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, 2005
[ ] 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
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NOCOPI TECHNOLOGIES, INC.
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(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
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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 (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, 2005: 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
PAGE
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Statements of Operations for Three and Nine Months
Ended September 30, 1
2005 and September 30, 2004
Balance Sheet at September 30, 2005 2
Statements of Cash Flows for Nine Months
Ended September 30, 2005 and 3
September 30, 2004
Notes to Financial Statements 4-7
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations 8-13
Item 3. Disclosure Controls and Procedures 14
PART II. OTHER INFORMATION 15
SIGNATURES 16
EXHIBIT INDEX 17
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
2005 2004 2005 2004
-------- -------- --------- ---------
REVENUES
LICENSES, ROYALTIES AND FEES $80,100 $101,800 $242,000 $274,700
PRODUCT AND OTHER SALES 58,700 63,200 154,500 175,200
-------- -------- --------- ---------
138,800 165,000 396,500 449,900
COST OF SALES
LICENSES, ROYALTIES AND FEES 26,500 36,400 82,400 97,000
PRODUCT AND OTHER SALES 26,600 34,300 73,000 87,200
-------- -------- --------- ---------
53,100 70,700 155,400 184,200
-------- -------- --------- ---------
GROSS PROFIT 85,700 94,300 241,100 265,700
OPERATING EXPENSES
RESEARCH AND DEVELOPMENT 35,600 40,400 110,200 134,400
SALES AND MARKETING 26,600 25,300 87,000 108,300
GENERAL AND ADMINISTRATIVE (EXCLUSIVE OF
LEGAL EXPENSES) 42,400 52,100 143,200 212,600
LEGAL EXPENSES 19,100 31,700 66,900 94,000
-------- -------- --------- ---------
123,700 149,500 407,300 549,300
-------- -------- --------- ---------
LOSS FROM OPERATIONS (38,000) (55,200) (166,200) (283,600)
OTHER INCOME (EXPENSES)
INTEREST INCOME - - 100 -
INTEREST AND BANK CHARGES (500) (3,200) (1,600) (9,900)
-------- -------- --------- ---------
(500) (3,200) (1,500) (9,900)
-------- -------- --------- ---------
NET LOSS ($38,500) ($58,400) ($167,700) ($293,500)
======== ======== ========= =========
BASIC AND DILUTED LOSS
PER COMMON SHARE ($.00) ($.00) ($.00) ($.01)
BASIC AND DILUTED WEIGHTED AVERAGE
COMMON SHARES OUTSTANDING 50,586,181 47,510,221 50,586,181 46,484,901
* THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
-1-
NOCOPI TECHNOLOGIES, INC.
BALANCE SHEET*
(UNAUDITED)
SEPTEMBER 30
2005
-----------
ASSETS
CURRENT ASSETS
CASH AND CASH EQUIVALENTS $ 3,700
ACCOUNTS RECEIVABLE LESS $15,000 ALLOWANCE 72,200
ARBITRATION SETTLEMENT RECEIVABLE 50,000
PREPAID AND OTHER 31,300
-----------
TOTAL CURRENT ASSETS 157,200
FIXED ASSETS
LEASEHOLD IMPROVEMENTS 71,200
FURNITURE, FIXTURES AND EQUIPMENT 476,200
-----------
547,400
LESS: ACCUMULATED DEPRECIATION 508,000
-----------
39,400
OTHER ASSETS
ARBITRATION SETTLEMENT RECEIVABLE 50,000
-----------
TOTAL ASSETS $246,600
===========
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
CURRENT LIABILITIES
ADVANCE FROM DIRECTOR $3,000
ACCOUNTS PAYABLE 440,200
ACCRUED EXPENSES 277,600
DEFERRED REVENUE 41,300
-----------
TOTAL CURRENT LIABILITIES 762,100
STOCKHOLDERS' DEFICIENCY
COMMON STOCK, $.01 PAR VALUE
AUTHORIZED - 75,000,000 SHARES
ISSUED AND OUTSTANDING - 50,586,181 SHARES 505,900
PAID-IN CAPITAL 11,497,400
ACCUMULATED DEFICIT (12,518,800)
-----------
(515,500)
-----------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIENCY $246,600
===========
* THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
-2-
NOCOPI TECHNOLOGIES, INC.
