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 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		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. 53,551,462 shares of common stock, par value $.01, as of August 1, 2009.

 

 

NOCOPI TECHNOLOGIES, INC.

INDEX

		PAGE
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
Statements of Operations for Three and Six Months Ended June 30, 2009 and June 30, 2008			1
Balance Sheets at June 30, 2009 and December 31, 2008			2
Statements of Cash Flows for Six Months Ended June 30, 2009 and June 30, 2008			3
Notes to Financial Statements			4-8
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			9-18
Item 4T. Controls and Procedures			19
Part II. OTHER INFORMATION
Item 1. Legal Proceedings			20
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			20
Item 3. Defaults upon Senior Securities			20
Item 4. Submissions of Matters to a Vote of Security Holders			20
Item 5. Other Information			20
Item 6. Exhibits			20
SIGNATURES			21
EXHIBIT INDEX			22

PART I — FINANCIAL INFORMATION

Item 1. Financial Statements

Nocopi Technologies, Inc.
Statements of Operations*
(unaudited)

		Three Months ended June 30								Six Months ended June 30
		2009				2008				2009				2008
Revenues
Licenses, royalties and fees		$	95,300			$	109,900			$	165,800			$	304,100
Product and other sales			92,200				127,600				135,300				205,200
			187,500				237,500				301,100				509,300
Cost of revenues
Licenses, royalties and fees			23,300				24,000				43,300				46,900
Product and other sales			66,200				76,000				113,400				138,200
			89,500				100,000				156,700				185,100
Gross profit			98,000				137,500				144,400				324,200
Operating expenses
Research and development			40,900				39,800				83,100				82,100
Sales and marketing			95,700				65,600				169,600				133,500
General and administrative			88,300				112,600				197,900				248,900
			224,900				218,000				450,600				464,500
Net loss from operations			(126,900	)			(80,500	)			(306,200	)			(140,300	)
Other income (expenses)
Reversal of accounts payable and accrued expenses			69,100				37,500				69,100				37,500
Interest income			—				900				—				2,300
Interest expense and bank charges			(800	)			(500	)			(1,000	)			(1,100	)
			68,300				37,900				68,100				38,700
Net loss before income taxes			(58,600	)			(42,600	)			(238,100	)			(101,600	)
Income taxes			—				900				—				900
Net loss		$	(58,600	)		$	(43,500	)		$	(238,100	)		$	(102,500	)
Basic and diluted net loss per common share		$	(.00	)		$	(.00	)		$	(.00	)		$	(.00	)
Basic and diluted weighted average common shares outstanding			52,541,045				52,284,170				52,413,441				52,280,004

Nocopi Technologies, Inc.

Balance Sheets*

		June 30				December 31
		2009				2008
		(unaudited)				(audited)
Assets
Current assets
Cash and cash equivalents		$	54,400			$	87,200
Accounts receivable less $5,000 allowance for doubtful accounts			115,500				167,100
Inventory			81,500				97,200
Prepaid and other			22,100				35,900
Total current assets			273,500				387,400
Fixed assets
Leasehold improvements			72,500				72,500
Furniture, fixtures and equipment			184,900				184,900
			257,400				257,400
Less: accumulated depreciation and amortization			237,700				233,100
			19,700				24,300
Total assets		$	293,200			$	411,700
Liabilities and Stockholders’ Equity (Deficiency)
Current liabilities
Line of credit		$	75,000				—
Accounts payable			263,200			$	272,200
Accrued expenses			114,600				117,100
Deferred revenue			17,200				10,000
Total current liabilities			470,000				399,300
Stockholders’ equity (deficiency)
Common stock, $.01 par value
Authorized — 75,000,000 shares
Issued and outstanding
2009 — 52,926,462 shares; 2008 — 52,285,837 shares			529,300				522,900
Paid-in capital			12,174,800				12,132,300
Accumulated deficit			(12,880,900	)			(12,642,800	)
Total stockholders’ equity (deficiency)			(176,800	)			12,400
Total liabilities and stockholders’ equity (deficiency)		$	293,200			$	411,700

Nocopi Technologies, Inc.

