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, 2001
[ ] 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
--------------------------------------------------------------------------------
(Address of principal executive offices)
(610) 834-9600
--------------------------------------------------------------------------------
(Issuer's telephone number)
Check whether the issuer has filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. Yes __X__
No _____
State the number of shares outstanding of each of the issuer's classes
of common equity, as of November 1, 2001: Common stock, par value $.01 per share
38,188,907 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, 2001 and September 30, 2000
Balance Sheet 2
September 30, 2001
Statements of Cash Flows 3
Nine Months Ended September 30, 2001
and September 30, 2000
Notes to Financial Statements 4 -7
Item 2. Management's Discussion and Analysis 8 -13
of Financial Condition and Results of Operations
Part II. OTHER INFORMATION 14-15
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
2001 2000 2001 2000
----------- ----------- ----------- -----------
Revenues
Licenses, royalties and fees $ 132,200 $ 223,900 $ 370,500 $ 665,000
Product and other sales 84,200 58,400 204,200 306,700
----------- ----------- ----------- -----------
216,400 282,300 574,700 971,700
Cost of sales
Licenses, royalties and fees 58,100 82,600 174,100 241,100
Product and other sales 49,000 37,900 107,400 254,500
----------- ----------- ----------- -----------
107,100 120,500 281,500 495,600
----------- ----------- ----------- -----------
Gross profit 109,300 161,800 293,200 476,100
Operating expenses
Research and development 64,100 58,700 191,400 154,800
Sales and marketing 44,100 52,300 181,200 156,600
General and administrative 207,800 145,800 635,500 404,600
----------- ----------- ----------- -----------
316,000 256,800 1,008,100 716,000
----------- ----------- ----------- -----------
Loss from operations (206,700) (95,000) (714,900) (239,900)
Other income (expenses)
Interest income 200 4,100 3,300 16,300
Interest and bank charges (400) (1,000) (1,200) (5,600)
Equity in net income of
unconsolidated affiliate - 30,900 - 35,000
----------- ----------- ----------- -----------
(200) 34,000 2,100 45,700
----------- ----------- ---------- -----------
Net loss ($206,900) ($61,000) ($712,800) ($194,200)
=========== =========== =========== ===========
Basic and diluted loss per
common share ($.01) ($.00) ($.02) ($.01)
Weighted average common
shares outstanding 38,188,907 33,817,332 37,015,426 33,817,332
See accompanying notes to financial statements.
1
Nocopi Technologies, Inc.
Balance Sheet
(unaudited)
September 30
2001
------------
Assets
Current assets
Cash and cash equivalents $ 34,900
Accounts receivable, less allowance 78,900
Prepaid and other 30,600
------------
Total current assets 144,400
Fixed assets
Leasehold improvements 39,500
Furniture, fixtures and equipment 476,200
------------
515,700
Less: accumulated depreciation 486,500
------------
29,200
Other assets
Investment in and advances to unconsolidated affiliate, at cost 110,600
------------
Total assets $ 284,200
============
Liabilities and Stockholders' Deficiency
Current liabilities
Accounts payable $ 291,500
Accrued expenses 222,700
Deferred revenue 66,800
------------
Total current liabilities 581,000
Stockholders' deficiency
Common stock, $.01 par value
Authorized - 75,000,000 shares
Issued and outstanding - 38,188,907 shares 381,900
Paid-in capital 10,751,900
Accumulated deficit (11,430,600)
------------
(296,800)
------------
Total liabilities and stockholders' deficiency $ 284,200
============
See accompanying notes to financial statements.
2
Nocopi Technologies, Inc.
Statements of Cash Flows
(unaudited)
Nine Months ended September 30
2001 2000
---------------------- -------------------
Operating Activities
Net loss ($712,800) ($194,200)
Adjustments to reconcile net loss to
cash from operating activities
Depreciation 27,000 41,400
Allowance for doubtful accounts, net 1,700 -
Equity in net income of unconsolidated affiliate - (35,000)
---------------------- -------------------
(684,100) (187,800)
(Increase) decrease in assets
Accounts receivable (8,600) 20,900
Prepaid and other 8,500 64,200
Increase (decrease) in liabilities
Accounts payable and accrued expenses 148,500 (198,100)
Deferred revenue 22,700 (39,100)
---------------------- -------------------
171,100 (152,100)
---------------------- -------------------
Net cash used in operating activities (513,000) (339,900)
Investing Activities
Additions to fixed assets - (14,700)
Advances from affiliate, net - 600
---------------------- -------------------
Net cash used in investing activities - (14,100)
Financing Activities
Issuance of common stock, net 361,000 -
Repayment of notes - (125,000)
---------------------- -------------------
Net cash provided by (used in) financing
activities 361,000 (125,000)
---------------------- -------------------
Decrease in cash and cash equivalents (152,000) (479,000)
Cash and cash equivalents at beginning of year 186,900 750,000
---------------------- -------------------
Cash and cash equivalents at end of period $34,900 $271,000
====================== ===================
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, subject to matters discussed in Note 4, management
believes are 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 2000 Annual Report. 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 2000 Annual Report on Form 10-KSB should be
read in conjunction with the accompanying interim financial statements.
