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, 2002.
[ ] 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, 2002: Common stock, par value $.01 per share:
42,638,908 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, 2002 and June 30, 2001
Balance Sheet 2
June 30, 2002
Statements of Cash Flows 3
Six Months Ended June 30, 2002
and June 30, 2001
Notes to Financial Statements 4-7
Item 2. Management's Discussion and Analysis 8-14
of Financial Condition and Results of Operations
Part II. OTHER INFORMATION 15-16
Signatures 17
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
2002 2001 2002 2001
------------ ------------ ------------ ------------
Revenues
Licenses, royalties and fees $ 103,900 $ 114,500 $ 238,400 $ 238,300
Product and other sales 72,900 69,600 140,300 120,000
------------ ------------ ------------ ------------
176,800 184,100 378,700 358,300
Cost of sales
Licenses, royalties and fees 49,800 45,500 99,900 116,000
Product and other sales 45,600 31,400 93,800 58,400
------------ ------------ ------------ ------------
95,400 76,900 193,700 174,400
------------ ------------ ------------ ------------
Gross profit 81,400 107,200 185,000 183,900
Operating expenses
Research and development 63,300 72,600 129,400 127,300
Sales and marketing 70,800 72,500 149,300 137,100
General and administrative
(exclusive 51,500 103,600 161,200 243,400
of legal expenses)
Legal expenses 140,300 122,800 214,300 184,300
------------ ------------ ------------ ------------
325,900 371,500 654,200 692,100
------------ ------------ ------------ ------------
Loss from operations (244,500) (264,300) (469,200) (508,200)
Other income (expenses)
Interest income -- 1,200 100 3,100
Interest expense and bank charges (2,300) (500) (3,000) (800)
------------ ------------ ------------ ------------
(2,300) 700 (2,900) 2,300
------------ ------------ ------------ ------------
Net loss ($246,800) ($263,600) ($472,100) ($505,900)
============ ============ ============ ============
Basic and diluted loss per
common share ($.01) ($.01) ($.01) ($.01)
Weighted average common
shares outstanding 42,238,908 37,734,362 41,838,908 36,428,685
See notes to financial statements.
1
Nocopi Technologies, Inc.
Balance Sheet
(unaudited)
June 30
2002
------------
Assets
Current assets
Cash and cash equivalents $6,300
Accounts receivable less allowance 82,100
Prepaid and other 32,600
-------------
Total current assets 121,000
Fixed assets
Leasehold improvements 39,500
Furniture, fixtures and equipment 476,200
-------------
515,700
Less: accumulated depreciation 492,000
-------------
23,700
Other assets
Investment in and advances to unconsolidated affiliate, at cost 110,600
-------------
Total assets $255,300
=============
Liabilities and Stockholders' Deficiency
Current liabilities
Demand loans $129,500
Accounts payable 371,100
Accrued expenses 277,800
Deferred revenue 94,600
-------------
Total current liabilities 873,000
Stockholders' deficiency
Common stock, $.01 par value
Authorized - 75,000,000 shares
Issued and outstanding - 42,638,908 shares 426,400
Paid-in capital 10,974,400
Accumulated deficit (12,018,500)
-------------
(617,700)
-------------
Total liabilities and stockholders' deficiency $255,300
=============
See notes to financial statements.
2
Nocopi Technologies, Inc.
Statements of Cash Flows
(unaudited)
Six Months ended June 30
2002 2001
--------- ---------
Operating Activities
Net loss ($472,100) ($505,900)
Adjustments to reconcile net loss to
cash from operating activities
Depreciation 9,000 18,000
Allowance for doubtful accounts, net -- 1,700
--------- ---------
(463,100) (486,200)
(Increase) decrease in assets
Accounts receivable (42,500) 14,300
Prepaid and other (9,900) (4,400)
Increase (decrease) in liabilities
Accounts payable and accrued expenses 149,600 48,200
Deferred revenue 31,600 (1,600)
--------- ---------
128,800 56,500
--------- ---------
Cash (used in) operating activities (334,300) (429,700)
Financing Activities
Issuance of common stock, net 211,000 311,000
Demand loans 129,500 --
--------- ---------
Cash provided by financing activities 340,500 311,000
--------- ---------
Increase (decrease) in cash and cash equivalents 6,200 (118,700)
Cash and cash equivalents - beginning of period 100 186,900
--------- ---------
Cash and cash equivalents - end of period $ 6,300 $ 68,200
========= =========
See notes to financial statements.
