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 September 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 November 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 Nine Months Ended
September 30, 2002 and September 30, 2001
Balance Sheet 2
September 30, 2002
Statements of Cash Flows 3
Nine Months Ended September 30, 2002
and September 30, 2001
Notes to Financial Statements 4-6
Item 2. Management's Discussion and Analysis 7-14
of Financial Condition and Results of Operations
Part II. OTHER INFORMATION 15
Signatures 16
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
2002 2001 2002 2001
--------- --------- --------- ---------
Revenues
Licenses, royalties and fees $ 95,300 $132,200 $333,700 $370,500
Product and other sales 107,200 84,200 247,500 204,200
--------- --------- --------- ---------
202,500 216,400 581,200 574,700
Cost of sales
Licenses, royalties and fees 46,000 58,100 145,900 174,100
Product and other sales 51,700 49,000 145,500 107,400
--------- --------- --------- ---------
97,700 107,100 291,400 281,500
--------- --------- --------- ---------
Gross profit 104,800 109,300 289,800 293,200
Operating expenses
Research and development 63,000 64,100 192,400 191,400
Sales and marketing 62,600 44,100 211,900 181,200
General and administrative (exclusive of
legal expenses) 57,800 93,800 219,000 337,200
Legal expenses 102,900 114,000 317,200 298,300
--------- --------- --------- ---------
286,300 316,000 940,500 1,008,100
--------- --------- --------- ---------
Loss from operations (181,500) (206,700) (650,700) (714,900)
Other income (expenses)
Interest income - 200 100 3,300
Interest and bank charges (3,100) (400) (6,100) (1,200)
--------- --------- --------- ---------
(3,100) (200) 6,000 2,100
--------- --------- --------- ---------
Net loss ($184,600) ($206,900) ($656,700) ($712,800)
========= ========= ========= =========
Basic and diluted loss per
common share ($.00) ($.01) ($.02) ($.02)
Weighted average common
shares outstanding 42,638,908 38,188,907 42,105,575 37,015,426
See accompanying notes to financial statements.
1
Nocopi Technologies, Inc.
Balance Sheet
(unaudited)
September 30
2002
------------
Assets
Current assets
Cash and cash equivalents $57,300
Accounts receivable, less allowance 55,200
Prepaid and other 24,200
------------
Total current assets 136,700
Fixed assets
Leasehold improvements 39,500
Furniture, fixtures and equipment 476,200
------------
515,700
Less: accumulated depreciation 496,500
------------
19,200
Other assets
Investment in and advances to unconsolidated affiliate, at cost 110,600
------------
Total assets $266,500
============
Liabilities and Stockholders' Deficiency
Current liabilities
Demand loans $ 160,400
Accounts payable 522,900
Accrued expenses 284,800
Deferred revenue 100,700
------------
Total current liabilities 1,068,800
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 (12,203,100)
------------
(802,300)
------------
Total liabilities and stockholders' deficiency $266,500
============
See accompanying notes to financial statements.
2
Nocopi Technologies, Inc.
Statements of Cash Flows
(unaudited)
Nine Months ended September 30
2002 2001
-------- ---------
Operating Activities
Net loss ($656,700) ($712,800)
Adjustments to reconcile net loss to
cash from operating activities
Depreciation 13,500 27,000
Allowance for doubtful accounts, net - 1,700
-------- ---------
(643,200) (684,100)
(Increase) decrease in assets
Accounts receivable (15,600) (8,600)
Prepaid and other (1,500) 8,500
Increase (decrease) in liabilities
Accounts payable and accrued expenses 308,400 148,500
Deferred revenue 37,700 22,700
-------- ---------
329,000 171,100
-------- ---------
Net cash (used in) operating activities (314,200) (513,000)
Financing Activities
Issuance of common stock, net 211,000 361,000
Demand loans 160,400 -
-------- ---------
Net cash provided by financing activities 371,400 361,000
-------- ---------
Increase (decrease) in cash and cash equivalents 57,200 (152,000)
Cash and cash equivalents at beginning of year 100 186,900
-------- ---------
Cash and cash equivalents at end of period $ 57,300 $ 34,900
======== =========
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 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 those 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 nine months ended September 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,
previously scheduled to be heard by the arbitrators late October 2002,
has been postponed to December 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 first nine months of 2002 the Company received unsecured
loans from three individuals, including $48,400 from the Company's
Chairman of the Board, totaling $160,400. The loans bear interest at
seven per cent per year and are payable on demand. 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.