STATEMENTS OF CASH FLOWS*
(UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30
2005 2004
--------- ---------
OPERATING ACTIVITIES
NET LOSS ($167,700) ($293,500)
ADJUSTMENTS TO RECONCILE NET LOSS
TO CASH FROM OPERATING ACTIVITIES
DEPRECIATION 12,600 15,300
COMPENSATION EXPENSE - STOCK OPTION GRANTS - 67,000
--------- ---------
(155,100) (211,200)
(INCREASE) DECREASE IN ASSETS
ACCOUNTS RECEIVABLE 31,300 (41,700)
ARBITRATION SETTLEMENT RECEIVABLE 50,000 50,000
PREPAID AND OTHER (2,100) 16,500
INCREASE (DECREASE) IN LIABILITIES
ACCOUNTS PAYABLE AND ACCRUED EXPENSES 36,200 75,800
DEFERRED REVENUE 16,400 (32,500)
--------- ---------
131,800 68,100
--------- ---------
NET CASH USED IN OPERATING ACTIVITIES (23,300) (143,100)
INVESTING ACTIVITIES
ADDITIONS TO FIXED ASSETS - (800)
--------- ---------
NET CASH USED IN INVESTMENT ACTIVITIES - (800)
FINANCING ACTIVITIES
ISSUANCE OF COMMON STOCK, NET - 152,100
ADVANCE FROM DIRECTOR, NET 3,000 -
--------- ---------
NET CASH PROVIDED BY FINANCING ACTIVITIES 3,000 152,100
--------- ---------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (20,300) 8,200
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 24,000 89,900
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $3,700 $98,100
========= =========
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 17,600
PAID-IN CAPITAL 157,800
*THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE 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 2004 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 2004 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,
2005 may not be necessarily indicative of the operating results
expected for the full year.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In December 2004, the FASB revised SFAS 123, "Accounting for Stock-Based
Compensation" to require all companies to expense the fair value of
employee stock options. SFAS 123R is effective at the beginning of the next
fiscal year beginning after December 15, 2005 for a small business issuer.
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. 46R ("FIN 46R"), Consolidation of Variable
Interest Entities - An Interpretation of AARB N. 51. FIN 46R 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 46R provisions are effective
for all arrangements entered into after January 31, 2003. FIN 46R
provisions are required to be adopted for the first period ending after
December 15, 2004 for a small business issuer.
FAS 150, Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity, requires financial
instruments within its scope to be classified as liabilities (or assets
in some circumstances). The Statement is effective for financial
instruments entered into or modified after May 31, 2003, and otherwise
-4-
effective at the beginning of the first interim period beginning after
June 15, 2003, except for certain mandatorily redeemable financial
instruments. It is to be implemented by reporting the cumulative effect
of a change in an accounting principle for financial instruments
created before the issuance date of the Statement and still existing at
the beginning of the interim period of adoption. Restatement is not
permitted. The effective date of certain provisions of Statement 150
for certain mandatorily redeemable financial instruments has been
deferred by FSP FAS 150-3. Under the FSP, certain mandatorily
redeemable shares are subject to the provisions of Statement 150 for
the first fiscal period beginning after December 15, 2004. Other
mandatorily redeemable shares are deferred indefinitely but may be
subject to classification or disclosure provisions of the Statement.
NOTE 2. GOING CONCERN
Since its inception, the Company has incurred significant losses and,
as of September 30, 2005, had accumulated losses of $12,518,800. For
the years ended December 31, 2004 and 2003, the Company's losses from
operations were $328,500 and $441,300, respectively. In addition, the
Company had negative working capital of $604,900 at September 30, 2005.
At September 30, 2005, its cash balance was $3,700. As a result, the
Company is in need of immediate capital investment to allow it to
continue in operations. The Company will likely 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.
and annual payments of $50,000 in 2004 and 2005 in accordance with the
settlement agreement, have permitted the Company to continue in
operation to the current date. Two further installments of $50,000 each
related to the settlement agreement are due in March 2006 and March
2007. 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.
