-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, VOE/nbbN4NevRDl+q58a/WmLxMptl3GfcakMtrbeNF4FmtWJ1qJRIFbkb9+Nf5g1 +Lbtew3fc/zCRjldmR29jg== 0000950115-99-001126.txt : 19990817 0000950115-99-001126.hdr.sgml : 19990817 ACCESSION NUMBER: 0000950115-99-001126 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990630 FILED AS OF DATE: 19990816 FILER: COMPANY DATA: COMPANY CONFORMED NAME: NOCOPI TECHNOLOGIES INC/MD/ CENTRAL INDEX KEY: 0000888981 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-SERVICES, NEC [8900] IRS NUMBER: 870406496 STATE OF INCORPORATION: MD FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10QSB SEC ACT: SEC FILE NUMBER: 000-20333 FILM NUMBER: 99693945 BUSINESS ADDRESS: STREET 1: 537 APPLE ST CITY: WEST CONSHOHOCKEN STATE: PA ZIP: 19428-2903 BUSINESS PHONE: 6108349600 MAIL ADDRESS: STREET 1: 537 APPLE ST CITY: WEST CONSHOHOCKEN STATE: PA ZIP: 19428-2903 10QSB 1 QUARTERLY REPORT 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__ 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 PART I - FINANCIAL INFORMATION Item 1. Financial Statements Nocopi Technologies, Inc. Statements of Operations (unaudited)
Three Months ended June 30 Six Months ended June 30 1999 1998 1999 1998 -------- -------- --------- ---------- Revenues 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
See notes to financial statements. 1 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 Nocopi Technologies, Inc. Statements of Cash Flows (unaudited)
Six Months ended June 30 1999 1998 ---------- ---------- Operating Activities 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 $1,560,200 ========== ==========
See notes to financial statements. 3 NOCOPI TECHNOLOGIES, INC. NOTES TO FINANCIAL STATEMENTS (UNAUDITED) Note 1. Financial Statements The accompanying interim financial statements have been prepared by the Company without audit. These statements include all adjustments (consisting only of normal recurring adjustments) which management believes necessary for a fair presentation of the statements and have been prepared on a consistent basis using the accounting policies described in the summary of Accounting Policies included in the Company's 1998 Annual Report. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. The Notes to Financial Statements included in the 1998 Annual Report should be read in conjunction with the accompanying interim financial statements. The interim operating results are not necessarily indicative of the operating results expected for the full year. Note 2. Comprehensive Income (Loss) In accordance with SFAS No. 130, Reporting Comprehensive Income, comprehensive loss is as follows:
Three Months Ended June 30 1999 1998 ----------------------- Net loss .............................................................. ($ 86,500) ($175,900) Currency translation adjustment ....................................... (6,000) 5,300 --------- --------- Comprehensive loss .................................................... ($ 92,500) ($170,600) ========= ========= Six Months Ended June 30 1999 1998 ------------------------ Net loss .............................................................. ($392,400) ($350,700) Currency translation adjustment ....................................... (18,100) 1,800 --------- --------- Comprehensive loss .................................................... ($410,500) ($348,900) ========= =========
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 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 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 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 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 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 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 EX-27 2 FDS --
5 6-MOS DEC-31-1999 JUN-30-1999 1,151,700 0 204,800 55,500 11,900 1,339,200 496,000 405,000 2,118,000 860,000 0 0 0 336,700 921,100 2,118,000 1,051,600 1,051,600 409,800 409,800 0 0 7,400 (392,400) 0 (392,400) 0 0 0 (392,400) (0.01) (0.01)
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