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 ACT OF 1934.
For the quarterly period ended March 31, 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 of 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 (10 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 May 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 Ended March 31, 1998
and March 31, 1997
Balance Sheet 2
March 31, 1998
Statements of Cash Flows 3
Three Months Ended March 31, 1998
and March 31, 1997.
Notes to 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.
Statements of Operations
(unaudited)
Three Months ended March 31
1998 1997
------------ ------------
Revenues
Licenses, royalties and fees $ 450,600 $ 637,100
Product and other sales 95,400 30,700
------------ ------------
546,000 667,800
Cost of sales
Licenses, royalties and fees 100,000 184,900
Product and other sales 84,700 26,600
------------ ------------
184,700 211,500
------------ ------------
Gross profit 361,300 456,300
Operating expenses
Research and development 106,600 120,500
Sales and marketing 201,200 182,500
General and administrative 217,500 235,400
------------ ------------
525,300 538,400
------------ ------------
Loss from operations (164,000) (82,100)
Other income (expenses)
Amortization of debt issuance costs (6,300) (6,300)
Interest income 34,500 4,300
Interest and bank charges (18,000) (17,400)
Equity in net loss of affiliate (21,000) (20,300)
------------ ------------
(10,800) (39,700)
------------ ------------
Net loss ($174,800) ($121,800)
============ ============
Basic and dilutive loss
per common share ($.01) ($.01)
Average common shares outstanding 33,587,332 14,080,654
See notes to financial statements.
1
<PAGE>
Nocopi Technologies, Inc.
Balance Sheet
(unaudited)
March 31
1998
-------------
Assets
Current assets
Cash and cash equivalents $ 2,430,900
Accounts receivable less allowances 226,900
Inventory 10,700
Prepaid and other 60,300
------------
Total current assets 2,728,800
Fixed assets
Leasehold improvements 50,900
Furniture, fixtures and equipment 424,700
------------
475,600
Less: accumulated depreciation 376,300
------------
99,300
Other assets
Investment in and advances to affiliate 275,600
Patents, net of accumulated amortization 529,500
Other 9,900
------------
815,000
------------
Total assets $ 3,643,100
============
Liabilities and Stockholders' Equity
Current liabilities
Current debt obligations $ 825,000
Accounts payable 308,600
Accrued expenses 183,700
Accrued commissions 115,300
Deferred revenue 79,300
------------
Total current liabilities 1,511,900
Long-term notes payable 125,000
Stockholders' equity
Common stock, $.01 par value
Authorized - 50,000,000 shares
Issued and outstanding
33,587,332 shares 335,900
Paid-in capital 10,396,200
Currency translation adjustment (27,400)
Accumulated deficit (8,698,500)
------------
2,006,200
------------
Total liabilities and stockholders' equity $ 3,643,100
============
See notes to financial statements.
2
<PAGE>
Nocopi Technologies, Inc.
Statements of Cash Flows
(unaudited)
<TABLE>
<CAPTION>
Three Months ended March 31
1998 1997
----------- -----------
<S> <C> <C>
Operating Activities
Net loss ($ 174,800) ($ 121,800)
Adjustments to reconcile net loss to cash
provided (used) in operating activities
Depreciation 21,900 21,900
Amortization 22,200 20,800
Allowance for doubtful accounts -- 6,300
Equity in net loss of affiliate 21,000 20,300
----------- -----------
(109,700) (52,500)
Changes in working capital
Accounts receivable (59,500) 90,100
Inventory (5,200) (3,200)
Prepaid and other (11,100) 3,500
Accounts payable and accrued expenses (2,900) 83,600
Deferred revenue 10,700 (20,500)
----------- -----------
(68,000) 153,500
----------- -----------
Cash provided (used) in operating activities (177,700) 101,000
Investing Activities
Additions to fixed assets (7,400) (6,400)
Additions to patents (7,600) (35,600)
Cash of Euro, beginning of year -- (1,641,200)
Advances to affiliate, net (91,000) (36,900)
----------- -----------
Cash used in investing activities (106,000) (1,720,100)
----------- -----------
Decrease in cash and cash equivalents (283,700) (1,619,100)
Cash and cash equivalents - beginning of period 2,714,600 2,229,200
----------- -----------
Cash and cash equivalents - end of period $ 2,430,900 $ 610,100
=========== ===========
</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.
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.
