Form 10-KSB
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB/A
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(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 2003
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[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 0-20333
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Nocopi Technologies, Inc.
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(Name of small business issuer in its charter)
Maryland 87-0406496
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(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
9C Portland Road, West Conshohocken, PA 19428
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(Address of principal executive offices) (Zip Code)
Issuer's telephone number (610) 834-9600
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Securities registered under Section 12(b) of the Exchange Act:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
None Not Applicable
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Securities registered under section 12(g) of the Exchange Act:
Common Stock $.01 par value
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(Title of class)
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(Title of class)
Check whether the issuer (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 _.
Check if no disclosure of delinquent filers in response to Item 405 of
Regulation S-B is contained in this form, and no disclosure will be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB/A or any
amendment to this Form 10-KSB/A. [ ]
Form 10-KSB
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State issuer's revenues for its most recent fiscal year. $571,500.
State the aggregate market value of the voting and non-voting common
equity held by non-affiliates of the issuer. $7,620,000 at March 31, 2004.
(APPLICABLE ONLY TO CORPORATE REGISTRANTS)
State the number of shares outstanding of each of the issuer's classes
of common equity, as of the latest practicable date. 45,972,241 shares of Common
Stock, $.01 par value at March 31, 2004.
DOCUMENTS INCORPORATED BY REFERENCE
None
Transitional Small Business Disclosure Format (Check one):
Yes [ ] No [X]
PART I
ITEM 1. BUSINESS
BACKGROUND
Nocopi Technologies, Inc. (hereinafter "Nocopi", "Registrant" or the "Company")
was organized in 1983 to exploit a technology developed by its founders for
impeding the reproduction of documents on office copiers. In its early stages of
development, Nocopi's business consisted primarily of selling copy resistant
paper to protect corporate documents and information. More recently, Registrant
has increasingly focused on developing and marketing technologies for document
and product authentication which can reduce losses caused by fraudulent document
reproduction and by product counterfeiting and/or diversion. Registrant derives
revenues by licensing its technologies, both to end-users and to value-added
resellers, and by selling products incorporating its technologies and technical
support services.
The decline in Registrant's financial condition has not stabilized or been
reversed. By the end of 2002, this decline had led to a severe working capital
deficiency and adverse liquidity that threatened and continues to threaten to
require the imminent cessation of Registrant's operations. During 2002,
Registrant received new capital investments totaling $411,000 from a variety of
sources including existing and new stockholders and received $160,400 in loans
from three individuals including the Company's Chairman of the Board. In 2003,
Registrant received an additional $4,500 in demand loans from its Chairman of
the Board. Registrant also repaid its Chairman of the Board $15,000 of the
demand loans previously provided by him.
During 2003, Registrant settled its dispute with Euro-Nocopi, S.A., its former
European licensee, relocated its operations to a smaller, lower cost facility
after the termination of its lease at its former location and hired two former
employees who have significant knowledge of the Registrant's technologies and
production methods. The $900,000 received in the arbitration settlement with
Euro-Nocopi, S.A. has permitted Registrant to continue in operation to the
current date. It remains highly uncertain whether Registrant can achieve
positive cash flow before its adverse liquidity forces it to cease or suspend
operations. Registrant's management intends to seek additional capital, if
possible, and may continue to explore possible business combination
opportunities if such opportunities are presented. Additional capital is also
needed to fund programs and activities designed to increase Registrant's
operating revenues to levels that will sustain its operations.
During 2003, Registrant developed and began to market a new technology, named
"Rub-n-Color", which consists of a system of removable dyes in a large variety
of colors that can be activated through rubbing with a fingernail or a firm
object. Registrant believes this technology, developed in late 2003, has
applications in children's activity products such as a coloring book without
crayons and in educational testing review products. Registrant has demonstrated
this technology to several potential licensees. There can be no assurances that
these initiatives will generate additional operating revenues that will allow
Registrant to sustain its operations.
ANTI-COUNTERFEITING AND ANTI-DIVERSION TECHNOLOGIES AND PRODUCTS
Continuing developments in copying and printing technologies have made it ever
easier to counterfeit a wide variety of documents. Lottery tickets, gift
certificates, event and transportation tickets, travelers' checks and the like
are all susceptible to counterfeiting, and Registrant believes that losses from
such counterfeiting have increased substantially with improvements in these
technologies. Product counterfeiting has long caused losses to manufacturers of
brand name products, and Registrant believes these losses have also increased as
the counterfeiting of labeling and packaging has become easier.
Registrant's document authentication technologies are useful to businesses
desiring to authenticate a wide variety of printed materials and products. These
include a technology with the ability to print invisibly on certain areas of a
document. The invisible printing can be activated or revealed by use of a
special highlighter pen when authentication is required. This technology is
marketed under the trademark COPIMARK(TM). Other variations of the COPIMARK(TM)
technology involve multiple color responses from a common pen, visible marks of
one color that turn another color with the pen or visible and invisible marks
that turn into a multicolored image. A related technology is Nocopi's RUB &
1
REVEAL(R) system, which permits the invisible printing of an authenticating
symbol or code that can be revealed by rubbing a fingernail over the printed
area. These technologies provide users with the ability to authenticate
documents and detect counterfeit documents. Applications include the
authentication of documents having intrinsic value, such as merchandise
receipts, checks, travelers' checks, gift certificates and event tickets, and
the authentication of product labeling and packaging. When applied to product
labels and packaging, such technologies can be used to detect counterfeit
products whose labels and packaging would not contain the authenticating marks
invisibly printed on the packaging or labels of the legitimate product, as well
as to combat product diversion (i.e. sale of legitimate products through
unauthorized distribution channels or in unauthorized markets). Registrant's
related invisible inkjet technology permits manufacturers and distributors to
track the movement of products from production to ultimate consumption when
coupled with proprietary software. Management believes that the "track and
trace" capability provided by this technology should be attractive to brand
owners and marketers. In late 2003, Registrant participated in a national public
meeting held by the US Food and Drug Administration that focused on the problem
of counterfeit and diverted pharmaceutical products where Registrant's patented
anti-counterfeiting and anti-diversion technologies were presented to the
meeting attendees.
DOCUMENT SECURITY PRODUCTS
Registrant continues to offer a line of burgundy colored papers that deter
photocopying and transmission by facsimile. This colored paper inhibits
photocopier reproduction at the cost of loss of easy legibility to the reader.
Registrant currently offers its copy resistant papers in three grades, each
balancing improved copy resistance against diminished legibility. Registrant
also sells user defined, pre-printed forms on which selected areas are colored
to inhibit reproduction. An example is a doctor's prescription form with the
signature area protected. This product line is called SELECTIVE NOCOPI(TM).
Registrant also offers several inks that impede photocopying by color copiers.
This technology is called COLORBLOC(R).
Since late 1999, Registrant has, in addition to marketing its own technologies
and products, acted as a distributor for a line of Pantograph security paper.
This patented product, complementary to the Registrant's line of security paper,
produces a message, such as "unauthorized copy", when a copy of an original
document that was printed or typed on the Pantograph paper, is reproduced on a
photocopier. This product line is called COPI-ALERT.
ENTERTAINMENT AND TOY PRODUCTS
In late 2003, after the re-employment of two former members of the Registrant's
technical staff, a new technology was developed that consists of removable dyes
that can be produced in a variety of colors and can be revealed by rubbing with
a fingernail or other firm object such as a plastic pen cap. This technology has
been named Rub-n-Color. Registrant believes that this new technology does not
compromise the confidentiality of its security and authentication technologies.
Applications include children's activity products such as a coloring book
without crayons or a restaurant place mat, educational instruction books,
testing review manuals. Registrant has obtained certifications of non-toxicity
from the Consumer Products Services, Inc. and the American Society for Testing
and materials laboratories. In February 2004, Registrant inaugurated its
marketing efforts for this new technology at the American International Toy Fair
in New York City. As a result of its participation, Registrant has identified a
number of potential licensees in the children's and educational markets and has
had preliminary contact, to date consisting primarily of negotiating
non-disclosure and non-analysis agreements, with several businesses in these
target markets. There are no assurances that the resources that Registrant, even
with additional investment, can devote to marketing and further technical
development of this new product line will be sufficient to increase the
Company's revenues to levels resulting in positive cash flow.
2
The following table illustrates the approximate percentage of Registrant's
revenues accounted for by each type of its products for each of the two last
fiscal years:
Year Ended December 31,
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Product Type 2003 2002
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Anti-Counterfeiting & Anti-Diversion Technologies and Products 82% 79%
Document Security Products 18% 21%
Entertainment and Toy Products * *
* Not marketed.
MARKETING
The marketing approach of Registrant is to offer sufficient flexibility in its
products and technologies so as to provide cost effective solutions to a wide
variety of counterfeiting, diversion and copier fraud problems. As a technology
company, Registrant generates revenues primarily by collecting license fees from
market-specific manufacturers who incorporate Registrant's technologies into
their manufacturing process and their products. Registrant also licenses its
technologies directly to end-users.