In mid-November, 2002, the Company entered into a subscription
agreement with a partnership composed of Michael Solomon, a director of
the Company, and three other persons pursuant to which the partnership
agreed to acquire, in return for a subscription payment of $200,000, a
total of 3,333,333 shares of the Company's common stock, together with
warrants to purchase an additional 40,000,000 shares of common stock in
the aggregate at exercise prices ranging from $0.10 to $0.25 per share,
during various periods through year-end 2003 through year-end 2006,
subject to partial rollover and extension. The warrants are subject to
the negotiation and agreement of the Company and the investors on the
definitive terms thereof and also to the approval by the Company's
common stockholders of an amendment to the Company's charter to
increase its authorized capital to a number of shares sufficient to
permit exercise of the warrants. This transaction was approved by the
Company's board of directors with Mr. Solomon abstaining. The Company
expects to receive the partnership's $200,000 subscription payment
within approximately one week.
Note 5. Going Concern
Since its inception, the Company has incurred significant losses and,
as of September 30, 2002, had accumulated losses of $12,203,100. For
the year ended December 31, 2001 and the nine-month period ended
September 30, 2002, the Company's net losses were $828,600 and
$656,700, respectively. The Company had negative working capital of
$932,100 at September 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 third
quarter and the early part of the fourth quarter of 2002 through its
receipt of additional demand loans of $30,900, including $20,900 from
the Company's Chairman of the Board, in the third quarter and advance
license fee payments totaling $95,000 received during the third quarter
and the early part of the fourth quarter of 2002 from two licensees,
one of whom is an owner of the Company's common stock. The Company
expects to receive during the next week an investment of $200,000 from
a partnership including an individual who is a director of the Company
for common stock and stock purchase warrants as described in Note 4
above. 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 cash infusions in the very near term, it will
be forced to cease operations by early 2003. 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.
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, 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.
8
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.
Revenues for the third quarter of 2002 were $202,500 compared to $216,400
in the third quarter of 2001, a 6% decline. Licenses, royalties and fees
declined by $36,900, or 28%, to $95,300 in the third quarter of 2002 from
$132,200 in the third quarter of 2001. The reduction in licenses, royalties and
fees is due primarily to the termination during the first nine months of 2002 of
license arrangements with three licensees, including Company's largest customer,
offset in part by license and royalty revenues received from two new licensees
acquired during 2002. Product sales were $107,200 in the third quarter of 2002
compared to $84,200 in the third quarter of 2001, a 27% increase due primarily
to higher sales of the Company security inks. For the first nine months of 2002,
revenues were $581,200, 1% higher than revenues of $574,700 in the first nine
months of 2001. Licenses, royalties and fees of $333,700 in the first nine
months of 2002 declined by $36,800, or 10%, from $370,500 in the first nine
months of 2001 as license fees and royalties from new licensees did not offset
those lost from terminated or discontinued license arrangements. Product sales
were $247,500 in the first nine months of 2002 compared to $204,200 in the first
nine months 2001, an increase of 21%. The increase in product sales reflects
higher level of sales of the Company's line of security papers and inks in the
first nine months of 2002 compared to the first nine months of 2001.
The Company's gross profit declined to $104,800 in the third quarter of
2002 or 52% of revenues from $109,300 or 51% of revenues in the third quarter of
2001. Licenses, royalties and fees have historically carried a 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 lower
gross profit than licenses, royalties and fees. However, the third quarter 2002
gross profit and gross profit percentage from licenses, royalties and fees was
negatively impacted by the decline in these revenues. The slightly lower gross
profit in absolute dollars in the third quarter of 2002 compared to the third
quarter of 2001 results principally from a decrease in revenues represented by
licenses, royalties and fees and higher expenditures for paper purchased by the
Company for resale offset in part by lower ink production costs.
