- ----------
Fully diluted
Net loss ($121,800) ($10,800)
Add interest on Series B notes 16,600 16,600
Deduct ownership interest of
others in consolidated entity (95,800) (87,100)
---------- ----------
Net loss applicable to common shares ($201,000) ($81,300)
========== ==========
Weighted average common shares
outstanding 14,080,654 14,044,166
Dilutive shares - based on the
treasury stock method using the
greater of the period-end market
price or the average market price (2) 1,293,014 1,325,977
---------- ----------
15,373,668 15,370,143
========== ==========
Per share amount applicable to
net loss ($.01) ($.01)
(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
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> MAR-31-1997
<CASH> 2,029,200
<SECURITIES> 0
<RECEIVABLES> 488,500
<ALLOWANCES> 43,400
<INVENTORY> 8,300
<CURRENT-ASSETS> 2,565,600
<PP&E> 483,100
<DEPRECIATION> 319,300
<TOTAL-ASSETS> 3,242,100
<CURRENT-LIABILITIES> 1,926,900
<BONDS> 0
0
0
<COMMON> 140,800
<OTHER-SE> (178,100)
<TOTAL-LIABILITY-AND-EQUITY> 3,242,100
<SALES> 832,900
<TOTAL-REVENUES> 832,900
<CGS> 230,200
<TOTAL-COSTS> 230,200
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 6,300
<INTEREST-EXPENSE> 18,000
<INCOME-PRETAX> (121,800)
<INCOME-TAX> 0
<INCOME-CONTINUING> (121,800)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (121,800)
<EPS-PRIMARY> (0.01)
<EPS-DILUTED> (0.01)
</TABLE>
