NOCOPI TECHNOLOGIES INC/MD/ - Quarter Report: 2011 June (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 of incorporation or organization)		(I.R.S. Employer Identification No.)

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 þ 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		Smaller reporting company þ
				(Do not check if a smaller reporting company)

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. 58,187,378 shares of common stock, par value $0.01, as of August 10, 2011

 

 

NOCOPI TECHNOLOGIES, INC.

INDEX

		PAGE
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
Statements of Operations for Three Months and Six Months Ended June 30, 2011 and June 30, 2010			1
Balance Sheets at June 30, 2011 and December 31, 2010			2
Statements of Cash Flows for Six Months Ended June 30, 2011 and June 30, 2010			3
Notes to Financial Statements			4-9
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			10-18
Item 3. Quantitative and Qualitative Disclosures About Market Risk			18
Item 4. Controls and Procedures			19
Part II. OTHER INFORMATION
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			20
Item 3. Defaults upon Senior Securities			20
Item 6. Exhibits			20
SIGNATURES			21
EXHIBIT INDEX			22
Exhibit 31.1
Exhibit 31.2
Exhibit 32.1
EX-101 INSTANCE DOCUMENT
EX-101 SCHEMA DOCUMENT
EX-101 CALCULATION LINKBASE DOCUMENT
EX-101 LABELS LINKBASE DOCUMENT
EX-101 PRESENTATION LINKBASE DOCUMENT

PART I — FINANCIAL INFORMATION

Item 1.		Financial Statements

Nocopi Technologies, Inc.

		Three Months ended June 30								Six Months ended June 30
		2011				2010				2011				2010
Revenues
Licenses, royalties and fees		$	107,600			$	57,700			$	199,800			$	111,700
Product and other sales			80,200				94,500				212,700				133,200
			187,800				152,200				412,500				244,900
Cost of revenues
Licenses, royalties and fees			15,800				19,100				31,500				39,800
Product and other sales			48,400				57,300				117,400				104,300
			64,200				76,400				148,900				144,100
Gross profit			123,600				75,800				263,600				100,800
Operating expenses
Research and development			28,600				35,100				57,400				77,100
Sales and marketing			43,700				34,700				92,400				69,100
General and administrative			81,100				74,500				181,900				175,000
			153,400				144,300				331,700				321,200
Net loss from operations			(29,800	)			(68,500	)			(68,100	)			(220,400	)
Other income (expenses)
Interest expense, bank charges and financing cost			(2,400	)			(2,600	)			(5,300	)			(5,800	)
			(2,400	)			(2,600	)			(5,300	)			(5,800	)
Net loss		$	(32,200	)		$	(71,100	)		$	(73,400	)		$	(226,200	)
Basic and diluted net loss per common share		$	(.00	)		$	(.00	)		$	(.00	)		$	(.00	)
Basic and diluted weighted average common shares outstanding			58,108,051				55,441,208				57,980,046				55,206,752

Nocopi Technologies, Inc.

		June 30				December 31
		2011				2010
		(unaudited)				(audited)
Assets
Current assets
Cash		$	82,300			$	10,600
Accounts receivable less $5,000 allowance for doubtful accounts			118,200				171,100
Inventory			27,400				34,800
Prepaid and other			16,200				37,200
Total current assets			244,100				253,700
Fixed assets
Leasehold improvements			72,500				72,500
Furniture, fixtures and equipment			184,500				184,500
			257,000				257,000
Less: accumulated depreciation and amortization			250,400				247,400
			6,600				9,600
Total assets		$	250,700			$	263,300
Liabilities and Stockholders’ Deficiency
Current liabilities
Line of credit		$	81,300			$	93,800
Demand loans			50,500				50,500
Accounts payable			265,700				263,400
Accrued expenses			165,900				142,500
Deferred revenue			75,500				46,500
Total current liabilities			638,900				596,700
Stockholders’ deficiency
Common stock, $0.01 par value
Authorized — 75,000,000 shares
Issued and outstanding 2011 — 58,187,378 shares; 2010 — 57,852,041 shares			581,900				578,500
Paid-in capital			12,380,600				12,365,400
Accumulated deficit			(13,350,700	)			(13,277,300	)
Total stockholders’ deficiency			(388,200	)			(333,400	)
Total liabilities and stockholders’ deficiency		$	250,700			$	263,300

Nocopi Technologies, Inc.

