U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Form 10-QSB
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934.
For the quarterly period ended June 30, 2004.
[ ] TRANSITION REPORT PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934.
For the transition period from _________________ to ______________
Commission file number 0-20333
NOCOPI TECHNOLOGIES, INC.
---------------------------------------
(Exact name of small business issuer as
specified in its charter)
MARYLAND 87-0406496
------------------------------- ---------------------------------
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
9C Portland Road, West Conshohocken, PA 19428
-------------------------------------------------------------
(Address of principal executive offices)
(610) 834-9600
-------------------------------------------------------------
(Issuer's telephone number)
Check whether the issuer has (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. Yes_X_ No___
State the number of shares outstanding of each of the issuer's classes of
common equity, as of August 1, 2004: Common stock, par value $.01 per share:
45,972,241 shares.
Transitional Small Business Disclosure Format (check one): Yes___ No_X_
NOCOPI TECHNOLOGIES, INC.
-------------------------
INDEX
Part I. FINANCIAL INFORMATION PAGE
Item 1. Financial Statements 1
Statements of Operations for Three and Six Months
Ended June 30, 2004 and June 30, 2003 1
Balance Sheet at June 30, 200 2
Statements of Cash Flows for Six Months Ended June 30, 2004
and June 30, 2003 3
Notes to Financial Statements 4-6
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations 7-13
Item 3. Controls and Procedures 14
Part II. OTHER INFORMATION
Item 1. Legal Proceedings 15
Item 2. Changes in Securities and use of Proceeds 15
Item 3. Defaults Upon Senior Securities 15
Item 4. Submission of matters to a Vote of Security Holders 15
Item 5. Other Information 15
Item 6. Exhibits and Reports on Form 8-K 15
SIGNATURES 16
INDEX TO EXHIBITS 17
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
2004 2003 2004 2003
-------- -------- -------- --------
(Note 3)
Revenues
Licenses, royalties and fees $ 95,300 $ 78,600 $172,900 $171,100
Product and other sales 49,000 75,400 112,000 127,800
-------- -------- -------- --------
144,300 154,000 284,900 298,900
Cost of sales
Licenses, royalties and fees 28,700 42,700 60,600 78,500
Product and other sales 22,300 36,400 52,900 68,000
-------- -------- -------- --------
51,000 79,100 113,500 146,500
-------- -------- -------- --------
Gross profit 93,300 74,900 171,400 152,400
Operating expenses
Research and development 42,000 49,400 94,000 98,600
Sales and marketing 38,000 31,900 83,000 118,100
General and administrative
(exclusive of legal expenses) 104,800 60,300 160,500 144,100
Legal expenses 28,900 30,200 62,300 48,800
-------- -------- -------- --------
213,700 171,800 399,800 409,600
-------- -------- -------- --------
Loss from operations (120,400) (96,900) (228,400) (257,200)
Other income (expenses)
Interest income -- 200 -- 300
Interest expense and bank charges (3,300) (3,500) (6,700) (6,900)
Net proceeds from arbitration settlement -- 932,700 -- 875,300
-------- -------- -------- --------
(3,300) 929,400 (6,700) 868,700
-------- -------- -------- --------
Net earnings (loss) ($123,700) $832,500 ($235,100) $611,500
======== ======== ======== ========
Basic and diluted earnings (loss) per
common share ($.00) $.02 ($.01) $.01
Weighted average common shares outstanding 45,972,241 45,972,241 45,972,241 45,972,241
*The accompanying notes are an integral part of these financial statements.
1
Nocopi Technologies, Inc.
Balance Sheet*
(unaudited)
June 30
2004
-----------
Assets
Current assets
Cash and cash equivalents $ 7,700
Accounts receivable less $15,000 allowance 55,600
Arbitration settlement receivable 50,000
Prepaid and other 21,500
-----------
Total current assets 134,800
Fixed assets
Leasehold improvements 71,200
Furniture, fixtures and equipment 476,200
-----------
547,400
Less: accumulated depreciation 485,300
-----------
62,100
Other assets
Arbitration settlement receivable 100,000
-----------
Total assets $ 296,900
===========
Liabilities and Stockholders' Deficiency
Current liabilities
Demand loans $149,900
Accounts payable 372,000
Accrued expenses 311,900
Deferred revenue 51,500
-----------
Total current liabilities 885,300
Stockholders' deficiency
Common stock, $.01 par value
Authorized - 75,000,000 shares
Issued and outstanding - 45,972,241 shares 459,700
Paid-in capital 11,199,100
Accumulated deficit (12,247,200)
-----------
(588,400)
-----------
Total liabilities and stockholders' deficiency $ 296,900
===========
*The accompanying notes are an integral part of these financial statements
2
Nocopi Technologies, Inc.