Statements of Cash Flows*
(unaudited)

		Six Months ended June 30
		2009				2008
Operating Activities
Net loss		$	(238,100	)		$	(102,500	)
Adjustments to reconcile net loss to cash used in operating activities
Depreciation and amortization			4,600				6,600
Reversal of accounts payable and accrued expenses			(69,100	)			(37,500	)
Compensation expense — stock option grants			7,900				30,500
			(294,700	)			(102,900	)
(Increase) decrease in assets
Accounts receivable			51,600				78,800
Inventory			15,700				(1,400	)
Prepaid and other			13,800				19,600
Increase (decrease) in liabilities
Accounts payable and accrued expenses			57,600				(41,600	)
Accrued income taxes			—				(800	)
Deferred revenue			7,200				—
			145,900				54,600
Net cash used in operating activities			(148,800	)			(48,300	)
Investing Activities
Additions to fixed assets			—				(1,200	)
Net cash used in investing activities			—				(1,200	)
Financing Activities
Net borrowings under line of credit			75,000				—
Issuance of common stock			41,000				—
Exercise of warrants			—				2,200
Net cash provided by financing activities			116,000				2,200
Decrease in cash and cash equivalents			(32,800	)			(47,300	)
Cash and cash equivalents at beginning of year			87,200				263,600
Cash and cash equivalents at end of period		$	54,400			$	216,300
Supplemental disclosure of cash flow information
Cash paid for interest		$	400			$	2,700
Cash paid for income taxes			—			$	1,600

NOCOPI TECHNOLOGIES, INC.

NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)

Note 1. Financial Statements

The accompanying unaudited condensed financial statements have been prepared by Nocopi Technologies, Inc. (the “Company”). These statements include all adjustments (consisting only of normal recurring adjustments) which management believes necessary for a fair presentation of the statements and have been prepared on a consistent basis using the accounting policies described in the summary of Accounting Policies included in the Company’s 2008 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 2008 Annual Report on Form 10-K should be read in conjunction with the accompanying interim financial statements. The interim operating results for the three and six months ended June 30, 2009 may not be necessarily indicative of the operating results expected for the full year.

Note 2. Going Concern

Since its inception, the Company has incurred significant losses and, as of June 30, 2009, had accumulated losses of $12,880,900. For the six months ended June 30, 2009, the Company had a net loss from operations of $306,200 and negative cash flow from operations of $148,800. At June 30, 2009, the Company had negative working capital of $196,500 and a stockholders’ deficiency of $176,800. For the year ended December 31, 2008, the Company’s net loss from operations was $362,300. 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 newly formed Loss Prevention Division. 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 2008, the Company negotiated a $100,000 revolving line of credit with a bank as an additional potential source of capital. During the second quarter of 2009, the Company borrowed $75,000 under the line of credit to fund its operating activities. There can be no assurances that the bank will continue to make the line of credit available in the future. During the second quarter of 2009, the Company raised $41,000 in a private placement whereby 640,625 shares of the Company’s common stock were sold to two non-affiliated individual investors. Management of the Company is continuing to seek potential investors to fund investments needed to increase its operating revenues to levels that will sustain its operations, to fund the start-up of a new business line and to fund operating deficits that it anticipates will continue until revenues from traditional product lines increase and revenues from 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 SFAS 123(R), “Share-Based Payment” 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 $.12 per share. The options vest after one year and expire after five years. In accordance with the fair value method as described in accounting requirements of SFAS No. 123(R), compensation expense of approximately $22,900 is being 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. During the three months and six months ended June 30, 2009, compensation expense of approximately $6,000 and $7,900, respectively, was recognized. As of June 30, 2009, the unrecognized portion of compensation expense was approximately $15,000.

On April 30, 2008, under the Company’s directors’ option plan (the “Plan”), options to acquire 100,000 shares of the Company’s common stock were granted to each of the five members of the Board of Directors of the Company, including one member who is also an executive officer of the Company, at $.45 per share. Under the terms of the Plan, the options (i) vested on January 1, 2009 and (ii) will expire five years from the date of grant. In accordance with the fair value method as described in accounting requirements of SFAS No. 123(R), compensation expense of approximately $121,700 was recognized during 2008 to account for the cost of employee and director services received by the Company in exchange for the grant of stock options. During the three and six months ended June 30, 2008, compensation expense of approximately $30,500 was recognized.

