NOCOPI TECHNOLOGIES INC/MD/ - Quarter Report: 2010 September (Form 10-Q)

 

 

United States
Securities and Exchange Commission

Washington, D.C. 20549

Form 10-Q

(Mark One)

þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934.

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934.

Commission File Number: 000-20333

NOCOPI TECHNOLOGIES, INC.

(Exact name of registrant as specified in its charter)

MARYLAND		87-0406496
(State or other jurisdiction		(I.R.S. Employer Identification No.)
of incorporation or organization)
9C Portland Road, West Conshohocken, PA		19428
(Address of principal executive offices)		(Zip Code)

(610) 834-9600

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 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 þ No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer o		Accelerated filer o		Non-accelerated filer o (Do not check if a smaller reporting company)		Smaller reporting company þ

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. 57,643,708 shares of common stock, par value $.01, as of November 5, 2010.

 

 

NOCOPI TECHNOLOGIES, INC.

INDEX

		PAGE
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
Statements of Operations for Three Months and Nine Months Ended September 30, 2010 and September 30, 2009			1
Balance Sheets at September 30, 2010 and December 31, 2009			2
Statements of Cash Flows for Nine Months Ended September 30, 2010 and September 30, 2009			3
Notes to Financial Statements			4-9
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			10-20
Item 4. Controls and Procedures			20
Part II. OTHER INFORMATION
Item 1. Legal Proceedings			21
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			21
Item 3. Defaults upon Senior Securities			21
Item 5. Other Information			21
Item 6. Exhibits			21
SIGNATURES			22
EXHIBIT INDEX			23
Exhibit 31.1
Exhibit 31.2
Exhibit 32.1

PART I — FINANCIAL INFORMATION

Item 1.		Financial Statements

Nocopi Technologies, Inc.

		Three Months ended								Nine Months ended
		September 30								September 30
		2010				2009				2010				2009
Revenues
Licenses, royalties and fees		$	78,000			$	81,400			$	189,700			$	247,200
Product and other sales			103,800				94,600				237,000				229,900
			181,800				176,000				426,700				477,100
Cost of revenues
Licenses, royalties and fees			15,100				22,300				54,900				65,600
Product and other sales			70,200				73,900				174,500				187,300
			85,300				96,200				229,400				252,900
Gross profit			96,500				79,800				197,300				224,200
Operating expenses
Research and development			27,500				41,000				104,600				124,100
Sales and marketing			38,500				67,400				107,600				237,000
General and administrative			79,600				90,400				254,600				288,300
			145,600				198,800				466,800				649,400
Net loss from operations			(49,100	)			(119,000	)			(269,500	)			(425,200	)
Other income (expenses)
Reversal of accounts payable			—				—				—				69,100
Interest expense, bank charges and financing cost			(2,500	)			(1,100	)			(8,300	)			(2,100	)
			(2,500	)			(1,100	)			(8,300	)			67,000
Net loss		$	(51,600	)		$	(120,100	)		$	(277,800	)		$	(358,200	)
Basic and diluted net loss per common share		$	(.00	)		$	(.00	)		$	(.00	)		$	(.01	)
Basic and diluted weighted average common shares outstanding			56,289,541				53,447,295				55,567,682				52,758,059

Nocopi Technologies, Inc.

		September 30				December 31
		2010				2009
		(unaudited)				(audited)
Assets
Current assets
Cash		$	18,900			$	37,200
Accounts receivable less $5,000 allowance for doubtful accounts			76,700				140,400
Inventory			33,500				66,100
Prepaid and other			16,900				35,200
Total current assets			146,000				278,900
Fixed assets
Leasehold improvements			72,500				72,500
Furniture, fixtures and equipment			184,500				184,900
			257,000				257,400
Less: accumulated depreciation and amortization			245,800				242,200
			11,200				15,200
Total assets		$	157,200			$	294,100
Liabilities and Stockholders’ Deficiency
Current liabilities
Line of credit		$	100,000			$	100,000
Demand loans			50,500				—
Accounts payable			237,800				268,400
Accrued expenses			126,700				106,900
Deferred revenue			45,300				13,900
Total current liabilities			560,300				489,200
Stockholders’ deficiency
Common stock, $.01 par value
Authorized – 75,000,000 shares
Issued and outstanding
2010 – 56,643,708 shares; 2009 – 54,972,296 shares			566,400				549,700
Paid-in capital			12,340,500				12,287,400
Accumulated deficit			(13,310,000	)			(13,032,200	)
Total stockholders’ deficiency			(403,100	)			(195,100	)
Total liabilities and stockholders’ deficiency		$	157,200			$	294,100

Nocopi Technologies, Inc.

		Nine Months ended September 30
		2010				2009
Operating Activities
Net loss		$	(277,800	)		$	(358,200	)
Adjustments to reconcile net loss to cash used in operating activities
Depreciation and amortization			6,300				6,900
Compensation expense — stock option grants			3,000				13,900
Financing cost — warrant grants			2,200				—
Reversal of accounts payable			—				(69,100	)
			(266,300	)			(406,500	)
Decrease in assets
Accounts receivable			63,700				66,600
Inventory			32,600				30,900
Prepaid and other			18,300				18,900
Increase (decrease) in liabilities
Accounts payable and accrued expenses			(10,800	)			61,800
Deferred revenue			31,400				900
			135,200				179,100
Net cash used in operating activities			(131,100	)			(227,400	)
Investing Activities
Additions to fixed assets			(2,300	)			—
Net cash used in investing activities			(2,300	)			—
Financing Activities
Net borrowings under line of credit			—				100,000
Proceeds from demand loans			50,500				—
Issuance of common stock			64,600				76,000
Net cash provided by financing activities			115,100				176,000
Decrease in cash			(18,300	)			(51,400	)
Cash at beginning of year			37,200				87,200
Cash at end of period		$	18,900			$	35,800
Supplemental disclosure of cash flow information
Cash paid for interest		$	2,900			$	1,200
Supplemental disclosure of non cash investing activities
Disposal of fully depreciated equipment
Furniture, fixtures and equipment		$	2,700
Accumulated depreciation and amortization		$	2,700

NOCOPI TECHNOLOGIES, INC.