Statements of Cash Flows*
(unaudited)
Six Months ended June 30
2004 2003
-------- --------
Operating Activities
Net earnings (loss) ($235,100) $611,500
Adjustments to reconcile net earnings (loss) to cash from operating activities
Depreciation 10,200 4,200
Compensation expense - stock option grants 58,000 --
-------- --------
(166,900) 615,700
(INCREASE) DECREASE IN ASSETS
ACCOUNTS RECEIVABLE (15,800) (15,800)
Arbitration settlement receivable 50,000 (200,000)
Prepaid and other 18,700 (2,700)
Increase (decrease) in liabilities
Accounts payable and accrued expenses 52,600 (277,100)
Deferred revenue (20,000) (22,400)
-------- --------
85,500 (518,000)
-------- --------
Cash provided by (used in) operating activities (81,400) 97,700
Investing Activities
Additions to fixed assets (800) (12,800)
Investment in affiliate -- 110,600
-------- --------
Cash provided by (used in) investment activities (800) 97,800
Financing Activities
Demand loans -- 4,500
-------- --------
Cash provided by investment activities -- 4,500
Increase (decrease) in cash and cash equivalents (82,200) 200,000
Cash and cash equivalents - beginning of period 89,900 139,000
-------- --------
Cash and cash equivalents - end of period $ 7,700 $339,000
======== ========
*The accompanying notes are an integral part of these financial statements
3
NOCOPI TECHNOLOGIES, INC.
-------------------------
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1. FINANCIAL STATEMENTS
The accompanying unaudited condensed financial statements have been
prepared by Nocopi Technologies, Inc. (the Company). These statements
include all adjustments (consisting only of normal recurring
adjustments) which management believes necessary for a fair
presentation of the statements and have been prepared on a consistent
basis using the accounting policies described in the summary of
Accounting Policies included in the Company's 2003 Annual Report on
Form 10-KSB. Certain financial information and footnote disclosures
normally included in financial statements prepared in accordance with
generally accepted accounting principles have been condensed or omitted
pursuant to such rules and regulations, although the Company believes
that the accompanying disclosures are adequate to make the information
presented not misleading. The Notes to Financial Statements included in
the 2003 Annual Report on Form 10-KSB should be read in conjunction
with the accompanying interim financial statements. The interim
operating results for the three and six months ended June 30, 2004 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, 2004, had accumulated losses of $12,247,200. For the
years ended December 31, 2003 and 2002, the Company's losses from
operations were $441,300 and $915,200, respectively. In addition, the
Company had negative working capital of $750,500 at June 30, 2004. The
Company 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.
There can be no assurances that the Company will be able to generate
sufficient revenues and gross profits to achieve and sustain
profitability and positive cash flow in the future.
The receipt of cash in the aggregate amount of $900,000 in June 2003 in
conjunction with the settlement of its arbitration proceedings with
Euro-Nocopi, S.A., an independent licensee, has permitted the Company
to continue in operation to the current date. As a result of the
settlement, the significant legal fees incurred in the arbitration have
been eliminated. Additionally, the Company has reduced staff and, in
2003, completed its relocation to a new facility that it believes will
enable the Company to further reduce its operating expenses. Management
of the Company believes that it will need to obtain additional capital
in the immediate future both to fund investments needed to increase its
operating revenues to levels that will sustain its operations and to
fund operating deficits that it anticipates will continue until revenue
increases can be realized. The Company believes that without additional
capital, whether in the form of debt, equity or both, it may be forced
to cease operations during the third quarter of 2004.