3
NOCOPI TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
Note 1. Financial Statements
The accompanying unaudited condensed financial statements have been
prepared by Nocopi Technologies, Inc. (the Company). 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 2001 Annual Report on
Form 10-KSB. Certain financial information and footnote disclosures
normally included in financial statements prepared in accordance with
generally accepted accounting principles have been condensed or omitted
pursuant to such rules and regulations, although the Company believes
that the accompanying disclosures are adequate to make the information
presented not misleading. The Notes to Financial Statements included in
the 2001 Annual Report on Form 10-KSB should be read in conjunction
with the accompanying interim financial statements. The interim
operating results for the three and six months ended June 30, 2002 may
not be necessarily indicative of the operating results expected for the
full year.
Note 2. Affiliate
The Company organized Euro-Nocopi, S.A. (Euro) in 1994 to market the
Company's technologies in Europe under an exclusive license
arrangement. Euro was capitalized through a European private placement.
The Company holds an approximately 18% interest in Euro.
During 2000, there arose between Euro and the Company a number of areas
of conflict and dispute, leading each party to the licensing
arrangement to assert informally that the other was in breach of its
obligations under that arrangement. The parties initially sought to
resolve their differences by negotiating a transaction in which Euro
would have purchased from the Company its entire equity interest as
well as the paid-up European rights to the Company's technologies.
These negotiations terminated without agreement early in December 2000.
Following the termination of the transaction negotiations, the Company
was informed by Euro that its shareholders had adopted resolutions for
Euro to liquidate and dissolve. In mid-December 2000, the Company
terminated its license agreement with Euro based on its dissolution and
discontinued the provision of support (including the sale of
proprietary inks) to Euro and certain of its customers. As a result of
the license termination the technological dependency of Euro on the
Company ceased and the Company was no longer permitted to account for
its investment in Euro on the equity method. Accordingly, the Company,
effective October 1, 2000, changed its method of accounting for its
investment in Euro to the cost method and recorded the carrying value
at that date as the cost of its investment.
4
Euro responded to the license termination by denying that the Company's
action was permissible or effective, and by asserting a claim that, as
a result of alleged breaches of the licensing agreement by the Company,
it was entitled to terminate the license and receive instead a
royalty-free license to exploit the Company's technologies in Europe in
perpetuity.
Promptly thereafter, Euro commenced an action before a court in Paris,
France in which it sought the entry of an order, in the nature of a
preliminary injunction, to compel the Company to honor its license
pending judicial or arbitral resolution of the dispute between the
parties under the license agreement. In the French litigation, Euro did
not seek an adjudication on the merits of the underlying dispute.
Certain shareholders of Euro subsequently joined in the proceedings
commenced by Euro.
In March 2001, the Emergency Judge hearing the action issued a decision
denying the relief requested by Euro and the shareholders. The
decision, which does not purport to be a final adjudication of the
merits of the controversy but only of Euro's request for preliminary
relief, held that Euro was not entitled to the requested order because
the Company had validly terminated the licensing arrangement in
mid-December, and also ordered Euro to pay into escrow the
approximately $125,000 that the Company claimed was due and owing under
the licensing arrangement.
In March 2001, Euro commenced an arbitration proceeding before the
American Arbitration Association in New York, NY against the Company.
In this proceeding, Euro has not asserted a claim for damages but has
asserted a claim for an award in the nature of a declaratory judgment
to the effect that, because the Company has (allegedly) breached the
license agreement, Euro is entitled to a perpetual royalty-free license
to exploit the Company's technologies in Europe. The Company has filed
a response denying that Euro is entitled to the relief requested,
asserting that it has validly terminated Euro's license agreement, and
seeking damages for Euro's breaches of the licensing agreement and its
continuing use of the licensed technologies. The arbitration currently
is scheduled to be heard by the arbitrators in late October 2002.
