Form 10-KSB
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
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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, 2005
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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 000-20333
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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 issues is not required to file reports pursuant to
Section 13 or 15(d) of the Exchange Act [ ]
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 or any
amendment to this Form 10-KSB. [ ]
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act) Yes [ ] No [X]
State issuer's revenues for its most recent fiscal year. $528,300.
State the aggregate market value of the voting and non-voting common
equity held by non-affiliates of the issuer [computed by reference to the price
at which the common equity of the registrant was last sold on March 15, 2006.
$9,970,000
(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. 50,750,655 shares of Common
Stock, $.01 par value at March 15, 2006.
DOCUMENTS INCORPORATED BY REFERENCE
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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 or 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, the 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 2004, Registrant received new
capital investments totaling $152,100 from three new stockholders and converted
demand notes and accrued interest totaling $175,400 into 1,753,940 shares of
Registrant's common stock.
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 is seeking 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.
In late 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 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, participated in trade shows including the 2004 and 2005
American International Toy Fair in New York City and has received several
industry awards. In late 2005, Registrant negotiated its first license for the
use of this technology. 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 the
copying and printing 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.
1
Registrant's proprietary 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 & 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
As mentioned above, 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 and 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 and it attended the Toy Fair
again in February 2005. During 2004, Registrant received awards from Creative
Child Magazine and Spectrum Magazine for its rub-it and Color Activity Book. As
a result of its participation and marketing activities, 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. During 2005, Registrant negotiated a license agreement
with a publisher of children's coloring and activity books to utilize
Registrant's inks in its products. The marketing of these products by the
licensee is anticipated to commence in 2006. 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 2005 2004
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Anti-Counterfeiting & Anti-Diversion Technologies and Products 86% 85%
Document Security Products 13% 15%
Entertainment and Toy Products 1% 0%
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 marketing 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.
3
MAJOR CUSTOMERS
During 2005, Registrant made sales or obtained revenues equal to 10% or more of
Registrant's 2005 total revenues from three non-affiliated customers who
individually accounted for approximately 41%, 16% and 11% of 2005 revenues.
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. Registrant currently has obtained patent protection on substantially
all its security inks including the RUB & REVEAL(R) system and has patents
pending on the newly marketed Rub-n-Color technology. Patents on Registrant's
line of burgundy colored papers, presently a minor portion of Registrant's
product line, have expired.
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, 2005 and 2004, Nocopi expended approximately
$145,900 and $170,300 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 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.
5
EMPLOYEES
At March 15, 2006, Registrant had three full-time and two part-time employees.
Registrant believes that its relations with its employees are good.
FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC OPERATIONS
Registrant conducts its operations solely in the United States; however, it does
have licensees in Europe, Australia and New Zealand. These licensees accounted
for less than 5% of Registrants gross revenues in 2005.
ITEM 2. DESCRIPTION OF PROPERTY
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 by the Registrant
from an unaffiliated third party pursuant to a lease expiring in March 2008.
Current monthly rent under this lease is $3,042 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 incurred leasehold
improvement expenditures of approximately $70,000 through December 31, 2005 and
believes that additional leasehold improvement expenditures will not be
significant. Registrant believes that this space will be adequate for its
current needs and that additional space will be available as needed.
ITEM 3. LEGAL PROCEEDINGS
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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the fourth quarter of the fiscal year ended December 31, 2005, no matters
were submitted to a vote of Registrant's security holders.
PART II
ITEM 5. MARKET FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND SMALL BUSINESS
ISSUER PURCHASES OF EQUITY SECURITIES
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.
6
High Bid Low Bid
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January 1, 2004 to March 31, 2004 $.24 $.13
April 1, 2004 to June 30, 2004 $.19 $.12
July 1, 2004 to September 30, 2004 $.17 $.08
October 1, 2004 to December 31, 2004 $.16 $.12
January 1, 2005 to March 31, 2005 $.13 $.11
April 1, 2005 to June 30, 2005 $.13 $.07
July 1, 2005 to September 30, 2005 $.11 $.07
October 1, 2005 to December 31, 2005 $.14 $.08
January 1, 2006 to March 15, 2006 $.29 $.08
As of March 15, 2006, 50,750,655 shares of Registrant's Common Stock were
outstanding. The number of holders of record of Registrant's Common Stock was
approximately 600. 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 50,750,655 shares of Common Stock which are
outstanding, Registrant, at March 15, 2006, has reserved for issuance 2,700,000
shares of its Common Stock which underlie options to purchase Common Stock of
the Registrant.
The Company did not pay dividends in 2005 or 2004 and does not anticipate paying
any such dividends in the foreseeable future. Any determination to pay dividends
in the future will be at the discretion of the Company's Board of Directors and
will be dependent upon the Company's results of operations, financial condition,
contractual restrictions and other factors deemed relevant by the Board of
Directors.
RECENT SALES OF UNREGISTERED SECURITIES
During 2005, the Company, did not issue any unregistered securities.
ISSUER REPURCHASES OF EQUITY SECURITIES
None
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
FORWARD-LOOKING INFORMATION
You should read the following discussion and analysis of the Company's financial
condition and results of operation in conjunction with the financial statements
and related notes. In addition to historical information, this discussion and
analysis contains forward-looking statements based on current expectations that
involve risks, uncertainties and assumptions. The Company's actual results and
the timing of events may differ materially from those anticipated in these
forward-looking statements as a result of various factors, including those set
forth in the "Risk Factors" section of this Item 6 and elsewhere in this Form
10-KSB.
This Form 10-KSB contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. Those statements are therefore entitled to the protection
of the safe harbor provisions of these laws. These forward-looking statements,
which are usually accompanied by words such as "may," "might," "will," "should,"
"could," "intends," "estimates," "predicts," "potential," "continue,"
"believes," "anticipates," "plans," "expects" and similar expressions, involve
risks and uncertainties, and relate to, without limitation, statements about the
Company's market opportunities, strategy, competition, projected revenue and
expense levels and the adequacy of the Company's available cash resources. This
Form 10-KSB also contains forward-looking statements attributed to third
parties. These statements are only predictions based on current expectations and
projections about future events. There are important factors that could cause
the Company's actual results, level of activity, performance or achievements to
differ materially from those expressed or forecasted in, or implied by, such
forward-looking statements, including those factors discussed in "Risk Factors."