The interim operating results for the nine months ended September 30,
2001 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 and a warrant
permitting it to increase its interest in Euro to 55%. This warrant,
which expires on December 31, 2001, is currently exercisable.
Additionally, although the matter is disputed, the Company believes it
has a right to acquire, under certain conditions, all shares of Euro
not owned by the Company for approximately one million shares of the
Company's common stock. This call right expires on December 31, 2001.
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 in
Euro (including the warrant and right described above) 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 it had adopted resolutions to liquidate and
dissolve. In mid-December 2000, the Company terminated its license
agreement with Euro in accordance with its terms and ceased to provide
technical support to Euro. As a result of the license termination the
4
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.
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 a royalty-free license to exploit the Company's
technologies in Europe.
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 the license
agreement 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 arbitration proceedings against the
Company before the American Arbitration Association in New York, NY. In
these proceedings, Euro has sought an award in the nature of a
declaratory judgment to the effect that, due to alleged breaches by the
Company of the licensing arrangement between the Company and Euro, it
is entitled to a royalty-free license to exploit Registrant's
technologies in Europe. Euro has not sought an award of money damages.
The demand appears to allege that the Company has committed numerous
breaches of the licensing arrangement between the parties, notably by
failing to disclose certain technical information, by failing to
provide technical support, services and products to Euro by entering
into a licensing agreement with a third party allegedly violating the
exclusivity provisions of the Euro licensing arrangement. The Company
has filed a response to Euro's demand denying that Euro is entitled to
the relief requested and asserting claims for sums due it under the
license agreement and for a determination that Registrant has validly
terminated the license agreement. The Company intends, subject to
financial constraints, to defend itself vigorously against Euro's
claims and intends to prosecute its counterclaims aggressively.
The Company has been made aware that in late March 2001 certain
shareholders of Euro have filed suit in a court in Paris, France
5
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 Company has been advised that 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 Company has received requests for indemnification from
certain of the defendants and anticipates that additional defendants
will seek indemnification from the Company in connection with the
lawsuit. The defendants have not yet been required to file a
substantive response to the complaint in this lawsuit and such a
response has not yet been prepared or filed.
Note 3. Stockholders' Deficiency
In March 2001, the Company received a $325,000 ($311,000 net of
expenses) investment from a licensee in return for 3,917,030 shares of
its common stock constituting approximately 10% of the Company's
outstanding common stock. In July 2001, the Company sold 454,545 shares
of its common stock to an investor for $50,000.
Note 4. Going Concern
Since its inception, the Company has incurred significant losses and,
as of September 30, 2001, had accumulated losses of $11,430,600. For
the years ended December 31, 2000 and 1999, the Company's net losses
were $382,700 and $1,262,600, respectively. During the nine months
ended September 30, 2001, the Company experienced a net loss of
$712,800 and had a negative cash flow from operating activities of
$513,000. In addition, the Company had negative working capital of
$436,600 at September 30, 2001. The Company expects to incur further
operating losses and experience negative cash flow for at least the
immediate 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.
The net proceeds from the sales in March 2001 and July 2001 by the
Company of a total of 4,371,575 shares of its common stock have
permitted the Company to continue in operation in the near term.
However, Management of the Company believes that, to survive, it must
obtain a significant amount of additional capital in the very near term
to fund payment of its substantial accounts payable obligations,
continuing operating deficits and the investment needed to increase its
operating revenues to levels that will sustain its operations. 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.
If the Company continues to experience negative cash flow at current
levels and is unable to significantly increase its cash balances
through further equity investment, for which it has no commitments and
only very limited prospects, it will be forced to cease operations due
to a lack of cash within two to three months from the end of the third
quarter. 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 is forced to cease operations.