The Company’s 1999 Stock Option Plan terminated in February 2009 and no further stock options can be granted under the plan; however, options granted before the termination date may be exercised through their expiration date.

The following table summarizes all stock option activity of the Company since December 31, 2008:

										Weighted Average
		Number				Exercise				Exercise
		of Shares				Price				Price
Outstanding options - December 31, 2008			2,250,000			$	.10 to $.45			$	.23
Issued			325,000			$	.12			$	.12
Canceled			950,000			$	.17			$	.17
Outstanding options - June 30, 2009			1,625,000			$	.10 to $.45			$	.24
Weighted average remaining contractual life (years)			2.79
Exercisable options - June 30, 2009			1,300,000			$	.10 to $.45			$	.27
Weighted average remaining contractual life (years)			2.32

Note 4. Line of Credit

In August 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 .5%. At June 30, 2009, 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. The Company presently is required to pay interest only on borrowings under the line of credit. During the three months ended June 30, 2009, the Company borrowed $75,000 of the $100,000 available under the line of credit.

Note 5. Stockholders’ Equity (Deficiency)

During the second quarter of 2009, the Company sold 640,625 shares of its common stock to two non-affiliated individuals for a total of $41,000 pursuant to a private placement. During the second quarter of 2008, a non-affiliated warrant holder exercised warrants to acquire 10,000 shares of common stock of the Company at $.22 per share.

Note 6. Other Income (Expenses)

Other income (expenses) includes, for the three months and six months ended June 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, has determined to be no longer statutorily payable as the statute of limitations to bring a claim has expired. Other

income (expenses) included, for the three months and six months ended June 30, 2008, the reversal of $37,500 of accounts payable and accrued expenses that the Company, with legal counsel, determined to be no longer statutorily payable as the statute of limitations to bring a claim had expired.

Note 7. Income Taxes

There is no income tax benefit for the three months and six months ended June 30, 2009 and June 30, 2008 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. The Company recorded an income tax expense of $900 in the three months and six months ended June 30, 2008 for certain state income taxes due for 2007 in excess of the tax liability recorded in that year.

There was no change in unrecognized tax benefits during the period ended June 30, 2009 and there was no accrual for uncertain tax positions as of June 30, 2009.

Tax years from 2005 through 2008 remain subject to examination by U.S. federal and state jurisdictions.

Note 8. Loss per Share

In accordance with SFAS No. 128, 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 six months ended June 30, 2009 and June 30, 2008, 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
		2009				2008				2009				2008
Customer A			34	%			34	%			36	%			47	%
Customer B			30	%			31	%			25	%			22	%
Customer C			17	%			19	%			18	%			17	%
Customer D			8	%			6	%			10	%			6	%

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
		2009				2008
Customer A			55	%			65	%
Customer B			24	%			—
Customer C			17	%			28	%
Customer D			—				3	%

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 Company’s revenues by geographic region are as follows:

		Three Months ended								Six Months ended
		June 30								June 30
		2009				2008				2009				2008
North America		$	131,800			$	163,300			$	226,700			$	395,300
Other			55,700				74,200				74,400				114,000
		$	187,500			$	237,500			$	301,100			$	509,300

Note 10. Subsequent Events

The Company continues negotiations for employment agreements with three individuals, one of whom is a current employee of the Company, related to the Company’s formation of a new sales and marketing division that focuses on sales of products to prevent and fight retail receipt and document fraud.

In July 2009, the Company sold 625,000 shares of its common stock to a non-affiliated investor for a total of $35,000 pursuant to a private placement.

Item 2.

NOCOPI TECHNOLOGIES, INC.

