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 June 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 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 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 August 1, 1998: Common stock, par value $.01 per share
33,587,332 shares.
Transitional Small Business Disclosure Format (check one): Yes X No
---- ----
<PAGE>
NOCOPI TECHNOLOGIES, INC.
INDEX
Part I. FINANCIAL INFORMATION
PAGE
Item 1. Financial Statements
Statements of Operations 1
Three Months and Six Months Ended June 30, 1998
and June 30, 1997
Balance Sheet 2
June 30, 1998
Statements of Cash Flows 3
Six Months Ended June 30, 1998
and June 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 10-11
Signatures 12
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Nocopi Technologies, Inc.
Statements of Operations
(unaudited)
<TABLE>
<CAPTION>
Three Months ended June 30 Six Months ended June 30
1998 1997 1998 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues
Licenses, royalties and fees $454,300 $ 479,700 $ 904,900 $1,116,800
Product and other sales 341,900 753,000 437,300 783,700
----------- ----------- ----------- -----------
796,200 1,232,700 1,342,200 1,900,500
Cost of sales
Licenses, royalties and fees 100,700 217,000 200,700 401,900
Product and other sales 331,600 745,000 416,300 771,600
----------- ----------- ----------- -----------
432,300 962,000 617,000 1,173,500
----------- ----------- ----------- -----------
Gross profit 363,900 270,700 725,200 727,000
Operating expenses
Research and development 108,200 121,900 214,800 242,400
Sales and marketing 207,600 145,500 408,800 328,000
General and administrative 246,500 264,200 464,000 499,600
----------- ----------- ----------- -----------
562,300 531,600 1,087,600 1,070,000
----------- ----------- ----------- -----------
Loss from operations (198,400) (260,900) (362,400) (343,000)
Other income (expenses)
Amortization 0 (6,400) (6,300) (12,700)
Interest income 26,700 6,700 61,200 11,000
Interest and bank charges (4,200) (17,800) (22,200) (35,200)
Equity in net income (loss) of affiliate 0 11,800 (21,000) (8,500)
----------- ----------- ----------- -----------
22,500 (5,700) 11,700 (45,400)
----------- ----------- ----------- -----------
Net loss ($175,900) ($266,600) ($350,700) ($388,400)
=========== =========== =========== ===========
Loss per common share ($.01) ($.02) ($.01) ($.03)
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)
June 30
1998
-----------
Assets
Current assets
Cash and cash equivalents $ 1,560,200
Accounts receivable less allowance 237,100
Inventory 6,000
Prepaid and other 62,300
-----------
Total current assets 1,865,600
Fixed assets
Leasehold improvements 52,900
Furniture, fixtures and equipment 429,400
-----------
482,300
Less: accumulated depreciation 398,200
-----------
84,100
Other assets
Investment in and advances to affiliate 381,100
Patents, net of accumulated amortization 520,300
Other 8,900
-----------
910,300
-----------
Total assets $ 2,860,000
===========
Liabilities and Stockholders' Equity
Current liabilities
Accounts payable $ 496,200
Accrued expenses 126,900
Accrued commissions 116,600
Deferred revenue 156,700
-----------
Total current liabilities 896,400
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 10,399,200
Currency translation adjustment (22,100)
Accumulated deficit (8,874,400)
-----------
1,838,600
-----------
Total liabilities and stockholders' equity $ 2,860,000
===========
See notes to financial statements.
2
<PAGE>
Nocopi Technologies, Inc.