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,
whether in the form of debt, equity or both, it may be forced to cease
operations during the fourth quarter of 2005.
NOTE 3. ADVANCE FROM DIRECTOR
During the third quarter of 2005, the Company's Chairman of the Board
advanced $6,000 to the Company of which $3,000 was repaid.
-5-
NOTE 4. INCOME TAXES
There is no provision for income taxes for the three months and nine
months ended September 30, 2005 and September 30, 2004 since The
Company has determined that the realization of the net deferred tax
asset is not assured. The Company has created a valuation allowance for
the entire amount of such benefits.
NOTE 5. LOSS PER SHARE
Because the Company reported a net loss for the three and nine months
ended September 30, 2005 and September 30, 2004, common stock
equivalents, consisting of stock options, were anti-dilutive.
NOTE 6. STOCK OPTIONS
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.
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 was recognized for its stock options issued during
the six months ended June 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.
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)
-6-
During 2005, the Company granted 300,000 options to three directors,
including its Chairman of the Board, under its Directors Stock Option
Plan at $.10 per share vesting on January 1, 2006 and expiring in April
2010. In September 2005, the Company granted 100,000 options to a
recently appointed director at $.09 per share, vesting on January 1,
2006 and expiring in May 2010. The options for all Directors are
contingent upon the directors attending a certain percentage of board
of directors meetings in 2005. In accordance with the fair value method
as described in accounting requirements of SFAS No. 123, expense of
approximately $17,000 will be recognized when the contingency is met.
NOTE 7. MAJOR CUSTOMER INFORMATION
The Company's largest non-affiliate customers accounted for
approximately 69% and 70% of revenues in the third quarter and first
nine months of 2005, respectively, approximately 67% and 58% of
revenues in the third quarter and first nine months of 2004,
respectively and approximately 86% of accounts receivable at September
30, 2005. The Company performs ongoing credit evaluations of its
customers and generally does not require collateral. The Company also
maintains allowances for potential credit losses.
-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, 2004 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 "Risk Factors." 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, as
well as 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 and/or additional royalties which
typically vary with the licensee's sales or production of products incorporating
the licensed technology. Technical services, in the form of on-site or telephone
consultations by members of the Company's technical staff, may be offered to
licensees of the Company's technologies. The consulting fees are billed at
agreed upon per diem or hourly rates at the time the services are rendered.
Service fees and sales revenues vary directly with the number of units of
service or product provided.
The Company recognizes revenue on its lines of business as follows:
a) License fees and royalties are recognized when the license term
begins. Upon inception of the license term, revenue is recognized in a manner
consistent with the nature of the transaction and the earnings process, which
generally is ratably over the license term;
-8-
b) Product sales are recognized upon shipment of products, when the
price is fixed or determinable and collectibility is reasonably assured; and
c) Fees for technical services are recognized when (i) the service has
been rendered; (ii) an arrangement exists; (iii) the price is fixed or
determinable based upon a per diem or hourly rate; and (iv) collectibility is
reasonably assured.
While the Company's fixed costs have been reduced as a result of its
relocation to a new location in 2003 and because the Company believes that
further fixed cost reductions may not be achievable, its operating results are
substantially dependent on revenue levels. Because revenues derived from
licenses and royalties carry a much higher gross profit margin than other
revenues, operating results are also substantially affected by changes in
revenue mix.
Both the absolute amounts of the Company's revenues and the mix among the
various sources of revenue are subject to substantial fluctuation. The Company
has a relatively small number of substantial customers rather than a large
number of small customers. Accordingly, changes in the revenue received from a
significant customer can have a substantial effect on the Company's total
revenue and on its revenue mix and overall financial performance. Such changes
may result from a customer's product development delays, engineering changes,
changes in product marketing strategies and the like. In addition, certain
customers have, from time to time, sought to renegotiate certain provisions of
their license agreements and, when the Company agrees to revise terms, revenues
from the customer may be affected. The addition of a substantial new customer or
the loss of a substantial existing customer may also have a substantial effect
on the Company's total revenue, revenue mix and operating results.