		Six Months ended June 30
		2011				2010
Operating Activities
Net loss		$	(73,400	)		$	(226,200	)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities
Depreciation and amortization			3,000				4,200
Compensation expense — stock option grants			—				3,000
Financing cost — warrant grants			600				2,200
			(69,800	)			(216,800	)
Decrease in assets
Accounts receivable			52,900				41,700
Inventory			7,400				19,800
Prepaid and other			21,000				2,200
Increase in liabilities
Accounts payable and accrued expenses			25,700				32,800
Deferred revenue			29,000				61,100
			136,000				157,600
Net cash provided by (used in) operating activities			66,200				(59,200	)
Financing Activities
Proceeds from demand loans			15,000				50,500
Repayment of demand loan			(15,000	)			—
Repayment of borrowings under line of credit			(12,500	)			—
Issuance of common stock			18,000				30,600
Net cash provided by financing activities			5,500				81,100
Increase in cash			71,700				21,900
Cash at beginning of year			10,600				37,200
Cash at end of period		$	82,300			$	59,100
Supplemental disclosure of cash flow information
Cash paid for interest		$	1,700			$	1,900

NOCOPI TECHNOLOGIES, INC.

NOTES TO FINANCIAL STATEMENTS

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 2010 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 2010 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 six months ended June 30, 2011 may not be necessarily indicative of the operating results expected for the full year.

The Company follows Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“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 June 30, 2011, had accumulated losses of $13,350,700. For the six months ended June 30, 2011, the Company had a net loss from operations of $68,100. At June 30, 2011, the Company had negative working capital of $394,800 and a stockholders’ deficiency of $388,200. For the year ended December 31, 2010, the Company’s net loss from operations was $234,400. 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 new product lines. 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 six months ended June 30, 2011, the Company raised $18,000 in a private placement exempt from registration under section 4(2) of the Securities Act of 1933, as amended, whereby 335,337 shares of the Company’s common stock were sold to two non-affiliated individual investors. Additionally, in late January 2011, the Company received an unsecured loan of $15,000 from William P. Curtis, Jr., a Director, and repaid the loan in early February 2011. During 2010, the Company received unsecured loans totaling $50,500 from four individuals, of which $7,500 was lent by Herman M. Gerwitz, a Director. During 2010, the Company raised $101,600 in a private placement exempt from registration under section 4(2) of the Securities Act of 1933, as amended, whereby 2,668,333 shares of the Company’s common stock were sold to five non-affiliated individual investors and 211,412 were sold to two Directors of the Company. Receipt of funds from these investors and from the demand loan holders has permitted the Company to continue in operation to the current date. Management of the Company believes that it will need additional capital in the future both to fund investments needed to increase its operating revenues to levels that will sustain its operations and to fund operating deficits that it anticipates will continue until revenue increases 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 at an undetermined date in the future.

Note 3. Stock Based Compensation

The Company follows FASB ASC 718, Compensation — 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, under the Company’s 1999 Stock Option Plan, 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 $0.12 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 compensation expense recognized during the three months and six months ended June 30, 2011. There was no compensation expense recognized during the three months ended June 30, 2010. During the six months ended June 30, 2010, compensation expense of approximately $3,000 was recognized. There was no unrecognized portion of expense at June 30, 2011. 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, 2010:

								Weighted Average
		Number				Exercise		Exercise
		of Shares				Price		Price
Outstanding options - December 31, 2010			945,000			$.12 to $.45		$	.29
Options expired			300,000			$.22		$	.22
Outstanding options - June 30, 2011			645,000			$.12 and $.45		$	.32
Weighted average remaining contractual life (years)			2.14
Exercisable options - June 30, 2011			645,000			$.12 and $.45		$	.32

Note 4. Line of Credit

The Company has a line of credit with a bank that, at its inception in 2008, allowed the Company to borrow up to $100,000 to provide a future source of working capital. The line of credit, which matures in September 2014, is secured by all the assets of the Company and bears interest at the bank’s prime rate plus 0.5%. At June 30, 2011, the interest rate applicable to the Company’s line of credit was 3.75%. Until the third quarter of 2010, the Company had been required to pay interest only on borrowings under the line of credit. In the third quarter of 2010, the Company was notified by the bank that the fully drawn line of credit, which had an outstanding balance of $100,000 at that time, was not being renewed. The bank offered to the Company and the Company accepted repayment terms that require the Company 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. The incurrence of certain unsecured loans in 2010 and 2011 constitutes a violation of certain covenants under the Company’s line of credit which gives the lender certain rights, including the right to require the Company to repay immediately the entire outstanding loan balance, which was $81,250 at June 30, 2011, rather than on a monthly basis over the following thirty-nine months. Should the bank require immediate prepayment, the Company’s financial condition could be materially adversely affected. Management of the Company intends to cure this violation.