Although the Company believes that the expectations reflected in these
forward-looking statements are based upon reasonable assumptions, no assurance
can be given that such expectations will be attained or that any deviations will
not be material. In light of these risks, uncertainties and assumptions, the
forward-looking events and circumstances discussed in this report may not occur
and actual results could differ materially and adversely from those anticipated
or implied in the forward-looking statements. The Company disclaims any
obligation or undertaking to disseminate any updates or revision to any
forward-looking statement contained herein to reflect any change in the
Company's expectations with regard thereto or any change in events, conditions
or circumstances on which any such statement is based.
7
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.
The Company recognizes revenue on its lines of business as follows:
a) License fees and royalties are recognized when the license term
begins. Upon inception of the license term, revenue is recognized in a manner
consistent with the nature of the transaction and the earnings process, which
generally is ratably over the license term;
b) Product sales are recognized upon shipment of products, when the
price is fixed or determinable and collectibility is reasonably assured; and
c) Fees for technical services are recognized when (i) the service has
been rendered; (ii) an arrangement exists; (iii) the price is fixed or
determinable based upon a per diem or hourly rate; and (iv) collectibility is
reasonably assured.
While the Company's fixed costs have been reduced as a result of its relocation
to a new location in 2003 and because the Company believes that further fixed
cost reductions may not be achievable, its operating results are substantially
dependent on revenue levels. Because revenues derived from licenses and
royalties carry a much higher gross profit margin than other revenues, operating
results are also substantially affected by changes in 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 2005 were $528,300, a decrease of approximately 16%, or $100,000,
from $628,300 in 2004. Licenses, royalties and fees decreased in 2005 by
approximately 18% to $307,400 from $373,200 in 2004. The decrease in licenses,
royalties and fees is due primarily to the non-renewal of license arrangements
with three licensees during 2005 offset in part by the inception of license
arrangements with three new licensees during the same period. Product and other
sales decreased by $34,200, or approximately 13% to $220,900 in 2005 from
$255,100 in 2004. The decrease in product and other sales reflects lower sales
of both the Company's security inks and its line of security papers in 2005
compared to 2004.
Gross profit decreased to $321,400 or approximately 61% of revenues in 2005 from
$365,200 or approximately 58% of revenues in 2004. 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 in 2005 compared to 2004 resulted principally from
a decrease in revenues represented by licenses, royalties and fees offset in
part by lower fixed costs of production.
8
Research and development expenses decreased to $145,900 in 2005 from $170,300 in
2004. The decrease in 2005 was due primarily to a reduction of staff during the
third quarter of 2004.
Sales and marketing expenses decreased to $109,600 in 2005 from $142,000 in
2004. The decrease in 2005 compared to 2004 reflects lower travel, sales
promotion and business show expense as certain expenses associated with the
introduction of the Company's new Rub-n-Color product for the Educational and
Toy Market in 2004 were not incurred in 2005.
General and administrative expenses (exclusive of legal expenses) decreased to
$200,100 in 2005 from $260,200 in 2004. The decrease in 2005 compared to 2004 is
due primarily to $75,000 in expenses recorded in 2004 in connection with the
issuance to members of the Company's Board of Directors and two consultants of
900,000 options to purchase shares of the Company's common stock. During 2005,
300,000 options were issued to three members of the Company's Board of Directors
and $17,000 in expense was recorded. During 2005 the Company's patent
acquisition expenses increased due to increased activity in this area.
Legal expenses decreased to $79,600 in 2005 from $121,200 in 2004. During 2004,
the Company incurred legal fees in structuring agreements related to the
conversion of the Company's demand loans into common stock and the release of
certain stock option rights. Additionally, during 2005, a lower level of legal
counseling was required by the Company in its compliance with securities
regulations and other matters than in 2004.
Other income (expense) decreased in 2005 compared to 2004 as interest expense on
demand loans was significantly reduced due to conversions to common stock of the
Company in September 2004.
The net loss of $215,900 in 2005 compared to $339,000 in 2004 was due to the
lower expense associated with the issuance of stock options to Directors and
consultants in 2005 compared to 2004, lower sales and marketing expenses, lower
legal expenses and a reduction of staff during 2004 offset in part by a lower
gross margin resulting from lower revenues.
PLAN OF OPERATION, LIQUIDITY AND CAPITAL RESOURCES
The Company's cash and cash equivalents decreased to $4,300 at December 31, 2005
from $24,000 at December 31, 2004. During 2005, the Company received $18,000 in
demand loans from two individuals, including $3,000 from its Chairman of the
Board, and used $37,700, including a portion of cash on hand at the beginning of
the year, to fund operations.
The continued loss of a number of customers during the past four 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. During
2004, the Company raised $161,000 ($152,100 net of offering expenses) in a
private placement whereby 1,610,000 shares of the Company's common stock were
sold to three non-affiliated individual investors pursuant to a valid private
placement. This investment, combined with 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 immediate future both to fund investments
needed to increase its operating revenues to levels that will sustain its
operations and to fund operating deficits that it anticipates will continue
until revenue increases can be realized. There can be no assurances that the
Company will be successful in obtaining sufficient additional capital, or if it
does, that the additional capital will enable the Company to improve its
business so as to have a material positive effect on the Company's operations
and cash flow. The Company believes that without additional investment, it may
be forced to cease operations at an undetermined future date.
9
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.
The Company does not currently plan any significant additional capital
investment over the next twelve months.
RISK FACTORS
Our operating results, financial condition and stock price are subject to
certain risks, some of which are beyond our control. These risks could cause our
actual operating and financial results to differ materially from those expressed
in our forward looking statements, including the risks described below and the
risks identified in other documents which are filed and furnished with the SEC:
Inability to Continue in Operation Without New Capital Investment. We had a
negative working capital of $631,700 at December 31, 2005. Additionally, we
experienced negative cash flow from operations of $37,700 in the year ended
December 31, 2005. Our management believes that while certain staff reductions
initiated in 2003 and the move of our operations to a new facility, which was
completed during the third quarter of 2003, will reduce our negative cash flow,
we anticipate that our negative cash flow will continue until we can achieve
revenue increases. Our management believes that we will need to obtain
additional capital in the future both to fund investments needed to increase our
operating revenues to levels that will sustain our operations and to fund
operating deficits that we anticipate will continue until revenue increases can
be realized. There can be no assurances that we will be successful in obtaining
sufficient additional capital, or if we do obtain additional capital, that the
additional capital will enable us to improve our business so as to have a
material positive effect on our operations and cash flow. We believe that
without additional investment, we may be forced to cease operations at an
undetermined future date. It is uncertain whether our assets will retain any
value if we cease operations. There are no assurances that we will be able to
secure additional equity investment before we may be forced to cease operations.