4
NOTE 3. SETTLEMENT OF ARBITRATION WITH AFFILIATE
In June 2003, the Company settled its arbitration proceeding commenced
by Euro-Nocopi, S.A. (Euro). Under the terms of the settlement, Euro
paid $900,000 to Nocopi and will pay an additional $200,000 in the
future for back royalties and all other matters in dispute between the
two companies, as well as the termination of Nocopi's 18% ownership of
Euro. As part of the settlement, the Company and Euro entered into an
amended and restated license pursuant to which the Company has agreed
that Euro may continue to market the Company's technologies in Europe.
The $200,000 is being paid in four equal annual installments commencing
in March 2004. The Company recorded a net gain of $932,700 and
$875,300, respectively, in the second quarter and first half of 2003
representing the proceeds of the settlement net of the Company's
$110,600 investment in Euro and legal expenses incurred during 2003
related to the arbitration.
For the first quarter of 2003 arbitration related legal expense of
$57,400 was reclassified from legal expenses to net proceeds from
arbitration settlement.
NOTE 4. DEMAND LOANS
The Company has unsecured loans from three individuals totaling
$149,900, including $37,900 from the Company's Chairman of the Board,
outstanding at June 30, 2004. The loans bear interest at seven per cent
per year and are payable on demand. In the third quarter of 2004, the
Company and the lenders discussed the conversion of the outstanding
balance of the loans, together with accrued interest thereon, into
shares of Common Stock of the Company. The lenders and the Company are
currently negotiating the definitive terms of the conversion.
NOTE 5. INCOME TAXES
There is no provision for income taxes for the three months and six
months ended June 30, 2004 since Management has determined that the
realization of the net deferred tax asset is not assured and has
created a valuation allowance for the entire amount of such benefits.
5
NOTE 6. STOCK OPTIONS ISSUED TO EMPLOYEES
The Company applies Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees," and related interpretations
in accounting for the issuance of its stock options. Accordingly, no
compensation cost has been recognized for its stock options issued
during the six months ended June 30, 2004. Had compensation cost for
the Company's issuance of vested stock options been determined based on
the fair value at grant dates for options consistent with the method of
SFAS No. 123, the Company's net loss would have been increased to the
pro forma amounts indicated below. The net loss per share would not
change. Fair value amounts were estimated using the Black-Scholes model
with the following assumptions: no dividend yield, expected volatility
of 60%, and a risk-free interest rate of 4% for the three and six
months ended June 30, 2004. There were no options issued for the six
months ended June 30, 2004.
Three Months Ended Six Months Ended
June 30, 2004 June 30, 2004
------------------ -----------------
Net loss As reported ($123,700) ($235,100)
Pro forma ($146,700) ($258,100)
Net loss per share As reported ($.00) ($0.01)
Pro forma ($.00) ($0.01)
6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
FORWARD-LOOKING INFORMATION
The following Management's Discussion and Analysis of Results of
Operations and Financial Condition should be read in conjunction with our
audited Financial Statements and Notes thereto for the year ended December 31,
2003 included in our Annual Report on Form 10-KSB filed with the Securities and
Exchange Commission.
The information in this discussion contains forward-looking statements
within the meaning of the Private Securities Litigation Reform Act of 1995.
Forward-looking statements involve known and unknown risks, uncertainties and
other factors, which may cause our actual results, performance or achievements
or industry results to be materially different from any future results,
performance or achievements expressed or implied by these forward-looking
statements. Such factors include those described in "Uncertainties That May
Affect the Company, its Operating Results and Stock Price." The forward-looking
statements included in this report may prove to be inaccurate. In light of the
significant uncertainties inherent in these forward-looking statements, you
should not consider this information to be a guarantee by us or any other person
that our objectives and plans will be achieved. The Company does not undertake
to publicly update or revise its forward-looking statements even if experience
or future changes make it clear that any projected results (expressed or
implied) will not be realized.
RESULTS OF OPERATIONS
The Company's revenues are derived from royalties paid by licensees of
the Company's technologies, fees for the provision of technical services to
licensees and from the direct sale of products incorporating the Company's
technologies, such as inks, security paper and pressure sensitive labels, and
equipment used to support the application of the Company's technologies, such as
ink-jet printing systems. Royalties consist of guaranteed minimum royalties
payable by the Company's licensees in certain cases and additional royalties
which typically vary with the licensee's sales or production of products
incorporating the licensed technology. Service fees and sales revenues vary
directly with the number of units of service or product provided.