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 2009 Annual Report on Form 10-K. 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 2009 Annual Report on Form 10-K should be read in conjunction with the accompanying interim financial statements. The interim operating results for the three months and nine months ended September 30, 2010 may not be necessarily indicative of the operating results expected for the full year.

The Company follows Financial Accounting Standards Board Accounting Standards Codification (“FASB ASC”) 220 in reporting comprehensive income. Comprehensive income is a more inclusive financial reporting methodology that includes disclosure of certain financial information that historically has not been recognized in the calculation of net income. Since the Company has no items of other comprehensive income, comprehensive income (loss) is equal to net income (loss).

Note 2. Going Concern

Since its inception, the Company has incurred significant losses and, as of September 30, 2010, had accumulated losses of $13,310,000. For the nine months ended September 30, 2010, the Company had a net loss from operations of $269,500 and negative cash flow from operations of $131,100. At September 30, 2010, the Company had negative working capital of $414,300 and a stockholders’ deficiency of $403,100. For the year ended December 31, 2009, the Company’s net loss from operations was $455,000. Due in part to the recession that has and is continuing to negatively impact the country’s economy, the Company, which is substantially dependent on its licensees to generate licensing revenues, 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 and its retail loss prevention activities. There can be no assurances that the Company will be able to generate sufficient revenues and gross profits to return to and sustain profitability and positive cash flow in the future.

During the nine months ended September 30, 2010, the Company received unsecured loans totaling $50,500 from four individuals, of which $7,500 was lent by Herman M. Gerwitz, a Director. In the first nine months of 2010, the Company raised $64,600 in a private placement exempt from registration under section 4(2) of the Securities Act of 1933, as amended, whereby 1,460,000 shares of the Company’s common stock were sold to three non-affiliated individual investors and 211,412 shares of the Company’s common stock were sold to two Directors of the Company. During 2009, the Company raised $162,000 in this private placement whereby 2,426,042 shares of the Company’s common stock were sold to six non-affiliated individual investors and 260,417 were sold to a Director of the Company. Receipt of funds from these investors, along with borrowings during 2009 under its line of credit with a bank, has permitted the Company to continue in operation to the current date. During 2009, the Company borrowed the entire $100,000 under the line of credit, obtained in 2008, to fund its operating activities. In August 2010, the Company accepted an offer by the bank to repay the outstanding loan balance in forty-eight equal monthly installments, plus interest, beginning in October 2010. Management of the Company believes that it will need 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 from traditional and new product lines 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 impact its revenues 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 in the near future.

Note 3. Stock Based Compensation

The Company follows FASB ASC 718, Stock Compensation, and uses the Black-Scholes option pricing model to calculate the grant-date fair value of an award.

In February 2009, the Board of Directors of the Company granted options to acquire 200,000 shares of its common stock to five employees of the Company, options to acquire 75,000 shares of its common stock to two consultants and options to acquire 50,000 shares of its common stock to an officer of the Company at $.12 per share. The options vested in February 2010 and expire five years from the date of grant. In accordance with the fair value method as described in the accounting requirements of FASB ASC 718, expense of approximately $22,900 was recognized over the vesting period of the options through February 2010 to account for the cost of services received by the Company in exchange for the grant of stock options. There was no expense recognized during the three months ended September 30, 2010. During the three months ended September 30, 2009, compensation expense of approximately $6,000 was recognized. During the nine months ended September 30, 2010 and September 30, 2009, compensation expense of approximately $3,000 and $13,900, respectively, was recognized. There was no unrecognized portion of expense at September 30, 2010. The Company’s stock option plans terminated prior to 2010 and no further stock options can be granted under the plans; however, stock options granted before the termination dates may be exercised through their expiration dates.

The following table summarizes all stock option activity of the Company since December 31, 2009:

										Weighted Average
		Number				Exercise				Exercise
		of Shares				Price				Price
Outstanding options December 31, 2009			1,325,000			$	.10 to $.45			$	.24
Canceled			380,000			$	.10 to $.12			$	.11
Outstanding options September 30, 2010			945,000			$	.12 to $.45			$	.29
Weighted average remaining contractual life (years)			2.16
Exercisable options September 30, 2010			945,000			$	.12 to $.45			$	.29
Weighted average remaining contractual life (years)			2.16

Note 4. Line of Credit

In 2008, the Company negotiated a $100,000 revolving line of credit with a bank to provide a source of working capital. The line of credit is secured by all the assets of the Company and bears interest at the bank’s prime rate plus 0.5%. At September 30, 2010, the interest rate applicable to the Company’s line of credit was 3.75%. The line of credit is subject to an annual review and quiet period. Until the third quarter of 2010, the Company had been required to pay interest only on borrowings under the line of credit. During the year ended December 31, 2009, the Company borrowed the entire $100,000 available under the line of credit. During the third quarter of 2010, the Company was notified by the bank that the line of credit was not being renewed and was offered repayment terms, which the Company has accepted, to repay the outstanding loan balance in forty-eight equal monthly installments of $2,083, plus interest at the bank’s prime rate plus 0.5%, beginning in October 2010.