In March 2001 certain shareholders of Euro filed suit in a French court
against certain current and former officers and directors of the
Company and against a licensee of the Company. The Company is not named
as a defendant in the suit. The suit seeks damages in excess of $7
million from the defendants for various alleged acts of oppression,
self-dealing and fraud in connection with the organization and
capitalization of Euro, the management of that company and the
Company's management of its relationship with that company. The
defendants have denied any liability to the plaintiffs and have sought
indemnification from the Company in connection with the lawsuit. The
Company has advanced certain costs of defense for the benefit of its
current and former directors and officers named as defendants. The
Company believes that its Directors and Officers Insurance carrier may
provide reimbursement of certain expenditures for legal fees (above the
policy deductible) in accordance with the terms of the insurance
policy.
5
Note 3. Demand Loans
During the second quarter of 2002 the Company received unsecured loans
from three individuals, including $27,500 from the Company's Chairman
of the Board, totaling $129,500. The loans bear interest at seven per
cent per year and are payable on demand. Subsequent to the end of the
second quarter of 2002, an additional $7,400 demand loan was received
from the Company's Chairman of the Board. The loans were used to
finance the Company's working capital requirements.
Note 4. Common Stock
During January 2002, the Company sold 2,316,667 shares of its common
stock to investors, including affiliates of the Company, for $139,000.
In May 2002, the Company sold 1,200,000 shares of its common stock to
non-affiliated investors for $72,000. One of the individuals who
invested in May 2002 was later appointed to the Company's Board of
Directors in late May 2002.
Note 5. Going Concern
Since its inception, the Company has incurred significant losses and,
as of June 30, 2002, had accumulated losses of $12,018,500. For the
year ended December 31, 2001 and the six-month period ended June 30,
2002, the Company's net losses were $828,600 and $472,100,
respectively. The Company had negative working capital of $752,000 at
June 30, 2002. 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 gross profits to achieve
and sustain profitability and positive cash flow in the future.
6
The Company has been able to continue in operation during the second
quarter of 2002 and the early part of the third quarter of 2002 through
the proceeds from the sales in May 2002 of a total of 1,200,000 shares
of the Company's common stock for $72,000 and its receipt of demand
loans of $129,500 received in the second quarter of 2002 and a further
$7,400 received in July and August 2002. Management of the Company
believes that, to survive, it must obtain additional capital in the
very near term to reduce the average age of its accounts payable and
improve vendor relations, to fund continuing operating deficits, to
fund investments needed to increase its operating revenues to levels
that will sustain its operations, to pursue arbitration of its dispute
with Euro and to continue to maintain its patents covering its
technologies. While the Company is actively seeking additional capital
investment, there can be no assurances that the Company will be
successful in obtaining sufficient additional capital, or if it does,
that the additional capital will enable the Company to improve its
business so as to have a material positive effect on the Company's
operations and cash flow. The Company believes that without substantial
investment in the very near term, it will be forced to cease operations
during the third quarter of 2002. It is uncertain whether the Company's
assets will retain any value if the Company ceases operations. There
are no assurances that the Company will be able to secure additional
capital before it is forced to cease operations.
7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Forward-Looking Information
The following Management's Discussion and Analysis of Results of Operations
and Financial Condition should be read in conjunction with our audited Financial
Statements and Notes thereto for the year ended December 31, 2001 included in
the Company's Annual Report on Form 10-KSB filed with the Securities and
Exchange Commission.
The information in this discussion contains forward-looking statements
within the meaning of the Private Securities Litigation Reform Act of 1995.
Forward-looking statements involve known and unknown risks, uncertainties and
other factors, which may cause our actual results, performance or achievements
or industry results to be materially different from any future results,
performance or achievements expressed or implied by these forward-looking
statements. Such factors include those described in "Uncertainties That May
Affect the Company, its Operating Results and Stock Price." The forward-looking
statements included in this report may prove to be inaccurate. In light of the
significant uncertainties inherent in these forward-looking statements, you
should not consider this information to be a guarantee by us or any other person
that our objectives and plans will be achieved. 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.
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 sale of products and supplies incorporating the Company's
technologies, such as inks and 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 relatively 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.
