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, 2000.
[ ] 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 of (IRS Employer
incorporation or organization) Identification No.)
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 May 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
PAGE
----
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
Statements of Operations 1
Three Months ended March 31, 2000 and March 31, 1999
Balance Sheet 2
March 31, 2000
Statements of Cash Flows 3
Three Months ended March 31, 2000 and March 31, 1999.
Notes to Financial Statements 4 - 5
Item 2. Management's Discussion and Analysis of 6 - 9
Financial Condition and Results of Operations
Part II. OTHER INFORMATION 10
Signatures 11
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Nocopi Technologies, Inc.
Statements of Operations
(unaudited)
Three Months ended March 31
2000 1999
---------- ----------
Revenues
Licenses, royalties and fees $ 218,200 $ 388,000
Product and other sales 198,400 198,100
---------- ----------
416,600 586,100
Cost of sales
Licenses, royalties and fees 82,800 105,900
Product and other sales 178,000 156,600
---------- ----------
260,800 262,500
---------- ----------
Gross profit 155,800 323,600
Operating expenses
Research and development 55,400 66,300
Sales and marketing 50,200 212,500
General and administrative 128,500 347,800
---------- ----------
234,100 626,600
---------- ----------
Loss from operations (78,300) (303,000)
Other income (expenses)
Interest income 6,800 12,800
Interest and bank charges (3,700) (4,200)
Equity in net income (loss) of unconsolidated
affiliate 2,100 (11,500)
---------- ----------
5,200 (2,900)
---------- ----------
Net loss $ (73,100) $ (305,900)
========== ==========
Basic and diluted loss per common share $ (.00) $ (.01)
Weighted average common shares outstanding 33,817,332 33,587,332
See notes to financial statements.
1
<PAGE>
Nocopi Technologies, Inc.
Balance Sheet
(unaudited)
March 31
2000
------------
Assets
Current assets
Cash and cash equivalents $ 479,100
Accounts receivable less allowances 55,100
Prepaid and other 46,300
------------
Total current assets 580,500
Fixed assets
Leasehold improvements 39,500
Furniture, fixtures and equipment 461,500
------------
501,000
Less: accumulated depreciation 436,900
------------
64,100
Other assets
Investment in and advances to unconsolidated affiliate 265,000
------------
Total assets $ 909,600
============
Liabilities and Stockholders' Equity
Current liabilities
Accounts payable $ 52,600
Accrued expenses 235,500
Accrued severance 128,900
Deferred revenue 178,600
------------
Total current liabilities 595,600
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 (50,600)
Accumulated deficit (10,408,200)
------------
314,000
------------
Total liabilities and stockholders' equity $ 909,600
============
See notes to financial statements.
2
<PAGE>
Nocopi Technologies, Inc.
Statements of Cash Flows
(unaudited)
<TABLE>
<CAPTION>
Three Months ended March 31
2000 1999
--------- -----------
<S> <C> <C>
Operating Activities
Net loss $ (73,100) $ (305,900)
Adjustments to reconcile net loss to cash
used in operating activities
Depreciation 13,800 15,600
Amortization 16,500
Equity in net (income) loss of unconsolidated
affiliate (2,100) 11,500
Stock option compensation 1,000
--------- ----------
(61,400) (261,300)
(Increase) decrease in assets
Accounts receivable 53,500 (33,200)
Prepaid and other 67,600 3,900
Increase (decrease) in liabilities
Accounts payable, accrued expenses and
accrued severance (224,100) 185,400
Deferred revenue (3,300) 7,200
--------- ----------
(106,300) 163,300
--------- ----------
Cash (used in) operating activities (167,700) (98,000)
Investing Activities
Additions to fixed assets (17,500)
Additions to patents (18,300)
Advances (to) from affiliate, net 21,800 (64,100)
--------- ----------
Cash provided by (used in) investing activities 21,800 (99,900)
Financing Activities
Repayment of notes (125,000)
--------- ----------
Cash (used in) financing activities (125,000)
--------- ----------
Decrease in cash and cash equivalents (270,900) (197,900)
Cash and cash equivalents - beginning of period 750,000 1,372,900
--------- ----------
Cash and cash equivalents - end of period $ 479,100 $1,175,000
========= ==========
</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 three months ended March 31, 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
March 31
--------------------------
2000 1999
-------- ---------
Net loss $(73,100) $(305,900)
Currency translation adjustment (11,100) (12,100)
-------- ---------
Comprehensive loss $(84,200) $(318,000)
======== =========
Note 3. Going Concern
Since its inception, the Company has incurred significant losses and, as of
March 31, 2000, had accumulated losses of $10,408,200. 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 $15,100 at March 31, 2000. The Company may incur further
operating losses and experience negative cash flow in the future. 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
4
<PAGE>
gross profits to achieve and sustain profitability and positive cash flow
in the future.