Note 5. Demand Loans

In March 2010, the Company received unsecured loans totaling $40,500 from three individuals of which $7,500 was lent by Herman M. Gerwitz, a Director. The loans bear interest at 8% and are payable on demand. The loans were used to finance the Company’s working capital requirements. Additionally, the Company granted warrants to purchase 40,500 shares of common stock of the Company at $.0703 per share to these three individuals. The warrants expire in five years. A financing cost of approximately $1,800 representing the fair value of the warrants was charged to income in the first quarter of 2010. The fair value of the warrants was determined using the Black-Scholes pricing model with the following assumptions: expected life-5 years; interest rate-2.65%; volatility-77% and dividend yield-0. In May 2010, the Company received an unsecured loan of $10,000 from an individual. The loan bears interest at 8% and is payable on demand. The loan was used to finance the Company’s working capital requirements. Additionally, the Company granted warrants to purchase 10,000 shares of common stock of the Company at $.06 per share to this individual. The warrants expire in five years. A financing cost of approximately $400 representing the fair value of the warrants was charged to income in the second quarter of 2010. The fair value of the warrants was determined using the Black-Scholes pricing model with the following assumptions: expected life-5 years; interest rate-2.11%; volatility-78% and dividend yield-0. The acceptance of these unsecured loans constitutes a violation of certain covenants under the Company’s line of credit which gives the lender certain rights including requiring the Company to repay the entire outstanding loan balance of $100,000. Such a requirement by the bank could have a material adverse effect on the Company’s financial condition. Management of the Company intends to cure this violation.

The following table summarizes the Company’s warrant activity since December 31, 2009:

										Weighted Average
		Number				Exercise				Exercise
		of Shares				Price				Price
Outstanding warrants December 31, 2009			47,000			$	.21 to $.27			$	.23
Warrants issued			50,500			$	.06 and $.07			$	.07
Outstanding warrants September 30, 2010			97,500			$	.06 to $.27			$	.14
Weighted average remaining contractual life (years)			2.77
Exercisable warrants September 30, 2010			97,500			$	.06 to $.27			$	.14
Weighted average remaining contractual life (years)			2.77

Note 6. Stockholders’ Deficiency

During the first nine months of 2010, the Company sold 1,460,000 shares of its common stock to three non-affiliated individuals, 148,912 shares of its common stock to Philip B. White, a Director and 62,500 shares of its common stock to Herman M. Gerwitz, a Director, for a total of $64,600 pursuant to a private placement. During the first nine months of 2009, the Company sold another 1,265,625 shares of its common stock to three other non-affiliated investors for a total of $76,000 pursuant to a private placement.

Note 7. Other Income (Expenses)

Other income (expenses) included, for the nine months ended September 30, 2009, the reversal of $69,100 of accounts payable related to invoices received from 2001 through 2003 from a business for consulting services that the Company, with legal counsel, had determined to be no longer statutorily payable as the statute of limitations to bring a claim had expired.

Note 8. Income Taxes

There is no income tax benefit for the losses for the three months and nine months ended September 30, 2010 and September 30, 2009 because 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.

There was no change in unrecognized tax benefits during the period ended September 30, 2010 and there was no accrual for uncertain tax positions as of September 30, 2010.

Tax years from 2007 through 2009 remain subject to examination by U.S. federal and state jurisdictions.

Note 9. Loss per Share

In accordance with FASB ASC 260, Earnings per Share, basic earnings (loss) per common share is computed using net earnings divided by the weighted average number of common shares outstanding for the periods presented. Diluted earnings per common share assumes that outstanding common shares were increased by shares issuable upon exercise of those stock options and warrants for which the market price exceeds the exercise price, less shares that could have been purchased by the Company with related proceeds. Because the Company reported a net loss for the three months and nine months ended September 30, 2010 and September 30, 2009, common stock equivalents, consisting of stock options and warrants, were anti-dilutive.

Note 10. Major Customer and Geographic Information

The Company’s revenues, expressed as a percentage of total revenues, from non-affiliated customers that equaled 10% or more of the Company’s total revenues were:

		Three Months ended								Nine Months ended
		September 30								September 30
		2010				2009				2010				2009
Customer A			29	%			18	%			30	%			18	%
Customer B			14	%			26	%			17	%			32	%
Customer C			8	%			9	%			11	%			9	%
Customer D			10	%			29	%			14	%			26	%

The Company’s non-affiliate customers whose individual balances amounted to more than 10% of the Company’s net accounts receivable, expressed as a percentage of net accounts receivable, were:

		September 30				December 31
		2010				2009
Customer A			45	%			19	%
Customer B			32	%			59	%
Customer C			—				—
Customer D			3	%			13	%

The Company performs ongoing credit evaluations of its customers and generally does not require collateral. The Company also maintains allowances for potential credit losses. The loss of a major customer could have a material adverse effect on the Company’s business operations and financial condition.

The Company’s revenues by geographic region are as follows:

		Three Months ended								Nine Months ended
		September 30								September 30
		2010				2009				2010				2009
North America		$	139,600			$	125,500			$	340,500			$	352,200
Other			42,200				50,500				86,200				124,900
		$	181,800			$	176,000			$	426,700			$	477,100

Note 11. Subsequent Events

In late October 2010, the Company sold 500,000 shares of its common stock to a non-affiliated investor for $16,000. In early November 2010, the Company sold another 500,000 shares of its common stock to another non-affiliated investor for $16,000.

Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations

NOCOPI TECHNOLOGIES, INC.

Management’s Discussion and Analysis
of Financial Condition and Results of Operations

Forward-Looking Information

This Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, regarding, among other things, anticipated improvements in operations, the Company’s plans, earnings, cash flow and expense estimates, strategies and prospects, both business and financial. All statements other than statements of current or historical fact contained in this report are forward-looking statements. The words “believe,’’ “expect,’’ “anticipate,’’ “should,’’ “plan,’’ “will,’’ “may,’’ “intend,’’ “estimate,’’ “potential,’’ “continue’’ and similar expressions, as they relate to the Company, are intended to identify forward-looking statements.

The Company has based these forward-looking statements largely on its current expectations and projections about future events, financial trends, market opportunities, competition, and the adequacy of the Company’s available cash resources, which the Company believes may affect its financial condition, results of operations, business strategy and financial needs. This Form 10-Q also contains forward-looking statements attributed to third parties. All such statements can be affected by inaccurate assumptions, including, without limitation, with respect to risks, uncertainties, anticipated operating efficiencies, new business prospects and the rate of expense increases. In light of these risks, uncertainties and assumptions, the forward-looking statements in this report may not occur and actual results could differ materially from those anticipated or implied in the forward-looking statements. For these reasons, and because of the uncertainty relating to the current financial crisis in today’s economic environment and the potential reduction in demand for the Company’s products, you should not consider this information to be a guarantee by the Company or any other person that its objectives and plans will be achieved. When you consider these forward-looking statements, you should keep in mind the “Risk Factors” and other cautionary statements set forth in this Item 2 and elsewhere in this Form 10-Q. The Company’s forward-looking statements speak only as of the date made. The Company undertakes no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

The following Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the Condensed Financial Statements and related notes included elsewhere in this report as well as with the Company’s audited Financial Statements and Notes thereto for the year ended December 31, 2009 included in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 31, 2010, and keeping in mind this entire cautionary statement regarding forward-looking information.

Results of Operations

The Company’s revenues are derived from (i) royalties paid by licensees of the Company’s technologies, (ii) fees for the provision of technical services to licensees, and (iii) the direct sale of (a) products incorporating the Company’s technologies, such as inks, security paper and pressure sensitive labels, and (b) 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;

b) Product sales are recognized (i) upon shipment of products; (ii) when the price is fixed or determinable and (iii) when collectability 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) collectability is reasonably assured.

The Company believes that, as fixed cost reductions beyond those it has achieved in recent years 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 2010 were $181,800 compared to $176,000 in the third quarter of 2009, an increase of $5,800, or approximately 3%. Licenses, royalties and fees decreased by $3,400, or approximately 4%, to $78,000 in the third quarter of 2010 from $81,400 in the third quarter of 2009. The decrease in licenses, royalties and fees is due primarily to declines in licensing revenues from three licensees in the entertainment and toy products market offset in part by license fees from a new licensee in the entertainment and toy products market and higher royalties from licensees in the retail receipt and document fraud market, several of which were added during 2009. In the first quarter of 2010, the Company was informed that one licensee in the entertainment and toy products market was discontinuing a product line incorporating technology licensed under a license agreement, ceasing ink purchases related to the these products and selling off its remaining inventory of these products. As a result of this licensee’s decision, no royalties were derived from products sold under this license in the third quarter of 2010. In the third quarter of 2009, royalties of $8,500 were received from this licensee. Additionally, third quarter 2010 revenues generated from a second licensee in the entertainment and toy products market, whose license contains guaranteed minimum annual royalties, declined compared to the third quarter of 2009. Late in the second quarter of 2010, the Company concluded a multi-year license, containing guaranteed minimum royalties, with a new licensee in the entertainment and toy products market that generated revenues in the third quarter. The Company believes this licensee will continue to generate future revenues, including ink sales. Product and other sales increased by $9,200, or approximately 10%, to $103,800 in the third quarter of 2010 from $94,600 in the third quarter of 2009. Sales of ink declined in the third quarter of 2010 compared to the third quarter of 2009. Sales of security ink to the Company’s licensees in the retail receipt and document fraud market increased in the third quarter of 2010 compared to the third quarter of 2009; however, these sales were more than offset by lower sales of ink to the third party printer of the Company’s major licensee in the entertainment and toy products market. In the third quarter of 2010, the Company made an initial sale to a large international business who is introducing entertainment and toy products that incorporate the Company’s technologies into South America. The Company believes that prospects are good for additional sales to this business. The Company derived revenues of approximately $85,600 from licensees and their printers in the entertainment and toy products market in the third quarter of 2010 compared to approximately $98,500 in the third quarter of 2009.

For the first nine months of 2010, revenues were $426,700, $50,400 or approximately 11%, lower than revenues of $477,100 in the first nine months of 2009. Licenses, royalties and fees of $189,700 in the first nine months of 2010 were $57,500 or approximately 23%, lower than $247,200 in the first nine months of 2009, due primarily to the same factors that caused the revenue decline in the third quarter of 2010 compared to the third quarter of 2009. Product and other sales increased by $7,100, or approximately 3%, to $237,000 in the first nine months of 2010 from $229,900 in the first nine months of 2009. The lower level of ink sales in the first nine months of 2010 compared to the first nine months of 2009 is due primarily to lower ink requirements of the third party printers of the Company’s major licensee in the entertainment and toy products business. These lower ink requirements are related to the licensees’ declines in sales during the current period of economic decline. The decline in ink sales was more than offset by sales of entertainment and toy products incorporating the Company’s technologies to the Company’s new customer for distribution in South America.

