U.S. Securities and Exchange Commission
Washington, D.C. 20549
Form 10-QSB
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTIONS 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the quarterly period ended June 30, 2000.
[ ] TRANSITION REPORT PURSUANT TO SECTIONS 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
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(Address of principal executive offices)
(610) 834-9600
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(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, 2000: Common stock, par value $.01 per share
33,817,332 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, 2000 and June 30, 1999
Balance Sheet 2
June 30, 2000
Statements of Cash Flows 3
Six Months Ended June 30, 2000
and June 30, 1999
Notes to Financial Statements 4-5
Item 2. Management's Discussion and Analysis 6-10
of Financial Condition and Results of Operations
Part II. OTHER INFORMATION 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
2000 1999 2000 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues
Licenses, royalties and fees $ 222,900 $ 413,500 $ 441,100 $ 801,500
Product and other sales 49,900 52,000 248,300 250,100
------------ ------------ ------------ ------------
272,800 465,500 689,400 1,051,600
Cost of sales
Licenses, royalties and fees 75,700 98,200 158,500 204,100
Product and other sales 38,600 49,100 216,600 205,700
------------ ------------ ------------ ------------
114,300 147,300 375,100 409,800
------------ ------------ ------------ ------------
Gross profit 158,500 318,200 314,300 641,800
Operating expenses
Research and development 40,700 59,200 96,100 125,500
Sales and marketing 54,100 170,900 104,300 383,400
General and administrative 130,300 187,700 258,800 535,500
------------ ------------ ------------ ------------
225,100 417,800 459,200 1,044,400
------------ ------------ ------------ ------------
Loss from operations (66,600) (99,600) (144,900) (402,600)
Other income (expenses)
Amortization
Interest income 5,400 11,100 12,200 23,900
Interest and bank charges (900) (3,200) (4,600) (7,400)
Equity in net income (loss) of
unconsolidated affiliate 2,000 5,200 4,100 (6,300)
------------ ------------ ------------ ------------
6,500 13,100 11,700 10,200
------------ ------------ ------------ ------------
Net loss ($ 60,100) ($ 86,500) ($ 133,200) ($ 392,400)
============ ============ ============ ============
Basic and diluted loss per
common share ($ .00) ($ .00) ($ .00) ($ .01)
Average common shares
outstanding 33,817,332 33,640,665 33,817,332 33,613,999
</TABLE>
See notes to financial statements.
1
<PAGE>
Nocopi Technologies, Inc.
Balance Sheet
(unaudited)
<TABLE>
<CAPTION>
June 30
2000
------------
Assets
<S> <C>
Current assets
Cash and cash equivalents $ 409,600
Accounts receivable less allowance 66,400
Prepaid and other 37,200
------------
Total current assets 513,200
Fixed assets
Leasehold improvements 39,500
Furniture, fixtures and equipment 476,200
------------
515,700
Less: accumulated depreciation 450,700
------------
65,000
Other assets
Investment in and advances to unconsolidated affiliate 254,600
------------
Total assets $ 832,800
============
Liabilities and Stockholders' Equity
Current liabilities
Accounts payable $ 96,400
Accrued expenses 222,700
Accrued severance 94,400
Deferred revenue 165,800
------------
Total current liabilities 579,300
Stockholders' equity
Common stock, $.01 par value
Authorized - 75,000,000 shares
Issued and outstanding - 33,817,332 shares 338,200
Paid-in capital 10,434,600
Accumulated other comprehensive loss (51,000)
Accumulated deficit (10,468,300)
------------
253,500
------------
Total liabilities and stockholders' equity $ 832,800
============
</TABLE>
See notes to financial statements.
2
<PAGE>
Nocopi Technologies, Inc.