Revenues for the third quarter of 2005 were $138,800 compared to $165,000
in the third quarter of 2004, a 16% decrease. Licenses, royalties and fees
decreased by $21,700, or 21%, to $80,100 in the third quarter of 2005 from
$101,800 in the third quarter of 2004. The decrease in licenses, royalties and
fees is due primarily to the non-renewal of two license agreements offset in
part by the inception during the third quarter of 2005 of a license arrangement
with the first licensee for the Company's new Rub-n-Color product for the
Educational and Toy Market. Product and other sales were $58,700 in the third
quarter of 2005 compared to $63,200 in the third quarter of 2004, a 7% decrease
due to lower sales of both the Company's security inks and papers. For the first
nine months of 2005, revenues were $396,500, 12% lower than revenues of $449,900
in the first nine months of 2004. Licenses, royalties and fees of $242,000 in
the first nine months of 2005 decreased by $32,700, or 12%, from $274,700 in the
first nine months of 2004 due primarily to the non-renewal of two licenses over
the preceding twelve months offset in part by the inception of three new license
arrangements over the same period. Product sales were $154,500 in the first nine
months of 2005 compared to $175,200 in the first nine months of 2004, a 12%
decline. The decrease in product sales reflects lower sales of the Company's
line of security papers offset in part by higher sales of inks during the first
half of 2005 compared to the first half of 2004.
The Company's gross profit decreased to $85,700 in the third quarter of
2005 or 62% of revenues from $94,300 or 57% of revenues in the third quarter of
2004. 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
third quarter of 2005 compared to the third quarter of 2004 resulted principally
from a decrease in revenues represented by licenses, royalties and fees offset
in part by lower fixed costs of production.
-9-
For the first nine months of 2005, the gross profit was $241,100, or 61% of
revenues compared to $265,700, or 59% of revenues, in the first nine months of
2004. The decrease in the gross profit in absolute dollars in the first half of
2005 compared to the first half of 2004 resulted from a lower level of revenues
in the first nine months of 2005 compared to the first nine months of 2004
Research and development expenses decreased to $35,600 in the third quarter
of 2005 from $40,400 in the third quarter of 2004. For the first nine months of
2005, research and development expenses were $110,200 compared to $134,400 in
the first nine months of 2004. The decrease in both the third quarter and first
nine months of 2005 was due primarily to a reduction of staff during the third
quarter of 2004.
Sales and marketing expenses of $26,600 in the third quarter of 2005
approximated the $25,300 incurred in the third quarter of 2004. For the first
nine months of 2005, sales and marketing expenses were $87,000 compared to
$108,300 in the first nine months of 2004. The decrease in the first nine months
of 2005 compared to the first nine months of 2004 reflects lower travel, sales
promotion and business show expense as certain expenses associated with the
introduction of the Company's new Rub-n-Color product for the Educational and
Toy Market in the first nine months of 2004 were not incurred in the the first
nine months of 2005.
General and administrative expenses (exclusive of legal expenses) decreased
by $9,700 to $42,400 in the third quarter of 2005 from $52,100 in the third
quarter of 2004. The decrease in the third quarter of 2005 compared to the third
quarter of 2004 is due primarily to $9,000 in expenses recorded in the third
quarter of 2004 in connection with the issuance to members of the Company's
Board of Directors and two consultants of 900,000 options to purchase shares of
the Company's common stock. During 2005, 300,000 options were issued to three
members of the Company's Board of Directors subject to certain board meeting
attendance requirements. For the first nine months, general and administrative
expenses (exclusive of legal expense) decreased by $69,400 to $143,200 in 2005
from $212,600 in 2004 primarily as a result of the same factor as the third
quarter decrease.
Legal expenses decreased to $19,100 and $66,900, respectively, in the third
quarter and first nine months of 2005 from $31,700 and $94,000 in the third
quarter and first nine months of 2004. During the third quarter of 2004, the
Company incurred legal fees in structuring agreements related to the conversion
of the Company's demand loans into common stock and the release of certain stock
option rights. Additionally, during the first nine months of 2005, a lower level
of legal counseling was required by the Company in its compliance with
securities regulations and other matters than in the first nine months of 2004.