The Company derived revenues of approximately $181,700 from licensees and their printers in the entertainment and toy products market in the first nine months of 2010, a decline of approximately $102,400 compared to revenues of approximately $284,100 in the first nine months of 2009. The Company also experienced a decline in sales of its security papers in the third quarter and first nine months of 2010 compared to the third quarter and first nine months of 2009.

The Company’s gross profit increased to $96,500 in the third quarter of 2010 or approximately 53% of revenues from $79,800 or approximately 45% of revenues in the third quarter of 2009. Licenses, royalties and fees have historically carried a higher gross profit than product and other 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. The higher gross profit in the third quarter of 2010 compared to the third quarter of 2009 results primarily from a more favorable mix of product sales and cost reductions implemented during the second quarter of 2010.

For the first nine months of 2010, the gross profit was $197,300, or approximately 46% of revenues, compared to $224,200, or approximately 47% of revenues, in the first nine months of 2009. The decrease in the gross profit in absolute dollars and as a percentage of revenues in the first nine months of 2010 compared to the first nine months of 2009 resulted from lower gross revenues of licenses, royalties and fees offset in part by higher product and other sales in the first nine months of 2010 compared to the first nine months of 2009, product mix and cost reductions.

As the variable component of cost of revenues related to licenses, royalties and fees is a low percentage of these revenues and the fixed component is not substantial, period to period changes in revenues from licenses, royalties and fees can significantly affect both the gross profit from licenses, royalties and fees as well as the overall gross profit. Primarily due to the cost reductions initiated in the second quarter of 2010, the gross profit from licenses, royalties and fees increased to approximately 81% of revenues from licenses, royalties and fees in the third quarter of 2010 from approximately 73% in the third quarter of 2009. Primarily due to the decrease in revenues from licenses, royalties and fees in the first nine months of 2010 compared to the first nine months of 2009, the gross profit from licenses, royalties and fees decreased to approximately 71% of revenues from licenses, royalties and fees in the first nine months of 2010 from approximately 73% in the first nine months of 2009.

The gross profit, expressed as a percentage of revenues, of product and other sales is dependent on both the overall sales volumes of product and other sales and on the mix of the specific goods produced and/or sold. As a result of both the mix of ink sales and cost reductions initiated in the second quarter of 2010, the gross profit from product and other sales increased to approximately 32% of revenues in the third quarter of 2010 compared to approximately 22% of revenues from product and other sales in the third quarter of 2009 and to approximately 26% of revenues from product and other sales in the first nine months of 2010 compared to approximately 19% of revenues from product and other sales in the first nine months of 2009.

Research and development expenses were $27,500 and $104,600 in the third quarter and first nine months of 2010 compared to $41,000 and $124,100 in the third quarter and first nine months of 2009. The decrease in both the third quarter and first nine months of 2010 compared to the third quarter and first nine months of 2009 is due primarily to a staff reduction in the second quarter of 2010.

Sales and marketing expenses decreased to $38,500 in the third quarter of 2010 from $67,400 in the third quarter of 2009 and to $107,600 in the first nine months of 2010 from $237,000 in the first nine months of 2009. The decrease in both the third quarter and first nine months of 2010 compared to the third quarter and first nine months of 2009 is due to the Company’s decision in the second half of 2009 to modify its method of marketing its security products to loss prevention departments in retailers. As a result, the Company incurred no consulting fees or business show expense in the third quarter and first nine months of 2010 and its travel expense declined in the third quarter and first nine months of 2010 compared to the third quarter and first nine months of 2009. Additionally, due to the lower level of sales in the first nine months of 2010 compared to the first nine months of 2009, commission expense was lower in the first nine months of 2010 compared to the first nine months of 2009.

General and administrative expenses decreased to $79,600 in the third quarter of 2010 from $90,400 in the third quarter of 2009 and to $254,600 in the first nine months of 2010 from $288,300 in the first nine months of 2009 due primarily to lower legal expenses in the third quarter and first nine months of 2010 compared to the third quarter and first nine months of 2009 as there were lower requirements for these services and lower compensation expense during the third quarter and first nine months of 2010 compared to the third quarter and first nine months of 2009.

Other income (expenses) included, for the nine months ended September 30, 2009, the reversal of $69,100 of accounts payable related to invoices received from 2001 through 2003 from a business for consulting services that the Company, with legal counsel, had determined to be no longer statutorily payable as the statute of limitations to bring a claim had expired. Additionally, the Company incurred higher interest expense and financing costs in the third quarter and first nine months of 2010 compared to the third quarter and first nine months of 2009 on funds borrowed under its line of credit and, in 2010, from demand loans obtained during 2010.

The net loss of $51,600 in the third quarter of 2010 compared to the net loss of $120,100 in the third quarter of 2009 results primarily from a higher gross profit on a higher level of revenues and lower sales and marketing expenses in the third quarter of 2010 compared to the third quarter of 2009 as well as lower compensation expense due to staff reductions in the second quarter of 2010. The Company’s lower net loss of $277,800 for the nine months ended September 30, 2010 compared to the net loss of $358,200 in the nine months ended September 30, 2009 results primarily from lower sales and marketing expenses and lower compensation expense offset in part by a lower gross profit on a lower level of revenues, no reversal of accounts payable in 2010 and higher interest and financing costs.

Management of the Company does not believe that inflation and changing prices have had a significant effect on its revenues and results of operations during the third quarter and first nine months of 2010 and the third quarter and first nine months of 2009.

