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, 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, West 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, 1999: Common stock, par value $.01 per share
33,717,332 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 Six Months Ended
June 30, 1999 and June 30, 1998
Balance Sheet 2
June 30, 1999
Statements of Cash Flows 3
Six Months Ended June 30, 1999
and June 30, 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 June 30 Six Months ended June 30
1999 1998 1999 1998
-------- -------- --------- ----------
Revenues
<S> <C> <C> <C> <C>
Licenses, royalties and fees $413,500 $454,300 $801,500 $904,900
Product and other sales 52,000 341,900 250,100 437,300
-------- --------- --------- ---------
465,500 796,200 1,051,600 1,342,200
Cost of sales
Licenses, royalties and fees 98,200 100,700 204,100 200,700
Product and other sales 49,100 331,600 205,700 416,300
-------- --------- --------- ---------
147,300 432,300 409,800 617,000
-------- --------- --------- ---------
Gross profit 318,200 363,900 641,800 725,200
Operating expenses
Research and development 59,200 108,200 125,500 214,800
Sales and marketing 170,900 207,600 383,400 408,800
General and administrative 187,700 246,500 535,500 464,000
-------- --------- --------- ---------
417,800 562,300 1,044,400 1,087,600
-------- --------- --------- ---------
Loss from operations (99,600) (198,400) (402,600) (362,400)
Other income (expenses)
Amortization (6,300)
Interest income 11,100 26,700 23,900 61,200
Interest and bank charges (3,200) (4,200) (7,400) (22,200)
Equity in net income (loss) of
unconsolidated affiliate 5,200 (6,300) (21,000)
-------- --------- --------- ---------
13,100 22,500 10,200 11,700
-------- --------- --------- ---------
Net loss ($86,500) ($175,900) ($392,400) ($350,700)
======== ======== ======== ========
Loss per common share ($.00) ($.01) ($.01) ($.01)
Average common shares Outstanding 33,640,665 33,587,332 33,613,999 33,587,332
</TABLE>
See notes to financial statements.
1
<PAGE>
Nocopi Technologies, Inc.
Balance Sheet
(unaudited)
June 30
1999
------------
Assets
Current assets
Cash and cash equivalents $1,151,700
Accounts receivable less allowance 149,300
Prepaid and other 38,200
-----------
Total current assets 1,339,200
Fixed assets
Leasehold improvements 39,500
Furniture, fixtures and equipment 456,500
-----------
496,000
Less: accumulated depreciation 405,000
-----------
91,000
Other assets
Investment in and advances to unconsolidated affiliate 159,200
Patents, net of accumulated amortization 523,300
Other 5,300
-----------
687,800
-----------
Total assets $2,118,000
===========
Liabilities and Stockholders' Equity
Current liabilities
Current debt obligations $125,000
Accounts payable 170,400
Accrued expenses 172,900
Accrued commissions 150,100
Accrued severance 92,000
Deferred revenue 149,800
-----------
Total current liabilities 860,200
Stockholders' equity
Common stock, $.01 par value
Authorized - 75,000,000 shares
Issued and outstanding - 33,667,332 shares 336,700
Paid-in capital 10,417,000
Accumulated other comprehensive loss (31,000)
Accumulated deficit (9,464,900)
-----------
1,257,800
-----------
Total liabilities and stockholders' equity $2,118,000
===========
See notes to financial statements.
2
<PAGE>
Nocopi Technologies, Inc.
Statements of Cash Flows
(unaudited)
<TABLE>
<CAPTION>
Six Months ended June 30
1999 1998
---------- ----------
Operating Activities
<S> <C> <C>
Net loss ($392,400) ($350,700)
Adjustments to reconcile net loss to
cash from operating activities
Depreciation 31,200 43,800
Amortization 33,000 38,100
Allowance for doubtful accounts 6,000
Equity in net loss of unconsolidated affiliate 6,300 21,000
Stock and stock option compensation 11,600 3,000
---------- ----------
(310,300) (238,800)
Changes in working capital
Accounts receivable (18,500) (75,700)
Prepaid and other 14,200 (13,600)
Accounts payable and accrued expenses 96,600 129,200
Deferred revenue 27,500 88,100
---------- ----------
119,800 128,000
---------- ----------
Cash used in operating activities (190,500) (110,800)
Investing Activities
Additions to fixed assets (17,500) (14,100)
Additions to patents (35,600) (13,300)
Advances (to) from affiliate, net 22,400 (191,200)
---------- ----------
Cash used in investing activities (30,700) (218,600)
Financing Activities
Repayment of notes (825,000)
---------- ----------
Cash used in financing activities (825,000)
---------- ----------
Decrease in cash and cash equivalents (221,200) (1,154,400)
Cash and cash equivalents - beginning of period 1,372,900 2,714,600
---------- ----------
Cash and cash equivalents - end of period $1,151,700 $1,560,200
========== ==========
</TABLE>
See notes to financial statements.