Registrant has identified a number of major markets for its technologies and
products, including security printers, manufacturers of labels, packaging
materials and specialty paper products and distributors of brand name products.
Within each market, key potential users have been identified, and several have
been licensed. Within North America, sales efforts include direct selling by
company personnel to create end user demand and selling through licensee sales
forces and sales agents with support from company personnel. Registrant has
determined that technical sales support by its personnel is of great importance
to increasing its licensees' sales of products incorporating Registrant's
technologies and, therefore, seeks to maintain, to the extent permitted by its
limited resources, its commitment to providing such support.
Since 1999, Registrant's management has refocused the company's marketing
efforts somewhat in view of the limited resources available to the Company for
marketing and the need to improve the Registrant's cash flow. Current marketing
efforts are focused on Registrant's more mature technologies that can be
utilized by customers with relatively less development efforts.
As continued improvements in color copier and desktop publishing technology make
counterfeiting and fraud opportunities less expensive and more available,
Registrant intends, to the extent feasible, to maintain an interactive product
development and enhancement program with the combined efforts of marketing,
applications engineering and research and development. Registrant's objective is
to concentrate its efforts on developing market-ready products with the most
beneficial ratios of market potential to development time and cost.
Except in Europe, Registrant markets its technologies through its own employees
and through independent sales representatives. In Europe, its security
technologies are marketed by Euro-Nocopi, S.A., a former affiliate of Registrant
which holds certain European rights with respect to those technologies.
Registrant is presently considering a number of marketing strategies for its
newly developed "Rub-n-Color" product line including licensing and direct sales
through product retailers.
Registrant has taken several steps to improve the marketing of its technologies.
These include the implementation of a new web site and online store designed
both to more effectively promote the Company's products and to provide for
smoother online ordering of certain products.
MAJOR CUSTOMERS
During 2003, Registrant made sales or obtained revenues equal to 10% or more of
Registrant's 2003 total revenues from three non-affiliated customers who
individually accounted for approximately 22%, 17% and 10% of 2003 revenues.
3
MANUFACTURING
Registrant has a small facility for the manufacture of its security inks. Except
for this facility, Registrant does not maintain manufacturing facilities.
Registrant presently subcontracts the manufacture of its applications (mainly
printing and coating) to third party manufacturers and expects to continue such
subcontracting. Because some of the processes that Nocopi uses in its
applications are based on relatively common manufacturing technologies, there
appears to be no technical or economic reason for Registrant to invest capital
in its own manufacturing facilities.
Registrant has established a quality control program that currently entails
laboratory analysis of developed technologies. When warranted, Registrant's
specially trained technicians travel to third party production facilities to
install equipment, train client staff and monitor the manufacturing process.
PATENTS
Nocopi has received various patents and/or has patents pending in the United
States, Canada, South Africa, Saudi Arabia, Australia, New Zealand, Japan,
France, the United Kingdom, Belgium, the Netherlands, Germany, Austria, Italy,
Sweden, Switzerland, Luxembourg, and Liechtenstein. Patent applications for
Registrant's technology (including improvements in the technology) have also
been filed in numerous other jurisdictions where commercial usage is foreseen,
including other countries in Europe, Japan, Australia, and New Zealand, and the
rights under such applications have been assigned to Registrant. Registrant's
patent counsel, which conducted the appropriate searches in Canada and the
United States, has reviewed the results of searches conducted in Europe and
advised management that effective patent protection for Registrant's technology
should be obtainable in all countries in which the patent applications have been
filed. There can be no assurance, however, that such protection will be
obtained.
When a new product or process is developed, the developer may seek to preserve
for itself the economic benefit of the product or process by applying for a
patent in each jurisdiction in which the product or process is likely to be
exploited. Generally speaking, in order for a patent to be granted, the product
or process must be new and be inventively different from what has been
previously patented or otherwise known anywhere in the world. Patents generally
have a duration of 17 years from the date of grant or 20 years from the date of
application depending on the jurisdiction concerned, after which time any person
is free to exploit the product or process covered by a patent. A person who is
the owner of a patent has, within the jurisdiction in which the patent is
granted, the exclusive right to exploit the patent either directly or through
licensees, and is entitled to prevent any person from infringing on the patent.
The granting of a patent does not prevent a third party from seeking a judicial
determination that the patent is invalid. Such challenges to the validity of a
patent are not uncommon and are occasionally successful. There can be no
assurance that a challenge will not be filed to one or more of Registrant's
patents and that, if filed, such challenge(s) will not be successful.
In the United States and Canada, the details of the product or process that is
the subject of a patent application are not publicly disclosed until a patent is
granted. However, in some other countries, patent applications are automatically
published at a specified time after filing.
RESEARCH AND DEVELOPMENT
Nocopi has been involved in research and development since its inception.
Although Registrant's deteriorating financial condition has forced it to reduce
funding for research and development in recent years, it intends to continue its
research and development activities in three areas, to the extent feasible.
First, Registrant will seek to continue to refine its present family of
products. Second, Registrant will seek to develop specific customer
applications. Finally, Registrant will seek to expand its technology into new
areas of implementation. There can be no assurances that Registrant will be able
to obtain funds necessary to continue its research and development activities.
4
During the years ended December 31, 2003 and 2002, Nocopi expended approximately
$202,800 and $254,100 respectively, on research and development.
COMPETITION
In the area of document and product authentication and serialization, Registrant
is aware of other technologies, both covert and overt surface marking
techniques, requiring decoding implements or analytical methods to reveal the
relevant information. These technologies are offered by other companies for the
same anti-counterfeiting and anti-diversion purposes the Registrant markets its
covert technologies. These include, among others, biological DNA codes,
microtaggants, thermochronic, UV and infrared inks as well as encryption, 2D
symbology and laser engraving. Registrant believes its patented and proprietary
technologies provide a unique and cost-effective solution to the problem of
counterfeiting and gray marketing in the document and product authentication
markets it has traditionally sought to exploit. Registrant knows of one large
company that recently began to offer an expanding portfolio of product security
solutions, some of which may be competitive with Registrant's authentication
technologies. In order both to minimize the adverse effect of this new
competition and to participate in the competitor's success, it has entered into
a license agreement with this competitor so that products incorporating
Registrant's technologies can be offered as part of this portfolio.
Registrant is not aware of any competitors that market paper which functions in
the same way as Nocopi security papers, although management is aware of a
limited number of competitors which are attempting different approaches to the
same problems which Registrant's products address. Registrant is aware of a
Japanese company that has developed a film overlay that is advertised as
providing protection from photocopying. Registrant has examined the film overlay
and believes that it has a limited number of applications. Nocopi security paper
is also considerably less expensive than the film overlay.
Other indirect competitors are marketing products utilizing the hologram and
copy void technologies. The hologram, which has been incorporated into credit
cards to foil counterfeiting, is considerably more costly than Registrant's
technology. Copy void is a security device that has been developed to indicate
whether a document has been photocopied. Registrant also markets a product that
has similar features to the copy void technology.
The Educational and Toy Products markets include numerous potential competitors
who have significantly greater financial resources and presence in these markets
than Registrant.
Registrant currently has extremely limited resources, and there can be no
assurance that other businesses with greater resources than Registrant will not
enter Registrant's markets and compete successfully with Registrant.
EURO-NOCOPI, S.A.
Registrant formed Euro-Nocopi, S.A. in 1994, to market the Company's
technologies in Europe under an exclusive licensing arrangement. Registrant then
owned approximately an 18% interest in Euro-Nocopi, S.A. During 2000, there
arose between Registrant and Euro-Nocopi, S.A. a number of areas of conflict and
dispute, leading each party to the licensing arrangement to assert informally
that the other was in breach of its obligations under that arrangement.
In December 2000, Registrant was informed by Euro-Nocopi, S.A. that it had
adopted resolutions to liquidate and dissolve. In December 2000, Registrant
terminated its license agreement with Euro-Nocopi, S.A. and discontinued the
provision of support (including the sale of proprietary inks) to Euro Nocopi,
S.A. and its customers. Euro-Nocopi S.A. responded by denying that Registrant's
termination of the licensing agreement was permissible or effective, and by
asserting a claim that, as a result of alleged breaches of the licensing
arrangement by Registrant, it was entitled to a royalty-free license to exploit
Registrant's technologies in Europe.
In March 2001, Euro-Nocopi, S.A. commenced an arbitration proceeding before the
American Arbitration Association against Registrant asserting a claim for an
award in the nature of a declaratory judgment to the effect that, because
Registrant had (allegedly) breached the license agreement, Euro-Nocopi, S.A. was
entitled to a perpetual royalty-free license to exploit Registrant's
technologies in Europe. The matter was resolved by a settlement in June 2003.
The settlement and proceedings are described below under the heading "Legal
Proceedings."