Possible Inability to Develop New Business. Even if we are able to raise cash
through additional capital investment or otherwise, we must quickly improve our
operating cash flow. Because we have already significantly reduced our operating
expenses, our management believes that any significant improvement in our cash
flow must result from increases in our revenues from traditional sources and
from new revenue sources. Our ability to develop new revenues may depend on the
extent of both our marketing activities and our research and development
activities, both of which are limited. There are no assurances that the
resources, even with additional investment, that we can devote to marketing and
to research and development will be sufficient to increase our revenues to
levels resulting in positive cash flow.
Inability to Obtain Raw Materials and Products for Resale. Our adverse financial
condition has required us to significantly defer payments due vendors who supply
raw materials and other components of our security inks and security paper that
we purchase for resale and professional and other services. As a result, we are
required to pay cash in advance of shipment to certain of our suppliers. Delays
in shipments to customers caused by our inability to obtain materials on a
timely basis and the possibility that certain current vendors may permanently
discontinue to supply us with needed products could impact our ability to
service our customers and adversely affect our customer and licensee
relationships. While receipt of funds in conjunction with the settlement of the
arbitration with Euro-Nocopi, S.A. and sales of shares of our common stock in
2004 have allowed us to continue in operation to the current date, there can be
no assurances that we will be able to maintain our vendor relationships in an
acceptable manner.
Uneven Pattern of Quarterly and Annual Operating Results. Our revenues, which
are derived primarily from licensing and royalties, are difficult to forecast
due to the long sales cycle of our technologies, the potential for customer
delay or deferral of implementation of our technologies, the size and timing of
inception of individual license agreements, the success of our 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 our 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 our
quarterly and annual revenue expectations and, as our operating expenses are
substantially fixed, income expectations will be subject to a similar adverse
outcome. As licensees for the entertainment and toy products are added, the
unpredictability of our revenue stream may be further impacted.
10
Volatility of Stock Price. The market price for our common stock has
historically experienced significant fluctuations and may continue to do so. We
have, since our inception, operated at a loss and have not produced revenue
levels traditionally associated with publicly traded companies. Our common stock
is not listed on a national or regional securities exchange and, consequently,
we receive limited publicity regarding our business achievements and prospects,
nor do securities analysts and traders extensively follow our stock and our
stock is also thinly traded. Our 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 our common stock.
Intellectual Property. We rely on a combination of protections provided under
applicable international patent, trademark and trade secret laws. We also rely
on confidentiality, non-analysis and licensing agreements to establish and
protect our rights in our proprietary technologies. While we actively attempt to
protect these rights, our technologies could possibly be compromised through
reverse engineering or other means. In addition, our ability to enforce our
intellectual property rights through appropriate legal action has been and will
continue to be limited by our adverse liquidity. There can be no assurances that
we will be able to protect the basis of our technologies from discovery by
unauthorized third parties or to preclude unauthorized persons from conducting
activities that infringe on our rights. Our adverse liquidity situation has also
impacted our ability to obtain patent protection on our intellectual property
and to maintain protection on previously issued patents. We have been advised by
our patent counsel that patent maintenance fees approximating $7,000 will be due
during 2006. We have not yet made a decision on keeping any or all of these
patents in force. There can be no assurances that we will be able to continue to
prosecute new patents and maintain issued patents. As a result, our customer and
licensee relationships could be adversely affected and the value of our
technologies and intellectual property (including their value upon our
liquidation) could be substantially diminished.
RECENTLY ISSUED ACCOUNTING STANDARDS
The Company currently accounts for stock-based compensation in accordance with
SFAS No. 123, "Accounting for Stock-Based Compensation," which for employee
stock options permits the use of intrinsic value method described in APB opinion
No. 25, Accounting for Stock Issued to Employees, and requires the Company to
disclose the pro forma effects for accounting for stock-based compensation using
the fair value method as described in the optional accounting requirements of
SFAS No. 123. As permitted by SFAS No. 123, the Company accounts for stock-based
compensation under APB Opinion No. 25, under which the Company has recognized no
compensation expense for employee granted options.
Had compensation cost for the Company's stock option plan been determined on the
fair value of the Company's common stock at the dates of awards under the fair
value method of SFAS No. 123, the Company's 2005 and 2004 net loss and net loss
per common share would have been increased to the pro forma amounts indicated
below. In 2005 and 2004, the fair value amounts were estimated using the
Black-Scholes options pricing model with the following assumptions: no dividend
yield, expected volatility of 60%, risk-free interest rate of 5% and expected
option life of five years.
11
December 31 December 31
2005 2004
----------- -----------
Net loss
As reported ($215,900) ($339,000)
Pro forma ($221,900) ($362,000)
Net loss per common share basic and diluted
As reported ($.00) ($0.01)
Pro forma ($.00) ($0.01)
In December 2004, the FASB issued SFAS No. 123 (revised 2004) (SFAS No. 123R),
Share-Based Payment, which addresses the accounting for share-based payment
transactions in which an enterprise receives employee services in exchange for
(a) equity instruments of the enterprise or (b) liabilities that are based on
the fair value of the enterprise's equity instruments or that may be settled by
the issuance of such equity instruments. SFAS No. 123R eliminates the ability to
account for share-based compensation transactions using the intrinsic value
method under APB Opinion No. 25, and requires instead that such transactions be
accounted for using a fair-value-based method. In January 2005, the SEC issued
SAB No. 107, which provides supplemental implementation guidance for SFAS No.
123R. SFAS No. 123R will be effective for the Company beginning in the first
quarter of its fiscal 2006. The Company's assessment of the estimated
stock-based compensation expense is affected by the Company's stock price as
well as assumptions regarding a number of complex variables and the related tax
impact. These variables include, but are not limited to, the Company's stock
price, volatility, and employee stock option exercise behaviors and the related
tax impact. The Company will recognize stock-based compensation expense on all
awards on a straight-line basis over the requisite service period using the
modified prospective method. Although the adoption of SFAS No. 123R is expected
to have a material effect on the Company's results of operations, future changes
to various assumptions used to determine the fair value of awards issued or the
amount and type of equity awards granted create uncertainty as to whether future
stock-based compensation expense will be similar to the historical SFAS No. 123
pro forma expense.
OFF-BALANCE SHEET ARRANGEMENTS
The Company does not have any off-balance sheet arrangements.
ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
For information required with respect to this Item 7, see index to Financial
Statements and Schedules on pages F-1 of this report on Form 10-KSB.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
ITEM 8A. CONTROLS AND PROCEDURES
The Company's disclosure controls and procedures are designed to provide
reasonable assurance that material information required to be included in its
periodic SEC reports is recorded, processed, summarized and reported within the
time periods specified in the relevant SEC rules and forms. The Company has
carried out an evaluation, under the supervision and with the participation of
the Company's management, including the Company's Chief Executive Officer and
Chief Financial Officer, of the effectiveness of the Company's disclosure
controls and procedures pursuant to Exchange Act Rule 13a-15. Based upon that
evaluation, the Company's Chief Executive Officer and Chief Financial Officer
concluded, as of the end of the period covered by this report, that the
Company's disclosure controls and procedures are effective.
12
There have been no changes in the Company's internal controls over financial
reporting during the fourth quarter of 2005 that have materially affected, or
are reasonably likely to materially affect, our internal controls over financial
reporting.
ITEM 8B. OTHER INFORMATION
None.
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., 59, 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.
Herman M. Gerwitz, CPA, 52, a director since May 2005,is the CFO of Keystone
Property Group. Mr. Gerwitz has been with Keystone full time since 1998 and has
been responsible for all the financial matters of a Real Estate Development
Company that has grown to over 3 million square feet of commercial real estate
and a $100,000,000 Real Estate Fund. Prior to joining Keystone, Mr.Gerwitz has
spent 20 years as a partner in a public accounting firm. He has received a BBA
from Temple University with master's coursework at Widner University. He is a
member of both the Pennsylvania and American Institutes of Certified Public
Accountants since 1983.
Stanley G. Hart, 45, a director since March 2001, is President and CEO of S.G.
Hart Associates, LLC, a strategic brand protection consulting company which
helps firms develop and implement strategies designed to protect global supply
chains from counterfeiting, diversion, theft and product tampering. Mr. Hart has
served in this position since 2003. From its formation in 2000 until its merger
in 2003, Mr. Hart was President and CEO of Westvaco Brand Security, Inc., a
wholly owned subsidiary of MeadWestvaco Corporation. Mr. Hart founded the
company and established operations in the USA, Japan, Hong Kong, Singapore,
Brazil, Belgium and Israel. Prior thereto, Mr. Hart served Westvaco Corporation
(parent company of Westvaco Brand Security, Inc.) for more than ten years in
various management capacities. Mr. Hart has over 20 years of international
general management experience within the brand protection, chemical, packaging
and paper industries. With five years as an expatriate, Mr. Hart's diverse
experience includes new ventures, international business, sales and marketing,
mergers and acquisitions, technology assessment and strategic planning. Mr. Hart
has a B.A. degree in Chemistry from the University of North Carolina at Chapel
Hill, and a MBA from the Fuqua School of Business at Duke University. Mr. Hart
is a member of the National Association of Corporate Directors, the American
Management Association, the American Consultants League and is an Accredited
Professional Consultant.
Richard Levitt, 49, a director since December 1999, is currently a Senior
Account Executive for Dell Inc and has served in this capacity since 2005. He
has day to day responsibilities to retain and develop preferred corporate
accounts in Western Pennsylvania. Prior to Dell Inc., he was engaged in the
network services segment of the computer industry. 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. 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. 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.
13
Rudolph A. Lutterschmidt, 59, 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 April 2005, Mr. Lutterschmidt has been
employed by BCA Employee Management Group, Inc., a Human Resource Outsource firm
located in West Chester, PA. From January 2002 to March 2005, Mr. Lutterschmidt
was employed by CitySort LP, a data to delivery mailing business, serving as its
Chief Financial Officer from January 2002 to February 2005. 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
graduate of Syracuse University, 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 2006 annual meeting of
stockholders of the Company.
AUDIT COMMITTEE FINANCIAL EXPERT
The Company has established a standing audit committee in accordance with
Section 3(a) (58) (A) of the Securities Exchange Act of 1934 that makes
recommendations to the Company's board of directors regarding the selection of
an independent registered public accounting firm, review the results and scope
of the Company's audits and other accounting-related services and reviews and
evaluates the Company's internal control functions. The audit committee is
comprised of Michael A. Feinstein, M.D., its Chairman of the Board, and Herman
M. Gerwitz, CPA. The board of directors has determined that Mr. Gerwitz is an
"audit committee financial expert" as currently defined under the SEC rules
implementing Section 407 of the Sarbanes Oxley Act of 2002. The board of
directors of the Company believes that the composition and functioning of its
audit committee complies with all applicable requirements of the Sarbanes Oxley
Act of 2002 and SEC rules and regulations including those regarding the
independence of the audit committee members.
CODE OF ETHICS
The Company has adopted a Code of Ethics that applies to its Principal Executive
Officer, Principal Financial Officer, Principal Accounting Officer and persons
performing similar functions. A copy of the Company's Code of Ethics is
incorporated by reference to Exhibit 14.1 of this report on Form 10-KSB.
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
Section 16(a) of the Exchange Act requires the Company's executive officers and
directors and any persons who beneficially own more than 10% of its common stock
(collectively, "Reporting Persons") to file reports of ownership and changes in
ownership with the SEC. Reporting Persons are required by SEC regulations to
furnish the Company with copies of all Section 16(a) forms they file.
Based solely on the Company's review of the copies of any Section 16(a) forms
received by it, the Company believes that with respect to the fiscal year ended
December 31, 2005, all the Reporting Persons complied with all applicable filing
requirements except as follows:
Michael A. Feinstein, M.D., the Company's Chairman and Chief Executive Officer,
has both directly and indirectly acquired common stock and stock options of the
Company in a number of transactions for which he has failed to file Form 4
reports on a timely basis. Messrs. Gerwitz and Levitt directly acquired stock
options of the Company and failed to file Form 3 and/or 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
EXECUTIVE OFFICER COMPENSATION
During 2005, the Company did not pay any cash 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. In 2005, Dr. Feinstein received options to purchase
100,000 shares of common stock of the Company, expiring in April 2010, at $.10
per share, representing 100% of the options granted to all employees during the
year. These options are exercisable on January 1, 2006. At December 31, 2005,
Dr. Feinstein held options to purchase 250,000 shares of the Company's common
stock. At December 31, 2005, 150,000 of these options were exercisable. In
addition, none of the 250,000 options held by Dr. Feinstein were "in the money"
as of December 31, 2005. The Company does reimburse the expenses incurred by its
named executive officers in the performance of their duties. Dr. Feinstein is
the Company's only "named executive officer".