8
Revenues for the second quarter of 2002 were $176,800 compared to $184,100
in the second quarter of 2001, a 4% decline. Licenses, royalties and fees
declined by $10,600, or 9%, to $103,900 in the second quarter of 2002 from
$114,500 in the second quarter of 2001. The reduction in licenses, royalties and
fees is due primarily to the termination during the second quarter of 2002 of a
license arrangement with the Company's largest customer offset in part by
license and royalty revenues received from two licensees. Product sales were
$72,900 in the second quarter of 2002 compared to $69,600 in the second quarter
of 2001, a 5% increase due primarily to higher sales of the Company security
inks. For the first six months of 2002, revenues were $378,700, 6% higher than
revenues of $358,300 in the first six months of 2002. Licenses, royalties and
fees of $238,400 in the first half of 2002 approximated the $238,300 in the
first half of 2001 as license fees and royalties from new licensees offset those
lost from terminated or discontinued license arrangements. Product sales were
$140,300 in the first half of 2002 compared to $120,000 in the first half of
2001. The increase in product sales reflects higher level of sales of the
Company's line of security papers and inks in the first half of 2002 compared to
the first half of 2001.
The Company's gross profit declined to $81,400 in the second quarter of
2002 or 46% of revenues from $107,200 or 58% of revenues in the second quarter
of 2001. Licenses, royalties and fees carry a substantially higher gross profit
than product sales, which generally consist of supplies or other manufactured
products which incorporate the Company's technologies or equipment used to
support the application of its technologies. These items (except for inks which
are manufactured by the Company) 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 in the
second quarter of 2002 compared to the second quarter of 2001 results
principally from (i) a decrease in revenues represented by licenses, royalties
and fees, (ii) higher costs of production of the ink products used by licensees
and (iii) higher expenditures for paper purchased by the Company for resale.
For the first six months of 2002, the gross profit was $185,000, or 49% of
revenues compared to $183,900, or 51% of revenues, in the first half of 2001.
The decline in the percentage of revenues represented by gross profit in the
first half of 2002 compared to the first half of 2001 resulted from a modest
increase in the percentage of overall revenues resulting from product sales..
Research and development expenses decreased to $63,300 in the second
quarter of 2002 from $72,600 in the second quarter of 2001. In the second
quarter of 2001 the Company incurred certain non-recurring costs in the
recruitment of an applications chemist hired during the quarter. For the first
six months of 2002, research and development expenses were $129,400 compared to
$127,300 in the first half of 2001.
9
Sales and marketing expenses were $70,800 in the second quarter of 2002
compared to $72,500 in the second quarter of 2001. For the first six months of
2002, sales and marketing expenses were $149,300 compared to $137,100 in the
first six months of 2001. The increase in 2002 reflects increased expenses
resulting from the hiring of a sales executive in the fourth quarter of 2001
offset during the second quarter by decreases in the fees paid to sales agents
and consultants in the second quarter and first half of 2001.
General and administrative expenses (exclusive of legal expense) decreased
to $51,500 and $161,200, respectively, in the second quarter and first half of
2002 from $103,600 and $243,400, in the second quarter and first half of 2001 as
the Company was forced to strictly limit its expenditures to conserve its cash
resources. The decline in both the second quarter and first half of 2002
compared to the second quarter and first half of 2001 relates to lower audit
fees, consulting fees costs involved in the acquisition of new patents and the
maintenance of existing patents in 2002 compared to 2001.
Legal expenses increased to $140,300 and $214,300, respectively, in the
second quarter and first half of 2002 from $122,800 and $184,300 in the second
quarter and first half of 2001. Significant legal expenses have been incurred
since early 2001 as a result of the arbitration proceedings and other litigation
in both the United States and France between the Company and Euro-Nocopi, S.A.,
its former European licensee. The increase in 2002 compared to 2001 results
primarily from higher arbitration related expenses as the arbitration
proceedings accelerate during the year. The arbitration currently is scheduled
to be heard by the arbitrators in late October 2002.
Other income (expense) includes interest income on funds invested and, in
2002, interest expense on the Demand Loans. The decline in interest income in
the second quarter and first half of 2002 compared to the second quarter and
first half of 2001 relates to lower levels of cash invested.
The net loss declined to $246,800 in the second quarter of 2002 from
$263,600 in the second quarter of 2001 and to $472,100 in the first half of 2002
from $505,900 in the first half of 2001. The decrease in the second quarter and
first half net loss in 2002 from the prior year period resulted primarily from
reductions in overhead expenses for both the second quarter and first half
offset in part by a lower gross margin in the second quarter of 2002 compared to
the second quarter of 2001.