3
<PAGE>
NOCOPI TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
Note 1. Financial Statements
The accompanying interim financial statements have been prepared by
the Company without audit. These statements include all adjustments
(consisting only of normal recurring adjustments) which management
believes necessary for a fair presentation of the statements and have
been prepared on a consistent basis using the accounting policies
described in the summary of Accounting Policies included in the
Company's 1998 Annual Report. Certain information and footnote
disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been
condensed or omitted. The Notes to Financial Statements included in
the 1998 Annual Report should be read in conjunction with the
accompanying interim financial statements. The interim operating
results are not necessarily indicative of the operating results
expected for the full year.
Note 2. Comprehensive Income (Loss)
In accordance with SFAS No. 130, Reporting Comprehensive Income,
comprehensive loss is as follows:
<TABLE>
<CAPTION>
Three Months Ended
June 30
1999 1998
-----------------------
<S> <C> <C>
Net loss .............................................................. ($ 86,500) ($175,900)
Currency translation adjustment ....................................... (6,000) 5,300
--------- ---------
Comprehensive loss .................................................... ($ 92,500) ($170,600)
========= =========
<CAPTION>
Six Months Ended
June 30
1999 1998
------------------------
<S> <C> <C>
Net loss .............................................................. ($392,400) ($350,700)
Currency translation adjustment ....................................... (18,100) 1,800
--------- ---------
Comprehensive loss .................................................... ($410,500) ($348,900)
========= =========
</TABLE>
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. Subsequent to the end of the second quarter, the severance
agreement was modified by mutual consent of the parties resulting in
the reduction of approximately $30,000 in the remaining severance
obligations which will be recognized as a third quarter 1999 reduction
in severance expense.
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 second quarter of 1999 were $465,500 compared to $796,200
in the second quarter of 1998, a decline of 42%. Licenses, royalties and fees
declined by $40,800 to $413,500 in the second quarter of 1999 from $454,300 in
the second quarter of 1998. The decline was due to lower volume related
royalties in the second quarter of 1999 compared to the second quarter of 1998
and the termination during 1998 of license agreements with five licensees.
Product and other sales declined to $52,000 in the second quarter of 1999 from
$341,900 in the second quarter of 1998. The $289,900 decline is due primarily to
lower sales of pressure-sensitive labels in the second quarter of 1999 compared
to the second quarter of 1998.
For the first six months of 1999, revenues were $1,051,600, 22% lower than
revenues of $1,342,200 in the first six months of 1998. Licenses, royalties and
fees declined by $103,400, or 11% to $801,500 in the first half of 1999 from
$904,900 in the first half of 1998 primarily due to lower volume-related
royalties and the termination of certain license agreements during 1998. Product
and other sales declined by $187,200 in the first half of 1999 to $250,100 from
$437,300 in the first half of 1998. The 43% decline is due primarily to lower
sales of pressure-sensitive labels offset in part by the sale of an ink-jet
printing system in the first quarter of 1999.
The Company's gross profit declined 13% to $318,200 or 68% of revenues, in
the second quarter of 1999 from $363,900, or 46% of revenues in the second
quarter of 1998. Licenses, royalties and fees carry a substantially higher gross
margin than product sales, which generally consist of manufactured products
5
<PAGE>
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 relates to lower overall revenues. The gross
margin improvement as a percentage of revenues is due primarily to the change in
revenue mix in favor of higher margin licenses, royalties and fees.
The gross profit for the first six months of 1999 was $641,800, or 61% of
revenues, compared to $725,200, or 54% of revenues in the first six months of
1998. The above mentioned factors related to the second quarter gross margin
affected the first half as well.