14
DIRECTOR COMPENSATION
Directors have not been paid any cash compensation for their services as such
during the year ended December 31, 2005. During 2005, Messrs. Hart and Levitt
received options to purchase an aggregate of 200,000 shares of common stock of
the Company at $.10 per share and Mr. Gerwitz received options to purchase
100,000 shares of common stock of the Company at $.11 per share. All directors
have been and will be reimbursed for reasonable expenses incurred in connection
with attendance at meetings of the Board of Directors 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 15, 2006, 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 officer (as
set forth under the heading "Executive Compensation") individually, and (3) all
directors and executive officers of the Company as a group. To the Company's
knowledge, except as set forth in the footnotes to this table and subject to
applicable community property laws, each person named in the table below has
sole voting and investment power with respect to the shares set forth opposite
such persons name. Except as otherwise indicated, the address of each of the
persons in the table below is c/o Nocopi Technologies, Inc., 9C Portland Road,
West Conshohocken, Pennsylvania, 19428.
COMMON STOCK
-----------------------------
NUMBER
OF SHARES
BENEFICIALLY PERCENTAGE OF
NAME OF BENEFICIAL OWNER OWNED CLASS (1)
------------------------ ------------- --------------
5% STOCKHOLDERS
Westvaco Brand Security, Inc. (2)
One High Ridge Park
Stamford, CT 06905 ....................................................... 3,917,030 7.6%
Ross. L Campbell
675 Lewis Lane
Ambler, PA 19002 (3) ..................................................... 3,264,457 6.3%
Philip N. Hudson
P.O. Box 160892
San Antonio, TX 78280-3092 ............................................... 3,105,000 6.0%
DIRECTORS AND OFFICERS
Michael A Feinstein, M.D. (4) ............................................ 3,047,140 5.9%
Herman Gerwitz (5) ...................................................... 275,000 *
Stanley G. Hart (6) ...................................................... 250,000 *
Richard Levitt (7) ....................................................... 535,800 1.0%
All Executive Officers and Directors as a Group (5 individuals) (8) ...... 3,698,227 8.1%
_______________
* Less than 1.0%.
(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 dated April 4, 2005 filed on behalf of Ross
L. Campbell.
15
(4) Includes 497,974 shares held by a pension plan of which Dr. Feinstein is a
trustee and 250,000 presently exercisable stock options.
(5) Includes 100,000 presently exercisable stock options.
(6) Includes 250,000 presently exercisable stock options.
(7) Includes 400 shares owned by Mr. Levitt's wife and 250,000 presently
exercisable stock options.
(8) Includes 950,000 presently exercisable stock options.
16
EQUITY COMPENSATION PLAN INFORMATION AS OF DECEMBER 31, 2005
Number of securities
remaining available for
future issuance under
Number of securities to be Weighted-average exercise equity compensation plans
issued upon exercise of price of outstanding (excluding securities
Plan Category outstanding options options reflected in column (a))
---------------------------- ---------------------------- ----------------------------
(a) (b) (c)
Equity Compensation
plans approved by
security holders 500,000 $.31 200,000
Equity Compensation
plans not approved by
security holders 1,175,000 $.15 825,000
---------------------------- ---------------------------- ----------------------------
TOTAL 1,675,000 $.24 1,025,000
============================ ============================ ============================
Registrant's 1999 Stock Option Plan was adopted by the Registrant's board of
directors in February 1999. The Plan provides for the grant of incentive or
non-qualified options to purchase up to 2,000,000 million shares of common
restricted stock of the Registrant to employees, directors, consultants and
advisors. The Plan is administered by the board of directors or a committee of
not less than two board members appointed by the board and terminates on the
tenth anniversary of its adoption.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None.
ITEM 13. EXHIBITS
See Exhibit Index.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The Company has retained the public accounting firm of Morison Cogen, LLP,
formerly Cogen Sklar, LLP, 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 2005 and 2004, 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 $24,000 and
$22,500, respectively.
AUDIT-RELATED FEES
During 2005 and 2004, 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 2005 and 2004, the aggregate fees billed for professional services
rendered by our principal accountant for tax compliance, tax advice and tax
planning were $4,500 in each year.
17
ALL OTHER FEES
During 2005 and 2004, there were no fees billed for products and services
provided by the principal accountant other than those set forth above.
AUDIT COMMITTEE APPROVAL
The Audit Committee, consisting of Michael A. Feinstein, M.D., Chairman and
Chief Executive Officer, and Herman M. Gerwitz, CPA, evaluate and approve in
advance, the scope and cost of the engagement of an auditor before the auditor
renders audit and non-audit services. We do not rely on pre-approval policies
and procedures.
18
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.
Date: April 6, 2006 By: /s/ Michael A. Feinstein, M.D.
----------------------------------
Michael A. Feinstein, M.D.
Title:Chairman of the Board and Chief Executive 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.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ Michael A. Feinstein, M.D. Chairman of the Board and Chief Executive April 6, 2006
------------------------------ Officer (Principal Executive Officer)
Michael A. Feinstein, M.D.
/s/ Rudolph A. Lutterschmidt Vice President, Chief Financial Officer and April 6, 2006
------------------------------ Chief Accounting Officer (Principal
Rudolph A. Lutterschmidt Financial and Accounting Officer)
/s/ Herman Gerwitz Director April 6, 2006
------------------------------
Herman Gerwitz
/s/ Stanley G. Hart Director April 6, 2006
------------------------------
Stanley G. Hart
/s/ Richard Levitt Director April 6, 2006
------------------------------
Richard Levitt
19
INDEX TO FINANCIAL STATEMENTS
Report of Independent Registered Certified Public Accounting Firm F-2
Balance Sheet as of December 31, 2005 F-3
Statements of Operations for the Years ended
December 31, 2005 and 2004 F-4
Statements of Stockholders' Deficiency for
the Years ended December 31, 2005 and 2004 F-5
Statements of Cash Flows for the Years ended
December 31, 2005 and 2004 F-6
Notes to Financial Statements F-7 to F-14
F-1
REPORT OF INDEPENDENT REGISTERED CERTIFIED PUBLIC ACCOUNTING FIRM
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, 2005 and the related statements of operations,
stockholders' equity, and cash flows for each of the two years in the
period ended December 31, 2005. 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 standards of the Public
Company Accounting Oversight Board (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, 2005, and the results of its
operations and its cash flows for each of the two years in the period
ended December 31, 2005 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/ MORISON COGEN, LLP
----------------------
Bala Cynwyd, Pennsylvania
March 20, 2006
F-2
NOCOPI TECHNOLOGIES, INC.