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

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, 2008 included in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 31, 2009, 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 second quarter of 2009 were $187,500 compared to $237,500 in the second quarter of 2008, a decrease of $50,000, or approximately 21%. Licenses, royalties and fees decreased by $14,600, or approximately 13%, to $95,300 in the second quarter of 2009 from $109,900 in the second quarter of 2008. The decrease in licenses, royalties and fees is due primarily to lower licensing revenues derived from three licensees in the entertainment and toy

products business and lower royalties from a licensee in the retail receipt and document fraud market resulting from the conversion of an exclusive license to a non-exclusive license at a lower royalty rate at the beginning of 2009 offset in part by revenues from two licenses signed in late 2008 and early 2009. The conversion to a non-exclusive license with this licensee in the retail receipt and document fraud market enables the Company to enter this market to sell its security products directly to loss prevention departments within retail businesses and chains and to license other printers who serve this market segment. Product and other sales decreased by $35,400, or approximately 28%, to $92,200 in the second quarter of 2009 from $127,600 in the second quarter of 2008. Sales of both ink and security paper declined in the second quarter of 2009 compared to the second quarter of 2008. The lower level of ink sales in the second quarter of 2009 compared to the second quarter of 2008 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 due to the licensees’ decline in sales during the current period of economic decline. The Company derived revenues of approximately $121,100 from licensees and their printers in the entertainment and toy products market in the second quarter of 2009 compared to approximately $155,700 in the second quarter of 2008. Sales of security paper also declined in the second quarter of 2009 compared to the second quarter of 2008.

     For the first six months of 2009, revenues were $301,100, $208,200, or approximately 41%, lower than revenues of $509,300 in the first six months of 2008. Licenses, royalties and fees of $165,800 in the first half of 2009 were $138,300, or approximately 45%, lower than $304,100 in the first half of 2008, due primarily to the same factors that caused the revenue decline in the second quarter of 2009 compared to the second quarter of 2008. Product and other sales declined by $69,900, or approximately 34%, to $135,300 in the first half of 2009 from $205,200 in the first half of 2008. The lower level of ink sales in the first half of 2009 compared to the first half of 2008 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 related to the licensees’ declines in sales during the current period of economic decline. The Company derived revenues of approximately $185,600 from licensees and their printers in the entertainment and toy products market in the first half of 2009 compared to approximately $353,500 in the first half of 2008. Additionally, ink sales to the Company’s licensee in the retail receipt and document fraud market declined in the first half of 2009 compared to the first half of 2008. The Company also experienced a decline in sales of its security papers in the first half of 2009 compared to the first half of 2008.

     The Company’s gross profit decreased to $98,000 in the second quarter of 2009 or approximately 52% of revenues from $137,500 or approximately 58% of revenues in the second quarter of 2008. 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 lower gross profit in the second quarter of 2009 compared to the second quarter of 2008 results primarily from lower gross revenues from licenses, royalties and fees and product and other sales in the second quarter of 2009 compared to the second quarter of 2008.

     For the first six months of 2009, the gross profit was $144,400, or approximately 48% of revenues, compared to $324,200, or approximately 64% of revenues, in the first six months of

2008. The decrease in the gross profit in absolute dollars and as a percentage of revenues in the first half of 2009 compared to the first half of 2008 resulted from lower gross revenues of both licenses, royalties and fees and product and other sales in the first half of 2009 compared to the first half of 2008.

     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 decrease in revenues from licenses, royalties and fees in the second quarter of 2009 compared to the second quarter of 2008, the gross profit from licenses, royalties and fees decreased to approximately 76% of revenues from licenses, royalties and fees in the second quarter of 2009 from approximately 78% in the second quarter of 2008 and to approximately 74% of revenues from licenses, royalties and fees in the first half of 2009 from approximately 85% in the first half of 2008.

     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 lower sales of both inks and security paper products in the second quarter of 2009 compared to the second quarter of 2008, the gross profit from product and other sales declined to approximately 28% of revenues in the second quarter of 2009 compared to approximately 40% of revenues from product and other sales in the second quarter of 2008 and to approximately 16% of revenues from product and other sales in the first half of 2009 compared to approximately 33% of revenues from product and other sales in the first half of 2008.

     Research and development expenses of $40,900 and $83,100 in the second quarter and first six months of 2009 were comparable to $39,800 and $82,100 in the second quarter and first six months of 2008.

