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
EXCHANGE ACT OF 1934.
For the quarterly period ended September 30, 2004
[ ] TRANSITION REPORT PURSUANT TO SECTION 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)
9C Portland Road, West Conshohocken, PA 19428
--------------------------------------------------------------------------------
(Address of principal executive offices)
(610) 834-9600
--------------------------------------------------------------------------------
(Issuer's telephone number)
Check whether the issuer has (1) 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 November 1, 2004: Common stock, par value $.01 per
share: 50,586,181 shares.
Transitional Small Business Disclosure Format (check one)
Yes _____ No __X__
NOCOPI TECHNOLOGIES, INC.
INDEX
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PAGE
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Statements of Operations for Three and Nine Months
Ended September 30, 2004 and September 30, 2003 1
Balance Sheet at September 30, 2004 2
Statements of Cash Flows for Nine Months Ended
September 30, 2004 and September 30, 2003 3
Notes to Financial Statements 4-7
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations 8-14
Item 3. Disclosure Controls and Procedures 14
PART II. OTHER INFORMATION
Item 2. Changes in Securities and use of Proceeds 15
Item 6. Exhibits and Reports on Form 8-K 15-16
SIGNATURES 17
EXHIBIT INDEX 18
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
NOCOPI TECHNOLOGIES, INC.
STATEMENTS OF OPERATIONS*
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
2004 2003 2004 2003
------------ ------------ ------------ ------------
(NOTE 3)
REVENUES
LICENSES, ROYALTIES AND FEES $ 101,800 $ 82,700 $ 274,700 $ 253,800
PRODUCT AND OTHER SALES 63,200 45,200 175,200 173,000
------------ ------------ ------------ ------------
165,000 127,900 449,900 426,800
COST OF SALES
LICENSES, ROYALTIES AND FEES 36,400 48,800 97,000 127,300
PRODUCT AND OTHER SALES 34,300 37,700 87,200 105,700
------------ ------------ ------------ ------------
70,700 86,500 184,200 233,000
------------ ------------ ------------ ------------
GROSS PROFIT 94,300 41,400 265,700 193,800
OPERATING EXPENSES
RESEARCH AND DEVELOPMENT 40,400 54,000 134,400 152,600
SALES AND MARKETING 25,300 30,700 108,300 148,800
GENERAL AND ADMINISTRATIVE (EXCLUSIVE OF
LEGAL EXPENSES) 52,100 49,000 212,600 193,100
LEGAL EXPENSES 31,700 18,000 94,000 66,800
------------ ------------ ------------ ------------
149,500 151,700 549,300 561,300
------------ ------------ ------------ ------------
LOSS FROM OPERATIONS (55,200) (110,300) (283,600) (367,500)
OTHER INCOME (EXPENSES)
INTEREST INCOME -- 200 -- 500
------------ ------------ ------------ ------------
INTEREST AND BANK CHARGES (3,200) (3,300) (9,900) (10,200)
NET PROCEEDS FROM ARBITRATION
SETTLEMENT -- 34,100 -- 909,400
------------ ------------ ------------ ------------
(3,200) 31,000 (9,900) 899,700
------------ ------------ ------------ ------------
NET EARNINGS (LOSS) ($ 58,400) ($ 79,300) ($ 293,500) $ 532,200
============ ============ ============ ============
BASIC AND DILUTED EARNINGS (LOSS)
PER COMMON SHARE
($ .00) ($ .00) ($ .01) $ .01
BASIC AND DILUTED WEIGHTED AVERAGE
COMMON SHARES OUTSTANDING 47,510,221 45,972,241 46,484,901 45,972,241
*SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
1
NOCOPI TECHNOLOGIES, INC.