Statements of Cash Flows
(unaudited)
<TABLE>
<CAPTION>
Six Months ended June 30
2000 1999
------------ ------------
<S> <C> <C>
Operating Activities
Net loss ($ 133,200) ($ 392,400)
Adjustments to reconcile net loss to
cash from operating activities
Depreciation 27,600 31,200
Amortization 33,000
Equity in net (income) loss of unconsolidated affiliate (4,100) 6,300
Stock and stock option compensation 11,600
----------- -----------
(109,700) (310,300)
(Increase) decrease in assets
Accounts receivable 42,200 (18,500)
Prepaid and other 76,700 14,200
Increase (decrease) in liabilities
Accounts payable and accrued expenses (227,600) 96,600
Deferred revenue (16,100) 27,500
----------- -----------
(124,800) 119,800
----------- -----------
Cash (used in) operating activities (234,500) (190,500)
Investing Activities
Additions to fixed assets (14,700) (17,500)
Additions to patents (35,600)
Advances from affiliate, net 33,800 22,400
----------- -----------
Cash provided by (used in) investing activities 19,100 (30,700)
Financing Activities
Repayment of notes (125,000)
----------- -----------
Cash used in financing activities (125,000)
----------- -----------
Decrease in cash and cash equivalents (340,400) (221,200)
Cash and cash equivalents - beginning of period 750,000 1,372,900
----------- -----------
Cash and cash equivalents - end of period $ 409,600 $ 1,151,700
=========== ===========
</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 1999 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 1999 Annual
Report should be read in conjunction with the accompanying
interim financial statements. The interim operating results for
the six months ended June 30, 2000 may not be 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
June 30
2000 1999
--------- ---------
Net loss ($60,100) ($86,500)
Currency translation adjustment ( 400) ( 6,000)
-------- --------
Comprehensive loss ($60,500) ($92,500)
======== ========
Six Months Ended
June 30
2000 1999
--------- ---------
Net loss ($133,200) ($392,400)
Currency translation adjustment ( 11,500) ( 18,100)
--------- ---------
Comprehensive loss ($144,700) ($410,500)
========= =========
4
<PAGE>
3. Going Concern
Since its inception, the Company has incurred significant losses
and, as of June 30, 2000, had accumulated losses of $10,468,300.
For the years ended December 31, 1999 and 1998, the Company's net
losses were $1,262,600 and $548,800, respectively. In addition,
the Company had negative working capital of $66,100 at June 30,
2000. The Company may incur further operating losses and
experience negative cash flow in the future. The Company believes
that its cash resources, based on current revenue and expenditure
levels, may not be sufficient to sustain the Company beyond early
to mid-2001. Achieving profitability and positive cash flow
depends on the Company's ability to generate and sustain
significant increases in revenues and gross profits from its
traditional business. There can be no assurances that the Company
will be able to generate sufficient revenues and gross profits to
achieve and sustain profitability and positive cash flow in the
future.
In addition to its focus on increasing revenues from traditional
sources of business, 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 the sale of assets of
the Company or of all or part of the business, an investment in
the Company by a strategic partner or the pursuit of strategic
alliances and/or acquisitions. There can be no assurances that
the Company will be successful in concluding a strategic
transaction or, if it is, that the transaction will have a
material positive effect on the Company's business operations and
cash flow.
5
<PAGE>
Item 2.
NOCOPI TECHNOLOGIES, INC.
Management's Discussion and Analysis
of Financial Condition and Results of Operations
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, and equipment used to support
the application of the Company's technologies, such as ink-jet printing systems.
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. The addition of a substantial new customer or
the loss of a substantial existing customer may also have a substantial effect
on the Company's total revenue, revenue mix and operating results.
Revenues for the second quarter of 2000 were $272,800 compared to $465,500
in the second quarter of 1999, a 41% decline. Virtually the entire decline in
revenues is attributable to a decline in licenses, royalties and fees which
declined by $190,600 in the second quarter of 2000 to $222,900 from $413,500 in
the second quarter of 1999. The reduction in licenses, royalties and fees is due
primarily to the termination or non-renewal of license arrangements with six
licensees, including the Company's largest customer, during the second half of
1999 offset in part by the addition of four new licensees. Product sales of
$49,900 in the second quarter of 2000 approximated the $52,000 realized in the
second quarter of 1999.
