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, 1999.
[ ] 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 May 1, 1999: Common stock, par value
$.01 per share 33,627,332 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, 1999
And March 31, 1998
Balance Sheet 2
March 31, 1999
Statements of Cash Flows 3
Three Months Ended March 31, 1999
And March 31, 1998.
Notes to Financial Statements 4
Item 2. Management's Discussion and Analysis 5-8
Of Financial Condition and Results of Operations
Part II. OTHER INFORMATION 9
Signatures 10
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Nocopi Technologies, Inc.
Statements of Operations
(unaudited)
<TABLE>
<CAPTION>
Three Months ended March 31
1999 1998
------------ ------------
<S> <C> <C>
Revenues
Licenses, royalties and fees $ 388,000 $ 450,600
Product and other sales 198,100 95,400
------------ ------------
586,100 546,000
Cost of sales
Licenses, royalties and fees 105,900 100,000
Product and other sales 156,600 84,700
------------ ------------
262,500 184,700
------------ ------------
Gross profit 323,600 361,300
Operating expenses
Research and development 66,300 106,600
Sales and marketing 212,500 201,200
General and administrative 347,800 217,500
------------ ------------
626,600 525,300
------------ ------------
Loss from operations (303,000) (164,000)
Other income (expenses)
Amortization of debt issuance costs (6,300)
Interest income 12,800 34,500
Interest and bank charges (4,200) (18,000)
Equity in net loss of unconsolidated affiliate (11,500) (21,000)
------------ ------------
(2,900) (10,800)
------------ ------------
Net loss ($ 305,900) ($ 174,800)
============ ============
Basic and diluted loss per common ($.01) ($.01)
share
Average common shares outstanding 33,587,332 33,587,332
</TABLE>
See notes to financial statements.
1
<PAGE>
Nocopi Technologies, Inc.
Balance Sheet
(unaudited)
March 31
1999
------------
Assets
Current assets
Cash and cash equivalents $ 1,175,000
Accounts receivable less allowances 164,000
Prepaid and other 48,500
------------
Total current assets 1,387,500
Fixed assets
Leasehold improvements 39,500
Furniture, fixtures and equipment 456,500
------------
496,000
Less: accumulated depreciation 389,400
------------
106,600
Other assets
Investment in and advances to unconsolidated affiliate 246,500
Patents, net of accumulated amortization 521,600
Other 6,200
------------
774,300
------------
Total assets $ 2,268,400
============
Liabilities and Stockholders' Equity
Current liabilities
Current debt obligations $ 125,000
Accounts payable 241,700
Accrued expenses 161,000
Accrued commissions 135,800
Accrued severance 135,700
Deferred revenue 129,500
------------
Total current liabilities 928,700
Stockholders' equity
Common stock, $.01 par value
Authorized - 75,000,000 shares
Issued and outstanding - 33,587,332 shares 335,900
Paid-in capital 10,407,200
Accumulated other comprehensive loss (25,000)
Accumulated deficit (9,378,400)
------------
1,339,700
------------
Total liabilities and stockholders' equity $ 2,268,400
============
See notes to financial statements.
2
<PAGE>
Nocopi Technologies, Inc.
Statements of Cash Flows
(unaudited)
<TABLE>
<CAPTION>
Three Months ended March 31
1999 1998
----------- -----------
<S> <C> <C>
Operating Activities
Net loss ($ 305,900) ($ 174,800)
Adjustments to reconcile net loss to cash
used in operating activities
Depreciation 15,600 21,900
Amortization 16,500 22,200
Equity in net loss of unconsolidated affiliate 11,500 21,000
Stock option compensation 1,000
----------- -----------
(261,300) (109,700)
(Increase) decrease in assets
Accounts receivable (33,200) (59,500)
Prepaid and other 3,900 (16,300)
Increase (decrease) in liabilities
Accounts payable and accrued expenses 185,400 (2,900)
Deferred revenue 7,200 10,700
----------- -----------
163,300 (68,000)
----------- -----------
Cash (used in) operating activities (98,000) (177,700)
Investing Activities
Additions to fixed assets (17,500) (7,400)
Additions to patents (18,300) (7,600)
Advances to affiliate, net (64,100) (91,000)
----------- -----------
Cash (used in) investing activities (99,900) (106,000)
----------- -----------
Decrease in cash and cash equivalents (197,900) (283,700)
Cash and cash equivalents - beginning of period 1,372,900 2,714,600
----------- -----------
Cash and cash equivalents - end of period $ 1,175,000 $ 2,430,900
=========== ===========
</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 1998 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 1998 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 (Loss)
In accordance with SFAS No. 130, Reporting Comprehensive Income,
comprehensive loss is as follows:
Three Months Ended
March 31
1999 1998
--------- ---------
Net loss ($305,900) ($174,800)
Currency translation adjustment ( 12,100) ( 3,500)
--------- ---------
Comprehensive loss ($318,000) ($178,300)
========= =========
Note 3.Accrued Severance
Includes accrual of $150,000 related to the resignation of the Company's
President and Chief Executive Officer, payable in installments of
approximately $15,000 per month commencing March 1, 1999.