BALANCE SHEET*
(UNAUDITED)
SEPTEMBER 30
2004
------------
ASSETS
CURRENT ASSETS
CASH AND CASH EQUIVALENTS $ 98,100
ACCOUNTS RECEIVABLE LESS $15,000 ALLOWANCE 81,500
ARBITRATION SETTLEMENT RECEIVABLE 50,000
PREPAID AND OTHER 23,700
------------
TOTAL CURRENT ASSETS 253,300
FIXED ASSETS
LEASEHOLD IMPROVEMENTS 71,200
FURNITURE, FIXTURES AND EQUIPMENT 476,200
------------
547,400
LESS: ACCUMULATED DEPRECIATION 490,400
------------
57,000
OTHER ASSETS
ARBITRATION SETTLEMENT RECEIVABLE 100,000
------------
TOTAL ASSETS $ 410,300
============
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
CURRENT LIABILITIES
ACCOUNTS PAYABLE $ 417,000
ACCRUED EXPENSES 264,600
DEFERRED REVENUE 39,000
------------
TOTAL CURRENT LIABILITIES 720,600
STOCKHOLDERS' DEFICIENCY
COMMON STOCK, $.01 PAR VALUE
AUTHORIZED - 75,000,000 SHARES
ISSUED AND OUTSTANDING - 50,586,181 SHARES 505,900
PAID-IN CAPITAL 11,489,400
ACCUMULATED DEFICIT (12,305,600)
------------
(310,300)
------------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIENCY $ 410,300
============
*SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
2
NOCOPI TECHNOLOGIES, INC.
STATEMENTS OF CASH FLOWS*
(UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30
2004 2003
--------- ---------
OPERATING ACTIVITIES
NET EARNINGS (LOSS) ($293,500) $ 532,200
ADJUSTMENTS TO RECONCILE NET EARNINGS
(LOSS) TO CASH FROM OPERATING ACTIVITIES
DEPRECIATION 15,300 9,900
COMPENSATION EXPENSE - STOCK OPTION GRANTS 67,000 --
--------- ---------
(211,200) 542,100
(INCREASE) DECREASE IN ASSETS
ACCOUNTS RECEIVABLE (41,700) (16,000)
ARBITRATION SETTLEMENT RECEIVABLE 50,000 (200,000)
PREPAID AND OTHER 16,500 (15,700)
INCREASE (DECREASE) IN LIABILITIES
ACCOUNTS PAYABLE AND ACCRUED EXPENSES 75,800 (258,800)
DEFERRED REVENUE (32,500) (25,400)
--------- ---------
68,100 (515,900)
--------- ---------
NET CASH PROVIDED BY (USED IN) OPERATING
ACTIVITIES (143,100) 26,200
INVESTING ACTIVITIES
ADDITIONS TO FIXED ASSETS (800) (67,400)
INVESTMENT IN AFFILIATE -- 110,600
--------- ---------
NET CASH PROVIDED BY (USED IN) INVESTMENT ACTIVITIES (800) 43,200
FINANCING ACTIVITIES
ISSUANCE OF COMMON STOCK, NET
152,100 --
DEMAND LOANS -- 4,500
DEMAND LOAN REPAYMENT -- (15,000)
--------- ---------
NET CASH PROVIDED BY (USED IN)
FINANCING ACTIVITIES 152,100 (10,500)
--------- ---------
INCREASE IN CASH AND CASH EQUIVALENTS 8,200 58,900
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 89,900 139,000
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 98,100 $ 197,900
========= =========
SUPPLEMENTAL DISCLOSURE OF NON CASH INVESTING AND FINANCING ACTIVITIES
CONVERSION OF DEMAND LOANS AND ACCRUED INTEREST TO COMMON STOCK
DEMAND LOANS (149,900)
ACCRUED INTEREST (25,500)
COMMON STOCK 17,500
PAID-IN CAPITAL 157,900
*SEE ACCOMPANYING 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 2003 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 2003 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 nine months ended September 30,
2004 may not be necessarily indicative of the operating results
expected for the full year.
NOTE 2. GOING CONCERN
Since its inception, the Company has incurred significant losses and,
as of September 30, 2004, had accumulated losses of $12,305,600. For
the years ended December 31, 2003 and 2002, the Company's losses from
operations were $441,300 and $915,200, respectively. In addition, the
Company had negative working capital of $467,300 at September 30, 2004.
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.