5
EMPLOYEES
At March 31, 2004, Registrant had four full-time and two part-time employees. In
late 2003, Registrant hired two former employees who have significant knowledge
of the Registrant's technologies and production methods. Registrant believes
that its relations with its employees are good.
FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC OPERATIONS
Certain information concerning Registrant's foreign and domestic operations is
contained in Note 9 to Registrant's Financial Statements included elsewhere in
this Annual Report on Form 10-KSB.
ITEM 2. PROPERTIES
Registrant's corporate headquarters, research and ink production facilities are
located at 9C Portland Road, West Conshohocken, Pennsylvania 19428. Its
telephone number is (610) 834-9600. These premises consist of approximately
5,000 square feet of space in a multi-tenant building leased from an
unaffiliated third party under a lease expiring in March 2008. Current monthly
rental under this lease is $2,813 escalating four percent on each anniversary
date of the lease. Registrant is also responsible for its pro-rata share of the
operating costs of the building. Registrant has incurred leasehold improvement
expenditures of approximately $70,000 through December 31, 2003 and believes
that additional leasehold improvement expenditures will not be significant.
Registrant believes that this space will be adequate for its current needs.
ITEM 3. LEGAL PROCEEDINGS
Except as set forth below, Registrant is not aware of any material pending
litigation (other than ordinary routine litigation incidental to its business
where, in management's view, the amount involved is less than 10% of
Registrant's current assets) to which Registrant is or may be a party, or to
which any of its properties is or may be subject, nor is it aware of any pending
or contemplated proceedings against it by any governmental authority. Registrant
knows of no material legal proceedings pending or threatened, or judgments
entered against, any director or officer of Registrant in his capacity as such.
In March 2001, Euro-Nocopi, S.A. commenced arbitration proceedings against
Registrant before the American Arbitration Association in New York, NY. In these
proceedings, Euro-Nocopi, S.A. has sought an award in the nature of a
declaratory judgment to the effect that, due to alleged breaches by Registrant
of the licensing arrangement between Registrant and Euro-Nocopi. S.A., it was
entitled to a royalty-free license to exploit Registrant's technologies in
Europe.
These arbitration proceedings were resolved by a settlement reached in June
2003. Under the agreement settling the dispute, Euro-Nocopi, S.A.'s exclusive
license with respect to Registrant's existing security technologies was
reinstated and amended; Registrant's equity interest in Euro-Nocopi, S.A. was
redeemed; Euro-Nocopi, S.A. agreed to pay to Registrant the sum of $1.1 million
(of which $900,000 was paid currently with the balance due in four annual
installments commencing in March 2004); and the parties exchanged full releases.
In March 2001 certain shareholders of Euro-Nocopi, S.A. filed suit in a court in
Paris, France against certain current and former officers and directors of
Registrant, and against a licensee of Registrant. Registrant is not named as a
defendant in the suit. The suit seeks damages in excess of $7 million from the
defendants for various alleged acts of oppression, self-dealing and fraud in
connection with the organization and capitalization of Euro-Nocopi, S.A., the
management of that company and Registrant's management of its relationship with
that company. The defendants in this litigation have denied any liability to the
plaintiffs and have claimed indemnification from Registrant in connection with
the lawsuit, and Registrant has advanced certain funds toward payment of the
costs of defense.
Under the settlement of the arbitration proceedings referred to above, this
lawsuit was to be substantially resolved, without any liability of, or payment
by, any of the individual defendants or by Registrant. This resolution has not
yet been implemented and cannot be implemented until Registrant resolves issues
6
raised by its former French counsel relating to fees due it for its services in
connection with the litigation as well as other services rendered to Registrant.
Under French rules governing lawyers and their relations with clients, new
counsel, which Registrant must retain to effectuate the resolution of the
underlying French lawsuit, cannot be retained until its former French counsel
has indicated that its claims for legal fees have been satisfied. Registrant is
seeking to resolve its dispute with its former counsel in order that the
litigation settlement can be effectuated.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the fourth quarter of the fiscal year ended December 31, 2003, no matters
were submitted to a vote of Registrant's security holders.
PART II
ITEM 5. MARKET PRICE OF AND DIVIDENDS ON REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
Registrant's Common Stock is traded on the over-the-counter market and quoted on
the NASD over-the-counter Bulletin Board under the symbol "NNUP". The table
below presents the range of high and low bid quotations of Registrant's Common
Stock by calendar quarter for the last two full fiscal years and for a recent
date, as reported by the National Quotation Bureau, Inc. The quotations
represent prices between dealers and do not include retail markup, markdown, or
commissions; hence, such quotations do not represent actual transactions.
High Bid Low Bid
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January 1, 2002 to March 31, 2002 $.16 $.10
April 1, 2002 to June 30, 2002 $.11 $.07
July 1, 2002 to September 30, 2002 $.08 $.05
October 1, 2002 to December 31, 2002 $.08 $.05
January 1, 2003 to March 31, 2003 $.07 $.03
April 1, 2003 to June 30, 2003 $.05 $.04
July 1, 2003 to September 30, 2003 $.20 $.04
October 1, 2003 to December 31, 2003 $.20 $.08
January 1, 2004 to March 31, 2004 $.24 $.13
As of March 31, 2004, 45,972,241 shares of Registrant's Common Stock were
outstanding. The number of holders of record of Registrant's Common Stock was
approximately 1,100. However, Registrant estimates that it has a significantly
greater number of Common Stockholders because a number of shares of Registrant's
Common Stock are held of record by broker-dealers for their customers in street
name. In addition to the 45,972,241 shares of Common Stock which are
outstanding, Registrant, at March 31, 2004, has reserved for issuance 2,700,000
shares of its Common Stock which underlie options to purchase Common Stock of
the Registrant. Under the terms of a Subscription Agreement under which
3,333,333 shares of Registrant's common stock were purchased from the Registrant
by an investment partnership in late 2002, one of whose partners is a director
of Registrant, Registrant has agreed to issue 40,000,000 warrants, at varying
prices ranging from $.10 per share to $.25 per share, exercisable during various
periods through year-end 2003 through year-end 2006, subject to partial rollover
and extension, to the partnership. The issuance of the warrants are subject to
the negotiation and agreement of the Registrant and the investors on the
definitive terms thereof and also to the approval by the Registrant's common
stockholders of an amendment to the Registrant's charter to increase its
authorized capital to a number of shares sufficient to permit exercise of the
warrants. At March 31, 2004, the definitive warrant agreement had not yet been
negotiated and the Company's stockholders have not been presented with an
amendment to increase the Company's authorized capital.
Registrant has paid no cash dividends on its Common Stock and does not
anticipate paying any such dividends in the foreseeable future.
7
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
FORWARD-LOOKING INFORMATION
The information in this Management's Discussion and Analysis of Results of
Operations and Financial Condition 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 fee and sales revenues vary
directly with the number of units of service or product provided.
Because the Company has a relatively high level of fixed costs, its operating
results are substantially dependent on revenue levels. Because revenues derived
from licenses and royalties carry a much higher gross profit margin than other
revenues, operating results are also significantly 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.
Revenues for 2003 were $571,500, a decline of 22%, or $165,300, from $736,800 in
2002. Licenses, royalties and fees declined in 2003 by 26% to $327,700 from
$441,100 in 2002. The reduction in licenses, royalties and fees is due primarily
to the termination or non-renewal of license arrangements with three licensees
during 2003 offset in part by revenues from a new licensee. Product and other
sales decreased by $51,900, or 18% to $243,800 in 2003 from $295,700 in 2002.
The decrease in product sales reflects a lower level of sales of the Company's
line of security papers in 2003 compared to 2002.
Gross profit declined to $259,400 or 45% of revenues in 2003 from $358,000 or
49% of revenues in 2002. Licenses, royalties and fees have historically carried
a 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
lower gross profit than licenses, royalties and fees. The lower gross profit
gross profit percentage in 2003 compared to 2002 results principally from a
decrease in revenues represented by licenses, royalties and fees combined with
lower sales of ink and paper, accompanied by a $66,700 reduction in total costs.
8
Research and development expenses decreased to $202,800 in 2003 from $254,100 in
2002. The decrease in 2003 relates primarily to the termination at December 31,
2002 of a consulting agreement with a former executive officer and director of
the Company.
Sales and marketing expenses decreased to $171,500 in 2003 from $269,900 in
2002. The decrease relates primarily to the departure of a sales executive late
in the first quarter of 2003. Sales and marketing expenses in 2003 includes fees
of approximately $18,000 paid to a member of the partnership that acquired
3,333,333 shares of the Company's common stock in late 2002 who was engaged as a
sales and marketing consultant in accordance with the terms of the subscription
agreement.
General and administrative expenses (exclusive of legal expenses) decreased to
$239,100 in 2003 from $269,600 in 2002 as the Company continued during 2003 to
strictly limit its expenditures to conserve its cash resources. The decline in
2003 compared to 2002 relates to lower audit fees and consulting expenses in
2003 compared to 2002.