Note 5. Demand Loans

In January 2011, the Company received an unsecured loan of $15,000 from William P. Curtis, Jr., a Director, and repaid the loan, with interest at 8%, in February 2011. The loan was used to finance the Company’s working capital requirements. Additionally, the Company granted warrants to purchase 15,000 shares of common stock of the Company at $0.06 per share to Mr. Curtis. The warrants expire in five years. A financing cost of approximately $600, representing the fair value of the warrants, was charged to income in the first quarter of 2011. 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%; expected volatility based on the Company’s historical volatility-83%; and dividend yield-0.

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 $0.0703 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 $0.06 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 following table summarizes all warrant activity of the Company since December 31, 2010:

								Weighted Average
		Number				Exercise		Exercise
		of Shares				Price		Price
Outstanding warrants - December 31, 2010			97,500			$.06 to $.27		$	.14
Warrants granted			15,000			$.06		$	.06
Outstanding warrants - June 30, 2011			112,500			$.06 to $.27		$	.13
Weighted average remaining contractual life (years)			2.35
Exercisable warrants - June 30, 2011			112,500			$.06 to $.27		$	.13

Note 6. Stockholders’ Deficiency

During the second quarter of 2011, the Company sold a total of 335,337 shares of its common stock to two non-affiliated individual investors for a total of $18,000 pursuant to a private placement. This included, in June 2011, the sale of 46,875 shares of its common stock to a non-affiliated investor for $3,000. During the second quarter of 2010, the Company sold 460,000 shares of its common stock to two non-affiliated individual investors and 148,912 shares of its common stock to Philip B. White, a Director, for a total of $30,600 pursuant to the private placement.

Note 7. Income Taxes

There is no income tax benefit for the losses for the three months and six months ended June 30, 2011 and June 30, 2010 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 June 30, 2011 and there was no accrual for uncertain tax positions as of June 30, 2011.

Tax years from 2008 through 2010 remain subject to examination by U.S. federal and state jurisdictions.

Note 8. Loss per Share

In accordance with FASB ASC 260, Earnings per Share, basic earnings (loss) per common share is computed using net earnings (loss) divided by the weighted average number of common shares outstanding for the periods presented. The computation of diluted earnings per common share involves the assumption that outstanding common shares are increased by shares issuable upon exercise of those stock options and warrants for which the market price exceeds the exercise price. The number of shares issuable upon the exercise of such stock options and warrants is decreased by shares that could have been purchased by the Company with related proceeds. Because the Company reported a net loss for the three months and six months ended June 30, 2011 and June 30, 2010, common stock equivalents, consisting of stock options and warrants, were anti-dilutive.

Note 9. 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								Six Months ended
		June 30								June 30
		2011				2010				2011				2010
Customer A			17	%			29	%			23	%			18	%
Customer B			25	%			16	%			22	%			19	%
Customer C			17	%			28	%			16	%			30	%

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:

		June 30				December 31
		2011				2010
Customer A			22	%			—
Customer B			39	%			75	%
Customer C			24	%			16	%

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								Six Months ended
		June 30								June 30
		2011				2010				2011				2010
North America		$	145,000			$	108,200			$	279,900			$	200,900
Asia			42,800				44,000				105,200				44,000
South America			—				—				27,400				—
		$	187,800			$	152,200			$	412,500			$	244,900

Item 2.		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 (the “Exchange Act”), 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 included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2010 filed with the Securities and Exchange Commission (the “SEC”) on March 31, 2011 and keeping in mind this 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 second quarter of 2011 were $187,800 compared to $152,200 in the second quarter of 2010, an increase of $35,600, or approximately 23%. Licenses, royalties and fees increased by $49,900, or approximately 86%, to $107,600 in the second quarter of 2011 from $57,700 in the second quarter of 2010. The increase in licenses, royalties and fees is due primarily to higher licensing revenues from a licensee in the entertainment and toy products market, license fees from a licensee in the entertainment and toy products market whose license commenced in mid-2010 and license fees and royalty revenues from a new licensee in the entertainment and toy products market whose multi-year license agreement commenced in the second quarter of 2011. There can be no assurances that the marketing and product development activities of the Company’s licensees or other businesses in the entertainment and toy products market will produce a significant increase in revenues for the Company, nor can the timing of any potential revenue increases be predicted, particularly given the uncertain economic conditions being experienced worldwide.