Plan of Operation, Liquidity and Capital Resources
The Company's cash and cash equivalents increased to $6,300 at June 30,
2002 from $100 at December 31, 2001. During the first half of 2002, the Company
sold 3,516,667 shares of its common stock to investors, including affiliates of
the Company, for $211,000, received loans of $129,500 from three individuals,
including $27,500 from the Chairman of the Board of the Company, in exchange for
Demand Loans and used $334,300 to fund operations.
10
The loss of a number of customers during the past three years and the
termination of the license agreement with Euro-Nocopi, S.A. in 2000 have had a
material adverse effect on the Company's revenues and 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 receipt of funds from
stock sales and demand loans has permitted it to continue in operation through
the end of the second quarter of 2002 and to the current time. In addition, the
Company's increasing illiquidity has forced it to follow a policy of deferring
payment to its vendors, even where such deferral has not been agreed to by the
vendors. As a result, the Company's trade payables have increased to $371,100 at
June 30, 2002 from $237,400 at December 31, 2001. Accordingly, the Company is
currently in default of the payment terms extended by a significant number of
its suppliers, professional service providers and other vendors, some of which
have suspended providing products and services to the Company.
Subsequent to the end of the second quarter of 2002, the Company received
$7,400 in additional loans from the Company's Chairman of the Board to allow it
to meet certain obligations, including payroll. During the second quarter of
2002, as part of a review of its patent portfolio, the Company discontinued
patent protection on patents it holds in certain jurisdictions where it believed
that the benefits of patent protection were outweighed by continuing maintenance
costs (in view of the Company's extremely limited resources). It has been
advised that patent and trademark maintenance fees approximating $3,000 will be
due through September 2002. The Company has not yet made a decision on keeping
any or all of these patents in force.
Management of the Company believes that, to survive, it must obtain
additional capital in the very near term to reduce its substantial obligations
and to improve its relations with its vendors, to fund continuing operating
deficits and to fund investment needed to increase its operating revenues to
levels that will sustain its operations. The Company continues to actively seek
such capital investment; however, if the Company fails to significantly increase
its cash balances through further capital investment, for which it has no
commitments and only very limited prospects, it will be forced to cease
operations due to a lack of cash during the third quarter of 2002. There can be
no assurances that the Company will be able to secure additional capital
investment before it is forced to cease operations.
Uncertainties That May Affect the Company, its 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:
Inability to Continue in Operation Without Immediate New Capital Investment. The
Company had a negative working capital of $752,000 at June 30, 2002 and
experienced negative cash flow from operations of $334,300 in the six months
ended June 30, 2002 and $603,800 in the year ended December 31, 2001. The
Company currently has insufficient cash to conduct its business operations in
the ordinary course without substantial regard for the effect of a contemplated
activity or transaction on its liquidity. Cash received from the sale of common
stock and the issuance of demand loans have allowed the Company to continue in
operations to the current date but have not been sufficient to offset the
Company's ongoing cash deficits resulting in the continuing deterioration of the
Company's financial condition. Management does not believe the Company can
significantly improve its negative cash flow in the near future. If it does not
obtain substantial capital investment in the very near term, it will be forced
to cease operations due to a lack of cash during the third quarter of 2002. It
is uncertain whether the Company's assets will retain any value if the Company
ceases operations. There are no assurances that the Company will be able to
secure additional capital investment before it is forced to cease operations.
11
Continuing Euro-Nocopi Litigation. The Company is currently expending sums
representing a substantial portion of it revenues for professional fees and
costs relating to legal disputes between the Company and its former affiliate,
Euro-Nocopi, S.A. as described under the heading "Litigation" in the Company's
Annual Report on Form 10-KSB. Management believes that successful resolution of
the disputes between it and Euro-Nocopi is necessary for the Company to be able
to license its technologies to European users and that the ability to license
European users (including as part of worldwide license arrangements) is
necessary for the viability of its business. If Euro-Nocopi succeeds in
asserting its rights to a paid-up European license, it will be entitled to
license European end users of the Company's technologies with no payment of
license fees (by Euro-Nocopi or such users) to the Company, and the Company will
not be entitled to grant licenses or collect license fees from European users or
to grant worldwide licenses. The Company cannot continue to pay the costs of
this dispute unless it can obtain substantial new capital investment, of which
there can be no assurances, and the Company will not prevail in this dispute if
it cannot continue to pay such costs. Even if the Company is able to continue
its dispute with Euro-Nocopi through resolution, there can be no assurance that
the resolution will be a successful one for the Company.