Plan of Operation, Liquidity and Capital Resources

The Company’s cash decreased to $18,900 at September 30, 2010 from $37,200 at December 31, 2009. During the first nine months of 2010, the Company received $64,600 from the sale of 1,671,412 shares of its common stock, borrowed $50,500 from four individuals, used $131,100 to fund operations and used $2,300 for capital investment.

During the first nine months of 2010, the Company’s revenues declined as a result of declines in licensing revenues from its principal licensees in the entertainment and toy products business. This decline was offset somewhat by increases in revenues from its original and new licensees in the retail receipt and document fraud market, from a new licensee in the entertainment and toy products market and from a new international customer. In addition, as a result of the Company’s decision in the second half of 2009 to modify its method of marketing its security products to loss prevention departments in retailers by marketing these products through licensed printers who serve this market segment, the Company’s selling expenses declined in the first nine months of 2010 compared to the first nine months of 2009. Additionally, the Company reduced it staff by two individuals in the second quarter of 2010. As the overhead savings more than offset the lower gross profit, the Company recorded a lower net loss of $277,800 in the first nine months of 2010 compared to $358,200 in the first nine months of 2009 and had negative operating cash flow of $131,100 during the first nine months of 2010. The Company’s net loss from operations was reduced in the first nine months of 2010 to $269,500 from $425,200 in the first nine months of 2009. At September 30, 2010, the Company had negative working capital of $414,300 and a stockholders’ deficiency of $403,100. For the full year 2009, the Company had a net loss of $389,400 and had negative operating cash flow of $312,000 during the year. At December 31, 2009, the Company had negative working capital of $210,300 and a $195,100 stockholders’ deficiency. In 2008, the Company secured a $100,000 line of credit with a bank to provide working capital in the future. During the year ended December 31, 2009, the Company borrowed the entire $100,000 available under the line of credit. In August 2010, the Company accepted an offer by the bank to repay the outstanding loan balance in forty-eight equal monthly installments, plus interest, beginning in October 2010. During the first nine months of 2010, the Company received unsecured loans totaling $50,500 from four individuals. Additionally, the Company, in 2009 and 2010 through the date of this report, has raised $258,600 through the sale of 5,357,871 shares of its common stock. These borrowings and sales of common stock have allowed the Company to remain in operation through the current date. There can be no assurances that the Company will be able to secure sufficient additional funding through investment or borrowings that will allow the Company to fund the losses that it believes will be incurred for the full year of 2010. The Company believes that without immediate additional investment, it may be forced to cease operations in the near future.

The Company’s plan of operation for the twelve months beginning with the date of this quarterly report consists of capitalizing on the specific business relationships it has developed in the entertainment and toy products business, including a new licensee added in the second quarter of 2010 and a new international customer added in the third quarter of 2010, through ongoing applications development for these licensees. Additionally, the Company anticipates further revenue growth in the retail loss prevention market through increased royalties from and security ink sales to its historical and newly added licensees in this market. The Company believes that these initiatives can provide increases in revenues and it will adjust its production and technical staff as necessary and invest in capital equipment needed to support potential growth in its ink production requirements. The Company has received and continues to seek additional capital, in the form of debt, equity or both to support its working capital requirements. There can be no assurances that the Company will be successful in raising additional capital.

The Company generates a significant portion of its total revenues from licensees in the entertainment and toy products market. A continuation of the slowdown in consumer spending that was experienced during 2009 due to the current negative economic environment may adversely affect the sales of these licensees’ products that are generally sold through retail outlets over the balance of the year. The Company’s revenues, results of operations and liquidity would likewise be negatively impacted as they were during 2009.

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 including the Company’s annual report on Form 10-K filed on March 31, 2010:

Access to Capital. The Company anticipates that it will need to raise capital in the immediate future to fund its historical and new business operations. The current crisis in the financial markets has caused serious deterioration in the net worth and liquidity of many investors, including that of potential investors in the Company, and seriously eroded investor confidence in general thereby making it more difficult for the Company to raise capital. If the Company is unable to secure capital in the near future, in the form debt, equity or both, it may be forced to cease operations. There can be no assurances that the Company will be successful in obtaining additional investment in sufficient amounts to fund its ongoing business operations.

Line of Credit. The Company has a $100,000 line of credit with a bank. During the nine months ended September 30, 2010 the Company accepted unsecured loans totaling $50,500 from four individuals. The acceptance of these unsecured loans constituted a violation of certain covenants of the Company’s line of credit with a bank. Under the terms of the line of credit agreement, this covenant violation is an event of default whereby the bank has certain rights including requiring the Company to repay the entire outstanding loan balance. In August 2010, the Company accepted an offer by the bank to repay the outstanding loan balance of $100,000 in forty-eight equal monthly installments, plus interest, beginning in October 2010. A requirement by the bank for immediate repayment of the entire outstanding loan balance could have a material adverse effect on the Company’s financial condition.