6
<PAGE>
For the first six months of 2000, revenues were $689,400, 34% lower than
revenues of $1,051,600 in the first six months of 1999. The decline of $362,200
in the first half of 2000, compared to the first half of 1999, is attributable
virtually in its entirety to a $360,400 reduction in licenses royalties and fees
caused by the same factors described above. Product and other sales of $248,300
for the first six months of 2000 nearly equaled the first half 1999 sales of
$250,100. In each period, the Company sold and installed an ink-jet printing
system.
The Company's gross profit declined to $158,500 in the second quarter of
2000 or 58% of revenues from $318,200 or 68% of revenues in the first quarter of
1999. Licenses, royalties and fees carry a substantially higher gross profit
than product sales, which generally consist of manufactured products which may
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 profit margin than licenses, royalties and fees. The
lower gross profit and the decline in gross profit as a percentage of revenues
in the second quarter of 2000 compared to the second quarter of 1999 results
principally from both the absolute decrease in revenues represented by licenses,
royalties and fees and the resulting change in revenue mix. The primary
components of cost of sales related to licenses, royalties and fees, such as
production labor and rent, are substantially fixed. The variable component of
these costs of sales, primarily ink and chemicals, is a small percentage of the
total cost and of the related revenues. As these revenues decline, the gross
profit is negatively impacted, both in absolute dollars and as a percentage of
revenues. The gross profit related to product and other sales improved in the
second quarter of 2000 compared to the second quarter of 1999 as a result of
changes in the mix of products sold.
For the first six months of 2000, the gross profit declined to $314,300, or
46% of revenues, from $641,800 or 61% of revenues in the first half of 1999. The
above mentioned factors related to the second quarter gross margin affected the
first half as well; however, the change in revenue mix of product and other
sales negatively affected their gross profit in the first half of 2000 compared
to the comparable 1999 period.
Research and development expenses declined to $40,700 and $96,100 in the
second quarter and first half of 2000, respectfully, from $59,200 and $125,500
in the comparable periods of 1998. The reductions are due primarily to lower
compensation expense resulting from staff reductions in early 2000 and lower
travel expenses in both quarters of 2000 compared to the same periods of 1999.
Sales and marketing expenses declined to $54,100 in the second quarter of
2000 from $170,900 in the second quarter of 1999. For the first six months of
2000, sales and marketing expenses were $104,300 compared to $383,400 in the
first six months of 1999. The reductions both for the second quarter and first
half are due primarily to staff reductions occurring in the second half of 1999
as well as lower commissions, travel and sales promotion expenses in the second
quarter and first half of 2000 compared to the same 1999 periods.
7
<PAGE>
General and administrative expenses declined to $130,300 in the second
quarter of 2000 from $187,700 in the second quarter of 1999. The decline
resulted primarily from staff reductions the second half of 1999 and a lower
level of professional fees in the second quarter of 2000 compared to the second
quarter of 1999. General and administrative expenses declined by $276,700 in the
first six months of 2000 to $258,800 from $535,500 in the first six months of
1999. The first half 1999 general and administrative expenses included a
$150,000 charge to severance expense resulting from the resignation of the
Company's President and Chief Executive Officer in February 1999. The position
of President and Chief Executive Officer has been vacant since February 1999.
This, along with other staff reductions made during the second half of 1999 and
a lower level of professional fees were the principal factors contributing to
the significant reduction in general and administrative expenses in the first
half of 2000 compared to the same period of 1999.
Other income (expense) includes interest on the $125,000 Series B 9%
Subordinated Convertible Promissory Notes through their repayment on March 31,
2000. The decline in interest income in the second quarter and first half of
2000 compared to the same periods of 1999 relates to lower levels of cash
invested as cash was utilized during 1999 and the first six months of 2000 to
fund operations and repay the Series B Notes.
Equity in net income (loss) of unconsolidated affiliate represents the
proportionate share in the net income or loss of Euro-Nocopi, S.A. attributable
to the Company's approximate 18% ownership share of Euro-Nocopi, S.A. As the
Euro-Nocopi first half 2000 financial statements remain incomplete, the second
quarter and first half 2000 equity in net income (loss) of unconsolidated
affiliate is based on an estimate of Euro-Nocopi's operating results for those
periods.
