================================================================================
U.S. Securities and Exchange Commission
Washington, D.C. 20549
Form 10-QSB
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the quarterly period ended September 30, 1998.
[ ] TRANSITION REPORT PURSUANT TO 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934.
For the transition period from _________________ to ______________
Commission file number 0-20333
NOCOPI TECHNOLOGIES, INC.
(Exact name of small business issuer as
specified in its charter)
MARYLAND 87-0406496
- --------------------------------- ---------------------------------
(State or other jurisdiction (IRS Employer Identification No.)
of incorporation or organization)
537 Apple Street, W. Conshohocken, PA 19428
- --------------------------------------------------------------------------------
(Address of principal executive offices)
(610) 834-9600
- --------------------------------------------------------------------------------
(Issuer's telephone number)
Check whether the issuer has filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 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
--- ---
State the number of shares outstanding of each of the issuer's classes of
common equity, as of November 1, 1998: Common stock, par value $.01 per share
33,587,332 shares.
Transitional Small Business Disclosure Format (check one): Yes No X
--- ---
<PAGE>
NOCOPI TECHNOLOGIES, INC.
-------------------------
INDEX
-----
Part I. FINANCIAL INFORMATION PAGE
Item 1. Financial Statements
Statements of Operations 1
Three Months and Nine Months Ended September 30, 1998
and September 30, 1997
Balance Sheet 2
September 30, 1998
Statements of Cash Flows 3
Nine Months Ended September 30, 1998
and September 30, 1997.
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)
<TABLE>
<CAPTION>
Three Months ended Nine Months ended
September 30 September 30
1998 1997 1998 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues
Licenses, royalties and fees $ 497,300 $ 503,500 $ 1,402,200 $ 1,620,300
Product and other sales 116,400 60,500 553,700 844,200
------------ ------------ ------------ ------------
613,700 564,000 1,955,900 2,464,500
Cost of sales
Licenses, royalties and fees 83,300 96,400 284,000 498,300
Product and other sales 103,800 59,800 520,100 831,400
------------ ------------ ------------ ------------
187,100 156,200 804,100 1,329,700
------------ ------------ ------------ ------------
Gross profit 426,600 407,800 1,151,800 1,134,800
Operating expenses
Research and development 97,200 125,500 312,000 367,900
Sales and marketing 201,200 171,800 610,000 499,800
General and administrative 221,900 235,000 685,900 734,600
------------ ------------ ------------ ------------
520,300 532,300 1,607,900 1,602,300
------------ ------------ ------------ ------------
Loss from operations (93,700) (124,500) (456,100) (467,500)
Other income (expenses)
Amortization (6,300) (6,300) (19,000)
Interest income 16,800 4,300 78,000 15,300
Interest and bank charges (4,100) (18,000) (26,300) (53,200)
Equity in net loss of affiliate (15,200) (21,000) (23,700)
------------ ------------ ------------ ------------
12,700 (35,200) 24,400 (80,600)
------------ ------------ ------------ ------------
Net loss ($ 81,000) ($ 159,700) ($ 431,700) ($ 548,100)
============ ============ ============ ============
Loss per common share ($ .00) ($ .01) ($ .01) ($ .04)
Average common shares outstanding 33,587,332 14,080,654 33,587,332 14,080,654
</TABLE>
See notes to financial statements.
1
<PAGE>
Nocopi Technologies, Inc.
Balance Sheet
(unaudited)
<TABLE>
<CAPTION>
September 30
1998
---------------
<S> <C>
Assets
Current assets
Cash and cash equivalents $ 1,329,100
Accounts receivable less allowance 260,300
Inventory 2,700
Prepaid and other 27,400
------------
Total current assets 1,619,500
Fixed assets
Leasehold improvements 37,000
Furniture, fixtures and equipment 431,700
------------
468,700
Less: accumulated depreciation 378,300
------------
90,400
Other assets
Investment in and advances to affiliate 303,600
Patents, net of accumulated amortization 510,100
Other 8,000
------------
821,700
------------
Total assets $ 2,531,600
============
Liabilities and Stockholders' Equity
Current liabilities
Accounts payable $ 221,500
Accrued expenses 148,200
Accrued commissions 132,200
Deferred revenue 131,500
------------
Total current liabilities 633,400
Long-term notes payable 125,000
Stockholders' equity
Common stock, $.01 par value
Authorized - 75,000,000 shares
Issued and outstanding
33,587,332 shares 335,900
Paid-in capital 10,403,700
Currency translation adjustment (11,000)
Accumulated deficit (8,955,400)
------------
1,773,200
------------
Total liabilities and stockholders' equity $ 2,531,600
============
</TABLE>
See notes to financial statements.