Since the Company's fixed costs have been reduced as a result of its
relocation to a new location in 2003 and the Company believes that further fixed
cost reductions may not be achievable, its operating results are substantially
dependent on revenue levels. Because revenues derived from licenses and
royalties carry a much higher gross profit margin than other revenues, operating
results are also substantially affected by changes in the sources of revenues.
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
7
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 2004 were $144,300 compared to
$154,000 in the second quarter of 2003, a 6% decline. Licenses, royalties and
fees increased by $16,700, or 21%, to $95,300 in the second quarter of 2004 from
$78,600 in the second quarter of 2003. The increase in licenses, royalties and
fees is due primarily to the inception during the second half of 2003 and the
first half of 2004 of license arrangements with three customers offset in part
by the termination of one license agreement during the second half of 2003.
Product sales were $49,000 in the second quarter of 2004 compared to $75,400 in
the second quarter of 2003, a 35% decrease due primarily to lower sales of the
Company's security paper and inks. For the first six months of 2004, revenues
were $284,900, 5% lower than revenues of $298,900 in the first six months of
2003. Licenses, royalties and fees of $172,900 in the first half of 2004
approximated the $171,100 in the first half of 2003 due primarily to the
inception of three new license arrangements over the preceding twelve months
offset in part by the termination of licenses with three licensees during 2003.
Product sales were $112,000 in the first half of 2004 compared to $127,800 in
the first half of 2003, a 12% decline. The decrease in product sales reflects
lower sales of the Company's line of security papers and inks during the first
half of 2004 compared to the first half of 2003.
The Company's gross profit increased to $93,300 in the second quarter
of 2004 or 64% of revenues from $74,900 or 49% of revenues in the second quarter
of 2003. Licenses, royalties and fees carry a substantially higher gross profit
than product sales, which generally consist of supplies or other manufactured
products which incorporate the Company's technologies or equipment used to
support the application of its technologies. These items (except for inks which
are manufactured by the Company) are generally purchased from third-party
vendors and resold to the end-user or licensee and carry a significantly lower
gross profit than licenses, royalties and fees. The higher gross profit in the
second quarter of 2004 compared to the second quarter of 2003 results
principally from an increase in revenues represented by licenses, royalties and
fees as well as lower costs of production of the ink products used by licensees
and paper purchased for resale. Additionally, the Company experienced lower rent
and occupancy costs resulting from the move of the facility in the second half
of 2003.
For the first six months of 2004, the gross profit was $171,400, or 60%
of revenues compared to $152,400, or 51% of revenues, in the first half of 2003.
The increase in the gross profit in both absolute dollars and percentage of
revenues in the first half of 2004 compared to the first half of 2003 resulted
from the same factors as the second quarter.
Research and development expenses decreased to $42,000 in the second
quarter of 2004 from $49,400 in the second quarter of 2003. For the first six
months of 2004, research and development expenses were $94,000 compared to
$98,600 in the first half of 2003. The decrease in both the second quarter and
first half of 2004 relates primarily to lower rent, occupancy and employee
benefits expenses in 2004 compared to 2003.
Sales and marketing expenses were $38,000 in the second quarter of 2004
compared to $31,900 in the second quarter of 2003. The increase in the second
quarter of 2004 compared to the second quarter of 2003 reflects marketing costs
associated with the introduction of the Company's new Rub-n-Color product for
the Educational and Toy Market. For the first six months of 2004, sales and
8
marketing expenses were $83,000 compared to $118,100 in the first six months of
2003. The decrease in the first half of 2004 relates primarily to the departure
of a sales executive late in the first quarter of 2003 and lower consulting fees
in the first half of 2004 compared to the first half of 2003 offset in part by
marketing costs associated with the introduction of the Company's new
Rub-n-Color product for the Educational and Toy Market
General and administrative expenses (exclusive of legal expenses)
increased to $104,800 in the second quarter of 2004 from $60,300 in the second
quarter of 2003. The increase in the second quarter of 2004 compared to the
second quarter of 2003 is due primarily to $58,000 in expenses recorded in
connection with the issuance to members of the Company's Board of Directors and
two consultants of 900,000 options to purchase shares of the Company's common
stock during the second quarter of 2004 offset in part by lower rent, occupancy
and public relations costs. For the first six months, general and administrative
expenses (exclusive of legal expense) increased to $160,500 in 2004 from
$144,100 in 2003 as a result as the same factors as the second quarter increase.