Other income (expense) decreased in the third quarter and first nine months
of 2005 compared to the third quarter and first nine months of 2004 as interest
expense on the demand loans was eliminated due to their conversion to common
stock of the Company in September 2004.
-10-
The net loss of $38,500 and $167,700, respectively, in the third quarter
and first nine months of 2005 compared to the net loss of $58,400 and $293,500,
respectively, in the third quarter and first nine months of 2004 was due to the
non-recurrence of the expense associated with the issuance of stock options to
Directors and consultants in the second quarter of 2004, lower sales and
marketing expenses and a reduction of staff during 2004 offset in part by a
lower gross margin resulting from lower revenues.
PLAN OF OPERATION, LIQUIDITY AND CAPITAL RESOURCES
The Company's cash and cash equivalents decreased to $3,700 at September
30, 2005 from $24,000 at December 31, 2004. The cash was used to fund operations
over the nine-month period.
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. 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.
This investment, combined with the receipt of $900,000 in June 2003 in
conjunction with the settlement of its arbitration proceedings with Euro-Nocopi,
S.A. and annual payments of $50,000 in 2004 and 2005 in accordance with the
settlement agreement, have permitted the Company to continue in operation to the
current date. As a result of the settlement, a significant ongoing expense for
related legal fees has 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 during the fourth quarter of 2005.
The Company, in response to the ongoing adverse liquidity situation, has
maintained a cost reduction program including staff reductions and curtailment
of discretionary research and development and sales and marketing expenses,
where possible.
RISK FACTORS
The Company's operating results, financial condition and stock price are subject
to certain risks, some of which are beyond the Company's control. These risks
could cause actual operating and financial results to differ materially from
those expressed in the Company's forward looking statements, including the risks
described below and the risks identified in other documents which are filed and
furnished with the SEC:
Inability to Continue in Operation Without Immediate New Equity Investment. The
Company had a negative working capital of $604,900 at September 30, 2005 and
experienced negative cash flow from operations of $23,300 in the nine months
ended September 30, 2005. Additionally, it experienced negative cash flow from
-11-
operations of $217,200 in the year ended December 31, 2004. Management of the
Company believes that while certain staff reductions initiated in 2003 and
continuing into 2004 as well as the move of the Company's operations to a new
facility in 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
investment, it may be forced to cease operations during the fourth quarter of
2005. 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, even with additional capital, can devote to marketing and to
research and development will be sufficient to increase the Company's revenues
to levels resulting in positive cash flow.
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.
-12-
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.
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. While the
Company has been advised by its patent counsel that patent maintenance fees
approximating $12,000 will be due during 2005, it presently intends to keep in
force patents, whose maintenance fees are approximately $1,000, that are
applicable to its current and prospective product offerings. 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.
-13-
ITEM 3. DISCLOSURE CONTROLS AND PROCEDURES
The Company's disclosure controls and procedures are designed to provide
reasonable assurance that material information required to be included in its
periodic SEC reports is recorded, processed, summarized and reported within the
time periods specified in the relevant SEC rules and forms. 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, as of the end of the period covered by this report, that the
Company's disclosure controls and procedures are effective.
There have been no changes in the Company's internal controls over financial
reporting during our most recent fiscal quarter that have materially affected,
or are reasonably likely to materially affect, our internal controls over
financial reporting.
-14-
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Not Applicable
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
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
(a) Exhibits
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. Certificate of Chief Executive Officer and Chief
Financial Officer Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
-15-
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, 2005 /s/ Michael A. Feinstein, M.D.
------------------------------
Michael A Feinstein, M.D.
Chairman of the Board & Chief Executive Officer
DATE: November 14, 2005 /s/ Rudolph A. Lutterschmidt
----------------------------
Rudolph A. Lutterschmidt
Vice President & Chief Financial Officer
-16-
EXHIBIT INDEX
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
-17-