During 2004, the Company raised $161,000 ($152,100 net of offering
expenses) in a private placement whereby 1,610,000 shares of the
Company's common stock were sold to three non-affiliated individual
investors pursuant to a valid private placement. These investments,
combined with the receipt of $900,000 in June 2003 in conjunction with
the settlement of its arbitration proceedings with Euro-Nocopi, S.A.
have permitted the Company to continue in operation to the current
date. As a result of the settlement, the significant legal fees
incurred in the arbitration have been eliminated. Additionally, the
Company has reduced staff and, in 2003, completed its relocation to a
new facility that it believes will enable the Company to further reduce
its operating expenses. Management of the Company believes that it will
need to obtain additional capital in the immediate future both to fund
investments needed to increase its operating revenues to levels that
will sustain its operations and to fund operating deficits that it
anticipates will continue until revenue increases can be realized. The
Company believes that without additional capital, whether in the form
of debt, equity or both, it may be forced to cease operations at an
undetermined future date.
4
NOTE 3. SETTLEMENT OF ARBITRATION WITH AFFILIATE
In June 2003, the Company settled its arbitration proceeding commenced
by Euro-Nocopi, S.A. (Euro). Under the terms of the settlement, Euro
paid $900,000 to Nocopi and will pay an additional $200,000 in the
future for back royalties and all other matters in dispute between the
two companies, as well as the termination of Nocopi's 18% ownership of
Euro. As part of the Settlement, the Company and Euro entered into an
amended and restated license pursuant to which the Company has agreed
that Euro may continue to market the Company's technologies in Europe.
The $200,000 will be paid in four equal annual installments commencing
in March 2004. The Company recorded a net gain of $34,100 and $909,400,
respectively, in the third quarter and first nine months of 2003
representing the proceeds of the settlement net of the Company's
$110,600 investment in Euro and legal expenses incurred during the 2003
related to the arbitration. During the third quarter of 2003 the
Company received a $36,900 refund of fees previously paid to the
arbitration panel as a result of the termination of the arbitration
proceedings.
For the first quarter of 2003 arbitration related legal expense of
$57,400 was reclassified from legal expenses to net proceeds from
arbitration settlement.
NOTE 4. DEMAND LOANS AND STOCKHOLDERS' DEFICIENCY
During the third quarter of 2004, the Company sold 1,610,000 shares of
its common stock to three non-affiliated individual investors for
$161,000 ($152,100 net of offering expenses) pursuant to a valid
private placement.
In September 2004, Nocopi Technologies, Inc. entered into an Agreement
of Terms with Entrevest I Associates pursuant to which, as
consideration for the release of certain stock option rights to
purchase up to 40,000,000 shares of the Company's common stock and the
release of the right to designate a member to the board of directors,
the Company agreed to issue 1,250,000 shares of restricted common stock
in the Company to Entrevest pursuant to a valid private placement,
which were valued at par. Prior to the transaction, Entrevest I
Associates owned 3,333,333 shares of common stock of the Company. Also,
as part of the Agreement, Michael Solomon has resigned from the Board
of Directors.
In September 2004, the Company entered into a Conversion Agreement with
three individuals whereby Demand Loans in the aggregate principal
amount of $149,900 together with $25,500 of accrued interest on the
Demand Loans were converted into shares of restricted common stock of
the Company. As a result, an aggregate of 1,753,940 shares of
restricted common stock were issued including 449,080 shares to Michael
A. Feinstein, M.D., the Company's Chairman of the Board.
NOTE 5. INCOME TAXES
There is no provision for income taxes for the three months and nine
months ended September 30, 2004 since Management has determined that
the realization of the net deferred tax asset is not assured and has
created a valuation allowance for the entire amount of such benefits.
5
NOTE 6. STOCK OPTIONS
On April 30, 2004, the company granted options to two consultants to
purchase a total of 300,000 shares of its common stock at an exercise
price of $0.17 per share, vesting after one year, and expiring in five
years. In accordance with the fair value method as described in
accounting requirements of SFAS No. 123, the Company recognized
consulting expense of $28,000 during the nine months ended September
30, 2004.
On April 30, 2004, the Company granted options to four directors to
purchase 50,000 shares each of its common stock at an exercise price of
$0.17 per share, vesting immediately, and expiring in five years. In
accordance with the fair value method as described in accounting
requirements of SFAS No. 123, the Company recognized consulting expense
of $18,000 during the nine months ended September 30, 2004.