BALANCE SHEET*
DECEMBER 31
2005
------------
ASSETS
CURRENT ASSETS
CASH AND CASH EQUIVALENTS $ 4,300
ACCOUNTS RECEIVABLE LESS $15,000 ALLOWANCE
FOR DOUBTFUL ACCOUNTS 47,500
ARBITRATION SETTLEMENT RECEIVABLE 50,000
PREPAID AND OTHER 40,400
------------
TOTAL CURRENT ASSETS 142,200
FIXED ASSETS
LEASEHOLD IMPROVEMENTS 71,200
FURNITURE, FIXTURES AND EQUIPMENT 476,200
------------
547,400
LESS: ACCUMULATED DEPRECIATION AND AMORTIZATION 512,400
------------
35,000
OTHER ASSETS
ARBITRATION SETTLEMENT RECEIVABLE 50,000
------------
$ 227,200
============
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
CURRENT LIABILITIES
DEMAND LOANS $ 18,000
ACCOUNTS PAYABLE 469,100
ACCRUED EXPENSES 276,800
DEFERRED REVENUE 10,000
------------
TOTAL CURRENT LIABILITIES 773,900
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 - 50,586,181 SHARES 505,900
PAID-IN CAPITAL 11,514,400
ACCUMULATED DEFICIT (12,567,000)
------------
(546,700)
------------
$ 227,200
============
*The accompanying notes are an integral part of these financial statements.
F-3
NOCOPI TECHNOLOGIES, INC.
STATEMENTS OF OPERATIONS*
YEARS ENDED DECEMBER 31
2005 2004
------------ ------------
REVENUES
LICENSES, ROYALTIES AND FEES $ 307,400 $ 373,200
PRODUCT AND OTHER SALES 220,900 255,100
------------ ------------
528,300 628,300
------------ ------------
COST OF SALES
LICENSES, ROYALTIES AND FEES 108,700 135,900
PRODUCT AND OTHER SALES 98,200 127,200
------------ ------------
206,900 263,100
------------ ------------
GROSS PROFIT 321,400 365,200
------------ ------------
OPERATING EXPENSES
RESEARCH AND DEVELOPMENT 145,900 170,300
SALES AND MARKETING 109,600 142,000
GENERAL AND ADMINISTRATIVE
(EXCLUSIVE OF LEGAL EXPENSES) 200,100 260,200
LEGAL EXPENSES 79,600 121,200
------------ ------------
535,200 693,700
------------ ------------
LOSS FROM OPERATIONS (213,800) (328,500)
------------ ------------
OTHER INCOME (EXPENSES)
INTEREST INCOME 100 200
INTEREST AND BANK CHARGES (2,200) (10,700)
------------ ------------
(2,100) (10,500)
------------ ------------
NET LOSS $ (215,900) $ (339,000)
============ ============
BASIC AND DILUTED LOSS PER COMMON SHARE $ (.00) $ (.01)
BASIC AND DILUTED WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING 50,586,181 47,614,388
*The accompanying notes are an integral part of these financial statements.
F-4
NOCOPI TECHNOLOGIES, INC.
STATEMENTS OF STOCKHOLDERS' DEFICIENCY*
FOR THE PERIOD JANUARY 1, 2004 THROUGH DECEMBER 31, 2005
COMMON STOCK
-------------------- PAID-IN ACCUMULATED
SHARES AMOUNT CAPITAL DEFICIT
------ ------ ------- -------
BALANCE - JANUARY 1, 2004 45,972,241 $459,700 $11,141,100 $(12,012,100)
SALES OF COMMON STOCK, NET 1,610,000 16,100 136,000
CONVERSION OF DEMAND LOANS AND
ACCRUED INTEREST 1,753,940 17,600 157,800
ISSUANCE OF COMMON STOCK IN EXCHANGE
FOR RELEASE OF STOCK OPTION RIGHTS 1,250,000 12,500 (12,500)
STOCK OPTION COMPENSATION 75,000
NET LOSS
(339,000)
------------------------------------------------------
BALANCE - DECEMBER 31, 2004 50,586,181 505,900 11,497,400 (12,351,100)
STOCK OPTION COMPENSATION 17,000
NET LOSS
(215,900)
------------------------------------------------------
BALANCE - DECEMBER 31, 2005 50,586,181 $505,900 $11,514,400 ($12,567,000)
*The accompanying notes are an integral part of these financial statements.
F-5
NOCOPI TECHNOLOGIES, INC.
STATEMENTS OF CASH FLOWS*
YEARS ENDED DECEMBER 31
2005 2004
--------- ---------
OPERATING ACTIVITIES
NET LOSS $(215,900) $(339,000)
ADJUSTMENTS TO RECONCILE NET EARNINGS (LOSS) TO
CASH USED IN OPERATING ACTIVITIES
DEPRECIATION 17,000 20,300
COMPENSATION EXPENSE - STOCK OPTION GRANTS 17,000 75,000
--------- ---------
(181,900) (243,700)
(INCREASE) DECREASE IN ASSETS
ACCOUNTS RECEIVABLE 56,000 (63,700)
ARBITRATION SETTLEMENT RECEIVABLE 50,000 50,000
PREPAID AND OTHER (11,200) 11,000
INCREASE (DECREASE) IN LIABILITIES
ACCOUNTS PAYABLE AND ACCRUED EXPENSES 64,300 75,800
DEFERRED REVENUE (14,900) (46,600)
--------- ---------
144,200 26,500
--------- ---------
NET CASH USED IN OPERATING ACTIVITIES (37,700) (217,200)
INVESTING ACTIVITIES
ADDITIONS TO FIXED ASSETS -- (800)
FINANCING ACTIVITIES
ISSUANCE OF COMMON STOCK, NET -- 152,100
DEMAND LOANS 21,500 --
DEMAND LOAN REPAYMENT (3,500) --
--------- ---------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 18,000 152,100
--------- ---------
DECREASE IN CASH AND CASH EQUIVALENTS (19,700) (65,900)
CASH AND CASH EQUIVALENTS
BEGINNING OF YEAR 24,000 89,900
--------- ---------
END OF YEAR $ 4,300 $ 24,000
========= =========
SUPPLEMENTAL DISCLOSURE OF NON CASH INVESTING AND FINANCING ACTIVITIES
CONVERSION OF DEMAND LOANS AND ACCRUED INTEREST TO COMMON STOCK
DEMAND LOANS (149,900)
ACCRUED INTEREST (25,500)
COMMON STOCK 17,600
PAID-IN CAPITAL 157,800
*The accompanying notes are an integral part of these financial statements.