Legal expenses decreased to $87,300 in 2003 from $479,600 in 2002. Legal fees
for 2003 associated with the Euro-Nocopi, S.A. arbitration proceedings that were
settled in June 2003 were offset against the settlement proceeds. In 2002, the
arbitration related legal fees were included in legal expenses.
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 $909,400 in 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 earnings of $458,800 in 2003 compared to the net loss of $924,500 in
2002 results primarily from the settlement of the arbitration proceedings with
Euro-Nocopi, S.A. during 2003 and lower overhead expenses offset in part by the
lower gross profit.
PLAN OF OPERATION, LIQUIDITY AND CAPITAL RESOURCES
The Company's cash and cash equivalents decreased to $89,900 at December 31,
2003 from $139,000 at December 31, 2002. During 2003, the Company received cash
of $900,000 in settlement of its arbitration proceedings with Euro-Nocopi, S.A.
and a further $4,500 in demand loans from its Chairman of the Board and used
$938,600 to fund operations, working capital requirements, including the payment
of certain accumulated professional fees and other obligations, and leasehold
improvements at the new operating facility it occupied in the third quarter of
2003. The Company also repaid its Chairman of the Board $15,000 of the demand
loans previously provided by him.
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. 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 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 investment, it may be forced to cease
operations during the second quarter of 2004.
The Company, in response to the ongoing adverse liquidity situation, has
maintained a cost reduction program including staff reductions, where possible,
and curtailment of discretionary research and development and sales and
marketing expenses.
9
The Company spent approximately $70,000 in leasehold improvements at its new
operating facility during 2003 and does not currently plan any significant
additional capital investment over the next twelve months.
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 New Capital Investment. The Company
had a negative working capital of $632,800 at December 31, 2003. 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 the third quarter of
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 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
investment, it may be forced to cease operations during the second 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 investment or otherwise, it must quickly improve
its operating cash flow. Because the Company has already significantly reduced
its operating expenses, Management believes that any significant improvement in
the Company's cash flow must result from increases in its revenues from
traditional sources and from new revenue sources. The Company's ability to
develop new revenues may depend on the extent of both its marketing activities
and its research and development activities, both of which are limited. There
are no assurances that the resources the Company, even with additional
investment, 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,
security paper that the Company purchases for resale and 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 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.
While receipt of funds in conjunction with the settlement of the arbitration
with Euro-Nocopi, S.A. has allowed the Company to continue in operation to the
current date, there can be no assurances that the Company will be able to
maintain its vendor relationships in an acceptable manner.
Uneven Pattern of Quarterly and Annual Operating Results. The Company's
revenues, which are derived primarily from licensing and royalties, are
difficult to forecast due to the long sales cycle of the Company's technologies,
the potential for customer delay or deferral of implementation of the Company's
technologies, the size and timing of inception of individual license agreements,
the success of the Company's licensees and strategic partners in exploiting the
market for the licensed products, modifications of customer budgets, and uneven
patterns of royalty revenue and product orders. As the Company's revenue base is
not substantial, delays in finalizing license contracts, implementing the
technology to initiate the revenue stream and customer ordering decisions can
have a material adverse effect on the Company's quarterly and annual revenue
expectations and, as the Company's operating expenses are substantially fixed,
income expectations will be subject to a similar adverse outcome.
10
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, nor do securities analysts and traders
extensively 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
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.
RECENTLY ISSUED ACCOUNTING STANDARDS
In October 2001, the Financial Accounting Standards Board issued SFAS No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets" ("Statement
144"), effective in fiscal years beginning after December 15, 2001, with early
adoption permitted, and in general are to be applied prospectively. Statement
144 establishes a single accounting model for the impairment or disposal of
long-lived assets, including discontinued operations. Statement 144 superseded
Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of," and APB Opinion No. 30, "Reporting the
Results of Operations - Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions." The Company adopted SFAS No. 144 effective January 1, 2002. The
adoption of this standard had no effect on the Company's financial statements.
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 April 2002, the FASB issued Statement No. 145, "Rescission of FASB Statements
No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Correction." This Statement eliminates extraordinary accounting treatment for
reporting gain or loss on debt extinguishment, and amends other existing
authoritative pronouncements to make various technical corrections, clarify
meanings, or describe their applicability under changed conditions.
In November 2002, the FASB issued Interpretation 45, "Guarantor's Accounting and
Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others." This Interpretation expands the disclosures to be made
by a guarantor about its obligations under certain guarantees and requires that,
at the inception of a guarantee, a guarantor recognize a liability for the fair
value of the obligation undertaken in issuing the guarantee. The disclosure
requirements are effective immediately. The initial recognition and measurement
provisions of this Interpretation are effective for guarantees issued or
modified after December 31, 2002.
11
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock Based
Compensation - Transition and Disclosure - an Amendment to SFAS 123". SFAS No.
148 provides two additional transition methods for entities that adopt the
preferable method of accounting for stock based compensation. Further, the
statement requires disclosure of comparable information for all companies
regardless of whether, when, or how an entity adopts the preferable, fair value
based method of accounting. These disclosures are now required for interim
periods in addition to the traditional annual disclosure. The amendments to SFAS
No. 123, which provides for additional transition methods are effective for
periods ending after December 15, 2002, although earlier application is
permitted. The amendments to the disclosure requirements are required for
financial reports containing condensed financial statements for interim periods
beginning after December 15, 2002.
In January 2003, subsequently revised in December 2003, the FASB issued FASB
Interpretation No. 46 ("FIN 46"), Consolidation of Variable Interest Entities -
An Interpretation of AARB N. 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 31, 2004 for a small business issuer.
In April 2003, the FASB issued Statement of Financial Accounting Standard No.
149 ("SFAS 149"), Amendment of Statement 133 on Derivative Instruments and
Hedging Activities. SFAS 149 amends and clarifies accounting for derivative
instruments, including certain derivative instruments embedded in other
contracts and for hedging activities under SFAS 133. SFAS 149 is generally
effective for derivative instruments, including certain derivative instruments
embedded in other contracts and for hedging activities under SFAS 133. SFAS 149
is generally effective for derivative instruments, including derivative
instruments embedded in certain contracts, entered into or modified after June
30, 2003 and for hedging relationships designated after June 30, 2003.
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 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.
ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Financial Statements of Registrant meeting the requirements of Regulation S-B
(except section 228.310 and Article 11 of Regulation S-X thereof) are included
herein beginning at page F-1 of this Annual Report on Form 10-KSB/A.
For information required with respect to this Item 7, see "Financial Statements
and Schedules on pages F-1 through F-13 of this report.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
ITEM 8A. CONTROLS AND PROCEDURES
Within 90 days prior to the filing date of this report, we carried out an
evaluation, under the supervision and with the participation of our principal
executive officer and principal financial officer, of the effectiveness of the
design and operation of our disclosure controls and procedures. Based on this
evaluation, our principal executive officer and principal financial officer
concluded that our disclosure controls and procedures provide reasonable
assurance that material information required to be included in our periodic SEC
reports is recorded, processed, summarized and reported within the time periods
specified in the relevant SEC rules and forms.
In addition, we reviewed our internal controls, and there have been no
significant changes in our internal controls or in other factors that could
significantly affect those controls subsequent to the date of their last
evaluation.
12
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16(A) OF THE EXCHANGE ACT.
The directors and officers of the Company, their ages, present positions with
the Company, and a summary of their business experience are set forth below.
Michael A. Feinstein, M.D., 57, Chairman of the Board of Directors since
December 1999 and Nocopi's acting Chief Executive Officer since February 2000,
has been a practicing physician in Philadelphia for more than twenty years,
serving for more than ten years as the President of a group medical practice
including three physicians. He is a Fellow of the American College of Obstetrics
and Gynecology and of the American Board of Obstetrics and Gynecology. He
received his B.A. from LaSalle College and his M.D. from Jefferson Medical
College. He has been an active private investor for more than thirty years,
during which he has consulted with the management of the companies in which he
invested on a number of occasions.
Stanley G. Hart, 43, a director since March 2001, is President and CEO of S.G.
Hart Associates, LLC a Brand Security and Protection Consulting Company. Mr.
Hart was President of Westvaco Brand Security, Inc., a wholly owned subsidiary
of MeadWestvaco Corporation, from its formation in September 2000 to July 2003.
Prior thereto, Mr. Hart served Westvaco Corporation (parent company of Westvaco
Brand Security, Inc.) for more than ten years in various capacities, most
recently as General Manager and Director of Westvaco's subsidiaries in Hong
Kong, Shanghai and Taipei.