For the first nine months of 2002, the gross profit was $289,800, or 50% of
revenues compared to $293,200, or 51% of revenues, in the first nine months of
2001. The modest decline in the percentage of revenues represented by gross
profit in the first nine months of 2002 compared to the first nine months of
2001 resulted from an increase in the percentage of overall revenues resulting
from product sales offset by the decline in the percentage of revenues from
licenses, royalties and fees.
9
Research and development expenses of $63,000 and $192,400 in the third
quarter and first nine months of 2002, respectively, approximated the $64,100
and $191,400 incurred in the comparable periods of 2001.
Sales and marketing expenses were $62,600 in the third quarter of 2002
compared to $44,100 in the third quarter of 2001. For the first nine months of
2002, sales and marketing expenses were $211,900 compared to $181,200 in the
first nine 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 in part by decreases in the fees paid to sales agents and consultants in
the third quarter and first nine months of 2001.
General and administrative expenses (exclusive of legal expenses) decreased
to $57,800 and $219,000, respectively, in the third quarter and first nine
months of 2002 from $93,800 and $337,200, in the third quarter and first nine
months of 2001 as the Company was forced to strictly limit its expenditures to
conserve its cash resources. The decline in both the third quarter and first
nine months of 2002 compared to the third quarter and first nine months of 2001
relates to lower audit fees, consulting fees and costs involved in the
acquisition of new patents and the maintenance of existing patents in 2002
compared to 2001.
.
Legal expenses were $102,900 and $317,200, respectively, in third quarter
and first nine months of 2002 compared to $114,000 and $298,300 in the third
quarter and first nine months 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 modestly lower fees in the
third quarter of 2002 compared to the third quarter of 2001 relates principally
to lower activity in the litigation activities in France during the third
quarter of 2002. The increase in the first nine months of 2002 compared to the
first nine months of 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 December
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 third quarter and first nine months of 2002 compared to the third quarter
and first nine months of 2001 relates to lower levels of cash invested.
The net loss declined to $184,600 in the third quarter of 2002 from
$206,900 in the third quarter of 2001 and to $656,700 in the first nine months
2002 from $712,800 in the first nine months of 2001. The decrease in the third
quarter and first nine months net loss in 2002 from the prior year period
resulted primarily from reductions in overhead expenses for both the third
quarter and first nine months of 2002.
10
Plan of Operation, Liquidity and Capital Resources
The Company's cash and cash equivalents increased to $57,300 at September
30, 2002 from $100 at December 31, 2001. During the first nine months 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 $160,400 from three
individuals, including $48,400 from the Chairman of the Board of the Company and
used $314,200 to fund operations.
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 third 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 $522,900 at
September 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.
During 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). Patent and trademark maintenance fees of $2,300 were paid during the
third quarter to keep expiring patents in force. It has been advised that no
patent and trademark maintenance fees are due during the fourth quarter of 2002.
The Company expects to receive during the next week an investment of
$200,000 from a partnership including an individual who a director of the
Company for common stock and stock purchase warrants as described in Note 4 to
the interim, unaudited financial statements included herein. 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 or otherwise, for which it has no commitments
and only very limited prospects, it will be forced to cease operations due to a
lack of cash by early 2003. There can be no assurances that the Company will be
able to secure additional capital investment before it is forced to cease
operations.
11
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 $932,100 at September 30, 2002 and
experienced negative cash flow from operations of $314,200 in the nine months
ended September 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
operation 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 a substantial cash infusion, (through capital investment or otherwise) in
the very near term, it will be forced to cease operations due to a lack of cash
by early 2003. 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.
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, during the current 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.
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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.
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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) 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.
(b) No Current Reports on Form 8-K have been filed by the
Registrant during the quarter ended September 30, 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: November 14, 2002 /s/ Michael A. Feinstein, M.D.
------------------------------
Michael A Feinstein, M.D.
Chairman of the Board
DATE: November 14, 2002 /s/ Rudolph A. Lutterschmidt
------------------------------
Rudolph A. Lutterschmidt
Vice President & Chief Financial Officer
16