6
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, 2000 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 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.
7
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 2001 were $216,400 compared to $282,300
in the third quarter of 2000, a 23% decline. Licenses, royalties and fees
declined by $91,700, or 41%, in the third quarter of 2001 to $132,200 from
$223,900 in the third quarter of 2000. The reduction in licenses, royalties and
fees is due primarily to the termination or non-renewal of license arrangements
with five licensees, including the Company's former exclusive European licensee,
during 2000 and the first nine months of 2001. Product sales were $84,200 in the
third quarter of 2001 compared to $58,400 in the third quarter of 2000. The
increase in product sales of $25,800, or 44% reflects higher sales of the
Company's security papers and inks.
For the first nine months of 2001, revenues were $574,700, 41% ($397,000)
lower than revenues of $971,700 in the first nine months of 2000. Licenses,
royalties and fees declined by $294,500, or 44%, in the first nine months of
2001 to $370,500 from $665,000 in the first nine months of 2000 for the same
reasons described above. Product sales were $204,200 in the first nine months of
2001 compared to $306,700 in the first nine months of 2000. During the first
nine months of 2000, the Company sold and installed an ink-jet printing system
to a new licensee. The $102,500 (33%) decline in product sales is attributable
to the non-recurrence of this one-time sale offset in part by increased sales of
the Company's security papers and inks in the first nine months of 2001.
The Company's gross profit declined to $109,300 in the third quarter of
2001 or 51% of revenues from $161,800 or 57% of revenues in the third quarter of
2000. The lower gross profit in absolute dollars in the third quarter of 2001
compared to the third quarter of 2000 results principally from a decrease in the
portion of revenues represented by licenses, royalties and fees, which typically
have a higher gross margin than other revenues.
For the first nine months of 2001, the gross profit declined to $293,200 or
51% of revenues, from $476,100, or 49% of revenues, in the first nine months of
2000. Certain components of cost of sales related to licenses, royalties and
fees, such as production labor and rent, are substantially fixed. The variable
component of these costs of sales, primarily ink and chemicals, is a small
percentage of the related revenues. As these revenues decline, the gross profit
is negatively impacted, both in absolute dollars and as a percentage of
revenues. The gross profit related to product and other sales increased in
absolute dollars in the first nine months of 2001 compared to the first nine
months of 2000 as a result of changes in the mix of products sold.
8
Research and development expenses increased to $64,100 and $191,400 in the
third quarter and first nine months of 2001, respectively, from $58,700 and
$154,800 in the comparable periods of 2000. The increases relate primarily to
higher compensation expense, as the addition of an applications chemist was
required in the second quarter of 2001 to support the Company's existing
technologies.
Sales and marketing expenses declined to $44,100 in the third quarter of
2001 from $52,300 in the third quarter of 2000 due primarily to lower travel and
sales promotion expenses in the third quarter of 2001. For the first nine months
of 2001, sales and marketing expenses were $181,200 compared to $156,600 in the
first nine months of 2000. The increase reflects fees paid to sales agents and
consultants and increased travel during the first half of 2001 related to the
Company's initiative to market its technologies directly to European users. The
Company generated approximately $16,000 in revenues during the third quarter of
2001 from European sources.
General and administrative expenses increased to $207,800 in the third
quarter of 2001 from $145,800 in the third quarter of 2000. The increase of
$62,000 results from higher legal and audit fees recognized in the third quarter
of 2001 compared to the third quarter of 2000 due to litigation and arbitration
proceedings with the Company's former European exclusive licensee. The Company's
legal and audit expenses were $120,000, or 55% of revenues, in the third quarter
of 2001 compared to $47,700, or 17% of revenues, in the third quarter of 2000.
General and administrative expenses increased by $230,900 in the first nine
months of 2001 to $635,500 from $404,600 in the first nine months of 2000 for
the same reasons as the third quarter, legal and audit expenses. Legal and audit
expenses were $366,900, or 64% of revenues, in the first nine months of 2001
compared to $121,400, or 12% of revenues, in the first nine months of 2000.
Other income (expense) includes interest income on funds invested. The
decline in interest income in the third quarter and first nine months of 2001
compared to the third quarter and first nine months of 2000 relates to lower
levels of cash invested.