Legal expenses of $28,900 in the second quarter of 2004 approximated
the $30,200 in the second quarter of 2003. Legal expenses for the first half of
2004 increased to $62,300 from $48,800 in the first half of 2003 due primarily
to compliance with recently enacted securities legislation and regulations. The
second quarter and first half 2003 legal fees associated with the Euro-Nocopi,
S.A. arbitration proceedings which were settled in June 2003 were offset against
the settlement proceeds.
Other income (expense) includes interest income on funds invested and
interest expense on the Demand Loans. Net proceeds from arbitration settlement
includes the net gain of $932,700 and $875,300, respectively, in the second
quarter and first half of 2003 representing the proceeds of the arbitration
settlement with Euro-Nocopi, S.A., net of the Company's $110,600 investment in
Euro-Nocopi, S.A. and legal expenses incurred during 2003 related to the
arbitration.
The net loss of $123,700 and $235,100, respectively, in the second
quarter and first half of 2004 compared to net earnings of $832,500 and
$611,500, respectively, in the second quarter and first half of 2003 results
primarily from the settlement of the arbitration proceedings with Euro-Nocopi,
S.A. during the second quarter of 2003, the expense associated with the issuance
of stock options to Directors and consultants in the second quarter of 2004,
lower rent and occupancy costs due to the move to a new facility during 2003 and
staff reductions during 2003.
PLAN OF OPERATION, LIQUIDITY AND CAPITAL RESOURCES
The Company's cash and cash equivalents decreased to $7,700 at June 30,
2004 from $89,900 at December 31, 2003. The cash was used to fund operations
over the six-month period.
The loss of a number of customers during the past three years and the
loss of periodic fees under the license agreement with Euro-Nocopi, S.A.
commencing in 2000 have had a material adverse effect on the Company's revenues
and results of operations and upon its liquidity and capital resources. The
receipt of $900,000 in June 2003 in conjunction with the settlement of its
arbitration proceedings with Euro-Nocopi, S.A. has permitted the Company to
continue in operation to the current date. As a result of the settlement, a
significant ongoing expense for related legal fees has been eliminated.
9
Additionally, the Company has reduced staff and, during the third quarter of
2003, completed its relocation to a new facility that it believes will enable
the Company to further reduce its operating expenses. Management of the Company
believes that it will need to obtain additional capital in the immediate future
both to fund investments needed to increase its operating revenues to levels
that will sustain its operations and to fund operating deficits that it
anticipates will continue until revenue increases can be realized. The Company
believes that without additional capital, in the form of debt, equity or both,
it may be forced to cease operations during the third quarter of 2004.
The Company, in response to the ongoing adverse liquidity situation,
has maintained a cost reduction program including staff reductions and
curtailment of discretionary research and development and sales and marketing
expenses, where possible.
UNCERTAINTIES THAT MAY AFFECT THE COMPANY, ITS OPERATING RESULTS AND STOCK PRICE
The Company's operating results and stock price are dependent upon a
number of factors, some of which are beyond the Company's control. These
include:
Inability to Continue in Operation Without Immediate New Equity Investment. The
Company had a negative working capital of $750,500 at June 30, 2004 and
experienced negative cash flow from operations of $81,400 in the six months
ended June 30, 2004. Additionally, it experienced negative cash flow from
operations of $78,800 (including $900,000 received in settlement of its
arbitration proceedings with Euro-Nocopi, S.A.) in the year ended December 31,
2003. Management of the Company believes that while certain staff reductions
initiated in 2003 and the move of the Company's operations to a new facility,
which was completed during 2003, will reduce the Company's negative cash flow,
it anticipates that the negative cash flow will continue until it can achieve
revenue increases. Management believes that it will need to obtain additional
capital in the immediate future both to fund investments needed to increase its
operating revenues to levels that will sustain its operations and to fund
operating deficits that it anticipates will continue until revenue increases can
be realized. There can be no assurances that the Company will be successful in
obtaining sufficient additional capital, or if it does, that the additional
capital will enable the Company to improve its business so as to have a material
positive effect on the Company's operations and cash flow. The Company believes
that without additional capital, in the form of debt, equity or both, it may be
forced to cease operations during the third quarter of 2004. It is uncertain
whether the Company's assets will retain any value if the Company ceases
operations. There are no assurances that the Company will be able to secure
additional equity investment before it may be forced to cease operations.