     Sales and marketing expenses increased to $95,700 in the second quarter of 2009 from $65,600 in the second quarter of 2008 and to $169,600 in the first six months of 2009 from $133,500 in the first six months of 2008. The increase in both the second quarter and first six months of 2009 compared to the second quarter and first six months of 2008 reflects fees paid to two sales consultants involved in the start up of the Company’s new Loss Prevention Division, participation in three Loss Prevention trade shows in the second quarter of 2009 and related travel expenses offset in part by lower commission expense on the lower level of sales and lower costs associated with the Company’s web site in the second quarter and first six months of 2009 compared to the second quarter and first six months of 2008.

     General and administrative expenses decreased to $88,300 in the second quarter of 2009 from $112,600 in the second quarter of 2008. The decrease in the second quarter of 2009 compared to the second quarter of 2008 is due primarily to: a) $6,000 in expenses recorded in the second quarter of 2009 in connection with the issuance of 325,000 options to purchase shares of the Company’s common stock in February 2009 to employees, an officer and others compared to $30,500 in expenses recorded in the second quarter of 2008 in connection with the issuance of 500,000 options to purchase shares of the Company’s common stock to members of the Company’s Board of Directors in April 2008; b) no patent acquisition and maintenance expenses in the second quarter of 2009; c) lower insurance expense in the second quarter of 2009

compared to the second quarter of 2008 related to favorable policy renewals and d) lower legal expenses due to lower requirements in the second quarter of 2009 compared to the second quarter of 2008 offset in part by higher compensation expense due to the inception in June 2008 of an employment agreement with the Company’s Chief Executive Officer.

     For the first six months of 2009, general and administrative expenses decreased to $197,900 from $248,900 in the first six months of 2008 due primarily to: a) the non-recurrence of the Company’s one-time contribution in the first half of 2008 of $40,000 to a licensee of the Company under an agreement whereby the licensee acquired an interest in a patent held by a third party and the Company received, among other things, certain assurances regarding its continuing ability to manufacture and sell products to this licensee; b) $7,900 in expenses recorded in the first half of 2009 in connection with the issuance of 325,000 options to purchase shares of the Company’s common stock in February 2009 to employees, an officer and others compared to $30,500 in expenses recorded in the first half of 2008 in connection with the issuance of 500,000 options to purchase shares of the Company’s common stock to members of the Company’s Board of Directors in April 2008; c) no patent acquisition and maintenance expenses in the first half of 2009; and d) lower insurance expense in the first half of 2009 compared to the first half of 2008 related to favorable policy renewals offset in part by higher compensation expense due to the inception in June 2008 of an employment agreement with the Company’s Chief Executive Officer.

     Other income (expenses) includes, for the three months and six months ended June 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, has determined to be no longer statutorily payable as the statute of limitations to bring a claim has expired. Other income (expenses) included, for the three months and six months ended June 30, 2008, the reversal of $37,500 of accounts payable and accrued expenses that the Company, with legal counsel, determined to be no longer statutorily payable as the statute of limitations to bring a claim had expired. Additionally, the Company incurred interest expense in the second quarter and first six months of 2009 on funds borrowed under its line of credit. There was no interest expense in the second quarter and first six months of 2008 as there were no loans outstanding during those periods.

     The net loss of $58,600 in the second quarter of 2009 compared to the net loss of $43,500 in the second quarter of 2008 results primarily from a lower gross profit on a lower level of revenues, higher compensation expense as well as consulting fees, business show and travel expense related to the start up Company’s new Loss Prevention Division offset in part by lower commissions and other sales related expenses, lower stock option compensation expense, lower patent related costs and higher income related to the reversal of accounts payable that are no longer statutorily payable. The net loss of $238,100 for the six months ended June 30, 2009 compared to the net loss of $102,500 in the six months ended June 30, 2008 results primarily from a lower gross profit on the lower level of revenues, higher compensation expense as well as consulting fees, business show and travel expense related to the start up Company’s new Loss Prevention Division offset in part by the non-recurrence of a one time transaction with a licensee, lower commissions and other sales related expenses, lower stock option compensation expense, lower patent related costs and higher income related to the reversal of accounts payable that are no longer statutorily payable.

     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 second quarter and first half of 2009 and the second quarter and first half of 2008.