Research and development expenses declined to $59,200 and $125,500 in the
second quarter and first half of 1999, respectively, from $108,200 and $214,800
in the comparable periods of 1998. The reductions were due primarily to lower
compensation expenses resulting from modifications to compensation arrangements
with certain individuals as well as lower travel expenses.
Sales and marketing expenses declined to $170,900 in the second quarter of
1999 from $207,600 in the second quarter of 1998. For the first half of 1999,
sales and marketing expenses were $383,400 compared to $408,800 in the first
half of 1998. The decline relates primarily to lower commission expenses on the
lower level of sales, as well as lower travel expenses in 1999 compared to 1998.
General and administrative expenses declined to $187,700 in the three
months ended June 30, 1999 from $246,500 in the same period of 1998. For the six
months ended June 30, 1999, general and administrative expenses increased to
$535,500 from $464,000 in the first six months of 1998. The second quarter
reduction in these expenses is due primarily to lower salary expense as a result
of the resignation of the Company's President and Chief Executive Officer in
February 1999. Included in the first half 1999 G&A expense is $150,000 in
related severance obligations charged to expense in the first quarter. As a
result of a third quarter modification to the severance agreement, the severance
obligations will be reduced by approximately $30,000.
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 second quarter and first half of 1999 compared to the
second quarter and first half of 1998 relates to lower levels of cash invested
as cash was utilized during 1998 to fund operations and to repay $825,000 of the
convertible notes.
Equity in net income (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 declined to $86,500 in the second quarter of 1999 from
$175,900 in the second quarter of 1998 primarily due to substantially reduced
overhead expenses in the quarter. The increase in the first half 1999 net loss
to $392,400 from $350,700 in the first half of 1998 relates primarily to the
above-mentioned accrual of severance obligations in 1999.
Liquidity and Capital Resources
The Company's cash and cash equivalents declined to $1,151,700 at June 30,
1999 from $1,372,900 at December 31, 1998. The cash was used primarily to fund
operations over the six-month period.
6
<PAGE>
The Company believes that its existing cash reserves combined with cash
flows from operations, if any, are likely to be sufficient to support its
operations at current levels of operations and debt service requirements over
the next twelve months. Unless the Company is able to generate significant
revenue increases from its traditional business or effect a transaction with
another entity that would increase its level of business by mid-2000, its future
liquidity may be adversely affected. The Board of Directors of the Company is in
the process of reviewing strategic alternatives to provide increased liquidity,
improve cash flow and enhance stockholder value. These potential alternatives
include an investment in the Company by a strategic partner, the pursuit of
strategic alliances or the sale of all or part of the business. There can be no
assurances that the Company will be successful in accomplishing such a
transaction or, if so achieved, that the transaction will have a material
positive effect on the Company's business operations and cash flow.
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 during the fourth 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
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-
7
<PAGE>
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.
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
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 June 30, 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: August 16, 1999 /s/ Jack H. Halperin
--------------------
Jack H. Halperin
Interim Chairman of the Board
DATE: August 16, 1999 /s/ Rudolph A. Lutterschmidt
----------------------------
Rudolph A. Lutterschmidt
Vice President & Chief Financial Officer
10
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> JUN-30-1999
<CASH> 1,151,700
<SECURITIES> 0
<RECEIVABLES> 204,800
<ALLOWANCES> 55,500
<INVENTORY> 11,900
<CURRENT-ASSETS> 1,339,200
<PP&E> 496,000
<DEPRECIATION> 405,000
<TOTAL-ASSETS> 2,118,000
<CURRENT-LIABILITIES> 860,000
<BONDS> 0
0
0
<COMMON> 336,700
<OTHER-SE> 921,100
<TOTAL-LIABILITY-AND-EQUITY> 2,118,000
<SALES> 1,051,600
<TOTAL-REVENUES> 1,051,600
<CGS> 409,800
<TOTAL-COSTS> 409,800
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 7,400
<INCOME-PRETAX> (392,400)
<INCOME-TAX> 0
<INCOME-CONTINUING> (392,400)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (392,400)
<EPS-BASIC> (0.01)
<EPS-DILUTED> (0.01)
</TABLE>