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 and/or acquisitions or the sale of all or part of the business.
There can be no assurances that the Company will be successful in
accomplishing 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.
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, 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 first quarter of 2000 were $416,600 compared to $586,100
in the first quarter of 1999, a 29% decline. Virtually the entire decline in
revenues is attributable to a decline in licenses, royalties and fees which
declined by $169,800 in the first quarter of 2000 to $218,200 from $388,000 in
the first quarter of 1999. The reduction in licenses, royalties and fees is due
primarily to the termination of license arrangements with six licensees,
including the Company's largest customer, during 1999 offset in part by the
addition of two new licensees. Product sales of $198,400 in the first quarter of
2000 approximated the $198,100 realized in the first quarter of 1999. In each
quarter, the Company sold and installed an ink-jet printing system.
The Company's gross profit declined to $155,800 in the first quarter of
2000 or 37% of revenues from $323,600 or 55% 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
6
<PAGE>
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 than licenses, royalties
and fees. The lower gross profit and the decline in gross profit as a percentage
of revenues in the first quarter of 2000 compared to the first quarter of 1999
results principally from a decrease in the portion of revenues represented by
licenses, royalties and fees. Certain 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 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 also declined in the first quarter of 2000 compared to the first
quarter of 1999 as a result of changes in the mix of products sold.
Research and development expenses declined to $55,400 in the first quarter
of 2000 from $66,300 in the first quarter of 1999. The reduction is due
primarily to lower compensation expense resulting from staff reductions during
the first quarter of 2000 and lower travel expenses in the first quarter of 2000
compared to the first quarter of 1999.
Sales and marketing expenses were $50,200 in the first quarter of 2000
compared to $212,500 in the first quarter of 1999, a reduction of $162,300. The
reduction is due primarily to staff reductions in the second half of 1999 as
well as lower commissions, travel and sales promotion expenses in the first
three months of 2000 compared to the first three months of 1999.
General and administrative expenses declined by $219,300 in the first
quarter of 2000 to $128,500 from $347,800 in the first quarter of 1999. The
first quarter 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 in addition to that
individual's compensation costs for the first two months of 1999. This, along
with other staff reductions during 1999, were the principal factors contributing
to the significant reduction in general and administrative expenses in the first
three months of 2000 compared to the same period of 1999. The position of
President and Chief Executive Officer has been vacant since February 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 first quarter of 2000 compared to
the first quarter of 1999 relates to lower levels of cash invested as cash was
utilized during 1999 and the first three months of 2000 to fund operations.
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.
The net loss declined to $73,100 in the first quarter of 2000 from $305,900
in the first quarter of 1999 for the reasons explained above.
7
<PAGE>
Liquidity and Capital Resources
The Company's cash and cash equivalents declined to $479,100 at March 31,
2000 from $750,000 at December 31, 1999. The cash was used primarily to make
severance payments of $136,100 in accordance with an agreement negotiated in
February 2000, repay the Company's $125,000 principal amount Series B
Subordinated Notes due on March 31, 2000 and fund operations over the
three-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.
The Board of Directors of the Company is currently 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 and/or
acquisitions or the sale of all or part of the business. There can be no
assurances that the Company will be successful in accomplishing 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 and sales and marketing expenses.
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 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.
8
<PAGE>
There can be no assurances 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 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.
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.
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.
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.
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
Not Applicable
Item 5. Other Information
Not Applicable
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit 27 - Financial Data Schedule
(b) No Current Reports on Form 8-K have been filed by the Registrant
during the quarter ended March 31, 2000.
10
<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 15, 2000 /s/ Michael A Feinstein, M.D.
----------------------------------------
Michael A Feinstein, M.D.
Chairman of the Board
DATE: May 15, 2000 /s/ Rudolph A. Lutterschmidt
----------------------------------------
Rudolph A. Lutterschmidt
Vice President & Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-END> MAR-31-2000
<CASH> 479,100
<SECURITIES> 0
<RECEIVABLES> 102,600
<ALLOWANCES> 47,500
<INVENTORY> 7,700
<CURRENT-ASSETS> 580,500
<PP&E> 501,000
<DEPRECIATION> 436,900
<TOTAL-ASSETS> 909,600
<CURRENT-LIABILITIES> 595,600
<BONDS> 0
0
0
<COMMON> 338,200
<OTHER-SE> (24,200)
<TOTAL-LIABILITY-AND-EQUITY> 909,600
<SALES> 416,600
<TOTAL-REVENUES> 416,600
<CGS> 260,800
<TOTAL-COSTS> 260,800
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,700
<INCOME-PRETAX> (73,100)
<INCOME-TAX> 0
<INCOME-CONTINUING> (73,100)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (73,100)
<EPS-BASIC> (0.00)
<EPS-DILUTED> (0.00)
</TABLE>