Plan of Operation, Liquidity and Capital Resources

     The Company’s cash and cash equivalents decreased to $54,400 at June 30, 2009 from $87,200 at December 31, 2008. During the first half of 2009, the Company received $41,000 from the sale of 640,625 shares of its common stock, borrowed $75,000 from a bank under its line of credit and used $148,800 to fund operations.

     While the Company has added new licensees in the entertainment and toy market over the past three years and had obtained significant increases in revenues from licenses, royalties and product sales from these licensees and their third party printers through the end of 2008, its working capital requirements have increased primarily in support of inventory and receivables related to these revenues. During the first half of 2009, the Company’s revenues declined significantly as a result of declines in licensing revenues from its principal licensees in the entertainment and toy products business and incurred expenditures related to the inception of a new division that will sell the Company’s security products directly to loss prevention departments within retail businesses and chains and to license other printers who serve this market segment. Primarily resulting from these two factors, the Company recorded a net loss of $238,100 in the first six months of 2009 and had negative operating cash flow of $148,800 during that period. At June 30, 2009, the Company had negative working capital of $196,500 and stockholders’ deficiency of $176,800. For the full year of 2008, the Company had a net loss of $271,700 and had negative operating cash flow of $175,200 during the year. At December 31, 2008, the Company had negative working capital of $11,900 and $12,400 in stockholders’ equity. During the third quarter of 2008, the Company secured a $100,000 line of credit with a bank as an additional potential source of working capital. During the second quarter of 2009, the Company borrowed $75,000 under the line of credit to fund its operating activities. The Company is presently required to pay interest only on borrowings under the line of credit. There can be no assurances that the bank will continue to make the line of credit available in the 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 through ongoing applications development for these licensees. The Company is also actively pursuing potential opportunities for its applications in new markets including the retail loss prevention market. The Company believes that these initiatives can provide increases in revenues and it will continue to increase 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 in the first half of 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 in the first half of 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, 2009:

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 64% of the Company’s second quarter 2009 revenues, approximately 61% of the Company’s first half 2009 revenues and approximately 63% of the Company’s 2008 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 return to levels of sales of products utilizing the Company’s technologies achieved in earlier periods 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. Two of the license agreements with this customer are currently in force through year-end 2009 and a third through year-end 2010. The agreements contain mutual renewal options. There can be no assurances that the licenses will continue in force at the same, or more favorable, terms beyond the current termination dates.

Possible Inability to Develop New Business. While the Company raised cash through additional capital investment in 2007 and generated cash flow from operations in 2007, it has had limited increases in its operating expenses until this time. However, additional expenditures are required in 2009 to fund the new Loss Prevention Division. Management of the Company believes that any significant improvement in the Company’s cash flow from operations must result from increases in revenues from traditional sources and from new revenue sources including its new Loss Prevention Division. 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 in previous periods required it to significantly defer payments due vendors who supply raw materials and other components of its security inks, security paper that it purchases for resale, 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 could impact the Company’s ability to service its customers, thereby adversely affecting its customer and licensee

relationships. Management of the Company believes that the capital investment and positive operating cash flow in 2007 have allowed the Company to improve its relationships with its vendors and professional service providers. There are, however, no assurances that the Company will be able to continue 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 and the Company’s new Loss Prevention Division begins operations, 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 through 2006 and again in 2008 and the first six months of 2009, 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.

Access to Capital. The Company presently needs to raise additional capital 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 form of debt, equity or both, its ability to maintain its business operations in their current form may be adversely affected. There can be no assurances that the Company will be successful in obtaining additional investment in sufficient amounts to fund its ongoing business operations.

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 in previous years had also impacted its ability to obtain patent protection on its intellectual property and to maintain protection on previously issued patents. The Company has been advised by its patent counsel that no patent maintenance fees are known to be due during 2009. 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 current global recession, the effects of which are expected to continue through at least 2009. 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 economy, and the Company’s inability 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 the recent global financial crisis and economic slowdown will have on it.

