SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A
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
Common stock, par value at May 1, 1997
$.01 per share 14,080,654
<PAGE>
NOCOPI TECHNOLOGIES, INC.
INDEX
Part I. FINANCIAL INFORMATION
PAGE
Item 1. Financial Statements
Statements of Operations 1
Three Months Ended March 31, 1997
and March 31, 1996
Balance Sheets 2
March 31, 1997 and December 31, 1996
Statements of Cash Flows 3
Three Months Ended March 31, 1997 and March 31, 1996.
Notes to Financial Statements 4 - 5
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations 6 - 9
Part II. OTHER INFORMATION 10
Signatures 11
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Nocopi Technologies, Inc.
Statements of Operations
(unaudited)
Three Months ended March 31
1997 1996
---- ----
Revenues
Licenses, royalties and fees $637,100 $832,600
Product and other sales 30,700 42,900
-------- --------
667,800 875,500
Cost of sales
Licenses, royalties and fees 184,900 131,000
Product and other sales 26,600 39,200
-------- --------
211,500 170,200
-------- --------
Gross profit 456,300 705,300
Operating expenses
Research and development 120,500 205,000
Sales and marketing 182,500 371,900
General and administrative 235,400 239,600
-------- --------
538,400 816,500
-------- --------
Loss from operations (82,100) (111,200)
Other income (expenses)
Amortization of debt issuance costs (6,300) (6,300)
Interest income 4,300 37,100
Interest and bank charges (17,400) (17,500)
Equity in net loss of affiliate (20,300)
Ownership interest of others in
net loss of consolidated entity 87,100
-------- --------
(39,700) 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 financial statements.
1
<PAGE>
Nocopi Technologies, Inc.
Balance Sheets
(unaudited)
March 31 December 31
1997 1996
---- ----
Assets
Current assets
Cash and cash equivalents $610,100 $2,229,200
Accounts receivable less allowances 265,600 513,400
Inventory 8,300 5,100
Prepaid and other 48,300 105,300
---------- ----------
Total current assets 932,300 2,853,000
Fixed assets
Leasehold improvements 45,600 43,200
Furniture, fixtures and equipment 413,800 435,000
---------- ----------
459,400 478,200
Less: accumulated depreciation 304,300 296,600
---------- ----------
155,100 181,600
Other assets
Investment in and advances to affiliate 332,100
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
---------- ----------
844,800 497,900
---------- ----------
Total assets $1,932,200 $3,532,500
========== ==========
Liabilities and Shareholders' Equity
Current liabilities
Current debt obligations $950,000
Accounts payable 244,000 $539,800
Accrued expenses 149,200 139,900
Accrued commissions 169,100 118,100
Deferred revenue 54,700 164,200
---------- ----------
Total current liabilities 1,567,000 962,000
Long-term notes payable 950,000
Ownership interest of others in consolidated entity 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 8,028,300 7,651,000
Currency translation adjustment (5,400) 57,100
Accumulated deficit (7,798,500) (7,676,700)
---------- ----------
365,200 172,200
---------- ----------
Total liabilities and shareholders' equity $1,932,200 $3,532,500
========== ==========
See notes to financial statements.
2
<PAGE>
Nocopi Technologies, Inc.
Statements of Cash Flows
(unaudited)
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 21,900 20,200
Amortization 20,800 19,500
Allowance for doubtful accounts 6,300 3,000
Equity in net loss of affiliate 20,300
Ownership interest of others in
net loss of consolidated entity (87,100)
---------- ----------
(52,500) (55,200)
Changes in working capital
Accounts receivable 90,100 150,900
Inventory (3,200) 14,500
Prepaid and other 3,500 (10,600)
Accounts payable and accrued expenses 83,600 (256,700)
Deferred revenue (20,500) 96,100
---------- ----------
153,500 (5,800)
---------- ----------
Cash provided (used) by operating activities 101,000 (61,000)
Investing Activities
Additions to fixed assets (6,400) (14,100)
Additions to patents (35,600) (6,700)
Cash of Euro, beginning of year (1,641,200)
Advances to affiliate, net (36,900)
---------- ----------
Cash used by investing activities (1,720,100) (20,800)
Effect of exchange rate changes on cash (64,500)
---------- ----------
Decrease in cash and cash equivalents (1,619,100) (146,300)
Cash and cash equivalents - beginning of period 2,229,200 2,982,100
---------- ----------
Cash and cash equivalents - end of period $610,100 $2,835,800
========== ==========
See notes to financial statements.
3
<PAGE>
NOCOPI TECHNOLOGIES, INC.