Product and other sales decreased by $14,300, or approximately 15%, to $80,200 in the second quarter of 2011 from $94,500 in the second quarter of 2010. Sales of ink decreased in the second quarter of 2011 compared to the second quarter of 2010 reflecting lower security ink requirements of the Company’s licensees in the retail receipt and document fraud market in the second quarter of 2011 compared to the second quarter of 2010. Ink sales to the third party printers of the Company’s two major licensees in the entertainment and toy products market in the second quarter of 2011 approximated the ink sales to these printers in the second quarter of 2010. The Company derived revenues of approximately $119,400 from licensees and their printers in the entertainment and toy products market in the second quarter of 2011 compared to approximately $70,100 in the second quarter of 2010.

For the first six months of 2011, revenues were $412,500, representing an increase of $167,600, or approximately 68% over revenues of $244,900 in the first six months of 2010. Licenses, royalties and fees of $199,800 in the first six months of 2011 were $88,100, or approximately 79% higher than licenses, royalties and fees of $111,700 in the first six months of 2010. This increase was due primarily to higher licensing revenues from a licensee in the entertainment and toy products market, license fees from a licensee in the entertainment and toy products market whose license commenced in mid-2010 and license fees and royalty revenues from a new licensee in the entertainment and toy products market whose multi-year license agreement commenced in the second quarter of 2011.

Product and other sales increased by $79,500, or approximately 60%, to $212,700 in the first six months of 2011 from $133,200 in the first six months of 2010. Sales of ink increased in the six months of 2011 compared to the first six months of 2010 due primarily to ink shipments to the third party printers used by the Company’s two major licensees in the entertainment and toy products market and the second shipment of entertainment and toy products that incorporate the Company’s technologies to the operating division in South America of the Company’s new international customer, offset in part by lower ink sales to the Company’s licensees in the retail receipt and document fraud market in the first six months of 2011 compared to the first six months of 2010. The Company derived revenues of approximately $270,900 from licensees and their printers in the entertainment and toy products market in the first six months of 2011 compared to revenues of approximately $96,100 in the first six months of 2010.

The Company’s gross profit increased to $123,600 in the second quarter of 2011, or approximately 66% of revenues, from $75,800 in the second quarter of 2010 or approximately 50% of revenues. Licenses, royalties and fees have historically carried a higher gross profit than product and other sales. Such other sales 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 second quarter of 2011 compared to the second quarter of 2010 results primarily from higher gross revenues from licenses, royalties and fees offset in part by lower product and other sales in the second quarter of 2011 compared to the second quarter of 2010.

For the first six months of 2011, gross profit was $263,600, or approximately 64% of revenues, compared to $100,800, or approximately 41% of revenues, in the first six months of 2010. The increase in gross profit in absolute dollars and as a percentage of revenues in the first six months of 2011 compared to the first six months of 2010 resulted from higher gross revenues of licenses, royalties and fees and product and other sales in the first six months of 2011 compared to the first six months of 2010.

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 overall gross profit. Primarily due to the increase in revenues from licenses, royalties and fees in the second quarter of 2011 compared to the second quarter of 2010, gross profit from licenses, royalties and fees increased to approximately 85% of revenues from licenses, royalties and fees in the second quarter of 2011 from approximately 67% in the second quarter of 2010 and to approximately 84% of revenues from licenses, royalties and fees in the first six months of 2011 from approximately 64% in the first six months of 2010.