Possible Inability to Develop New Business. Even if the Company is able to raise
cash through additional capital or otherwise, it must quickly improve its
operating cash flow. Because the Company has already significantly reduced its
operating expenses, Management believes that any significant improvement in the
Company's cash flow must result from increases in its revenues from traditional
sources and from new revenue sources. The Company's ability to develop new
revenues may depend on the extent of both its marketing activities and its
research and development activities. There are no assurances that the resources
the Company, even with additional capital, can devote to marketing and to
research and development will be sufficient to increase the Company's revenues
to levels resulting in positive cash flow.
Inability to Obtain Raw Materials and Products for Resale. The Company's adverse
financial condition has required it to significantly defer payments due vendors
who supply raw materials and other components of the Company's security inks,
10
security paper that the Company purchases for resale and professional and other
services. As a result, the Company is on credit hold with certain of its
suppliers and is required to pay cash in advance of shipment to others. Delays
in shipments to customers caused by the Company's inability to obtain materials
on a timely basis and the possibility that certain current vendors may
permanently discontinue to supply the Company with needed products could impact
the Company's ability to service its customers and adversely affect its customer
and licensee relationships. Management of the Company believes that, without
significant capital investment in the very near term, the Company will not be
able to maintain acceptable relationships with its vendors and professional
service providers. There are no assurances that the Company will be able to
secure sufficient capital investment to maintain its vendor accounts on
satisfactory terms.
Uneven Pattern of Quarterly and Annual Operating Results. The Company's
revenues, which are derived primarily from licensing and royalties, are
difficult to forecast due to the long sales cycle of the Company's technologies,
the potential for customer delay or deferral of implementation of the Company's
technologies, the size and timing of inception of individual license agreements,
the success of the Company's licensees and strategic partners in exploiting the
market for the licensed products, modifications of customer budgets, and uneven
patterns of royalty revenue and product orders. As the Company's revenue base is
not substantial, delays in finalizing license contracts, implementing the
technology to initiate the revenue stream and customer ordering decisions can
have a material adverse effect on the Company's quarterly and annual revenue
expectations and, as the Company believes that further reductions in the fixed
component of the Company's operating expenses may not be achievable, income
expectations will be subject to a similar adverse outcome.
Volatility of Stock Price. The market price for the Company's common stock has
historically experienced significant fluctuations and may continue to do so. The
Company has, since its inception, operated at a loss and has not produced
revenue levels traditionally associated with publicly traded companies. The
Company's common stock is not listed on a national or regional securities
exchange and, consequently, the Company receives limited publicity regarding its
business achievements and prospects, few securities analysts and traders follow
it and it is thinly traded. The market price may be affected by announcements of
new relationships or modifications to existing relationships. The stock prices
of many developing public companies, particularly those with small
capitalizations, have experienced wide fluctuations not necessarily related to
operating performance. Such fluctuations may adversely affect the market price
of the Company's common stock.
Intellectual Property. The Company relies on a combination of protections
provided under applicable international patent, trademark and trade secret laws.
It also relies on confidentiality, non-analysis and licensing agreements to
establish and protect its rights in its proprietary technologies. While the
Company actively attempts to protect these rights, the Company's technologies
could possibly be compromised through reverse engineering or other means. In
addition, the Company's ability to enforce its intellectual property rights
through appropriate legal action has been and will continue to be limited by the
Company's adverse liquidity. There can be no assurances that the Company will be
able to protect the basis of its technologies from discovery by unauthorized
third parties or to preclude unauthorized persons from conducting activities
that infringe on the Company's rights. The Company's adverse liquidity situation
has also impacted its ability to obtain patent protection on its intellectual
property and to maintain protection on previously issued patents. The Company
has paid approximately $7,000 in patent maintenance fees that are due during
11
2004 as advised by its patent counsel. There can be no assurances that the
Company will be able to continue to prosecute new patents and maintain issued
patents. As a result, the Company's customer and licensee relationships could be
adversely affected and the value of the Company's technologies and intellectual
property (including their value upon a liquidation of the Company) could be
substantially diminished.