NOTES TO 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. Basis of Presentation
The Form 10-Q which is being amended included the accounts of the
Company and Euro-Nocopi S.A. (Euro), the European affiliate of the
Company on a consolidated basis. Events occurring subsequent to the
filing date required the Company to cease consolidating effective
January 1, 1997 and to apply the equity method.
Prior to January 1, 1997, the financial statements included the
accounts of the Company and Euro-Nocopi S.A., the European affiliate of
the Company, on a consolidated basis. Consolidation was appropriate due
to the operational and financial control the Company exercised over
Euro. Additionally, the Company held approximately an 18% interest in
Euro and warrants permitting it to increase its interest in Euro to
55%. During the second quarter of 1997, the Company ceased to exercise
effective control over Euro. The cessation of effective control
resulted from a dispute which arose in April 1997 between the Company
and Euro under the license agreement between the Company and Euro
concerning Euro's contention that it was entitled to a share of certain
minimum royalties under a worldwide agreement with a manufacturer which
distributes products incorporating the Company's technologies. In an
agreement negotiated during the second quarter of 1997 and concluded in
July 1997, the Company agreed to credit Euro $154,500 as Euro's share
of previously collected minimum royalties, the $154,500 to be applied
to license fee payments due the Company by Euro through the first
quarter of 1998. The Company also agreed to pay Euro 35% of future
guaranteed royalties from this manufacturer. The $154,500 settlement
has been charged to cost of sales and was included in the results of
operations for the six months ended June 30, 1997. The Company also
agreed to modify its warrant by extending its term through December
2001 but making it exercisable beginning the earlier of 1) January 1,
2001; 2) in the event of a sale of all or part of Euro; or 3) in the
event of a public listing of Euro's shares on a stock market. In
addition, the Company agreed to defer to January 1, 2001 its right to
acquire, under certain conditions, all remaining shares of Euro for
shares of the Company. This call right expires December 31, 2001.
4
<PAGE>
Additionally, the licensing agreement between the two companies was
amended relative to the negotiation of future worldwide licensing
contracts, the five directors of Euro who were also Nocopi directors
resigned from Euro's Board, and the Company ceased to exercise
effective control of Euro. During the fourth quarter of 1997, a Nocopi
director was elected to Euro's Board of Directors and the Chief
Operating Officer of Euro was appointed to the Company's Board of
Directors. Additionally, Euro is dependent on the Company for the
technology it licenses from the Company and markets in Europe.
Accordingly, the Company ceased consolidating effective January 1,
1997, applied the equity method, and recorded an adjustment to paid-in
capital of $377,300 to record its 18% share of Euro's net equity at
January 1, 1997 resulting primarily from the expiration in 1997 of
certain liquidation privileges on the 82% of Euro's stock not owned by
the Company.
Note 3. 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.
5
<PAGE>
Item 2.
NOCOPI TECHNOLOGIES, INC.
Management's Discussion and Analysis
of Financial Condition and Results of Operations
Basis of Presentation
The Form 10-Q which is being amended included the accounts of the Company
and Euro-Nocopi S.A. (Euro), the European affiliate of the Company, on a
consolidated basis. Events occurring subsequent to the filing date required the
Company to cease consolidating effective January 1, 1997 and to apply the equity
method.
Prior to January 1, 1997, the financial statements included the accounts of
the Company and Euro-Nocopi S.A., the European affiliate of the Company, on a
consolidated basis. Consolidation was appropriate due to the operational and
financial control the Company exercised over Euro. Additionally, the Company
held approximately an 18% interest in Euro and warrants permitting it to
increase its interest in Euro to 55%. During the second quarter of 1997, the
Company ceased to exercise effective control over Euro. The cessation of
effective control resulted from a dispute which arose in April 1997 between the
Company and Euro under the license agreement between the Company and Euro
concerning Euro's contention that it was entitled to a share of certain minimum
royalties under a worldwide agreement with a manufacturer which distributes
products incorporating the Company's technologies. In an agreement negotiated
during the second quarter of 1997 and concluded in July 1997, the Company agreed
to credit Euro $154,500 as Euro's share of previously collected minimum
royalties, the $154,500 to be applied to license fee payments due the Company by
Euro through the first quarter of 1998. The Company also agreed to pay Euro 35%
of future guaranteed royalties from this manufacturer. The $154,500 settlement
has been charged to cost of sales and was included in the results of operations
for the six months ended June 30, 1997. The Company also agreed to modify its
warrant by extending its term through December 2001 but making it exercisable
beginning the earlier of 1) January 1, 2001; 2) in the event of a sale of all or
part of Euro; or 3) in the event of a public listing of Euro's shares on a stock
market. In addition, the Company agreed to defer to January 1, 2001 its right to
acquire, under certain conditions, all remaining shares of Euro for shares of
the Company. This call right expires December 31, 2001.