Richard Levitt, 47, a director since December 1999, has been engaged in the
network services segment of the computer industry since 1988. In 1995, he
participated in the founding of XiTech Corporation, a Pittsburgh,
Pennsylvania-based provider of computing and computer networking hardware and
network design and implementation services which in five years has grown to over
100 employees and over $40 million in annual sales. Since founding XiTech, he
has served as one of its corporate principals as a Network Consultant and as the
Manager of its Network Sales force. In these capacities, Mr. Levitt played a
crucial role in the strategic and financial planning for XiTech, as well as the
development of new accounts. Before joining XiTech, Mr. Levitt served as a
network sales executive for Digital Equipment Corporation from 1988 to 1994 and
as a network consultant for TriLogic Corporation during 1994 and 1995. Mr.
Levitt holds a B.S. in Marketing from Kent State University.
Waldemar Maya, Jr., 53, a director since December 1999, currently is a private
business consultant. He served from 1999 to 2001 as Director of Finance,
Airplane Services for the Boeing Company. Before joining Boeing, Mr. Maya had
served from 1994 to 1998 as the Executive Vice President, Treasurer and
Secretary of N.J. Malin & Associates, a Texas-based wholesaler of material
handling equipment.
Claude H. Nash, Ph.D, 61, a director since August 2002, has been Vice President,
Office of Research and Development of the University of Maryland Biotechnology
Institute in Baltimore, MD since June 2003. Dr. Nash was a co-founder of
ViroPharma, Inc., an Exton, Pennsylvania pharmaceutical company. Dr. Nash served
as chairman of ViroPharma's board of directors from February 1997 until
September 2002, as Chief Executive Officer and President from December 1994
until August 2000, and as one of its directors from its commencement of
operations in 1994 to 2003. Dr. Nash presently serves as a consultant to
ViroPharma. From 1983 until 1994, Dr. Nash served as Vice President, Infectious
Disease and Tumor Biology at Schering-Plough Corporation, a pharmaceutical
company. Dr. Nash received his Ph.D. from Colorado State University. Dr. Nash
also is a director of Adolor Corporation and Assera Corporation.
Michael B. Solomon, CPA, 51, a director since May 2002, is currently the CEO of
Rudney Solomon Cohen & Felzer PC and has been a shareholder or partner of the
CPA firm since 1978. Mr. Solomon was also CEO of Omnikem Incorporated (a
specialty chemical company) during the year 2000, which he successfully sold to
Vulcan Materials Company on September 29, 2000. Mr. Solomon is a Director of
Bennett's Trailer Co. Mr. Solomon is a 1974 Pennsylvania State University
graduate and earned his CPA certificate in 1978.
13
Rudolph A. Lutterschmidt, 57, has been Vice President and Chief Financial
Officer of the Company for more than five years, serving in this capacity on a
part-time basis since January 2000. Since January 2002, Mr. Lutterschmidt has
been employed by CitySort LP, a data to delivery mailing business, as its Chief
Financial Officer. From January 2000 through November 2001, he had been employed
as a management consultant by Smart & Associates, LLP, an accounting and
professional services firm. He is a member of Financial Executives
International, the Institute of Management Accountants and is a Certified
Management Accountant.
The terms of the current directors will expire at the 2004 annual meeting of
stockholders of the Company.
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
Section 16(a) of the Exchange Act requires persons who become directors and/or
executive officers of a public company (such as Nocopi) to file reports with the
SEC regarding their beneficial ownership of the company's securities. A report
must be filed shortly after a person becomes an executive officer or director,
and shortly after an executive officer or director experiences a change in his
beneficial ownership of his company's securities. Except as set forth below,
based on a review of all Forms 3, 4 and 5 submitted during or in respect of the
Company's most recent fiscal year, to the Company's knowledge, none of its
executive officers and directors failed to file, on a timely basis, reports
required under Section 16 of the Exchange Act during or in respect of such year.
Messrs. Nash, Solomon and Alan Rihm were appointed to the Company's Board of
Directors during such year and thereby became subject to the Section 16
reporting requirements. The Company is not aware that any of them has yet filed
a statement of beneficial ownership in respect of the Company's securities.
Michael A. Feinstein, M.D., the Company's Chairman and Chief Executive Officer,
has both directly and indirectly acquired common stock of the Company in a
number of transactions for which he has failed to file Form 4 reports on a
timely basis. The Company is advised that such reports are being prepared and
will be filed promptly.
ITEM 10. EXECUTIVE COMPENSATION
During 2003, the Company did not pay any compensation to Dr. Feinstein, who has
served since February 2000 as the Company's acting Chief Executive Officer, and
no other executive officer of the Company received compensation equal to or
greater than $100,000. The Company does reimburse the expenses incurred by its
officers in the performance of their duties.
DIRECTOR COMPENSATION
Directors have not been paid any fees for their services as such during the year
ended December 31, 2003. All directors have been and will be reimbursed for
reasonable expenses incurred in connection with attendance at Board of Directors
meetings or other activities undertaken by them on behalf of the Company.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of March 31, 2004, the stock ownership of (1)
each person or group known by the Registrant to beneficially own 5% or more of
Registrant's common stock and (2) each director and Named Executive (as set
forth under the heading "Executive Compensation") individually, and of all
directors and executive officers of the Company as a group.
COMMON STOCK
--------------------------------
NUMBER
OF SHARES
BENEFICIALLY PERCENTAGE OF
OWNED CLASS (1)
------------- --------------
NAME OF BENEFICIAL OWNER
5% STOCKHOLDERS
Westvaco Brand Security, Inc. (2)............................................... 3,917,030 8.5%
Entrevest I Associates (3)...................................................... 3,333,333 7.3%
DIRECTORS AND OFFICERS
Michael A Feinstein, M.D. (4)................................................... 1,823,667 4.0%
Stanley G. Hart................................................................. 0 *
Richard Levitt (5).............................................................. 285,800 *
Waldemar Maya, Jr............................................................... 0 *
Claude H. Nash (6)............................................................. 10,000 *
Michael Solomon (7)............................................................. 953,333 2.1%
All Executive Officers and Directors as a Group (7 individuals)................. 3,073,400 6.7%
_______________
* Less than 1.0%.
14
(1) Where the Number of Shares Beneficially Owned (reported in the preceding
column) includes shares which may be purchased upon the exercise of
outstanding stock options which are or within sixty days will become
exercisable ("presently exercisable options") the percentage of class
reported in this column has been calculated assuming the exercise of such
presently exercisable options.
(2) As reflected in a Schedule 13D dated March 14, 2001 filed on behalf of
Westvaco Brand Security, Inc.
(3) As reflected in a Schedule 13D/A dated January 19, 2004 filed on behalf of
Entrevest I Associates.
(4) Includes 193,500 shares held by a pension plan of which Dr. Feinstein is a
trustee.
(5) Includes 400 shares owned by Mr. Levitt's wife.
(6) Includes 10,000 shares owned by Mr. Nash's wife.
(7) Includes 833,333 shares representing Mr. Solomon's interest in Entrevest I
Associates, a partnership that holds 3,333,333 shares.
The Company has entered into an agreement with Entrevest I Associates, a
partnership of which Mr. Solomon is a partner, pursuant to which the Company
issued to the partners on December 4, 2002 an aggregate of 3,333,333 shares
constituting 8% of its then outstanding capital stock. Under the agreement,
subject to certain conditions including approval by the Company's stockholders
of an appropriate increase in the number of shares of common stock authorized by
the Company's Articles of Incorporation, the partners have the right to
purchase, at various times through December 31, 2006, at various prices ranging
from $0.10 per share through $0.25 per share, an additional 40,000,000 shares of
the Company's common stock. If the conditions to these rights are satisfied and
such purchases are made (in whole or in substantial part), a change in control
of the Company may occur.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None.
15
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following Financial Statements are filed as part of this Annual Report
on Form 10-KSB/A
PAGE
----
Report of Independent Certified Public Accountants F-1
Balance Sheet as of December 31, 2003 F-2
Statements of Operations for the Years ended
December 31, 2003 and 2002 F-3
Statements of Stockholders' Deficiency for
the Years ended December 31, 2003 and 2002 F-4
Statements of Cash Flows for the Years ended
December 31, 2003 and 2002 F-5
Notes to Financial Statements F-6 to F-13
(b) The Exhibit Index begins on Page 19 of this Annual Report on Form
10-KSB/A.
(c) The Registrant filed the following Current Report on Form 8-K during the
last quarter of the fiscal year covered by this Annual Report on Form
10-KSB/A.
October 17, 2003 - Press Release dated October 17, 2003.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The Company has retained the public accounting firm of Cogen Sklar, LLP,
('Cogen'), whose principal business address is 150 Monument Rd., Suite 500, Bala
Cynwyd, PA 19004, to perform its annual audit for inclusion of its report in
Form 10-KSB, and perform SAS 100 reviews of quarterly information in connection
with Form 10-QSB filings.
AUDIT FEES
During 2003 and 2002, the aggregate fees billed for professional services
rendered by our principal accountant for the audit of our annual financial
statements and review of our quarterly financial statements was $21,000 and
$21,000.