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 1999 were $586,100 compared to $546,000
in the first quarter of 1998, an increase of 7%. Licenses, royalties and fees
declined by $62,600 due in part to lower volume-related royalties in the first
quarter of 1999 compared to the first quarter of 1998 and the termination of
license agreements with three licensees. Product sales increased $102,700 to
$198,100 in the first quarter of 1999 from $95,400 in the first quarter of 1998
primarily as the result of the $92,000 sale of an inkjet printing system during
the quarter.
The Company's gross profit declined to $323,600 in the first quarter of
1999 or 55% of revenues from $361,300 or 66% of revenues in the first quarter of
1998. Licenses, royalties and fees carry a substantially higher gross margin
than product sales, which generally consist of manufactured products which
incorporate the Company's technologies or equipment used to support the
application of its technologies. These items are generally purchased from
third-party vendors and resold to the end-user or licensee and carry a
significantly lower gross margin than licenses, royalties and fees. The lower
gross margin in absolute dollars as well as percentage of revenues, in the first
quarter of 1999 compared to the first quarter of 1998 results both from lower
licenses, royalties and fees as well as the change in revenue mix in favor of
product sales.
5
<PAGE>
Research and development expenses declined to $66,300 in the first quarter
of 1999 from $106,600 in the first quarter of 1998. The reduction is due
primarily to lower compensation expense resulting from modifications to
compensation arrangements with certain individuals as well as lower travel
expense during the quarter.
Sales and marketing expenses were to $212,500 in the first quarter of 1999
compared to $201,200 in the first quarter of 1998. The $11,300 increase relates
primarily to higher sales promotion expenses in the first quarter of 1999
compared to the first quarter of 1998.
General and administrative expenses increased $130,300 to $347,800 in the
first quarter of 1999 from $217,500 in the first quarter of 1998. The increase
results from the resignation of the Company's President and Chief Executive
Officer in February 1999 whereby $150,000 in severance obligations was charged
to expense during the first quarter of 1999.
Other income (expense) includes interest on the $125,000 Series B 9%
Subordinated Convertible Promissory Notes due March 31, 2000. The decline in
interest income in the first quarter of 1999 compared to the first quarter of
1998 relates to lower levels of cash invested as cash was utilized during 1998
to fund operations and to repay $825,000 of debt.
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 increased to $305,900 in the first quarter of 1999 from
$174,800 in the first quarter of 1998. As explained above, the increase relates
primarily to the accrual of severance obligations in 1999.
Liquidity and Capital Resources
The Company's cash and cash equivalents declined to $1,175,000 at March 31,
1999 from $1,372,900 at December 31, 1998. The cash was used primarily to fund
operations over the three-month period including reimbursable expenditures on
behalf of its European affiliate.
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. These potential
problems exist because many computer software applications use two digits to
designate a year. Any computer hardware and programs that have date sensitive
software may recognize a date using "00" as the year 1900 rather than the year
2000. The inability to properly process dates beyond 1999 may cause computer
systems to process information incorrectly or not at all. 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 the end of the third quarter of 1999. The Company has determined
that the vendor's upgrade software is available and is Year 2000 compliant. The
Company estimates the costs to purchase and install the upgrades at less than
$10,000. The Company continues to communicate with vendors, financial
institutions and others to assure their compliance to Year 2000 issues. However,
there can be no
6
<PAGE>
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 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 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
7
<PAGE>
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.
8
<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
The Company has postponed its annual meeting of shareholders
scheduled to be held on June 30, 1999. The Company plans to
hold its annual meeting during the third quarter of 1999 and
will make a public announcement of the date.
The Company is in the process of engaging independent legal
and securities counsel, which will advise the Company in
matters related to corporate governance and securities law as
well as assist in the preparation of the proxy statement and
other required documents and provide guidance on the Company's
long-term strategic direction.
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, 1999.
9
<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 24, 1999 /s/ Jack H. Halperin
----------------------------------------
Jack H. Halperin
Interim Chairman of the Board
DATE: May 24, 1999 /s/ Rudolph A. Lutterschmidt
----------------------------------------
Rudolph A. Lutterschmidt
Vice President & Chief Financial Officer
10
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
NOCOPI TECHNOLOGIES, INC.
EXHIBIT 27
MARCH 31, 1999
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> MAR-31-1999
<CASH> 1,175,000
<SECURITIES> 0
<RECEIVABLES> 219,500
<ALLOWANCES> 55,500
<INVENTORY> 9,200
<CURRENT-ASSETS> 1,387,500
<PP&E> 496,000
<DEPRECIATION> 389,400
<TOTAL-ASSETS> 2,268,400
<CURRENT-LIABILITIES> 928,700
<BONDS> 0
0
0
<COMMON> 335,900
<OTHER-SE> 1,003,800
<TOTAL-LIABILITY-AND-EQUITY> 2,268,400
<SALES> 586,100
<TOTAL-REVENUES> 586,100
<CGS> 262,500
<TOTAL-COSTS> 262,500
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 12,800
<INCOME-PRETAX> (305,900)
<INCOME-TAX> 0
<INCOME-CONTINUING> (305,900)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (305,900)
<EPS-BASIC> (0.01)
<EPS-DILUTED> (0.01)
</TABLE>