Additionally, the licensing agreement between the two companies was amended
relative to the negotiation of future worldwide licensing contracts, the five
directors of Euro who were also Nocopi directors resigned from Euro's Board, and
the Company ceased to exercise effective control of Euro. During the fourth
quarter of 1997, a Nocopi director was elected to Euro's Board of Directors and
the Chief Operating Officer of Euro was appointed to the Company's Board of
Directors. Additionally, Euro is dependent on the Company for the technology it
licenses from the Company and markets in Europe. Accordingly, the Company ceased
consolidating effective January 1, 1997, applied the equity method, and recorded
an adjustment to paid-in capital of $377,300 to record its 18% share of Euro's
net equity at January 1, 1997 resulting primarily from the expiration in 1997 of
certain liquidation privileges on the 82% of Euro's stock not owned by the
Company.
6
<PAGE>
Results of Operations
Revenues for the first quarter of 1997 declined 24% to $667,800 from
$875,500 in the first quarter of 1996. The decline of $207,700 is due primarily
to the change in accounting for Euro whose revenues are not included in 1997.
The Company's first quarter 1996 results included revenues of $81,500
attributable to Euro. Revenues were also negatively affected by 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 $456,300, or 68% of revenues in the
first quarter of 1997, 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 decreased to $120,500 in the first
quarter of 1997 from $205,000 in the first quarter of 1996. The reduction in
1997 results primarily from the exclusion of Euro's costs from the statement of
operations.
Sales and marketing expenses declined in the first quarter of 1997 to
$182,500 from $371,900 in the first quarter of 1996. The exclusion of Euro's
sales and marketing expenses in 1997 is the principal reason for the decrease.
Euro's first quarter 1996 sales and marketing expenses were $143,300. Also
contributing to the decrease are lower commission and sales promotion expenses
incurred in the first quarter of 1997 compared to the first quarter of 1996.
General and administrative expenses were $235,400 in the first quarter
compared to $239,600 in the first quarter of 1996. The decline in 1997 is
attributable to the exclusion of the general and administrative expense of Euro
offset in part by increases in legal and other professional expenses as well as
costs associated with the Company's international parent 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 during the periods
that its accounts were included in the Company's financial statements.
Equity in loss of affiliate represents the proportionate share in the loss
of Euro attributable to the Company's approximate 18% ownership share from
January 1, 1997, the date on which the Company began applying the equity method.
Ownership interest of others in consolidated entity represents the
proportionate share in the loss of Euro attributable to the 82% ownership
interest of the outside shareholders of that company for the periods that its
accounts were included in the Company's financial statements on a consolidated
basis.
7
<PAGE>
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.
Liquidity and Capital Resources
The Company's cash and cash equivalents decreased to $610,100 at March 31,
1997. The Company's consolidated cash and cash equivalent position at December
31, 1996 was $2,229,200 of which $1,641,200 was held by Euro and $588,000 was
held by the Company. The amount held by Euro was available primarily to fund
Euro's operations. Because the financial statements of the Company can no longer
be consolidated with those of Euro, the cash position declined by the $1,641,200
held by Euro at December 31, 1996. 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's ability to support its consolidated operations and debt
service requirements over the next twelve months may be dependent on 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.
8
<PAGE>
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 confidentiality, 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.
9
<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
Registrant during the quarter ended March 31, 1997.
10
<PAGE>
SIGNATURES
Pursuant to the requirement 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, 1998 /s/ Norman A. Gardner
-----------------------------
Norman A. Gardner
President & Chief Executive Officer
DATE: May 14, 1998 /s/ Rudolph A. Lutterschmidt
------------------------------
Rudolph A. Lutterschmidt
Vice President & Chief Financial Officer
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 Euro-Nocopi S.A ................ (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> 610,100
<SECURITIES> 0
<RECEIVABLES> 309,000
<ALLOWANCES> 43,400
<INVENTORY> 8,300
<CURRENT-ASSETS> 932,300
<PP&E> 459,400
<DEPRECIATION> 304,300
<TOTAL-ASSETS> 1,932,200
<CURRENT-LIABILITIES> 1,567,000
<BONDS> 0
0
0
<COMMON> 140,800
<OTHER-SE> 224,400
<TOTAL-LIABILITY-AND-EQUITY> 1,932,200
<SALES> 667,800
<TOTAL-REVENUES> 667,800
<CGS> 211,500
<TOTAL-COSTS> 211,500
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 6,300
<INTEREST-EXPENSE> 17,400
<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>
