U.S. Securities and Exchange Commission
Washington, D.C. 20549
Form 10-QSB
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTIONS 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the quarterly period ended September 30, 2003
[ ] TRANSITION REPORT PURSUANT TO SECTIONS 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the transition period from _________________ to ______________
Commission file number 0-20333
NOCOPI TECHNOLOGIES, INC.
---------------------------------------
(Exact name of small business issuer as
specified in its charter)
MARYLAND 87-0406496
--------------------------------- ---------------------------------
(State or other jurisdiction (IRS Employer Identification No.)
of incorporation or organization)
9 Portland Road, West Conshohocken, PA 19428
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(Address of principal executive offices)
(610) 834-9600
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(Issuer's telephone number)
Check whether the issuer has filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. Yes X No
--- ---
State the number of shares outstanding of each of the issuer's classes
of common equity, as of November 1, 2003: Common stock, par value $.01 per
share: 45,972,241 shares.
Transitional Small Business Disclosure Format (check one): Yes No X
--- ---
NOCOPI TECHNOLOGIES, INC.
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INDEX
Part I. FINANCIAL INFORMATION PAGE
Item 1. Financial Statements
Statements of Operations 1
Three Months and Nine Months Ended
September 30, 2003 and September 30, 2002
Balance Sheet 2
September 30, 2003
Statements of Cash Flows 3
Nine Months Ended September 30, 2003
and September 30, 2002
Notes to Financial Statements 4-6
Item 2. Management's Discussion and Analysis 7-13
of Financial Condition and Results of Operations
Item 3. Controls and Procedures 14
Part II. OTHER INFORMATION 15
Signatures 16
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Nocopi Technologies, Inc.
Statements of Operations
(unaudited)
Three Months ended Nine Months ended
September 30 September 30
2003 2002 2003 2002
------------ ------------ ------------ ------------
(Note 2)
Revenues
Licenses, royalties and fees $ 82,700 $ 95,300 $ 253,800 $ 333,700
Product and other sales 45,200 107,200 173,000 247,500
------------ ------------ ------------ ------------
127,900 202,500 426,800 581,200
Cost of sales
Licenses, royalties and fees 48,800 46,000 127,300 145,900
Product and other sales 37,700 51,700 105,700 145,500
------------ ------------ ------------ ------------
86,500 97,700 233,000 291,400
------------ ------------ ------------ ------------
Gross profit 41,400 104,800 193,800 289,800
Operating expenses
Research and development 54,000 63,000 152,600 192,400
Sales and marketing 30,700 62,600 148,800 211,900
General and administrative (exclusive of
legal expenses) 49,000 57,800 193,100 219,000
Legal expenses 18,000 102,900 66,800 317,200
------------ ------------ ------------ ------------
151,700 286,300 561,300 940,500
------------ ------------ ------------ ------------
Loss from operations (110,300) (181,500) (367,500) (650,700)
Other income (expenses)
Interest income 200 - 500 100
Interest and bank charges (3,300) (3,100) (10,200) (6,100)
Net proceeds from arbitration
settlement 34,100 - 909,400 -
------------ ------------ ------------ ------------
31,000 (3,100) 899,700 6,000
------------ ------------ ------------ ------------
Net earnings (loss) ($79,300) ($184,600) $ 532,200 ($656,700)
============ ============ ============ ============
Basic and diluted earnings (loss)
per common share ($.00) ($.00) $ .01 ($.02)
Basic and diluted weighted average
common shares outstanding 45,972,241 42,638,908 45,972,241 42,105,575
See accompanying notes to financial statements.
1
Nocopi Technologies, Inc.