Possible Inability to Develop New Business. Even if the Company is able to raise
cash through additional equity investment or otherwise, it must improve its
operating cash flow. Because the Company cannot further reduce its operating
expenses in the near term future, Management believes that any significant
improvement in the Company's cash flow must result from increases in its
revenues from traditional sources and from new revenue sources. The Company's
ability to develop new revenues may depend on the extent of both its marketing
activities and its research and development activities. While the Company has,
with its limited resources, in the past year modestly expanded its sales
activities, resulting in two new license agreements, the renewal of others and
initiated a dealer sales program to market its security papers, Management
believes that substantial additional investment in its sales and marketing
efforts will be required to generate revenue increases. There are no assurances
that the resources the Company can devote to marketing and to research and
development will be sufficient or that the Company, even with additional
investment, will attract sufficient new business to increase the Company's
revenues to levels resulting in positive cash flow.
12
Inability to Obtain Raw Materials and Products for Resale. The Company's adverse
financial condition has required it to significantly defer payments due vendors
who supply raw materials and other components of the Company's security inks,
security paper that the Company purchases for resale and professional and other
services. As a result, the Company is on credit hold with certain of its
suppliers and is required to pay cash in advance of shipment to others. Delays
in shipments to customers caused by the Company's inability to obtain materials
on a timely basis and the possibility that certain current vendors may
permanently discontinue to supply the Company with needed products could impact
the Company's ability to service its customers and adversely affect its customer
and licensee relationships. Management of the Company believes that, without
significant capital investment in the very near term, the Company will not be
able to maintain acceptable relationships with its vendors and professional
service providers. There are no assurances that the Company will be able to
secure sufficient capital investment to maintain its vendor accounts on
satisfactory terms.
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 of the Company's technologies,
the potential for customer delay or deferral of utilizing 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 licensed products, modifications of customer budgets, and uneven
patterns of royalty revenue and product orders. Because the Company's revenue
base is not substantial, such delays from one or a small group of customers can
have a material adverse effect on the Company's quarterly and annual revenues
and, as the Company's operating expenses are substantially fixed, on quarterly
and annual operating results.
Volatility of Stock Price. The market price for the Company's common stock has
historically experienced significant fluctuations. 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, and securities analysts and traders do not extensively follow it.
These factors may result in the company continuing to experience significant
fluctuations in the price of its stock which are not necessarily related to its
operating performance.
13
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. In
addition, the Company's ability to enforce its intellectual property rights
through appropriate legal action has been and will continue to be limited by the
Company's adverse liquidity. 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
that infringe on the Company's rights. The Company's adverse liquidity situation
has also impacted its ability to obtain patent protection on its intellectual
property and to maintain protection on previously issued patents. There can be
no assurances that the Company will be able to continue to prosecute new patents
and maintain issued patents. As a result, the Company's customer and licensee
relationships could be adversely affected and the value of the Company's
technologies and intellectual property (including their value upon a liquidation
of the Company) could be substantially diminished.
14
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Not Applicable
Item 2. Changes in Securities
During May 2002, Registrant sold an aggregate of 1,200,000 shares of
its Common Stock, par value $.01 per share, to six individual investors
(who were acquainted with members of Registrant's Board of Directors)
for $72,000, or $.06 per share, in private transactions exempt from
registration pursuant to Section 4(2) of the Securities Act. No
underwriters were involved in the transactions or received any
commissions or other compensation. Proceeds of the sales were used to
fund working capital requirements.
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) Exhibits
99.1. Certificate of Chief Executive Officer and Chief Financial
Officer Pursuant to 18 U.S.C. Section 1350, As Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
15
(b) Reports on Form 8-K
The Registrant filed the following Current Reports on Forms 8-K
and 8-K/A during the quarter ended June 30, 2002.
April 3, 2002 - Changes in Registrant's Certifying Accountant
April 18, 2002 - Press Release dated April 18, 2002
June 17, 2002 - Press Release dated June 17, 2002
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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 19, 2002 /s/ Michael A Feinstein, M.D.
-----------------------------
Michael A Feinstein, M.D.
Chairman of the Board
DATE: August 19, 2002 /s/ Rudolph A. Lutterschmidt
----------------------------
Rudolph A. Lutterschmidt
Vice President & Chief Financial Officer
17