Dependency on Major Customer. The Company derives a significant percentage of its revenues through a relationship with a major customer and two of its operating companies. Revenues obtained directly from this customer and indirectly, through its third party printers, equaled approximately 24% of the Company’s third quarter 2010 revenues, approximately 31% of the Company’s revenues in the first nine months of 2010 and approximately 56% of the Company’s 2009 full year revenues. The Company also has substantial receivables from these businesses. While multi-year licenses exist with these organizations, the Company is dependent on its licensees to develop new products and markets that will generate increases in its licensing and product revenues. The inability of these licensees to maintain at least current levels of sales of products utilizing the Company’s technologies could adversely affect the Company’s operating results and cash flow. As the Company’s licensees are subject to, and have been adversely affected, by economic conditions related to the current economic conditions, the Company’s revenues may be adversely impacted. In 2009, the Company entered into a three year license agreement, containing guaranteed minimum annual royalties, commencing January 2010 with this customer covering products sold under previous license agreements with two of the licensee’s operating divisions. The agreement contains renewal options. In March 2010, the Company was informed that this customer is discontinuing a product line incorporating technology licensed under a separate license agreement, ceasing ink purchases related to the these products and selling off its remaining inventory of these products. In 2009, the Company’s revenues related to this discontinued product line were approximately 7% of the Company’s total revenues. There can be no assurances that the recently renewed license will continue in force at the same, or more favorable, terms beyond its current termination date.

Possible Inability to Develop New Business. While the Company raised cash through additional capital investment, borrowings under its line of credit in 2009 and loans from individuals in 2010, it has limited increases in its operating expenses. Management of the Company believes that any significant improvement in the Company’s cash flow must result from increases in 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, both of which are limited. There are no assurances that the resources that the Company can devote to marketing and to research and development will be sufficient to increase its revenues to levels that will enable it to return to and maintain positive operating cash flow in the future.

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 to providers of professional and other services. As a result, the Company is required to pay cash in advance of shipment to certain of its suppliers. Delays in shipments to customers caused by the inability to obtain materials on a timely basis and the possibility that certain current vendors may permanently discontinue supplying the Company with needed products and services could impact the Company’s ability to service its customers, thereby adversely affecting its customer and licensee relationships. While receipt of funds through the sale of shares of the Company’s common stock and borrowings under the Company’s line of credit and from others have allowed the Company to continue in operation to the current date, there can be no assurances that the Company will be able to maintain its vendor relationships in an acceptable manner.

Uneven Pattern of Quarterly and Annual Operating Results. The Company’s revenues, which are derived primarily from licensing, royalties and sales of products incorporating its technologies, are difficult to forecast due to the long sales cycle of its technologies, the potential for customer delay or deferral of implementation of its technologies, the size and timing of inception of individual license agreements, the success of its 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. As licensees for the entertainment and toy products markets are added, the unpredictability of the Company’s revenue stream may be further impacted.

Volatility of Stock Price. The market price for the Company’s common stock has historically experienced significant fluctuations and may continue to do so. From inception, with the exception of 2007, the Company 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, it receives limited publicity regarding its business achievements and prospects. Additionally, securities analysts and traders do not extensively follow the Company’s stock and its stock is also thinly traded. The Company’s 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. The Company 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, its 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 had been and may continue to be limited by its 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 its rights. The Company’s adverse liquidity situation also impacts its ability to obtain patent protection on its intellectual property and to maintain protection on previously issued patents. The Company was advised by its patent counsel that patent maintenance fees approximating $2,600 were due during 2010. The Company kept one of the two affected patents in force. 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 its technologies and intellectual property (including their value upon liquidation) could be substantially diminished.

Economic Conditions. The Company’s revenue is susceptible to changes in general economic conditions and the present global recession that is continuing during 2010. Decreasing consumer confidence, further slowdown in consumer spending or other downturn in the U.S. economy as a whole or in any geographic markets from which the Company derives revenue, could substantially impact its sales, liquidity and overall results of operations, as these factors may result in decreased demand for the Company’s products from its customers and licensees, and the Company’s ability to develop new customers and licensees. Due to the uncertainty surrounding the financial crisis, and the Company’s ability to predict the effect such conditions will have on its customers and licensees, the Company cannot predict the scope or magnitude of the negative effect that such an ongoing global financial crisis and economic slowdown will have on it.

Recently Issued Accounting Pronouncements Not Yet Adopted

In October 2009, the Financial Accounting Standards Board (FASB) issued Accounting Standard Update (ASU) No. 2009-13 on ASC 605, Revenue Recognition — Multiple Deliverable Revenue Arrangement — a consensus of the FASB Emerging Issues Task Force (ASU 2009-13). ASU 2009-13 amended guidance related to multiple-element arrangements which requires an entity to allocate arrangement consideration at the inception of an arrangement to all of its deliverables based on their relative selling prices. The consensus eliminates the use of the residual method of allocation and requires the relative-selling-price method in all circumstances. All entities must adopt the guidance no later than the beginning of their first fiscal year beginning on or after June 15, 2010. Entities may elect to adopt the guidance through either prospective application for revenue arrangements entered into, or materially modified, after the effective date or through retrospective application to all revenue arrangements for all periods presented. We are currently evaluating the impact, if any, of ASU 2009-13 on our financial position and results of operations.

In October 2009, the FASB issued ASU No. 2009-14 on ASC 985, Certain Revenue Arrangements That Include Software Elements (ASU 2009-14). ASU 2009-14 amended guidance that is expected to significantly affect how entities account for revenue arrangements that contain both hardware and software elements. As a result, many tangible products that rely on software will be accounted for under the revised multiple-element arrangements revenue recognition guidance, rather than the software revenue recognition guidance. The revised guidance must be adopted by all entities no later than fiscal years beginning on or after June 15, 2010. An entity must select the same transition method and same period for the adoption of both this guidance and the revisions to the multiple-element arrangements guidance noted above. We are currently evaluating the impact, if any, of ASU 2009-14 on our financial position and results of operations.