F-6
NOCOPI TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2005 AND 2004
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, 2005, Nocopi had no investments in money market accounts.
CONCENTRATION OF CREDIT RISK INVOLVING CASH - During the year, the Company
had uninsured cash balances at one financial institution. This financial
institution has a strong credit rating, and Management believes that
credit risk related to these deposits is minimal. At December 31, 2005,
the total balance was 0.
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-7
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.
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. Because the Company
reported a net loss in 2005 and 2004, 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
The Company follows Statement of Financial Accounting Standard ("SFAS")
No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets."
The Statement requires that long-lived assets and certain identifiable
intangibles be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of the asset may not be
recoverable. The Company is not aware of any events or circumstances which
indicate the existence of an impairment which would be material to the
Company's annual financial statements.
RECENTLY ISSUED ACCOUNTING STANDARDS
The Company currently accounts for stock-based compensation in accordance
with SFAS No. 123, "Accounting for Stock-Based Compensation," which for
employee stock options permits the use of intrinsic value method described
in APB opinion No. 25, Accounting for Stock Issued to Employees, and
requires the Company to disclose the pro forma effects for accounting for
stock-based compensation using the fair value method as described in the
optional accounting requirements of SFAS No. 123. As permitted by SFAS No.
123, the Company accounts for stock-based compensation under APB Opinion
No. 25, under which the Company has recognized no compensation expense for
employee granted options.
Had compensation cost for the Company's stock option plan been determined
on the fair value of the Company's common stock at the dates of awards
under the fair value method of SFAS No. 123, the Company's 2005 and 2004
net loss and net loss per common share would have been increased to the
pro forma amounts indicated below. In 2005 and 2004, the fair value
amounts were estimated using the Black-Scholes options pricing model with
the following assumptions: no dividend yield, expected volatility of 60%,
risk-free interest rate of 5% and expected option life of five years.
F-8
December 31 December 31
2005 2004
----------- -----------
Net loss
As reported ($215,900) ($339,000)
Pro forma ($221,900) ($362,000)
Net loss per common share basic and diluted
As reported ($.00) ($0.01)
Pro forma ($.00) ($0.01)
In December 2004, the FASB issued SFAS No. 123 (revised 2004) (SFAS No.
123R), Share-Based Payment, which addresses the accounting for share-based
payment transactions in which an enterprise receives employee services in
exchange for (a) equity instruments of the enterprise or (b) liabilities
that are based on the fair value of the enterprise's equity instruments or
that may be settled by the issuance of such equity instruments. SFAS No.
123R eliminates the ability to account for share-based compensation
transactions using the intrinsic value method under APB Opinion No. 25, and
requires instead that such transactions be accounted for using a
fair-value-based method. In January 2005, the SEC issued SAB No. 107, which
provides supplemental implementation guidance for SFAS No. 123R. SFAS No.
123R will be effective for the Company beginning in the first quarter of
its fiscal 2006. The Company's assessment of the estimated stock-based
compensation expense is affected by the Company's stock price as well as
assumptions regarding a number of complex variables and the related tax
impact. These variables include, but are not limited to, the Company's
stock price, volatility, and employee stock option exercise behaviors and
the related tax impact. The Company will recognize stock-based compensation
expense on all awards on a straight-line basis over the requisite service
period using the modified prospective method. Although the adoption of SFAS
No. 123R is expected to have a material effect on the Company's results of
operations, future changes to various assumptions used to determine the
fair value of awards issued or the amount and type of equity awards granted
create uncertainty as to whether future stock-based compensation expense
will be similar to the historical SFAS No. 123 pro forma expense.
3. GOING CONCERN
Since its inception, the Company has incurred significant losses and, as of
December 31, 2005, had accumulated losses of $12,567,000. For the years
ended December 31, 2005 and 2004, the Company's losses from operations were
$213,800 and $328,500, respectively. In addition, the Company had negative
working capital of $631,700 at December 31, 2005. 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.
F-9
During 2004, the Company raised $161,000 ($152,100 net of offering
expenses) in a private placement whereby 1,610,000 shares of the Company's
common stock were sold to three non-affiliated individual investors
pursuant to a valid private placement. Additionally, the Company has
reduced staff and continued to reduce expenses. Management of the Company
believes that it has in immediate need to obtain additional capital 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 and is
actively seeking investment through a valid private placement initiated in
early 2006. There can be no assurances that the Company will be successful
in obtaining sufficient additional capital, or if it does, that the
additional capital will enable the Company to improve its business so as to
have a material positive effect on the Company's operations and cash flow.
The Company believes that without additional capital, whether in the form
of debt, equity or both, it may be forced to cease operations at an
undetermined future date.
The Company's independent registered certified public accountants have
included a "going concern" explanatory paragraph in their audit report
accompanying the 2005 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 2005, the Company received unsecured loans totaling $21,500 from
two individuals of which $6,500 was lent by Michael A. Feinstein, M.D.,
its Chairman of the Board and repaid $3,500 in loans made by this
individual. At December 31, 2005, the total demand loans outstanding were
$18,000. 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.
In September 2004, the Company entered into a Conversion Agreement with
three individuals whereby demand loans in the aggregate principal amount
of $149,900 together with $25,500 of accrued interest on the demand loans
were converted into shares of restricted common stock of the Company at
$.10, the market price at the date of issue. As a result, an aggregate of
1,753,940 shares of restricted common stock were issued including 449,080
shares to Dr. Feinstein, the Company's Chairman of the Board.
5. STOCKHOLDERS' DEFICIENCY
During the third quarter of 2004, the Company sold 1,610,000 shares of its
common stock to three non-affiliated individual investors for $161,000
($152,100 net of offering expenses) pursuant to a valid private placement.