AUDIT-RELATED FEES
During 2003 and 2002, our principal accountant did not render assurance and
related services reasonably related to the performance of the audit or review of
financial statements.
TAX FEES
During 2003 and 2002, the aggregate fees billed for professional services
rendered by our principal accountant for tax compliance, tax advice and tax
planning was $4,000 and $4,500.
16
ALL OTHER FEES
During 2003 and 2002, there were no fees billed for products and services
provided by the principal accountant other than those set forth above.
AUDIT COMMITTEE APPROVAL
We do not presently have an audit committee. All of the services listed above
were approved by Michael A. Feinstein, M.D., our Chief Executive Officer.
17
SIGNATURES
Pursuant to the requirements of Section 13 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.
Registrant
Dated: April 29, 2004 By: /s/ Michael A. Feinstein, M.D.
----------------------------------
Michael A. Feinstein, M.D.
Chairman of the Board
Dated: April 29, 2004 By: /s/ Rudolph A. Lutterschmidt
--------------------------------
Rudolph A. Lutterschmidt
Vice President, Chief Financial Officer
and Chief Accounting Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
Date: April 29, 2004 /s/ Michael A. Feinstein, M.D.
------------------------------
Michael A. Feinstein, M.D., Chairman of the Board
Date: April 29, 2004 /s/ Stanley G. Hart
-------------------
Stanley G. Hart, Director
Date: April 29, 2004 /s/ Richard Levitt.
-------------------
Richard Levitt, Director
Date: April 29, 2004
----------------------------------
Waldemar Maya, Jr., Director
Date: April 29, 2004 /s/ Claude Nash.
----------------
Claude Nash, Director
Date: April 29, 2004 /s/ Michael Solomon
-------------------
Michael Solomon, Director
18
The following Exhibits are filed as part of this Annual Report on Form 10-KSB/A:
Exhibit
Number Description
------- -----------
3.1 Articles of Incorporation (1)
3.2 Bylaws (1)
3.3 Articles of Amendment to Articles of Incorporation (3)
3.4 Article of Amendment to Articles of Incorporation (4)
3.5 Amendments to Bylaws (5)
10.1 Summary Plan Description for Nocopi Technologies, Inc. 401(k)
Profit Sharing Plan (2)
10.2 Nocopi Technologies, Inc. 1996 Stock Option Plan (3)
10.3 Nocopi Technologies, Inc. 1999 Stock Option Plan (4)
10.4 Amended Summary Plan Description for Nocopi Technologies, Inc.
401(k) Profit Sharing Plan (4)
10.5 Director Indemnification Agreement (5)
10.6 Officer Indemnification Agreement (5)
10.7 License Agreement with Westvaco Brand Security, Inc. (6)
10.8 Amendment to Westvaco License Agreement (6)
10.9 Amendment (No. 2) to Westvaco License Agreement (6)
10.10 Stock Purchase Agreement with Westvaco Brand Security, Inc. (6)
10.11 Registration Rights Agreement with Westvaco Brand Security, Inc. (6)
10.12 Collateral Assignment of Patent Rights to Westvaco Brand
Security, Inc. (6)
10.13 Escrow Agreement with Westvaco Brand Security, Inc. (6)
10.14 Amendment (No. 3) to Westvaco License Agreement (7)
10.15 Subscription Agreement with Entrevest I Associates (7)
10.16 Lease Agreement dated March 19, 2003 relating to premises at
9 Portland Road, West Conshohocken, PA 19428 (7)
10.17 Settlement Agreement with Euro-Nocopi, S.A. (8)
32.1 Certification of Chief Financial Officer required by Rule 13a-14(a).
32.2 Certification of Chief Executive Officer required by Rule 13a-14(a).
99.1 Certifications of Chief Executive Officer and Chief Financial
Officer Pursuant to 18 U.S.C. Section 1350, As Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
19
(1) Incorporated by reference to Registrant's Registration Statement on Form
10, as filed with the Commission on or about August 19, 1992
(2) Incorporated by reference to Registrant's Annual Report on Form 10-K for
the Year Ended December 31, 1993
(3) Incorporated by reference to Registrant's Annual Report on Form 10-K for
the Year Ended December 31, 1996
(4) Incorporated by reference to Registrant's Annual Report on Form 10-KSB for
the Year Ended December 31, 1998
(5) Incorporated by reference to Registrant's Quarterly Report on Form 10-QSB
for the Three Months Ended September 30, 1999
(6) Incorporated by reference to Registrant's Annual Report on Form 10-KSB for
the Year Ended December 31, 2000
(7) Incorporated by reference to Registrant's Annual Report on Form 10-KSB for
the Year Ended December 31, 2002
(8) Incorporated by reference to Registrant's Annual Report on Form 10-KSB for
the Year Ended December 31, 2003
20
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Stockholders and Board of Directors
of Nocopi Technologies, Inc.
West Conshohocken, Pennsylvania
We have audited the accompanying balance sheet of Nocopi Technologies, Inc. as
of December 31, 2003 and the related statements of operations, stockholders'
equity, and cash flows for each of the two years in the period ended December
31, 2003. The financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall presentation of the
financial statements. We believe that our audits provide a reasonable basis for
our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Nocopi Technologies, Inc. at
December 31, 2003, and the results of its operations and its cash flows for each
of the two years in the period ended December 31, 2003 in conformity with
accounting principles generally accepted in the United States.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 3 to the
financial statements, the Company has suffered recurring losses from operations
that raises substantial doubt about its ability to continue as a going concern.
Management's plans in regard to this matter are also described in Note 3. The
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
/s/ COGEN SKLAR, LLP
--------------------
COGEN SKLAR, LLP
Bala Cynwyd, Pennsylvania
February 26, 2004
F-1
NOCOPI TECHNOLOGIES, INC.
BALANCE SHEET
DECEMBER 31
2003
----
ASSETS
CURRENT ASSETS
CASH AND CASH EQUIVALENTS $89,900
ACCOUNTS RECEIVABLE LESS $15,000 ALLOWANCE
FOR DOUBTFUL ACCOUNTS 39,800
ARBITRATION SETTLEMENT RECEIVABLE 50,000
PREPAID AND OTHER 40,200
-------------
TOTAL CURRENT ASSETS 219,900
FIXED ASSETS
LEASEHOLD IMPROVEMENTS 70,400
FURNITURE, FIXTURES AND EQUIPMENT 476,200
-------------
546,600
LESS: ACCUMULATED DEPRECIATION AND AMORTIZATION 475,100
-------------
71,500
OTHER ASSETS
ARBITRATION SETTLEMENT RECEIVABLE 150,000
-------------
$441,400
=============
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
CURRENT LIABILITIES
DEMAND LOANS $149,900
ACCOUNTS PAYABLE 366,400
ACCRUED EXPENSES 264,900
DEFERRED REVENUE 71,500
-------------
TOTAL CURRENT LIABILITIES 852,700
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' DEFICIENCY
SERIES A PREFERRED STOCK $1.00 PAR VALUE
AUTHORIZED - 300,000 SHARES
ISSUED AND OUTSTANDING - NONE
COMMON STOCK, $.01 PAR VALUE
AUTHORIZED - 75,000,000 SHARES
ISSUED AND OUTSTANDING - 45,972,241 SHARES 459,700
PAID-IN CAPITAL 11,141,100
ACCUMULATED DEFICIT (12,012,100)
-------------
(411,300)
-------------
$441,400
=============
The accompanying notes are an integral part of these financial statements.
F-2
NOCOPI TECHNOLOGIES, INC.
STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31
2003 2002
---- ----
REVENUES
LICENSES, ROYALTIES AND FEES $327,700 $441,100
PRODUCT AND OTHER SALES 243,800 295,700
----------------- -----------------
571,500 736,800
----------------- -----------------
COST OF SALES
LICENSES, ROYALTIES AND FEES 168,100 187,700
PRODUCT AND OTHER SALES 144,000 191,100
----------------- -----------------
312,100 378,800
----------------- -----------------
GROSS PROFIT 259,400 358,000
----------------- -----------------
OPERATING EXPENSES
RESEARCH AND DEVELOPMENT 202,800 254,100
SALES AND MARKETING 171,500 269,900
GENERAL AND ADMINISTRATIVE
(EXCLUSIVE OF LEGAL EXPENSES) 239,100 269,600
LEGAL EXPENSES 87,300 479,600
----------------- -----------------
700,700 1,273,200
----------------- -----------------
LOSS FROM OPERATIONS (441,300) (915,200)
----------------- -----------------
OTHER INCOME (EXPENSES)
INTEREST INCOME 4,100 300
INTEREST AND BANK CHARGES (13,400) (9,600)
NET SETTLEMENT FROM ARBITRATION 909,400 -
----------------- -----------------
900,100 (9,300)
----------------- -----------------
NET EARNINGS (LOSS) $458,800 ($924,500)
================= =================
BASIC AND DILUTED EARNINGS (LOSS) PER COMMON SHARE $.01 ($.02)
BASIC AND DILUTED WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 45,972,241 42,516,686
The accompanying notes are an integral part of these financial statements.