On April 30, 2004, the Company granted options to three directors to
purchase 100,000 shares each of its common stock at an exercise price
of $0.17 per share, vesting on January 1, 2005, and expiring in five
years from vesting date. The options are contingent on the directors
attending a certain percentage of Board of Directors meetings during
2004. In accordance with the fair value method as described in
accounting requirements of SFAS No. 123, the options were valued at
$38,000. The Company is recognizing this expense prorata on a quarterly
basis. The Company recognized expense of $9,000 and $21,000 for the
three months and nine months ended September 30, 2004.
On April 30, 2004, the Company granted options to two officers to
purchase a total of 250,000 shares of its common stock at an exercise
price of $0.17 per share, which was the market price on grant date,
expiring in five years and vesting at various dates through April 30,
2005.
6
The Company applies Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees," and related interpretations
in accounting for the issuance of its stock options. Accordingly, no
compensation cost has been recognized for its stock options issued
during the nine months ended September 30, 2004. Had compensation cost
for the Company's issuance of vested stock options been determined
based on the fair value at grant dates for options consistent with the
method of SFAS No. 123, the Company's net loss would have been
increased to the pro forma amounts indicated below. The net loss per
share would not change. Fair value amounts were estimated using the
Black-Scholes model with the following assumptions: no dividend yield,
expected volatility of 60%, and a risk-free interest rate of 4% for the
three and nine months ended September 30, 2004. There were no options
issued for the nine months ended September 30, 2003.
Three Months Ended Nine Months Ended
September 30, 2004 September 30, 2004
------------------ ------------------
Net loss As reported ($58,400)
($293,500)
Pro forma ($58,400) ($316,500)
Net loss per share As reported ($.00) ($0.01)
Pro forma ($.00) ($0.01)
7
ITEM 2.
NOCOPI TECHNOLOGIES, INC.
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,
2003 included in our 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 direct sale of products incorporating the Company's
technologies, such as inks, security paper 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 fees 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.
8
Revenues for the third quarter of 2004 were $165,000 compared to
$127,900 in the third quarter of 2003, a 29% increase. Licenses, royalties and
fees increased by $19,100, or 23%, to $101,800 in the third quarter of 2004 from
$82,700 in the third quarter of 2003. The increase in licenses, royalties and
fees is due primarily to the inception during the first nine months of 2004 of
license arrangements with two customers offset in part by the termination of one
license agreement during the fourth quarter of 2003. Product and other sales
were $63,200 in the third quarter of 2004 compared to $45,200 in the third
quarter of 2003, a 40% increase due to higher sales of the Company's security
inks offset in part by lower sales of its security papers. The relocation to a
new facility in the third quarter of 2003 impacted its ink production
capabilities during that period. For the first nine months of 2004, revenues
were $449,900, 5% higher than revenues of $426,800 in the first nine months of
2003. Licenses, royalties and fees of $274,700 in the first nine months of 2004
increased by $20,900, or 8%, from $253,800 in the first nine months of 2003 as
license fees and royalties from new licensees offset those lost from terminated
or discontinued license arrangements. Product and other sales of $175,200 in the
first nine months of 2004 approximated the $173,000 recorded in the first nine
months of 2003.
The Company's gross profit increased to $94,300 in the third quarter of
2004 or 57% of revenues from $41,400 or 32% of revenues in the third quarter of
2003. Licenses, royalties and fees have historically carried 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 higher
gross profit in the third quarter of 2004 compared to the third quarter of 2003
results principally from an increase in revenues represented by licenses,
royalties and fees as well as lower costs of production of the ink products used
by licensees and paper purchased for resale. Additionally, the Company
experienced lower rent and occupancy costs resulting from the move of the
facility in the second half of 2003.
For the first nine months of 2004, the gross profit was $265,700, or
59% of revenues compared to $193,800, or 45% of revenues, in the first nine
months of 2003. The increase in the gross profit in both absolute dollars and
percentage of revenues in the first nine months of 2004 compared to the first
nine months of 2003 resulted from the same factors as those described above with
respect to the third quarter results.