2
<PAGE>
Nocopi Technologies, Inc.
Statements of Cash Flows
(unaudited)
<TABLE>
<CAPTION>
Nine Months ended September 30
1998 1997
----------- -----------
<S> <C> <C>
Operating Activities
Net loss ($ 431,700) ($ 548,100)
Adjustments to reconcile net loss to
cash used in operating activities
Depreciation 65,700 65,700
Amortization 54,000 62,300
Allowance for doubtful accounts 5,400 17,300
Equity in net loss of affiliate 21,000 23,700
Other 7,500
----------- -----------
(278,100) (379,100)
Changes in assets and liabilities
Accounts receivable (98,300) 89,100
Inventory 2,800 3,000
Prepaid and other 21,800 (21,900)
Accounts payable and accrued expenses (108,600) 135,900
Deferred revenue 62,900 56,200
----------- -----------
(119,400) 262,300
----------- -----------
Cash used in operating activities (397,500) (116,800)
Investing Activities
Additions to fixed assets (42,300) (11,100)
Additions to patents (18,100) (71,000)
Cash of Euro, beginning of year (1,641,200)
Advances (to) from affiliate, net (102,600) 18,600
----------- -----------
Cash used in investing activities (163,000) (1,704,700)
Financing Activities
Repayment of notes (825,000)
----------- -----------
Cash used in financing activities (825,000)
----------- -----------
Decrease in cash and cash equivalents (1,385,500) (1,821,500)
Cash and cash equivalents - beginning of period 2,714,600 2,229,200
----------- -----------
Cash and cash equivalents - end of period $ 1,329,100 $ 407,700
=========== ===========
</TABLE>
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
1997 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 1997 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.
The Statements of Operations for the three and nine months
ended September 30, 1997 and the Statement of Cash Flows for
the nine months ended September 30, 1997 have been restated
on a basis consistent with the Form 10-Q/A for the quarter
ended March 31, 1997. The 10-Q/A amended the previously
filed 10-Q which included the accounts of the Company and
Euro-Nocopi S.A., the European affiliate of the Company on a
consolidated basis. Events occurring during 1997, subsequent
to the filing of the 10-Q for the quarter ended March 31,
1997, required the Company to cease consolidating effective
January 1, 1997 and to apply the equity method.
Note 2. Comprehensive Income
The Company adopted SFAS No. 130, Reporting Comprehensive
Income, which requires that all components of comprehensive
income and total comprehensive income be reported on one of
the following: a statement of income and comprehensive
income, a statement of comprehensive income or a statement of
stockholders' equity. Comprehensive income is comprised of
net income and all changes to stockholders' equity, except
those due to investments by owners (changes in paid-in-
capital) and distributions to owners (dividends). For interim
reporting purposes, SFAS 130 requires disclosure of total
comprehensive income.
4
<PAGE>
Total comprehensive loss is as follows:
<TABLE>
<CAPTION>
Three Months Ended
September 30
1998 1997
---- -----
<S> <C> <C>
Net loss ($ 81,000) ($159,700)
Currency translation adjustment 11,100 (6,200)
--------- --------
Comprehensive loss ($ 69,900) ($165,900)
======== ========
Nine Months Ended
September 30
1998 1997
---- ----
Net loss ($431,700) ($548,100)
Currency translation adjustment 12,900 (74,800)
-------- --------
Comprehensive loss ($418,800) ($622,900)
======= ========
</TABLE>
5
<PAGE>
Item 2.
NOCOPI TECHNOLOGIES, INC.
-------------------------
Management's Discussion and Analysis
of Financial Condition and Results of Operation
Results of Operations
The Company's revenues are derived from royalties paid by licensees of the
Company's technologies, fees for the provision of technical services to
licensees and from the direct sale of products incorporating the Company's
technologies, such as pressure sensitive labels. Royalties consist of guaranteed
minimum royalties payable by the Company's licensees in certain cases and
additional royalties which typically vary with the licensee's sales or
production of products incorporating the licensed technology. Service fee and
sales revenues vary directly with the number of units of service or product
provided.