Equity in net income of unconsolidated affiliate represented the
proportionate share in the net income or loss of Euro-Nocopi, S.A. attributable
to the Company's approximate 18% ownership share of Euro-Nocopi, S.A. The
Company changed its method of accounting for its investment in Euro-Nocopi, S.A.
to the cost method effective October 1, 2000.
The net loss increased to $206,900 in the third quarter of 2001 from
$61,000 in the third quarter of 2000 and to $712,800 in the first nine months of
2001 from $194,200 in the first nine months of 2000. The increase in the third
quarter and first nine months net loss from the prior year period resulted
primarily from reductions in revenue and gross profit as the Company's business
has continued to contract, the loss of licensing revenues from the Company's
former European exclusive licensee, and higher audit expenses and increased
legal fees incurred in litigation and arbitration proceedings with this licensee
and factors related to the Company's adverse liquidity situation.
9
Plan of Operation, Liquidity and Capital Resources
The Company's cash and cash equivalents declined to $34,900 at September
30, 2001 from $186,900 at December 31, 2000. During the first nine months of
2001, the Company sold 4,371,575 shares of its common stock to a licensee and a
non-affiliated individual investor for $375,000 ($361,000 net of expenses) and
used $513,000 to fund operations over the nine-month period then ended.
The loss of a number of customers during the past three years and the
termination of the Company's exclusive European licensee in 2000 has had a
material adverse effect on the Company's 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. During the first nine months of 2001,
the receipt of funds in conjunction with the sale of approximately 13% of the
Company's common stock has permitted the Company to continue in operation in the
near term. 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 $291,500 at September 30, 2001 from $207,200 at June 30, 2001.
The Company's trade payables were $153,000 at December 31, 2000. Accordingly,
the Company is currently in default of the payment terms extended by certain of
its professional service providers and other vendors. Management of the Company
believes that, to survive, it must obtain additional capital in the very near
term to reduce its substantial obligations, fund continuing operating deficits
and fund investment needed to increase its operating revenues to levels that
will sustain its operations. If the Company fails to significantly increase its
cash balances through further equity investment, for which it has no commitments
and only very limited prospects, it will be forced to cease operations due to a
lack of cash within two to three months from the end of the third quarter. There
can be no assurances that the Company will be able to secure additional equity
investment before it is forced to cease operations.
The Company, in response to the ongoing adverse liquidity situation, has
maintained a cost reduction program including staff reductions, where possible,
and curtailment of discretionary research and development and sales and
marketing expenses.
Risk Factors
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:
Potential Inability to Continue in Operation; Immediate Need for New Equity
Investment. The Company had a negative working capital of $436,600 at September
30, 2001 and experienced negative cash flow from operations of $513,000 in the
nine months ended September 30, 2001. Additionally, it experienced negative cash
flow of $563,100 and $622,900, respectively, for the years ended December 31,
2000 and 1999. While the Company, in early March 2001, received $311,000 in net
new equity investment, and a further $50,000 in July 2001, Management does not
10
believe the Company can significantly improve its negative cash flow in the near
future through its United States operations. Subsequent to the termination of
the licensing agreement with Euro-Nocopi, S.A., the Company has been seeking to
negotiate end-user licenses with current users of its technologies in Europe but
has realized only modest revenues to date from European sources. There can be no
assurances that the Company will be able to enter into licenses with European
customers that will generate sufficient revenues and cash flow to offset the
negative cash flow currently being experienced in its United States operations.
The Company continues to incur significant legal fees in connection with ongoing
litigation and arbitration proceedings with Euro-Nocopi, S.A. If the Company
continues to experience negative cash flow at current levels and is unable to
significantly increase its cash balances through further equity investment or
otherwise, it will be forced to cease operations due to a lack of cash within
two to three months from the end of the third quarter. 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 is forced to cease operations.
Possible Inability to Develop New Business. Even if the Company is able to raise
cash through additional equity investment 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. While the Company has, since
mid-September of 2001, hired a new sales executive, initiated a dealer sales
program and completed a licensing agreement for the use of its technologies in
the gaming industry, Management does not expect these actions to have a
significant immediate positive effect on the Company's revenues and cash flow.
There are no assurances that the resources the Company 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.
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's operating expenses are substantially fixed,
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
11
business achievements and prospects, nor do securities analysts and traders
extensively follow it. 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 situation. 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. In either event, the Company's
customer and licensee relationships could be adversely affected.