Research and development expenses decreased to $40,400 in the third
quarter of 2004 from $54,000 in the third quarter of 2003. For the first nine
months of 2004, research and development expenses were $134,400 compared to
$152,600 in the first nine months of 2003. The decrease in both the third
quarter and first nine months of 2004 relates primarily to lower rent, occupancy
and employee benefit expenses in 2004 compared to 2003.
9
Sales and marketing expenses were $25,300 in the third quarter of 2004
compared to $30,700 in the third quarter of 2003. For the first nine months of
2004, sales and marketing expenses were $108,300 compared to $148,800 in the
first nine months of 2003. The decrease in the third quarter of 2004 compared to
the third quarter of 2003 results primarily from lower rent and occupancy
expenses. The lower selling expenses in the first nine months of 2004 compared
to the first nine months of 2003 relate primarily to the departure of a sales
executive late in the first quarter of 2003 and lower consulting fees as well as
lower rent and occupancy costs in the first nine months of 2004 compared to the
first nine months of 2003 offset in part by marketing costs associated with the
introduction of the Company's new Rub-n-Color product for the Educational and
Toy Market
General and administrative expenses (exclusive of legal expenses)
increased modestly to $52,100 in the third quarter of 2004 from $49,000 in the
third quarter of 2003. For the first nine months of 2004, general and
administrative expenses increased to $212,600 from $193,100 in the first nine
months of 2003. The increase for the first nine months of 2004 compared to the
first nine months of 2003 is due primarily to $67,000 in expenses recorded in
connection with the issuance to members of the Company's Board of Directors and
two consultants of options to purchase shares of the Company's common stock
during the second quarter of 2004 offset in part by lower rent, occupancy and
public relations costs.
Legal expenses increased to $31,700 and $94,000, respectively, in the
third quarter and first nine months of 2004 from $18,000 and $66,800 in the
third quarter and first nine months of 2003. The increases in legal expenses
relate to compliance with recently enacted securities legislation and
regulations and, in the third quarter of 2004, to legal fees incurred in
structuring agreements related to the conversion of the Company's Demand Loans
into common stock and the release of certain stock option rights. Legal fees for
the third quarter and first nine months of 2003 associated with the Euro-Nocopi,
S.A. arbitration proceedings that were settled in June 2003 were offset against
the settlement proceeds.
Other income (expense) includes interest income on funds invested and
interest expense on the Demand Loans. Net proceeds from arbitration settlement
includes the net gain of $909,400 in the first nine months of 2003 representing
the proceeds of the arbitration settlement with Euro-Nocopi, S.A., net of the
Company's $110,600 investment in Euro-Nocopi, S.A. and legal expenses incurred
during 2003 related to the arbitration. The net proceeds of the arbitration
settlement of $34,100 recognized in the third quarter of 2003 included a $36,900
refund of fees previously paid to the arbitration panel as a result of the
termination of the arbitration proceedings.
The net loss of $58,400 and $293,500, respectively, in the third
quarter and first nine months of 2004 compared to a net loss of $79,300 and net
earnings of $532,200 in the third quarter and first nine months of 2003 results
primarily from the settlement of the arbitration proceedings with Euro-Nocopi,
S.A. during the second quarter of 2003, the expense associated with the issuance
of stock options to Directors and consultants during 2004, lower rent and
occupancy costs due to the move to a new facility in 2003 and staff reductions
during 2003.
PLAN OF OPERATION, LIQUIDITY AND CAPITAL RESOURCES
The Company's cash and cash equivalents increased to $98,100 at
September 30, 2004 from $89,900 at December 31, 2003. During the first nine
months of 2004, the Company sold 1,610,000 shares of its common stock to three
non-affiliated individual investors for $161,000 ($152,100 net of offering
expenses) and used $143,900 to fund operations over the nine-month period.
10
The loss of a number of customers during the past three years and the
loss of periodic fees under the license agreement with Euro-Nocopi, S.A.
commencing 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
receipt of $152,100 of net proceeds from the sale of common stock of the Company
in 2004 and $900,000 in June 2003 in conjunction with the settlement of its
arbitration proceedings with Euro-Nocopi, S.A. have permitted the Company to
continue in operation to the current date. As a result of the settlement, the
significant legal fees incurred in the arbitration have been eliminated.