F-3
NOCOPI TECHNOLOGIES, INC.
STATEMENTS OF STOCKHOLDERS' DEFICIENCY
FOR THE PERIOD JANUARY 1, 2002 THROUGH DECEMBER 31, 2003
COMMON STOCK PAID-IN ACCUMULATED
SHARES AMOUNT CAPITAL DEFICIT
------ ------ ------- -------
BALANCE - JANUARY 1, 2002 39,122,241 $391,200 $10,798,600 $(11,546,400)
SALES OF COMMON STOCK 6,850,000 68,500 342,500
NET LOSS (924,500)
----------------------------------------------------
BALANCE - DECEMBER 31, 2002 45,972,241 459,700 11,141,100 (12,470,900)
NET EARNINGS
458,800
----------------------------------------------------
BALANCE - DECEMBER 31, 2003 45,972,241 $459,700 $11,141,100 ($12,012,100)
========== ======== =========== ============
The accompanying notes are an integral part of these financial statements.
F-4
NOCOPI TECHNOLOGIES, INC.
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31
2003 2002
---- ----
OPERATING ACTIVITIES
NET EARNINGS (LOSS) $458,800 ($924,500)
ADJUSTMENTS TO RECONCILE NET EARNINGS (LOSS) TO
CASH USED IN OPERATING ACTIVITIES
DEPRECIATION 12,900 18,700
ALLOWANCE FOR DOUBTFUL ACCOUNTS, NET - (6,200)
----------------- ------------------
471,700 (912,000)
(INCREASE) DECREASE IN ASSETS
ACCOUNTS RECEIVABLE (700) 6,700
ARBITRATION SETTLEMENT RECEIVABLE (200,000) -
PREPAID AND OTHER (9,200) (8,300)
INCREASE (DECREASE) IN LIABILITIES
ACCOUNTS PAYABLE AND ACCRUED EXPENSES (291,400) 423,400
DEFERRED REVENUE (49,200) 57,700
----------------- ------------------
(550,500) 479,500
----------------- ------------------
NET CASH USED IN OPERATING ACTIVITIES (78,800) (432,500)
INVESTING ACTIVITIES
ADDITIONS TO FIXED ASSETS (70,400) -
INVESTMENT IN AFFILIATE 110,600 -
----------------- ------------------
NET CASH PROVIDED BY INVESTMENT ACTIVITIES 40,200 -
FINANCING ACTIVITIES
ISSUANCE OF COMMON STOCK - 411,000
DEMAND LOANS 4,500 160,400
DEMAND LOAN REPAYMENT (15,000) -
----------------- ------------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES (10,500) 571,400
----------------- ------------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (49,100) 138,900
CASH AND CASH EQUIVALENTS
BEGINNING OF YEAR 139,000 100
----------------- ------------------
END OF YEAR $89,900 $139,000
================= ==================
The accompanying notes are an integral part of these financial statements.
F-5
NOCOPI TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2003 AND 2002
1. ORGANIZATION OF THE COMPANY
Nocopi Technologies, Inc. (the Company) is organized under the laws of the
State of Maryland. Its main business activities are the development and
distribution of document security products and the licensing of its
patented authentication technologies in the United States and foreign
countries. The Company operates in one principal industry segment.
2. SIGNIFICANT ACCOUNTING POLICIES
ESTIMATES - The preparation of the financial statements in conformity with
Accounting Principles Generally Accepted in the United States requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent liabilities
at the dates of financial statements and the reported amounts of revenues
and expenses during the reported periods. Actual results could differ from
those estimates.
CASH AND CASH EQUIVALENTS - Cash equivalents consist principally of time
deposits and highly liquid investments with an original maturity of three
months or less placed with major banks and financial institutions. Cash
equivalents are carried at the lower of cost, plus accrued interest, or
market value and are held in money market accounts at a local bank. At
December 31, 2003, Nocopi's investments in money market accounts amounted
to $77,100.
CONCENTRATION OF CREDIT RISK INVOLVING CASH - During the year, the Company
had deposits with a major financial institution that exceeded Federal
Deposit Insurance limits. This financial institution has a strong credit
rating, and Management believes that credit risk related to these deposits
is minimal. The Company maintains uninsured cash balances at one financial
institution. At December 31, 2003, the total balance was $77,100.
FIXED ASSETS are carried at cost less accumulated depreciation and
amortization. Furniture, fixtures and equipment are generally depreciated
on the straight-line method over their estimated service lives. Leasehold
improvements are amortized on a straight-line basis over the shorter of
five years or the term of the lease. Major renovations and betterments are
capitalized. Maintenance, repairs and minor items are expensed as
incurred. Upon disposal, assets and related depreciation are removed from
the accounts and the net amount, less proceeds from disposal, is charged
or credited to income.
PATENT COSTS are charged to expense as incurred due to the uncertainty of
their recoverability as a result of the Company's adverse liquidity
situation.
REVENUES, consisting primarily of license fees and royalties, are recorded
as earned over the license term. Product sales are recognized upon
shipment of products.
INCOME TAXES - Deferred income taxes are provided for all temporary
differences and net operating loss and tax credit carryforwards. Deferred
tax assets are reduced by a valuation allowance when, in the opinion of
management, it is more likely than not that some portion or all of the
deferred tax assets will not be realized.
F-6
FAIR VALUE - The carrying amounts reflected in the balance sheets for
cash, cash equivalents, receivables, accounts payable and accrued expenses
approximate fair value due to the short maturities of these instruments.
The fair value of the settlement receivable approximates the carrying
value because of the current low interest rates that would be used in
discounting future cash flows. The fair values represent estimates of
possible value that may not be realized in the future. The carrying value
of the Demand Loans approximates the fair market value since the interest
rate associated with the debt approximates the current market interest
rate.
EARNINGS (LOSS) PER SHARE - The Company follows Statement of Financial
Accounting Standards No. 128, "Earnings Per Share" resulting in the
presentation of basic and diluted earnings per share. Options to purchase
525,000 shares of common stock at exercise prices of $.30 and $.45 per
share were outstanding during 2003 but were not included in the
calculation of diluted earnings per share because the exercise price was
greater than the average market price of the common shares. Because the
Company reported a net loss in 2002, common stock equivalents, including
stock options and warrants were anti-dilutive.
COMPREHENSIVE INCOME (LOSS) - The Company follows Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income". Since the
Company has no items of comprehensive income (loss), Comprehensive income
(loss) is equal to net income (loss).
RECOVERABILITY OF LONG-LIVED ASSETS
In October 2001, the Financial Accounting Standards Board issued SFAS No.
144, "Accounting for the Impairment or Disposal of Long-Lived Assets"
("Statement 144"), effective in fiscal years beginning after December 15,
2001, with early adoption permitted, and in general are to be applied
prospectively. Statement 144 establishes a single accounting model for the
impairment or disposal of long-lived assets, including discontinued
operations. Statement 144 superseded Statement No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to Be
Disposed Of," and APB Opinion No. 30, "Reporting the Results of Operations
- Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and
Transactions." The adoption of this standard, effective January 1, 2002,
had no effect on the Company's financial statements.
RECENTLY ISSUED ACCOUNTING STANDARDS
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.
F-7
In April 2002, the FASB issued Statement No. 145, "Rescission of FASB
Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and
Technical Correction." This Statement eliminates extraordinary accounting
treatment for reporting gain or loss on debt extinguishment, and amends
other existing authoritative pronouncements to make various technical
corrections, clarify meanings, or describe their applicability under
changed conditions.
In November 2002, the FASB issued Interpretation 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others." This Interpretation expands the
disclosures to be made by a guarantor about its obligations under certain
guarantees and requires that, at the inception of a guarantee, a guarantor
recognize a liability for the fair value of the obligation undertaken in
issuing the guarantee. The disclosure requirements are effective
immediately. The initial recognition and measurement provisions of this
Interpretation are effective for guarantees issued or modified after
December 31, 2002.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock
Based Compensation - Transition and Disclosure - an Amendment to SFAS
123". SFAS No. 148 provides two additional transition methods for entities
that adopt the preferable method of accounting for stock based
compensation. Further, the statement requires disclosure of comparable
information for all companies regardless of whether, when, or how an
entity adopts the preferable, fair value based method of accounting. These
disclosures are now required for interim periods in addition to the
traditional annual disclosure. The amendments to SFAS No. 123, which
provides for additional transition methods are effective for periods
ending after December 15, 2002, although earlier application is permitted.
The amendments to the disclosure requirements are required for financial
reports containing condensed financial statements for interim periods
beginning after December 15, 2002.