In April 2010 the FASB issued Accounting Standards Update (ASU) No. 2010-13, Compensation — Stock Compensation (ASC Topic 718), Effect of Denominating the Exercise Price of a Share-Based Payment Award in the Currency of the Market in Which the Underlying Equity Security Trades. This update provides amendments to Accounting Standards Codification (ASC) Topic 718 to clarify that an employee share-based payment award with an exercise price denominated in the currency of a market in which a substantial portion of the entity’s equity securities trades should not be considered to contain a condition that is not a market, performance, or service condition. Therefore, an entity would not classify such an award as a liability if it otherwise qualifies as equity. The amendments in this update are effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2010. The amendments in this update should be applied by recording a cumulative-effect adjustment to the opening balance of retained earnings. The cumulative-effect adjustment should be calculated for all awards outstanding as of the beginning of the fiscal year in which the amendments are initially applied, as if the amendments had been applied consistently since the inception of the award. The cumulative-effect adjustment should be presented separately. Earlier application is permitted.

As of September 30, 2010, there are no other recently issued accounting standards not yet adopted which would have a material effect on the Company’s financial statements.

Recently Adopted Accounting Pronouncements

In January 2010, FASB issued ASU No. 2010-06, Fair Value Measurements and Disclosures (ASC Topic 820), Improving Disclosures about Fair Value Measurements. This update provides amendments to ASC Topic 820 that will provide more robust disclosures about (1) the different classes of assets and liabilities measured at fair value, (2) the valuation techniques and inputs used, (3) the activity in Level 3 fair value measurements, and (4) the transfers between Levels 1, 2, and 3. This standard is effective for interim and annual reporting periods beginning after December 15, 2009, except for the disclosures about purchases, sales, issuances, and settlements in the roll forward of activity in Level 3 fair value measurements. Those disclosures are effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years. This standard is not currently applicable to the Company.

In January 2010, FASB issued ASU No. 2010-05, Compensation — Stock Compensation (ASC Topic 718), Escrowed Share Arrangements and the Presumption of Compensation. This update codifies Emerging Issues Task Force D-110. This standard is not currently applicable to the Company.

In January 2010, FASB issued ASU N0. 2010-01, Equity (ASC Topic 505), Accounting for Distributions to Shareholders with Components of Stock and Cash. The update clarifies that the stock portion of a distribution to shareholders that allows them to elect to receive cash or stock with a potential limitation on the total amount of cash that all shareholders can elect to receive in the aggregate is considered a share issuance that is reflected prospectively in earnings per share and is not considered a stock dividend for purposes of ASC Topic 505 and Topic 260, Earnings Per Share. This standard is effective for interim and annual periods ending on or after December 15, 2009, and should be applied on a retrospective basis. This standard is not currently applicable to the Company.

Off-Balance Sheet Arrangements

The Company does not have any off-balance sheet arrangements.

Item 4.		Controls and Procedures

(a) Disclosure Controls and Procedures

The Company has carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the Company’s disclosure controls and procedures pursuant to Exchange Act Rules 13a-15(e) and 15d-15(e). Based upon that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded, as of the end of the period covered by this report, that the Company’s disclosure controls and procedures are effective to ensure that information required to be disclosed by the Company in the reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified within the rules and forms of the SEC, and are designed to ensure that information required to be disclosed by the Company in these reports is accumulated and communicated to management as appropriate to allow timely decisions regarding required disclosures.

(b) Changes in Internal Control over Financial Reporting

There have been no changes in the Company’s internal controls over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act) during the most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

PART II — OTHER INFORMATION

Item 1.		Legal Proceedings

Not Applicable

Item 2.		Unregistered Sales of Equity Securities and Use of Proceeds

On August 5, 2010, the Company sold 750,000 shares of its common stock to two individual investors (who were acquainted with a member of the Company’s Board of Directors) for $24,000, or $0.032 per share; on August 11, 2010, the Company sold 250,000 shares of its common stock to an individual investor (who was acquainted with a member of the Company’s Board of Directors) for $8,000, or $0.032 per share; on August 11, 2010, the Company sold 62,500 shares of its common stock to Herman M. Gerwitz, a Director, for $2,000, or $0.032 per share; on October 30, 2010, the Company sold 500,000 shares of its common stock to an individual investor (who was acquainted with a member of the Company’s Board of Directors) for $16,000, or $0.032 per share; on November 3, 2010, the Company sold 500,000 shares of its common stock to an individual investor (who was acquainted with a member of the Company’s Board of Directors) for $16,000, or $0.032 per share. The shares were sold in private transactions exempt from registration pursuant to Section 4(2) of the Securities Act of 1933, as amended. No underwriters were involved in these transactions or received any commissions or other compensation. Proceeds of the sales were used to fund the Company’s working capital requirements.

Item 3.		Defaults Upon Senior Securities

During the first nine months of 2010, the Company accepted unsecured loans totaling $50,500 from four individuals. The acceptance of these unsecured loans constituted a violation of certain covenants of the Company’s $100,000 line of credit with a bank. Under the terms of the line of credit agreement, this covenant violation is an event of default in the amount $100,000, the total amount outstanding under the line of credit.

Item 5.		Other Information

Not Applicable

Item 6.		Exhibits

(a) Exhibits

	31.1			Certification of Chief Executive Officer required by Rule 13a-14(a).
	31.2			Certification of Chief Financial Officer required by Rule 13a-14(a).
	32.1			Certifications 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.

SIGNATURES

Pursuant to the requirement of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

EXHIBIT INDEX

	31.1			Certification of Chief Executive Officer required by Rule 13a-14(a).
	31.2			Certification of Chief Financial Officer required by Rule 13a-14(a).
	32.1			Certifications of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant Section 906 of the Sarbanes-Oxley Act of 2002