12
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Except as set forth below, Registrant is not aware of any material
pending litigation (other than ordinary routine litigation incidental
to its business where, in management's view, the amount involved is
less than 10% of Registrant's current assets) to which Registrant is or
may be a party, or to which any of its properties is or may be subject,
nor is it aware of any pending or contemplated proceedings against it
by any governmental authority. Registrant knows of no material legal
proceedings pending or threatened, or judgments entered against, any
director or officer of Registrant in his capacity as such.
In December 2000, Euro-Nocopi, S.A, Registrant's former European
licensee, commenced emergency proceedings against Registrant in a court
in Paris, France. It sought the entry of an order, in the nature of a
preliminary injunction, to compel Registrant to honor the license
agreement between Euro-Nocopi and Registrant (which Registrant
terminated in December 2000) pending judicial or arbitral resolution of
a dispute between the parties under the license agreement. Notably, in
the French litigation, Euro-Nocopi S.A. did not seek an adjudication on
the merits of the underlying dispute. Certain shareholders of
Euro-Nocopi, S. A. subsequently joined in the proceedings commenced by
Euro-Nocopi, S.A. In March 2001, the Emergency Judge hearing the action
issued a decision denying the relief requested by Euro-Nocopi, S.A. and
the shareholders. The decision, which does not purport to be a final
adjudication of the merits of the controversy but only of Euro-Nocopi's
request for preliminary relief, notes that Registrant had validly
terminated the licensing arrangement and held that Euro-Nocopi, S.A.
was not entitled to the requested order compelling Registrant to
continue to perform the license agreement. The decision also ordered
Euro-Nocopi, S.A. to pay into escrow the approximately $125,000 that
Registrant claimed was due and owing under the licensing arrangement.
In March 2001, Euro-Nocopi, S.A. commenced arbitration proceedings
against Registrant before the American Arbitration Association in New
York, NY. In these proceedings, Euro-Nocopi, S.A. has sought an award
in the nature of a declaratory judgment to the effect that, due to
alleged breaches by Registrant of the licensing arrangement between
Registrant and Euro-Nocopi. S.A., it is entitled to a royalty-free
license to exploit Registrant's technologies in Europe. Euro-Nocopi,
S.A. has not sought an award of money damages.
The demand appears to allege that Registrant has committed numerous
breaches of the licensing arrangement between the parties, notably by
failing to disclose certain technical information, by failing to
provide technical support, services and products to Euro-Nocopi, S.A.
and by entering into a licensing agreement with a third party allegedly
13
violating the exclusivity provisions of the Euro-Nocopi, S.A. licensing
arrangement. Registrant has filed a response to Euro-Nocopi's demand
denying that Euro-Nocopi is entitled to the relief requested and
asserting claims for sums due it under the license agreement and for a
determination that Registrant has validly terminated the license
agreement. Registrant intends, subject to financial constraints, to
defend itself vigorously against Euro-Nocopi's claims and intends to
prosecute its counterclaims aggressively.
Registrant has been made aware that in late March 2001 certain
shareholders of Euro-Nocopi, S.A. have filed suit in a court in Paris,
France against certain current and former officers and directors of
Registrant, and against a licensee of Registrant. The current officers
and directors of Registrant named as defendants in the lawsuit are
Michael Feinstein, Chairman of the Board, and Stanley Hart, a director.
Registrant is not named as a defendant in the suit. Registrant has been
advised that 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-Nocopi, S.A., the management of that company and Registrant's
management of its relationship with that company. ___ Registrant has
received requests for indemnification from certain of the defendants
and anticipates that additional defendants will seek indemnification
from the Company in connection with the lawsuit. The defendants have
not yet been required to file a substantive response to the complaint
in this lawsuit and such a response has not yet been prepared or filed.
Item 2. Changes in Securities
In July 2001, Registrant sold an aggregate of 454,545 shares of common
stock to a private investor for $50,000 in cash. The transaction was
exempt from registration under the Securities Act pursuant to Sections
3(b) and/or 4(2) and/or Rules 505 and 506 promulgated under the
Securities Act.
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). No Current Reports on Form 8-K have been filed by the
Registrant during the quarter ended September 30, 2001.
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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, 2001 /s/ Michael A Feinstein, M.D.
-----------------------------
Michael A Feinstein, M.D.
Chairman of the Board
DATE: November 14, 2001 /s/ Rudolph A. Lutterschmidt
----------------------------
Rudolph A. Lutterschmidt
Vice President & Chief Financial Officer
15