In January 2003, subsequently revised in December 2003, the FASB issued
FASB Interpretation No. 46 ("FIN 46"), Consolidation of Variable Interest
Entities - An Interpretation of AARB N. 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 31, 2004 for a small business
issuer.
In April 2003, the FASB issued Statement of Financial Accounting Standard
No. 149 ("SFAS 149"), Amendment of Statement 133 on Derivative Instruments
and Hedging Activities. SFAS 149 amends and clarifies accounting for
derivative instruments, including certain derivative instruments embedded
in other contracts and for hedging activities under SFAS 133. SFAS 149 is
generally effective for derivative instruments, including certain
derivative instruments embedded in other contracts and for hedging
activities under SFAS 133. SFAS 149 is generally effective for derivative
instruments, including derivative instruments embedded in certain
contracts, entered into or modified after June 30, 2003 and for hedging
relationships designated after June 30, 2003.
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 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.
F-8
3. GOING CONCERN
Since its inception, the Company has incurred significant losses and, as
of December 31, 2003, had accumulated losses of $12,012,100. 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 $632,800 at December 31, 2003. 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 $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, the significant legal fees incurred in the arbitration will be
eliminated. 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 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
investment, it may be forced to cease operations during the second quarter
of 2004.
The Company's independent certified public accountants have included a
"going concern" explanatory paragraph in their audit report accompanying
the 2003 financial statements. The paragraph states that the Company's
recurring losses from operations raise substantial doubt about the
Company's ability to continue as a going concern and cautions that the
financial statements do not include any adjustments that might result from
the outcome of this uncertainty.
4. DEMAND LOANS
During 2003, the Company received additional unsecured loans of $4,500
from its Chairman of the Board and repaid $15,000 in loans previously made
by this individual. At December 31, 2003 the total demand loans
outstanding was $149,900. The loans bear interest at seven per cent per
year and are payable on demand. The loans were used to finance the
Company's working capital requirements.
5. STOCKHOLDERS' DEFICIENCY
During January 2002, the Company sold 2,316,667 shares of its common stock
to investors, including affiliates of the Company, for $139,000. In May
2002, the Company sold 1,200,000 shares of its common stock to
non-affiliated investors for $72,000. One of the individuals who invested
in May 2002 was later appointed to the Company's Board of Directors in
late May 2002.
F-9
In mid-November, 2002, the Company entered into a subscription agreement
with a partnership composed of Michael Solomon, a director of the Company,
and three other persons pursuant to which the partnership agreed to
acquire, in return for a subscription payment of $200,000, a total of
3,333,333 shares of the Company's common stock, together with warrants to
purchase an additional 40,000,000 shares of common stock in the aggregate
at exercise prices ranging from $0.10 to $0.25 per share, during various
periods through year-end 2003 through year-end 2006, subject to partial
rollover and extension. The warrants are subject to the negotiation and
agreement of the Company and the investors on the definitive terms thereof
and also to the approval by the Company's common stockholders of an
amendment to the Company's charter to increase its authorized capital to a
number of shares sufficient to permit exercise of the warrants. This
transaction was approved by the Company's board of directors with Mr.
Solomon abstaining. The Company received the partnership's $200,000
subscription payment in early December 2002. At December 31, 2003, the
definitive warrant agreement had not yet been negotiated and the Company's
stockholders have not been presented with an amendment to increase the
Company's authorized capital.
6. INCOME TAXES
There is no provision for income taxes for 2003 due to the availability of
net operating loss carryforwards for which the Company had previously
established a 100% valuation allowance for deferred tax assets due to the
uncertainty of their recoverability. At December 31, 2003, the Company had
net operating loss carryforwards ("NOL's") approximating $11,500,000.
These operating losses are available to offset future taxable income
through the year 2023. As a result of the sale of the Company's common
stock in an equity offering in late 1997 and the issuance of additional
shares, the amount of the NOL's carryforwards may be limited.
Additionally, the utilization of these NOL's if available, to reduce the
future income taxes will depend on the generation of sufficient taxable
income prior to their expiration. There were no temporary differences for
the years ended December 31, 2003 and 2002. The Company has established a
100% valuation allowance of approximately $4,700,000 at December 31, 2003
for the deferred tax assets due to the uncertainty of their realization.
7. COMMITMENTS AND CONTINGENCIES
The Company conducts its operations in leased facilities and leases
equipment under non-cancelable operating leases expiring at various dates
to 2008.
Future minimum lease payments under non-cancelable operating leases with
initial or remaining terms of one year or more at December 31, 2003 are:
$34,800 - 2004; $36,100 - 2005; $37,600 - 2006; $39,100 - 2007 and $9,900
- 2008.
Total rental expense under operating leases was $101,100 and $104,500 in
2003 and 2002, respectively.
The Company had a consulting agreement with a former executive officer and
director, the term of which expired at December 31, 2002. The Board of
Directors of the Company, in mid-2000, suspended cash payments to the
consultant as a potential offset to certain payments made to the
consultant by a licensee of the Company. All other provisions of the
agreement remained in force throughout the term of the agreement. At
December 31, 2003, unpaid consulting fees totaling $166,300 were included
in Accrued Expenses on the Balance Sheet.
F-10
From time to time, the Company may be subject to legal proceedings and
claims that arise in the ordinary course of its business. During late 2000
and early 2001 several legal and arbitration proceedings were commenced by
the Company's former European exclusive licensee and certain of its
shareholders against the Company, certain former and present directors of
the Company and against a licensee of the Company. These proceedings were
settled during 2003 as described in Note 9.
8. STOCK OPTIONS AND 401(K) SAVINGS PLAN
The 1996 and 1999 Stock Option Plans provide for the granting of up to
2,700,000 incentive and non-qualified stock options to employees,
non-employee directors, consultants and advisors to the Company. In the
case of options designated as incentive stock options, the exercise price
of the options granted must be not less than the fair market value of such
shares on the date of grant. Non-qualified stock options may be granted at
any amount established by the Stock Option Committee or, in the case of
Discounted Options issued to non-employee directors in lieu of any portion
of an Annual Retainer, in accordance with a formula designated in the
Plan.
A summary of stock options under the Company's stock option plans follows:
Exercise Weighted
Number of Price Range Average
Shares Per Share Exercise Price
------ --------- --------------
Outstanding at December 31, 2003 and 2002 525,000 $.30 and $.45 $.36
======= ============= ====
Exercise Weighted
Option Price Range Average
Shares Per Share Exercise Price
------ --------- --------------
Exercisable at year end:
2003 and 2002 525,000 $.30 and $.45 $.36
Options available for future grant under all plans:
2003 and 2002 2,175,000
The following table summarizes information about stock options outstanding at
December 31, 2003:
Range of exercise prices $.30 to $.45
------------
Number outstanding at
December 31, 2003 525,000
-------
Weighted average remaining contractual life
(years) 2.09
----
Weighted average exercise price $.36
----
Exercisable options:
Number outstanding at
December 31, 2003 525,000
-------
Weighted average remaining
Contractual life (years) 2.09
----
Weighted average exercise price $.36
----
F-11
No options were granted in 2003 or 2002.
The Company continues to account for stock-based compensation using the
intrinsic value method prescribed in Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees". Compensation cost for
stock options, if any, is measured as the excess of the quoted market
price of the Company's stock at the date of grant over the amount an
employee must pay to acquire the stock. Compensation costs for shares
issued under performance share plans are recorded based upon the current
market value of the Company's stock at the end of each period. The Company
has adopted the disclosure-only provisions of Statement of Financial
accounting Standards ("SFAS") No. 123, "Accounting for Stock Based
Compensation" for employees and employee-directors as defined in SFAS No.
123. Compensation costs for grants to employees and directors would be
determined based on the fair value at the date of grant in accordance with
SFAS No. 123 and would be amortized over the vesting period of the option,
which is generally two years. Had compensation cost for the Company's
stock option grants to employees and employee-directors been determined
based on the fair value at the date of grants in accordance with the
provisions of SFAS No. 123, the Company would have amortized the cost over
the vesting period of the option. There was no pro forma effect on the
Company's net loss or the net loss per share applicable to common shares
for 2003 and 2002, since no options were granted during these periods.
At December 31, 2003, the Company has reserved 2,700,000 shares of common
stock for possible future issuance upon exercise of stock options. The
Company sponsors a 401(k) savings plan, covering substantially all
employees, providing for employee and employer contributions. Employer
contributions are made at the discretion of the Company. There were no
contributions charged to expense during 2003 or 2002.
9. 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 will be paid in
four equal annual installments commencing in March 2004. The Company
recorded a net settlement of $909,400 in 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.
10. MAJOR CUSTOMER INFORMATION
The Company's largest non-affiliate customers accounted for approximately
49% and 16% of revenues in 2003 and 2002, respectively, and approximately
56% of accounts receivable at December 31, 2003. The Company performs
ongoing credit evaluations of its customers and generally does not require
collateral. The Company also maintains allowances for potential credit
losses.
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