Balance Sheet
(unaudited)
September 30
2003
------------
Assets
Current assets
Cash and cash equivalents $ 197,900
Accounts receivable less $15,000 allowance 55,100
Arbitration settlement receivable 50,000
Prepaid and other 46,700
------------
Total current assets 349,700
Fixed assets
Leasehold improvements 67,400
Furniture, fixtures and equipment 476,200
------------
543,600
Less: accumulated depreciation 472,100
------------
71,500
Other assets
Arbitration settlement receivable 150,000
------------
Total assets $ 571,200
============
Liabilities and Stockholders' Deficiency
Current liabilities
Demand loans $ 149,900
Accounts payable 372,800
Accrued expenses 291,100
Deferred revenue 95,300
------------
Total current liabilities 909,100
Stockholders' deficiency
Common stock, $.01 par value
Authorized - 75,000,000 shares
Issued and outstanding - 45,972,241 shares 459,700
Paid-in capital 11,141,100
Accumulated deficit (11,938,700)
------------
(337,900)
------------
Total liabilities and stockholders' deficiency $ 571,200
============
See accompanying notes to financial statements.
2
Nocopi Technologies, Inc.
Statements of Cash Flows
(unaudited)
Nine Months ended September 30
2003 2002
--------- ---------
Operating Activities
Net earnings (loss) $ 532,200 ($656,700)
Adjustments to reconcile net earnings
(loss) to cash from operating activities
Depreciation 9,900 13,500
--------- ---------
542,100 (643,200)
(Increase) in assets
Accounts receivable (16,000) (15,600)
Arbitration settlement receivable (200,000)
Prepaid and other (15,700) (1,500)
Increase (decrease) in liabilities
Accounts payable and accrued expenses (258,800) 308,400
Deferred revenue (25,400) 37,700
--------- ---------
(515,900) 329,000
--------- ---------
Net cash provided by (used in) operating activities 26,200 (314,200)
Investing Activities
Additions to fixed assets (67,400) -
Investment in affiliate 110,600 -
--------- ---------
Net cash provided by investment activities 43,200 -
Financing Activities
Issuance of common stock, net - 211,000
Demand loans 4,500 160,400
Demand loan repayment (15,000) -
--------- ---------
Net cash provided by (used in) financing activities (10,500) 371,400
--------- ---------
Increase in cash and cash equivalents 58,900 57,200
Cash and cash equivalents at beginning of year 139,000 100
--------- ---------
Cash and cash equivalents at end of period $ 197,900 $ 57,300
========= =========
See accompanying notes to financial statements.
3
NOCOPI TECHNOLOGIES, INC.
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NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
Note 1. Financial Statements
The accompanying unaudited condensed financial statements have been
prepared by Nocopi Technologies, Inc. (the Company). These statements
include all adjustments (consisting only of normal recurring
adjustments) which management believes necessary for a fair
presentation of the statements and have been prepared on a consistent
basis using the accounting policies described in the summary of
Accounting Policies included in the Company's 2002 Annual Report on
Form 10-KSB. Certain financial information and footnote disclosures
normally included in financial statements prepared in accordance with
generally accepted accounting principles have been condensed or omitted
pursuant to such rules and regulations, although the Company believes
that the accompanying disclosures are adequate to make the information
presented not misleading. The Notes to Financial Statements included in
the 2002 Annual Report on Form 10-KSB should be read in conjunction
with the accompanying interim financial statements. The interim
operating results for the three and nine months ended September 30,
2003 may not be necessarily indicative of the operating results
expected for the full year.
Note 2. Settlement of Arbitration with Affiliate
In June 2003, the Company settled its arbitration proceeding commenced
by Euro-Nocopi, S.A. (Euro). Under the terms of the settlement, Euro
paid $900,000 to Nocopi and will pay an additional $200,000 in the
future for back royalties and all other matters in dispute between the
two companies, as well as the termination of Nocopi's 18% ownership of
Euro. As part of the Settlement, the Company and Euro entered into an
amended and restated license pursuant to which the Company has agreed
that Euro may continue to market the Company's technologies in Europe.
The $200,000 will be paid in four equal annual installments commencing
in March 2004. The Company recorded a net gain of $34,100 and $909,400,
respectively, in the third quarter and first nine months of 2003
representing the proceeds of the settlement net of the Company's
$110,600 investment in Euro and legal expenses incurred during the 2003
related to the arbitration. During the third quarter of 2003 the
Company received a $36,900 refund of fees previously paid to the
arbitration panel as a result of the termination of the arbitration
proceedings.