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. The gross profit from product and other sales increased to approximately 40% of revenues in the second quarter of 2011 compared to approximately 39% of revenues in the second quarter of 2010. This increase was due to favorable margins on certain products due to both favorable customer mix and raw materials prices and a staff reduction in the second quarter of 2010. For the first six months of 2011, the gross profit, expressed as a percentage of revenues, increased to approximately 45% of revenues from product and other sales compared to approximately 22% of revenues from product and other sales in the first six months of 2010 due to higher sales of these products in the first six months of 2011 compared to the first six months of 2010, favorable margins on certain products due to both favorable customer mix and raw materials prices and a staff reduction in the second quarter of 2010.

Research and development expenses declined to $28,600 in the second quarter of 2011 from $35,100 in the second quarter of 2010 and to $57,400 in first six months of 2011 from $77,100 in first six months of 2010. This decrease is due primarily to a staff reduction in the second quarter of 2010.

Sales and marketing expenses increased to $43,700 in the second quarter of 2011 from $34,700 in the second quarter of 2010 and to $92,400 in the first six months of 2011 from $69,100 in the first six months of 2010. The increase in both the second quarter and first six months of 2011 compared to the second quarter and first six months of 2010 is due primarily to higher commission expenses on the higher level of revenues, relocation expenses related to the relocation of an employee from North Carolina to Pennsylvania and higher travel expenses in the first six months of 2011 compared to the first six months of 2010.

General and administrative expenses increased to $81,100 in the second quarter of 2011 from $74,500 in the second quarter of 2010 and to $181,900 in the first six months of 2011 from $175,000 in the first six months of 2010. The increase in both the second quarter and first six months of 2011 compared to the second quarter and first six months of 2010 is due primarily to higher patent related expenses and professional fees in the second quarter and first six months of 2011 compared to the second quarter and first six months of 2010.

Other income (expenses) includes interest on funds borrowed under the Company’s line of credit with a bank and on unsecured loans from five individuals. Also included in other income (expenses) are financing costs related to warrants issued in the first six months of 2011 and the second quarter and first six months of 2010 in conjunction with unsecured loans received during those periods.

The lower net loss of $32,200 and $73,400 in the second quarter and first six months of 2011 compared to the net loss of $71,100 and $226,200, respectively, in the second quarter and first six months of 2010 resulted primarily from a higher gross profit on a higher level of revenues offset in part by higher sales and marketing expenses and general and administrative expenses in the second quarter and first six months of 2011 compared to the second quarter and first six months of 2010.

Plan of Operation, Liquidity and Capital Resources

During the first six months of 2011, the Company’s cash increased to $82,300 at June 30, 2011 from $10,600 at December 31, 2010. During the first six months of 2011, the Company generated $66,200 from its operating activities, received $18,000 from the sale of 335,337 shares of its common stock and borrowed $15,000 from a director. The Company repaid the loan from the director and also repaid $12,500 of its line of credit with a bank.

During the first six months of 2011, the Company’s revenues increased as a result of higher license fees from a major customer in the entertainment and toy products market, license fees generated from a license signed in mid-2010 with a licensee in the entertainment and toy products market, sales of ink to the licensed printers of these customers, a second sale of products incorporating the Company’s technologies to a new customer in the entertainment and toy products market and license and royalty revenues from a new licensee signed in the first quarter of 2011. As the Company’s total overhead and other expenses in the first six months of 2011 were comparable to the total overhead and other expenses in the first six months of 2010, the increase in the gross profit resulted in a reduction of the Company’s net loss to $73,400 in the first six months of 2011 compared to $226,200 in the first six months of 2010. The Company had positive operating cash flow of $66,200 during the first six months of 2011. At June 30, 2011, the Company had negative working capital of $394,800 and a stockholders’ deficiency of $388,200. For the full year of 2010, the Company had a net loss of $245,100 and had negative operating cash flow of $170,200. At December 31, 2010, the Company had negative working capital of $343,000 and a $333,400 stockholders’ deficiency.

During 2010, the Company accepted an offer by the bank to repay the then outstanding balance of $100,000 under its line of credit with a bank in forty-eight equal monthly installments, plus interest, beginning in October 2010. As of June 30, 2011, the balance on the line of credit had been reduced to $81,250. During 2010 and early 2011, the Company received unsecured loans totaling $65,500 from five individuals and repaid $15,000 of those amounts borrowed. Additionally, in 2010 and 2011 through the date of this report, the Company raised approximately $119,600 through the sale of 3,215,082 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 investments or borrowings that will allow the Company to fund losses that it presently believes may continue during 2011. The Company believes that without additional investment, it may be forced to cease operations at an undetermined date in the future.