Total comprehensive loss is as follows:
Three Months Ended
March 31
1998 1997
------------------------
Net loss ($174,800) ($121,800)
Currency translation adjustment (3,500) (62,500)
---------- ---------
Comprehensive loss ($178,300) ($184,300)
---------- ---------
4
<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 first quarter of 1998 declined 18% to $546,000 from
$667,800 in the first quarter of 1997. Licenses, royalties and fees declined by
$186,500 due in part to lower minimum license fees from certain U.S. customers
resulting principally from a renegotiated contract with 3M Corporation. The
contract with 3M has been mutually terminated effective April 30, 1998. Product
and other sales increased by $64,700 in the first quarter of 1998 compared to
the first quarter of 1997 as a result of higher sales of pressure-sensitive
labels during the quarter.
The Company's gross profit declined to $361,300 or 66% of revenues in the
first quarter of 1998 from $456,300 or 68% of revenues in the first quarter of
1997. The decline in both absolute dollars and as a percentage of revenues is
due to lower licenses, royalties and fees.
Research and development expenses declined to $106,600 in the first quarter
of 1998 from $120,500 in the first quarter of 1997. The decline relates
primarily to a cost containment program, including staff reductions, implemented
during 1997.
5
<PAGE>
Sales and marketing expenses increased to $201,200 in the first quarter of
1998 from $182,500 in the first quarter 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.
The increase in 1998 reflects the Company's commitment to develop markets for
its technologies, particularly its recently developed inkjet computer printer
technologies. These market development activities have required higher sales and
marketing expenditures, including travel.
General and administrative expenses declined to $217,500 in the first
quarter of 1998 from $235,400 in the first quarter of 1997. The decline reflects
lower professional expenses in the first quarter of 1998.
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 invested increased in the first
quarter of 1998 compared to the first quarter 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
loss of Euro-Nocopi attributable to the Company's approximate 18% ownership
share of Euro-Nocopi.
The net loss increased in the first quarter of 1998 to $174,800 from
$121,800 in the first quarter of 1997. The increase in the net loss is
attributable primarily to lower revenues realized in the first quarter of 1998
from licensees and increased sales and marketing expenses offset in part by
higher interest income in the first quarter of 1998.
Liquidity and Capital Resources
The Company's cash and cash equivalents declined to $2,430,900 at March 31,
1998 from $2,714,600 at December 31, 1997. The cash was used primarily to fund
operations over the three-month period including reimbursable expenditures on
behalf of its European affiliate.
In early April 1998, the Company repaid $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
chares of the Company's common stock.
In the first quarter of 1998, the Company relocated its Corporate
headquarters to a new location and plans to relocate its research facilities to
this location by the third quarter of 1998. The Company does not anticipate
significant capital spending as a result of this relocation.
The Company believes that it has sufficient working capital to support its
operations and debt service requirements over the next twelve months.
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 Discussion and Analysis. In each case,
6
<PAGE>
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 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.
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 27 - Financial Data Schedule
(b). No Current Reports on Form 8-K have been filed by the Registrant
during the quarter ended March 31, 1998.
8
<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/ Richard A. Check
----------------------------------
Richard A. Check
President & Chief Executive Officer
DATE: May 14, 1998 /s/ Rudolph A. Lutterschmidt
----------------------------------
Rudolph A. Lutterschmidt
Vice President & Chief
Financial Officer
9
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> MAR-31-1998
<CASH> 2,430,900
<SECURITIES> 0
<RECEIVABLES> 271,000
<ALLOWANCES> 44,100
<INVENTORY> 10,700
<CURRENT-ASSETS> 2,728,800
<PP&E> 475,600
<DEPRECIATION> 376,300
<TOTAL-ASSETS> 3,643,100
<CURRENT-LIABILITIES> 1,511,900
<BONDS> 125,000
0
0
<COMMON> 335,900
<OTHER-SE> 1,670,300
<TOTAL-LIABILITY-AND-EQUITY> 3,643,100
<SALES> 546,000
<TOTAL-REVENUES> 546,000
<CGS> 184,700
<TOTAL-COSTS> 184,700
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 18,000
<INCOME-PRETAX> (174,800)
<INCOME-TAX> 0
<INCOME-CONTINUING> (174,800)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (174,800)
<EPS-PRIMARY> (0.01)
<EPS-DILUTED> (0.01)
</TABLE>