Additionally, the Company has reduced staff and, during the third quarter of
2003, completed its relocation to a new facility that it believes will enable
the Company to further reduce its operating expenses. Management of the Company
believes that it will need to obtain additional capital in the future both to
fund investments needed to increase its operating revenues to levels that will
sustain its operations and to fund operating deficits that it anticipates will
continue until revenue increases can be realized. 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 additional
investment, it may be forced to cease operations at an undetermined future date.
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:
Possible Inability to Continue in Operation Without New Capital
Investment. The Company had a negative working capital of $467,300 at September
30, 2004 and experienced negative cash flow from operations of $143,100 in the
nine months ended September 30, 2004. Additionally, it experienced negative cash
flow from operations of $78,800 (including $900,000 received in settlement of
its arbitration proceedings with Euro-Nocopi, S.A.) in the year ended December
31, 2003. Management of the Company believes that while certain staff reductions
initiated in 2003 and the move of the Company's operations to a new facility,
which was completed during 2003, will reduce the Company's negative cash flow,
it anticipates that the negative cash flow will continue until it can achieve
revenue increases. Management believes that it will need to obtain additional
capital in the future both to fund investments needed to increase its operating
revenues to levels that will sustain its operations and to fund operating
deficits that it anticipates will continue until revenue increases can be
realized. 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 additional capital, in the form of debt, equity or both, it may be
forced to cease operations at an undetermined future date. 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 equity investment before it may be forced to cease operations.
Possible Inability to Develop New Business. Even if the Company is able
to raise cash through additional capital or otherwise, it must quickly improve
its operating cash flow. Because the Company has already significantly reduced
its operating expenses, 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. There are no assurances that the
resources the Company can devote to marketing and to research and development,
even with additional capital, will be sufficient to increase the Company's
revenues to levels resulting in positive cash flow.
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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 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 believes that further reductions in the fixed
component of the Company's operating expenses may not be achievable, 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, few securities analysts and traders follow
it and it is thinly traded. 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.
12
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. The Company has paid approximately $7,000 in patent maintenance fees
that are due during 2004 as advised by its patent counsel. 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.
OFF-BALANCE SHEET ARRANGEMENTS
The Company does not have any off-balance sheet arrangements.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In December 2002, the FASB issued Statement of Financial Accounting
Standard No. 148 ("SFAS 148), Accounting for Stock-Based Compensation -
Transition and Disclosure. SFAS 148 provides alternative methods of transition
for voluntary change to the fair value based method of accounting for
stock-based employee compensation. SFAS 148 also requires prominent disclosure
in the "Summary of Significant Accounting Policies" of both annual and interim
financial statements about the method used on reported results. The Company has
adopted the disclosure requirements of SFAS 148 for the 2003 fiscal year.
Adoption of this statement has affected the location of the Company's disclosure
in the consolidated financial statements, but will not impact the Company's
results of operation or financial position unless the Company changes to the
fair value method of accounting for stock-based employee compensation.
On April 22, 2003, the FASB announced its decision to require all
companies to expense the fair value of employee stock options. Companies will be
required to measure the cost according to the fair value of the options.
Although the new guidelines have not yet been released, it is expected that they
will be finalized soon and be effective in 2004. When final rules are announced,
the Company will assess the impact to its financial statements.
The following recently issued accounting pronouncements are currently
not applicable to the Company.
In January 2003, subsequently revised December 2003, the FASB issued
FASB Interpretation No. 46 ("FIN 46"), Consolidation of Variable Interest
Entities - An Interpretation of AARB No. 51. FIN 46 requires that if any entity
has a controlling financial interest in a variable interest entity, the assets,
liabilities and results of activities of the variable interest entity should be
included in the consolidated financial statements of the entity. FIN 46
provisions are effective for all arrangements entered into after January 31,
2003. FIN 46 provisions are required to be adopted for the first period ending
after December 15, 2004 for a small business issuer.
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In May 2003, the FASB issued Statement of Financial Accounting Standard
No. 150 ("SFAS 150"), Accounting for Certain Financial Instruments With
Characteristics of Both Liabilities and Equity. SFAS 150 clarifies the
accounting for certain financial instruments with characteristics of both
liabilities and equity and requires those instruments be classified as
liabilities on the balance sheet. Previously, many of those financial statements
were classified as equity. SFAS 150 is effective for financial instruments
entered into or modified after May 31, 2003 and otherwise is effective at the
beginning of the first interim period beginning after June 15, 2003.