The Company’s plan of operation for the twelve months beginning with the date of this quarterly report consists of concentrating available human and financial resources to continue to capitalize on the specific business relationships the Company has developed in the entertainment and toy products market, including a new licensee added in 2010, a new international customer added in 2010 and a new licensee added in the first quarter of 2011. The Company plans to continue developing applications for these licensees while expanding its licensee base in the entertainment and toy market. Additionally, the Company anticipates revenue growth in the retail loss prevention market through increased royalties from security ink sales to its long-standing and recently-added licensees in this market. The Company will continue to adjust its production and technical staff as necessary. The Company will also, subject to available financial resources, invest in capital equipment needed to support potential growth in ink production requirements beyond its current capacity. Additionally, the Company will pursue opportunities to market its current technologies in specific security and non-security markets.

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, or that such additional capital, if obtained, will enable the Company to generate additional revenues and positive cash flow.

The Company generates a significant portion of its total revenues from licensees in the entertainment and toy products market. These licensees generally sell their products through retail outlets. Over the balance of the year, such sales may be adversely affected by a continuation of the slowdown in consumer spending that was experienced during 2009 and 2010 due to the current negative economic environment. As a result, the Company’s revenues, results of operations and liquidity may continue to be negatively impacted as they were during the previous two years.

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, 2011:

Access to Capital. The Company anticipates the need to raise capital in order to fund its historical and new business operations. The crisis in the financial markets that commenced in 2007 caused serious deterioration in the net worth and liquidity of many investors, including potential investors in the Company, and seriously eroded investor confidence in general making it more difficult for the Company to raise capital. If the Company is unable to secure capital, in the form of debt, equity or both, that may be needed in the future, 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 line of credit with a bank that, at its inception, allowed the Company to borrow a maximum of $100,000. In August 2010, after the bank indicated that it would not renew the line of credit, the Company accepted an offer by the bank to repay the then outstanding loan balance of $100,000 in forty-eight equal monthly installments of $2,083, plus interest, beginning in October 2010 and maturing in September 2014. During 2010 and the first quarter of 2011, the Company incurred unsecured loans totaling $65,500 from five individuals and repaid $15,000 of these loans. The incurrence of these unsecured loans constituted a violation of certain covenants of the Company’s line of credit with the 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 the right to require the Company to immediately repay the entire outstanding loan balance. Should the bank impose a requirement for immediate repayment of the entire outstanding loan balance, which was $81,250 at June 30, 2011, this 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 licensing relationship with a major customer. Revenues obtained directly from this customer and indirectly, through the customer’s third party printer, equaled approximately 42% of the Company’s second quarter 2011 revenues, approximately 45% of the Company’s first half 2011 revenues and approximately 39% of the Company’s 2010 full year revenues. The Company also has substantial receivables from these businesses. The Company is dependent on its licensees to develop new products and markets that will generate increases in its licensing and product revenues. While a multi-year license exists with this major customer, the inability of the Company’s 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. Additionally, as the Company’s licensees continue to be adversely affected by the current economic downturn, the Company’s revenues may be adversely impacted. In late 2009, the Company entered into a three-year license agreement that commenced in January 2010. This license agreement contains guaranteed minimum annual royalties covering products sold under previous license agreements with two of the licensee’s operating divisions. Although the agreement contains renewal options, there can be no assurances that the license will continue in force at the same or more favorable terms beyond its current termination date.