Because the Company has a relatively high level of fixed costs, its
operating results are substantially dependent on revenue levels. Because
revenues derived from licenses and royalties carry a much higher gross profit
margin than other revenues, operating results are also substantially affected by
changes in revenue mix.
Both the absolute amounts of the Company's revenues and the mix among the
various sources of revenue are subject to substantial fluctuation. The Company
has a relatively small number of substantial customers rather than a large
number of small customers. Accordingly, changes in the revenue received from a
significant customer can have a substantial effect on the Company's total
revenue and on its revenue mix and overall financial performance. Such changes
may result from a customer's product development delays, engineering changes,
changes in product marketing strategies and the like. In addition, certain
customers have, from time to time, sought to renegotiate certain provisions of
their license agreements and, when the Company agrees to revise terms, revenues
from the customer may be affected.
Revenues for the third quarter of 1998 were $613,700 compared to $564,000
in the third quarter of 1997, an increase of 9%. Licenses, royalties and fees
were $497,300 in the third quarter of 1998 compared to $503,500 in the third
quarter of 1997. Product and other sales increased to $116,400 in the third
quarter of 1998 from $60,500 in the third quarter of 1997 due to higher
pressure-sensitive label sales in the quarter and sales of inkjet anti-diversion
hardware and systems.
For the first nine months of 1998, revenues were $1,955,900 compared to
$2,464,500, a decrease of 21%. Licenses, royalties and fees declined by
$218,100, or 13%, due in part to lower license fees and royalties from certain
U.S. customers resulting principally from the re-negotiation in early 1997 of an
exclusive license with 3M Corporation. The license was mutually terminated
effective April 30, 1998. Product and other sales declined to $553,700 in the
first nine months of 1998 from $844,200 in the first nine months of 1997. The
decline of $290,500 resulted from lower sales of pressure-sensitive labels and
inkjet equipment in the first nine months of 1998.
Gross profit increased to $426,600, or 70% of revenues in 1998 from
$407,800, or 72%, of revenues in the third quarter of 1997. The 5% increase in
absolute dollars is attributable primarily to the 9% revenue increase.
6
<PAGE>
The gross profit for the first nine months of 1998 was $1,151,800, or 59%
of revenues compared to $1,134,800, or 46% of revenues in the first nine months
of 1997. The gross profit was negatively affected by the $218,100 decline in
licenses, royalties and fees in the first nine months of 1998 compared to the
first nine months of 1997. The gross profit decline was offset by a
non-recurring settlement with Euro-Nocopi S.A., the Company's affiliate, which
occurred during the first half of 1997. The settlement involved a dispute with
Euro-Nocopi whereby, in the second quarter of 1997, the Company agreed to credit
Euro-Nocopi $154,500 as its share of certain minimum royalties under a worldwide
agreement with a manufacturer who distributed products incorporating the
Company's technologies.
Research and development expenses declined to $97,200 and $312,000 in the
third quarter and first nine months of 1998, respectively, from $125,500 and
$367,900 in the comparable periods of 1997. The declines relate primarily to a
cost containment program, including staff reductions, implemented during 1997.
Sales and marketing expenses increased to $201,200 in the third quarter of
1998 from $171,800 to the third quarter of 1997. For the first nine months of
1998, sales and marketing expenses were $610,000 compared to $499,800 in the
first nine months of 1997. During 1997, the Company reduced its sales and
marketing expenses through staff reductions and lower discretionary sales
promotion expenses as the Company sought to conserve cash during a period of
adverse liquidity. The increase in 1998 reflects the Company's commitment to
develop markets for its technologies, including its inkjet computer printer
technologies. These market development activities have required higher sales and
marketing expenditures.
General and administrative expenses declined to $221,900 in the third
quarter of 1998 from $235,000 in the third quarter of 1997. For the first nine
months, general and administrative expenses declined to $685,900 in 1998 from
$734,600 in 1997. The decline for both periods results primarily from lower
professional expenses.
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. The reduction in interest expense in the third
quarter and first nine months of 1998 compared to the comparable periods of 1997
reflects the repayment of $825,000 principal amount of notes in early April
1998. The $125,000 balance was extended for a period of two years to March 31,
2000 at an interest rate of 9%. Interest income increased in the third quarter
and first nine months of 1998 compared to the third quarter and first nine
months of 1997 due to the investment of funds raised in the private placement
completed in late 1997.