The net loss declined to $60,100 in the second quarter of 2000 from $86,500
in the second quarter of 1999 and to $133,200 in the first half of 2000 from
$392,400 in the first half of 1999. The reduction in the second quarter net loss
from the year earlier period resulted primarily from the reductions in research
and development, selling and general and administrative expenses associated with
staff reductions described above, substantially offset by the reductions in
revenue and gross profit identified above. The year to year reduction in net
loss from the first half of 1999 to the first half of 2000 resulted from the
same factors, and from the non-recurrence of the severance expense associated
with the departure of the Company's President and Chief Executive Officer during
the first quarter of 1999. As a result of the Company's adverse liquidity
situation, positions in production, research, sales and administration have not
been filled following the departure of certain employees and consultants.
Liquidity and Capital Resources
The Company's cash and cash equivalents declined to $409,600 at June 30,
2000 from $750,000 at December 31, 1999. The cash was used primarily to make
severance payments of $170,600 in accordance with an agreement negotiated in
February 2000 and to repay the Company's $125,000 principal amount Series B
Subordinated Notes on March 31, 2000.
8
<PAGE>
Additionally, cash in the amount of $44,800 was used to fund ongoing operations
over the six-month period.
The loss of a number of customers during 1998 and 1999 including, in 1999,
the Company's largest customer, has had a material adverse effect on the
Company's results of operations and upon its liquidity and capital resources.
The Company believes that the conditions arising from these circumstances raise
substantial doubts about the Company's ability to continue as a going concern as
its cash resources, based on current revenue and expenditure levels, may not be
sufficient to sustain the Company beyond early to mid-2001. The Board of
Directors of the Company is presently focused on increasing the Company's
revenue base from its traditional sources of business. There can be no
assurances that the Company will be able to generate sufficient incremental
revenues and gross profits to achieve and sustain profitability and positive
cash flow in the future. The Board of Directors continues to explore strategic
alternatives that may provide increased liquidity, improve cash flow and enhance
stockholder value. These potential alternatives include the sale of assets of
the Company or of all or part of the business, an investment in the Company by a
strategic partner or the pursuit of strategic alliances and/or acquisitions.
There can be no assurances that the Company will be successful in concluding a
strategic 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, in response to the adverse liquidity situation, has instituted
a cost reduction program including staff reductions and curtailment of
discretionary research and development, sales and marketing and administrative
expenses.
Factors That May Affect Operating Results 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:
Adverse Liquidity. As a result of the loss of a number of customers during
1998 and 1999 including, in 1999, the Company's largest customer, the Company is
experiencing a period of adverse liquidity during which it has been and will
continue to be required to reduce expenses while the Company's Board of
Directors explores options to restructure the Company's operations, including
seeking a potential business combination. The requirement to conserve cash has
caused the Company to limit its discretionary research and development and sales
and marketing expenditures, thus impeding the Company's ability to develop new
technologies and markets. These factors may negatively impact the Company's
efforts to increase its customer base and revenues.
New Business Opportunities. The Company, with limited and reduced research
and development resources may be unable to develop new technologies that it
believes will enhance and expand its position in the anti-counterfeiting and
anti-diversion marketplace that it serves. There can be no assurances that the
resources expended in this effort will generate significant revenues for the
Company.
9
<PAGE>
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.
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 do securities analysts and traders
extensively follow it. 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.
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 assurances that the Company will be able to protect the basis of its
technologies from discovery by unauthorized third parties or to preclude
unauthorized persons from conducting activities which infringe on the Company's
rights. In either event, the Company's customer and licensee relationships could
be adversely affected.
Forward-Looking Information
The foregoing contains forward-looking information within the meaning of
the Private Securities Litigation Reform 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.
10
<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, 2000.
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 21, 2000 /s/ Michael A Feinstein, M.D.
-----------------------------
Michael A Feinstein, M.D.
Chairman of the Board
DATE: August 21, 2000 /s/ Rudolph A. Lutterschmidt
----------------------------
Rudolph A. Lutterschmidt
Vice President & Chief Financial Officer
12