ITEM 3. DISCLOSURE CONTROLS AND PROCEDURES
The Company has carried out an evaluation, under the supervision and
with the participation of the Company's management, including the Company's
Chief Executive Officer and Chief Financial Officer, of the effectiveness of the
Company's disclosure controls and procedures pursuant to Exchange Act Rule
13a-15. Based upon that evaluation, the Company's Chief Executive Officer and
Chief Financial Officer concluded that the Company's disclosure controls and
procedures are effective in timely alerting them to material information
relating to the Company that is required to be included in the Company's
periodic filings with the Securities and Exchange Commission. There have been no
significant changes in the Company's internal controls over financial reporting
or, to the Company's knowledge, in other factors that could significantly affect
those internal controls subsequent to the date the Company carried out its
evaluation.
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PART II - OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES
During September 2004, Registrant sold an aggregate of 1,610,000 shares
of its Common Stock, par value $.01 per share, to three individual investors
(who were acquainted with members of Registrant's Board of Directors) for
$161,000, or $.10 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.
In September 2004, Nocopi Technologies, Inc. entered into an Agreement
of Terms with Entrevest I Associates pursuant to which, as consideration for the
release of certain stock option rights to purchase up to 40,000,000 shares of
the Company's common stock and the release of the right to designate a member to
the board of directors, the Company agreed to issue 1,250,000 shares of
restricted common stock in the Company, par value $.01 per share, to Entrevest
pursuant to a valid private placement. Prior to the transaction, Entrevest I
Associates owned 3,333,333 shares of common stock of the Company. Also, as part
of the Agreement, Michael Solomon has resigned from the Board of Directors. As a
result of this transaction, the potential issuance of 40,000,000 common shares
and the resultant dilution have been eliminated. No underwriters were involved
in the transactions or received any commissions or other compensation.
In September 2004, the Company entered into a Conversion Agreement with
three individuals whereby Demand Loans in the aggregate principal amount of
$149,900 together with $25,500 of accrued interest on the Demand Loans were
converted into shares of restricted common stock of the Company. As a result, an
aggregate of 1,753,940 shares of restricted common stock, par value $.01 per
share, were issued including 449,080 shares to Michael A. Feinstein, M.D., the
Company's Chairman of the Board. The conversion eliminated $175,400 of
short-term obligations.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.1 Agreement of Terms with Entrevest I Associates, filed as Exhibit
99.1 to the Report on Form 8-K filed with the SEC on September 16,
2004, and incorporated herein by reference.
10.2 Conversion Agreement
31.1 Certificate of Chief Executive Officer required by Rule 13a-14(a).
31.2 Certificate of Chief Financial Officer required by Rule 13a-14(a).
32.1 Certificate of Chief Executive Officer and Chief Financial Officer
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
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(b) The Registrant filed the following Current Reports on Form 8-K during the
quarter ended September 30, 2004:
July 15, 2004 - Press Release dated July 15, 2004
regarding Industry Awards received.
September 16, 2004 - Entry into a Material Definitive
Agreement with Entrevest I Associates.
September 21, 2004 - Press Release dated September 21, 2004
regarding the Agreement of Terms with
Entrevest I Associates.
September 30, 2004 - Departure of Directors or Principal
Officers; Election of Directors;
Appointment of Principal Officers.
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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: November 15, 2004 /s/ Michael A. Feinstein, M.D.
-----------------------------------------------
Michael A Feinstein, M.D.
Chairman of the Board & Chief Executive Officer
DATE: November 15, 2004 /s/ Rudolph A. Lutterschmidt
-----------------------------------------------
Rudolph A. Lutterschmidt
Vice President & Chief Financial Officer
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EXHIBIT INDEX
10.2 Conversion Agreement
31.1 Certificate of Chief Executive Officer required by Rule 13a-14(a).
31.2 Certificate of Chief Financial Officer required by Rule 13a-14(a).
32.1 Certificate of Chief Executive Officer and Chief Financial Officer
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002