Equity in net loss of affiliate represents the proportionate share in the
income of Euro-Nocopi attributable to the Company's approximate 18% ownership
share of Euro-Nocopi.
The net loss for the three months ended September 30, 1998 was $81,000
compared to $159,700 in the three months ended September 30, 1997. The nine
month 1998 net loss was $431,700 compared to $548,100 in the first nine months
of 1997. The decrease in the net loss for the third quarter of 1998 compared to
the third quarter of 1997 is attributable to higher revenues as well as higher
interest income and lower interest expense. For the first nine months of 1998,
the positive effect of the first half 1997 settlement with Euro-Nocopi S.A. is
offset in part by a lower gross profit resulting from lower revenues for the
first nine months of 1998 compared to the same period of 1997.
7
<PAGE>
Liquidity and Capital Resources
The Company's cash and cash equivalents declined to $1,329,100 at September
30, 1998 from $2,714,600 at December 31, 1997. The cash was used primarily to
fund operations over the nine-month period including reimbursable expenditures
on behalf of its European affiliate and, in early April 1998, repay $825,000
principal amount of its Series B 7% Subordinated Convertible Promissory Notes
due March 31, 1998. The $125,000 remaining notes were extended to March 31,
2000. Under the extension arrangement, these notes bear interest at 9% and are
convertible into 625,000 shares of the Company's common stock.
In the first quarter of 1998, the Company relocated its Corporate
headquarters to a new location and relocated its research facilities to this
location in August 1998. The Company has invested approximately $40,000 in
leasehold improvements at this location in which it conducts all of its business
operations.
The Company believes that it has sufficient working capital to support its
operations and debt service requirements over the next twelve months.
The Company is aware of Year 2000 potential problems. As its internal
information systems consist primarily of third party software systems, the
Company intends to purchase and install available Year 2000 compliant upgrade
versions by early 1999. The Company has, and will continue to communicate with
vendors, financial institutions and others to assure their compliance to Year
2000 issues. The Company plans to devote the necessary resources to resolve Year
2000 issues in a timely manner and does not believe the costs will have a
material adverse effect on its business, financial condition or results of
operations. However, there can be no assurance that the systems of other
companies on which the Company relies will be converted in a timely manner.
The foregoing contains forward-looking information within the meaning of
the Private Securities Litigation Act of 1995. Such forward-looking statements
involve certain risks and uncertainties including the particular factors
described in this Management's Discussion and Analysis. In each case, actual
results may differ materially from such forward-looking statements. The Company
does not undertake to publicly update or revise its forward looking statements
even if experience or future changes make it clear that any projected results
(expressed or implied) will not be realized.
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
8
<PAGE>
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, the Company receives limited publicity 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 27 - Financial Data Schedule
(b). No Current Reports on Form 8-K have been filed by the Registrant
during the quarter ended September 30, 1998.
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: November 12, 1998 /s/ Richard A. Check
----------------------------------------
Richard A. Check
President & Chief Executive Officer
DATE: November 12, 1998 /s/ Rudolph A. Lutterschmidt
----------------------------------------
Rudolph A. Lutterschmidt
Vice President & Chief Financial Officer
11
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-Mos
<FISCAL-YEAR-END> Dec-31-1998
<PERIOD-END> Sep-30-1998
<CASH> 1,329,100
<SECURITIES> 0
<RECEIVABLES> 309,800
<ALLOWANCES> 49,500
<INVENTORY> 2,700
<CURRENT-ASSETS> 1,619,500
<PP&E> 468,700
<DEPRECIATION> 378,300
<TOTAL-ASSETS> 2,531,600
<CURRENT-LIABILITIES> 633,400
<BONDS> 125,000
0
0
<COMMON> 335,900
<OTHER-SE> 1,437,300
<TOTAL-LIABILITY-AND-EQUITY> 2,531,600
<SALES> 1,955,900
<TOTAL-REVENUES> 1,955,900
<CGS> 804,100
<TOTAL-COSTS> 804,100
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 12,000
<INTEREST-EXPENSE> 26,300
<INCOME-PRETAX> (431,700)
<INCOME-TAX> 0
<INCOME-CONTINUING> (431,700)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (431,700)
<EPS-PRIMARY> (0.01)
<EPS-DILUTED> (0.01)
</TABLE>