In September 2004, the Company entered into an Agreement of Terms with
Entrevest I Associates pursuant to which, as consideration for the release
of certain stock option rights to purchase up to 40,000,000 shares of the
Company's common stock and the release of the right to designate a member
to the Board of Directors, the Company agreed to issue 1,250,000 shares of
restricted common stock in the Company to Entrevest pursuant to a valid
private placement, which were valued at par. Prior to the transaction,
Entrevest I Associates owned 3,333,333 shares of common stock of the
Company. Also, as part of the Agreement, Michael Solomon has resigned from
the Board of Directors.
F-10
6. INCOME TAXES
There is no provision for income taxes for 2005 and 2004 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, 2005, the
Company had net operating loss carryforwards ("NOL's") approximating
$12,000,000. These operating losses are available to offset future taxable
income through the year 2025. 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, 2005 and 2004. The Company has established a
100% valuation allowance of approximately $4,900,000 at December 31, 2005
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 2009.
Future minimum lease payments under non-cancelable operating leases with
initial or remaining terms of one year or more at December 31, 2005 are:
$38,600 - 2006; $40,100 - 2007; $10,900 - 2008 and $1,000 - 2009.
Total rental expense under operating leases was $37,700 in both 2005 and
2004.
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, 2005, unpaid consulting fees totaling $166,300 were included
in Accrued Expenses on the Balance Sheet.
From time to time, the Company may be subject to legal proceedings and
claims that arise in the ordinary course of its business.
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.
F-11
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 525,000 $.30 and $.45 $.36
Options granted 1,150,000 .17 .17
Options canceled 200,000 .17 .17
--------- ------------- -----
Outstanding at December 31, 2004 1,475,000 $.17 to $.45 .24
Options granted 400,000 .10 and .11 .10
Options canceled 200,000 .30 .30
--------- ------------- -----
Outstanding at December 31, 2005 1,675,000 $.10 to $.45 $.20
========= ============= =====
Exercise Weighted
Option Price Range Average
Shares Per Share Exercise Price
------ --------- --------------
Exercisable at year end:
2004 625,000 $.17 to $.45 $.32
2005 1,275,000 $.17 to $.45 $.23
Options available for future grant under all plans:
2004 1,225,000
2005 1,025,000
The following table summarizes information about stock options outstanding at
December 31, 2005:
Range of exercise prices $.10 to $.45
------------
Number outstanding at
December 31, 2005 1,675,000
---------
Weighted average remaining contractual life
(years) 3.00
----
Weighted average exercise price $.20
----
Exercisable options:
Number outstanding at
December 31, 2005 1,275,000
---------
Weighted average remaining
Contractual life (years) 2.54
----
Weighted average exercise price $.23
----
F-12
Effective April 30, 2005, the Company, under its directors stock option
plan, granted options to two directors to purchase 100,000 shares each of
its common stock at an exercise price of $0.10 per share, vesting on
January 1, 2006, and expiring in five years. On September 23, 2005, the
Company granted options to a new director to purchase 100,000 shares of
its common stock at an exercise price of $0.11 per share, vesting on
January 1, 2006, and expiring in five years. The options are contingent on
the directors attending a certain percentage of Board of Directors
meetings during 2005. In accordance with the fair value method as
described in accounting requirements of SFAS No. 123, The Company
recognized consulting expense of $17,000 during the year ended December
31, 2005.
Effective April 30, 2005, the Company granted options to an officer and
director under its directors stock option plan to purchase a total of
100,000 shares of its common stock at an exercise price of $0.10 per
share, which was the market price on grant date, expiring in five years
and vesting on January 1, 2006.
On April 30, 2004, the Company granted options to two consultants to
purchase a total of 300,000 shares of its common stock at an exercise
price of $0.17 per share, vesting after one year, and expiring in five
years. In accordance with the fair value method as described in accounting
requirements of SFAS No. 123, the Company recognized consulting expense of
$28,000 during the year ended December 31, 2004.
On April 30, 2004, the Company granted options to four directors to
purchase 50,000 shares each of its common stock at an exercise price of
$.17 per share, vesting immediately, and expiring in five years. In
accordance with the fair value method as described in accounting
requirements of SFAS No. 123, the Company recognized consulting expense of
$18,000 during the year ended December 31, 2004.
On April 30, 2004, the Company granted options to four directors to
purchase 100,000 shares each of its common stock at an exercise price of
$0.17 per share, vesting on January 1, 2005, and expiring in five years.
The options are contingent on the directors attending a certain percentage
of Board of Directors meetings during 2004. In accordance with the fair
value method as described in accounting requirements of SFAS No. 123, The
Company recognized consulting expense of $29,000 during the year ended
December 31, 2004.
On April 30, 2004, the Company granted options to two officers to purchase
a total of 250,000 shares of its common stock at an exercise price of
$0.17 per share, which was the market price on grant date, expiring in
five years and vesting at various dates through April 30, 2005.
At December 31, 2005, 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 2005 or 2004.
F-13
9. MAJOR CUSTOMER INFORMATION
The Company's largest non-affiliate customers accounted for approximately
68% and 52% of revenues in 2005 and 2004, respectively, and approximately
85% of accounts receivable at December 31, 2005. The Company performs
ongoing credit evaluations of its customers and generally does not require
collateral. The Company also maintains allowances for potential credit
losses.
10. SUBSEQUENT EVENT
On February 8, 2006 the Company raised $25,000 through the sale of 164,474
shares of its common stock to a pension plan controlled by the Chairman of
the Board of the Company. The stock was issued at $0.152 per share, which
was a 20% discount to the closing price on that date.
F-14
EXHIBIT INDEX
The following Exhibits are filed as part of this Annual Report on Form 10-KSB:
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)
4.1* Form of Certificate of Common Stock [NOCOPI - ADD THIS ONE]
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)
10.18 Agreement of Terms with Entrevest I Associates (9)
10.19 Conversion Agreement (10)
14.1 Code of Ethics (11)
31.1* Certification of Chief Financial Officer required by Rule 13a-14(a).
31.2* Certification of Chief Executive Officer required by Rule 13a-14(a).
32.1* Certifications of Chief Executive Officer and Chief Financial
Officer Pursuant to 18 U.S.C. Section 1350, As Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
* Exhibit filed with this Report.
+ Compensation plans and arrangements for executives and others.
(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
(9) Incorporated by reference to Registrant's Current Report on Form 8-K filed
with the Commission on September 16, 2004
(10) Incorporated by reference to Registrant's Quarterly Report on Form 10-QSB
for the Three Months Ended September 30, 2004
(11) Incorporated by reference to Registrant's Annual Report on Form 10-KSB for
the Year Ended December 31, 2004