Possible Inability to Develop New Business. 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 raised cash through additional capital investment and loans from individuals in 2010 and 2011. The Company also benefited from limiting increases in its operating expenses and reducing its operating expenses when possible. The Company’s ability to develop new revenues may depend on the extent of 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 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 to (i) vendors who supply raw materials and other components of its security inks and (ii) 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. The inability to obtain materials on a timely basis and the possibility that certain vendors may permanently discontinue supplying the Company with needed products and services may result in delayed shipments to customers and further impact the Company’s ability to service its customers, thereby adversely affecting the Company’s relationships with its customers and licensees. 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 and sales of products incorporating its technologies as well as royalties from these products, are difficult to forecast; such forecasting difficulty is due to, among other reasons, 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 the finalization of license contracts, the implementation of the technology to initiate the revenue stream and the ordering decisions of customers can have a material adverse effect on the Company’s quarterly and annual revenue expectations. 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 predictability 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. With the exception of 2007, from its inception, the Company has operated at a loss and has not produced revenue levels traditionally associated with publicly-traded companies. The Company’s common stock is not listed on a national or regional securities exchange and, consequently, the Company receives limited publicity regarding its business achievements and prospects. Additionally, securities analysts and traders do not extensively follow the Company’s stock and its stock is 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 may 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 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 the Company’s 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. As advised by its patent counsel, the Company has paid patent maintenance fees of approximately $400 during the first six months of 2011. There can be no assurances that the Company will be able to continue to prosecute new patents and maintain issued patents. As a result, the Company’s customer and licensee relationships could be adversely affected, and the value of the Company’s technologies and intellectual property (including their value upon 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 expected to continue during 2011. The Company’s sales, liquidity and overall results of operations may be negatively affected by decreasing consumer confidence, further slowdowns in consumer spending or other downturns in the U.S. economy as a whole or in any geographic markets from which the Company derives revenue. In addition, these factors may result in decreased customer and licensee demand for the Company’s products and may negatively impact the Company’s ability to develop new customers and licensees. Due to the uncertainty surrounding the financial crisis, the Company is unable to predict the effect of such conditions on its customers and licensees. Consequently, the Company cannot predict the scope or magnitude of the negative effect resulting from an ongoing global financial crisis and economic slowdown.

Recently Adopted Accounting Pronouncements

As of June 30, 2011 and for the period then ended, there were no recently adopted accounting pronouncements that had a material effect on the Company’s financial statements.

Recently Issued Accounting Pronouncements Not Yet Adopted

As of June 30, 2011, there are no recently issued accounting standards not yet adopted which would have a material effect on the Company’s financial statements.

Off-Balance Sheet Arrangements

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

Item 3.		Quantitative and Qualitative Disclosures About Market Risk

Not applicable.

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 2.		Unregistered Sales of Equity Securities and Use of Proceeds

On June 9, 2011, the Company sold 46,875 shares of its Common Stock, $0.01 per share (the “Common Stock”), to an individual accredited investor (who was acquainted with a member of the Company’s Board of Directors) for $3,000, or $0.064 per share. The shares of Common Stock were sold in a private transaction exempt from registration pursuant to Section 4(2) of the Securities Act. Appropriate legends were affixed to the securities issued in this transaction. The recipient of securities in this transaction had adequate access, through employment or business relationships, to information about us. No underwriters were involved in this transaction or received any commissions or other compensation. Proceeds of the sale of Common Stock were used to fund the Company’s working capital requirements.

During the second quarter of 2011, the Company sold 335,337 shares of its Common Stock to two non-affiliated individual investors for a total of $18,000 pursuant to a private placement. Appropriate legends were affixed to the securities issued in these transactions. Each of the recipients of securities in these transactions had adequate access, through employment or business relationships, to information about us.

Item 3.		Defaults Upon Senior Securities

During 2010 and the first six months of 2011, the Company accepted unsecured loans totaling $65,500 from five individuals and repaid $15,000 of the loans received. 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 whereby the bank has certain rights, including the right to require the Company to immediately repay the entire outstanding loan balance, which was $81,250 at June 30, 2011.

Item 6.		Exhibits

(a) Exhibits

	31.1			Certification of Chief Executive Officer required by Rule 13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
	31.2			Certification of Chief Financial Officer required by Rule 13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
	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.
	101			The following materials from the Nocopi Technologies, Inc. Quarterly Report on Form 10-Q for the quarter ended June 30, 2011 are furnished herewith, formatted in XBRL (eXtensible Business Reporting Language): (i) the Statements of Operations, (ii) the Balance Sheets, (iii) the Statements of Cash Flows, and (iv) the Notes to Financial Statements, tagged as blocks of text.

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)/15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
	31.2			Certification of Chief Financial Officer required by Rule 13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
	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.
	101			The following materials from the Nocopi Technologies, Inc. Quarterly Report on Form 10-Q for the quarter ended June 30, 2011 are furnished herewith, formatted in XBRL (eXtensible Business Reporting Language): (i) the Statements of Operations, (ii) the Balance Sheets, (iii) the Statements of Cash Flows, and (iv) the Notes to Financial Statements, tagged as blocks of text.