Recently Adopted Accounting Pronouncements

In April 2009, the FASB issued FASB Staff Position No. 107-1 (“FSP FAS 107-1”) and APB 28-1 (“APB 28-1”), which amends FASB Statement No. 107, Disclosures about Fair Value of Financial Instruments and APB Opinion No. 28, Interim Financial Reporting, to require disclosures about the fair value of financial instruments for interim reporting periods. FSP FAS 107-1 and APB 28-1 is effective for interim reporting periods ending after June 15, 2009. The adoption of this staff position did not have a material impact on the Company’s financial statements.

In April 2009, the FASB issued FASB Staff Position No. 157-4 (“FSP FAS 157-4”), which provides additional guidance in accordance with FASB No. 157, Fair Value Measurements, when the volume and level of activity for the asset or liability has significantly decreased. FSP FAS 157-4 is effective for interim and annual reporting periods ending after June 15, 2009. The adoption of this staff position did not have a material effect on the Company’s financial statements.

In April 2009, the FASB issued FASB Staff Position No. 115-2 (“FSP FAS 115-2”) and FASB Staff Position No. 124-2 (“FSP FAS 124-2”), which amends the other-than-temporary impairment guidance for debt and equity securities. FSP FAS 115-2 and FSP FAS 124-2 is effective for interim and annual reporting periods ending after June 15, 2009. The adoption of this staff position did not have a material effect on the Company’s financial statements.

In May 2009, the FASB issued SFAS No. 165, Subsequent Events, which is effective for interim or annual financial periods ending after June 15, 2009. SFAS No. 165 establishes general

standards of accounting and disclosure of events that occur after the balance sheet but before financial statements are issued or are available to be issued.

However, since the Company is a public entity, management is required to evaluate subsequent events through the date that financial statements are issued and disclose the date through which subsequent events have been evaluated, as well as the date the financial statements were issued. SFAS No. 165 was adopted for its interim period ending June 30, 2009. Subsequent events have been evaluated through August 14, 2009, the date the financial statements were issued as further discussed in EITF Topic No. D-86.

Recently Issued Accounting Pronouncements Not Yet Adopted

In June 2009, the FASB issued SFAS No. 167, Amendments to FASB Interpretation No. 46(R).

This Statement is a revision to FIN 46(R) and changes how a company determines when an entity that is insufficiently capitalized or is not controlled through voting (or similar rights) should be consolidated. The determination of whether a company is required to consolidate an entity is based on, among other things, an entity’s purpose and design and a company’s ability to direct the activities of the entity that most significantly impact the entity’s economic performance.

This Statement requires an additional reconsideration event when determining whether an entity is a variable interest entity when any changes in facts and circumstances occur such that the holders of the equity investment at risk, as a group, lose the power from voting rights or similar rights of those investments to direct the activities of the entity that most significantly impact the entity’s economic performance. It also requires ongoing assessments of whether an enterprise is the primary beneficiary of a variable interest entity. These requirements will provide more relevant and timely information to users of financial statements.

This Statement shall be effective as of the beginning of each reporting entity’s first annual reporting period that begins after November 15, 2009, for interim periods within that first annual reporting period, and for interim and annual reporting periods thereafter. This pronouncement is not currently applicable to the Company.

In June 2009, the FASB issued SFAS No. 168, The FASB Accounting Standards Codification, which establishes the Codification as the source of authoritative GAAP recognized by the FASB to be applied by nongovernmental entities. SFAS 168 is effective for financial statements issued for interim and annual periods ending after September 15, 2009. The adoption of SFAS 168 is not expected to have an effect on the Company’s financial reporting.

Off-Balance Sheet Arrangements

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

Item 4T. 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 May 27, 2009, the Company sold 250,000 shares of its Common Stock, par value $.01 per share, to an individual investor (who was acquainted with a member of the Company’s Board of Directors) for $16,000, or $0.064 per share; on June 11, 2009, the Company sold 390,625 shares of its Common Stock, par value $.01 per share, to an individual investor (who was acquainted with a member of the Company’s Board of Directors) for $25,000, or $0.064 per share. All shares were sold in private transactions exempt from registration pursuant to Section 4(2) of the Securities Act. 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

     Not Applicable

Item 4. Submission of Matters to a Vote of Security Holders

     Not Applicable

Item 5. Other Information

     Not Applicable

Item 6. Exhibits

          (a) Exhibits

31.1		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.		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