Statements of Cash Flows
(unaudited)
Six Months ended June 30
1998 1997
----------- -----------
Operating Activities
Net loss ($350,700) ($388,400)
Adjustments to reconcile net loss to
cash from operating activities
Depreciation 43,800 43,800
Amortization 38,100 41,400
Allowance for doubtful accounts 6,000 12,000
Equity in net loss of affiliate 21,000 8,500
Other 3,000 0
----------- -----------
(238,800) (282,700)
Changes in working capital
Accounts receivable (75,700) (564,500)
Inventory (500) 1,500
Prepaid and other (13,100) 99,300
Accounts payable and accrued expenses 129,200 509,200
Deferred revenue 88,100 35,000
----------- -----------
128,000 80,500
----------- -----------
Cash used by operating activities (110,800) (202,200)
Investing Activities
Additions to fixed assets (14,100) (6,800)
Additions to patents (13,300) (48,400)
Cash of Euro, beginning of year 0 (1,641,200)
Advances to affiliate, net (191,200) (80,600)
----------- -----------
Cash used by investing activities (218,600) (1,777,000)
Financing Activities
Repayment of notes (825,000) 0
----------- -----------
Cash used by financing activities (825,000) 0
----------- -----------
Decrease in cash and cash equivalents (1,154,400) (1,979,200)
Cash and cash equivalents - beginning of period 2,714,600 2,229,200
----------- -----------
Cash and cash equivalents - end of period $ 1,560,200 $ 250,000
=========== ===========
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 six months ended June
30, 1997 and the Statement of Cash Flows for the six months ended June
30, 1997 have been restated on a basis consistent with the Form 10Q/A
for the quarter ended March 31, 1997. The 10Q/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:
Three Months Ended
June 30
1998 1997
---- ----
Net loss ($175,900) ($266,600)
Currency translation adjustment 5,300 ( 6,100)
--------- ---------
Comprehensive loss ($170,600) ($272,700)
========= =========
Six Months Ended
June 30
1998 1997
---- ----
Net loss ($350,700) ($388,400)
Currency translation adjustment 1,800 (68,600)
--------- ---------
Comprehensive loss ($348,900) ($457,000)
========= =========
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 second quarter of 1998 were $796,200 compared to
$1,232,700 in the second quarter of 1997, a 35% decline. Licenses, royalties and
fees were $454,300 in the second quarter of 1998, a decline of $25,400 from the
second quarter of 1997 due in part to lower volume based royalties during the
quarter. Product and other sales were $341,900 in the second quarter of 1998
compared to $753,000 in the second quarter of 1997. The decline of $411,100, or
55%, is due primarily to lower sales of pressure-sensitive labels during the
second quarter of 1998 compared to the second quarter of 1997 and a one-time
sale of inkjet equipment valued at $138,200 in the second quarter of 1997.
For the first six months of 1998, revenues were $1,342,200, 29% lower than
revenues of $1,900,500 in the first six months of 1997. Licenses, royalties and
fees declined by $211,900 due in part to lower license fees and royalties from
certain U.S. customers resulting principally from the renegotiation in early
1997 of an exclusive license with 3M Corporation. The license was mutually
terminated effective April 30, 1998. Product and other sales decreased to
$437,300 in the first half of 1998 from $783,700 in the first half of 1997. The
$346,400 decline is principally attributable to lower sales of
pressure-sensitive labels in the first half of 1998 and the one-time sale of
inkjet equipment in the first half of 1997.
6
<PAGE>
The gross profit increased 34% to $363,900, or 46% of revenues, in the
second quarter of 1998 from $270,700, or 22% of revenues, in the second quarter
of 1997. The increase in absolute dollars and as a percentage of revenues
relates primarily to the settlement of a dispute with Euro-Nocopi, its
affiliate, 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.
The gross profit for the first half of 1998 was $725,200, or 54% of
revenues compared to $727,000 or 38% of revenues in the first half of 1997. The
gross profit was negatively affected by the $211,900 decline in licenses,
royalties and fees in the first six months of 1998 compared to the first six
months of 1997. As the non-recurring settlement with Euro-Nocopi occurred in the
first half of 1997, the resulting improvement in the first half of 1998 was
offset by the gross profit decline attributable to lower licenses, royalties and
fees.
Research and development expenses declined to $108,200 and $214,800 in the
second quarter and first half of 1998, respectively, from $121,900 and $242,400
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 $207,600 in the second quarter of
1998 from $145,500 to the second quarter of 1997. For the first half of 1998,
sales and marketing expenses were $408,800 compared to $328,000 in the first
half 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, particularly its recently developed inkjet computer printer
technologies. These market development activities have required higher sales and
marketing expenditures.
General and administrative expenses declined to $246,500 in the second
quarter of 1998 from $264,200 in the second quarter of 1997. For the first six
months, general and administrative expenses declined to $464,000 in 1998 from
$499,600 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 second
quarter and first half 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 at an interest
rate of 9%. Interest income increased in the second quarter and first half of
1998 compared to the second quarter and first half of 1997 due to the investment
of funds raised in the private placement completed in late 1997.