OFF-BALANCE SHEET ARRANGEMENTS
The Company does not have any off-balance sheet arrangements.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In December 2002, the FASB issued Statement of Financial Accounting
Standard No. 148 ("SFAS 148), Accounting for Stock-Based Compensation -
Transition and Disclosure. SFAS 148 provides alternative methods of transition
for voluntary change to the fair value based method of accounting for
stock-based employee compensation. SFAS 148 also requires prominent disclosure
in the "Summary of Significant Accounting Policies" of both annual and interim
financial statements about the method used on reported results. The Company has
adopted the disclosure requirements of SFAS 148 for the 2003 fiscal year.
Adoption of this statement has affected the location of the Company's disclosure
in the consolidated financial statements, but will not impact the Company's
results of operation or financial position unless the Company changes to the
fair value method of accounting for stock-based employee compensation.
On April 22, 2003, the FASB announced its decision to require all
companies to expense the fair value of employee stock options. Companies will be
required to measure the cost according to the fair value of the options.
Although the new guidelines have not yet been released, it is expected that they
will be finalized soon and be effective in 2004. When final rules are announced,
the Company will assess the impact to its financial statements.
The following recently issued accounting pronouncements are currently
not applicable to the Company.
In January 2003, subsequently revised December 2003, the FASB issued
FASB Interpretation No. 46 ("FIN 46"), Consolidation of Variable Interest
Entities - An Interpretation of AARB No. 51. FIN 46 requires that if any entity
has a controlling financial interest in a variable interest entity, the assets,
liabilities and results of activities of the variable interest entity should be
included in the consolidated financial statements of the entity. FIN 46
provisions are effective for all arrangements entered into after January 31,
2003. FIN 46 provisions are required to be adopted for the first period ending
after December 15, 2004 for a small business issuer.
In May 2003, the FASB issued Statement of Financial Accounting Standard
No. 150 ("SFAS 150"), Accounting for Certain Financial Instruments With
Characteristics of Both Liabilities and Equity. SFAS 150 clarifies the
accounting for certain financial instruments with characteristics of both
liabilities and equity and requires those instruments be classified as
liabilities on the balance sheet. Previously, many of those financial statements
were classified as equity. SFAS 150 is effective for financial instruments
entered into or modified after May 31, 2003 and otherwise is effective at the
beginning of the first interim period beginning after June 15, 2003.
12
ITEM 3. 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 Rule
13a-15. Based upon that evaluation, the Company's Chief Executive Officer and
Chief Financial Officer concluded that the Company's disclosure controls and
procedures are effective in timely alerting them to material information
relating to the Company that is required to be included in the Company's
periodic filings with the Securities and Exchange Commission. There have been no
significant changes in the Company's internal controls or, to the Company's
knowledge, in other factors that could significantly affect those internal
controls subsequent to the date the Company carried out its evaluation.
13
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Not Applicable
Item 2. Changes in Securities
Not Applicable
Item 3. Defaults Upon Senior Securities
Not Applicable
Item 4. Submission of Matters to a Vote of Security Holders
Not Applicable
Item 5. Other Information
Not Applicable
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
31.1 Certificate of Chief Executive Officer required by
Rule 13a-14(a).
31.2 Certificate of Chief Financial Officer required by
Rule 13a-14(a).
32. Certificate of Chief Executive Officer and Chief
Financial Officer Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K
The Registrant filed the following Current Reports on
Form 8-K during the quarter ended June 30, 2004.
April 20, 2004 - Press Release dated April 20, 2004
May 11, 2004 - Press Release dated May 11, 2004
14
SIGNATURES
Pursuant to the requirement of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NOCOPI TECHNOLOGIES, INC.
DATE: August 13, 2004 /s/ Michael A. Feinstein, M.D.
----------------------------------------
Michael A Feinstein, M.D.
Chairman of the Board
/s/ Rudolph A. Lutterschmidt
----------------------------------------
Rudolph A. Lutterschmidt
Vice President & Chief Financial Officer
15
EXHIBIT INDEX
31.1 Certificate of Chief Execution Officer pursuant to Rule 13a 0 14(a) and
15d - 14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002.
31.2 Certificate of Chief Financial Officer pursuant to Rule 13a 0 14(a) and
15d - 14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002.
32. Certificate pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
16