Equity in net income (loss) of affiliate represents the proportionate share
in the income or loss of Euro-Nocopi attributable to the Company's approximate
18% ownership share of Euro-Nocopi.
The net loss for the three months ended June 30, 1998 was $175,900 compared
to $266,600 in the three months ended June 30, 1997. The first half 1998 net
loss was $350,700 compared to $388,400 in the first half of 1997. The decrease
in the net loss for the second quarter of 1997 relates primarily to the
non-recurring settlement with Euro-Nocopi recorded in the second quarter of
1997.
7
<PAGE>
The positive effect of this settlement is offset in part by a lower gross profit
resulting from lower revenues for the first half of 1998 compared to the first
half of 1997.
Liquidity and Capital Resources
The Company's cash and cash equivalents declined to $1,560,200 at June 30,
1998 from $2,714,600 at December 31, 1997. The cash was used primarily to fund
operations over the six-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 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 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
The Registrant's 1998 Annual Meeting of Shareholders was held on
June 8, 1998. At such meeting, Registrant's shareholders elected
five (5) persons nominated by management to serve as directors of
Registrant, approved an Amendment to the Articles of
Incorporation to increase the Registrant's authorized shares of
Common Stock from 50,000,000 shares to 75,000,000 shares, and
ratified the selection of BDO Seidman, LLP as Registrant's
independent public accountants.
The following table shows the votes cast for and against each person
nominated to serve as a director, as well as all abstentions, authority
withheld and broker non-votes:
<TABLE>
<CAPTION>
Votes Against or
Name of Nominee Authority Broker Non-Votes
Votes For Withheld Abstentions
<S> <C> <C> <C> <C>
Jack H. Halperin 25,243,012 65,716 0 0
Susan Cox 25,235,562 73,166 0 0
Neal J. Sroka 25,234,562 74,166 0 0
Richard A. Check 25,225,444 83,284 0 0
Dr. A. Gundjian 23,492,176 1,816,552 0 0
</TABLE>
The voting on the proposal to approve an Amendment to the Articles of
Incorporation to increase the Registrant's authorized shares of common stock
from 50,000,000 shares to 75,000,000 shares was as follows: 23,702,256 For;
978,588 Against; 627,884 Abstentions; and 0 Broker Non-Votes.
The voting on the proposal to ratify the selection of BDO Seidman, LLP as
Registrant's independent public accountants was as follows: 25,155,403 For;
67,565 Against; 85,760 Abstentions; and -0- Broker Non-Votes.
10
<PAGE>
Item 5. Other Information
Not Applicable
Item 6. Exhibits and Reports on Form 8-K
(a). Exhibit 27 - Financial Data Schedule
(b). The Registrant filed the following Current Report on Form
8-K during the quarter ended June 30, 1998.
June 22, 1998 - Change in Control of Registrant.
11
<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: August 13, 1998 /s/ Richard A. Check
--------------------
Richard A. Check
President & Chief Executive Officer
DATE: August 13, 1998 /s/ Rudolph A. Lutterschmidt
---------------------------
Rudolph A. Lutterschmidt
Vice President & Chief Financial Officer
12
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1998
<CASH> 1,560,200
<SECURITIES> 0
<RECEIVABLES> 287,200
<ALLOWANCES> 50,100
<INVENTORY> 6,000
<CURRENT-ASSETS> 1,865,600
<PP&E> 482,300
<DEPRECIATION> 398,200
<TOTAL-ASSETS> 2,860,000
<CURRENT-LIABILITIES> 896,400
<BONDS> 125,000
0
0
<COMMON> 335,900
<OTHER-SE> 1,502,700
<TOTAL-LIABILITY-AND-EQUITY> 2,860,000
<SALES> 1,342,200
<TOTAL-REVENUES> 1,342,200
<CGS> 617,000
<TOTAL-COSTS> 617,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 22,200
<INCOME-PRETAX> (350,700)
<INCOME-TAX> 0
<INCOME-CONTINUING> (350,700)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (350,700)
<EPS-PRIMARY> (0.01)
<EPS-DILUTED> (0.01)
</TABLE>