Arbitration related legal expense of $57,400 incurred in the first
quarter of 2003 were reclassified from legal expenses to net proceeds
from arbitration settlement.
Note 3. Demand Loans
During the first half of 2003, the Company received additional
unsecured loans of $4,500 from its Chairman of the Board and in the
third quarter repaid $15,000 in loans previously made by this
individual. At September 30, 2003 the total demand loans outstanding
was $149,900. The loans bear interest at seven per cent per year and
are payable on demand. The loans were used to finance the Company's
working capital requirements.
4
Note 4. Income Taxes
There is no provision for income taxes for the three months and nine
months ended September 30, 2003 due to the availability of net
operating loss carryforwards for which the Company had previously
established a 100% valuation allowance for deferred tax assets due to
the uncertainty of their recoverability.
Note 5. Earnings (Loss) Per Share
The weighted average diluted common shares outstanding for the three
and nine months ended September 30, 2003 and 2002 excludes the dilutive
effect of the 525,000 options outstanding since such options have an
exercise price in excess of the average market value of the Company's
common stock during the three and nine months ended September 30, 2003
and 2002.
Note 6. Going Concern
Since its inception, the Company has incurred significant losses and,
as of September 30, 2003, had accumulated losses of $11,938,700. For
the years ended December 31, 2002 and 2001, the Company's net losses
were $924,500 and $828,600, respectively. In addition, the Company had
negative working capital of $559,400 at September 30, 2003. The Company
may incur further operating losses and experience negative cash flow in
the future. Achieving profitability and positive cash flow depends on
the Company's ability to generate and sustain significant increases in
revenues and gross profits from its traditional business. There can be
no assurances that the Company will be able to generate sufficient
revenues and gross profits to achieve and sustain profitability and
positive cash flow in the future.
5
The receipt of $900,000 in June 2003 in conjunction with the settlement
of its arbitration proceedings with Euro-Nocopi, S.A. has permitted the
Company to continue in operation to the current date. As a result of
the settlement, the significant legal fees incurred in the arbitration
will be eliminated. Additionally, the Company has reduced staff and,
during the third quarter of 2003, completed its relocation to a new
facility that it believes will enable the Company to further reduce its
operating expenses. Management of the Company believes that it will
need to obtain additional capital in the future both to fund
investments needed to increase its operating revenues to levels that
will sustain its operations and to fund operating deficits that it
anticipates will continue until revenue increases can be realized.
There can be no assurances that the Company will be successful in
obtaining sufficient additional capital, or if it does, that the
additional capital will enable the Company to improve its business so
as to have a material positive effect on the Company's operations and
cash flow. The Company believes that without additional investment, it
may be forced to cease operations at an undetermined future date.
6
Item 2.
NOCOPI TECHNOLOGIES, INC.
-------------------------
Management's Discussion and Analysis
of Financial Condition and Results of Operations
Forward-Looking Information
The following Management's Discussion and Analysis of Results of Operations
and Financial Condition should be read in conjunction with our audited Financial
Statements and Notes thereto for the year ended December 31, 2002 included in
our Annual Report on Form 10-KSB filed with the Securities and Exchange
Commission.
The information in this discussion contains forward-looking statements
within the meaning of the Private Securities Litigation Reform Act of 1995.
Forward-looking statements involve known and unknown risks, uncertainties and
other factors, which may cause our actual results, performance or achievements
or industry results to be materially different from any future results,
performance or achievements expressed or implied by these forward-looking
statements. Such factors include those described in "Uncertainties That May
Affect the Company, its Operating Results and Stock Price." The forward-looking
statements included in this report may prove to be inaccurate. In light of the
significant uncertainties inherent in these forward-looking statements, you
should not consider this information to be a guarantee by us or any other person
that our objectives and plans will be achieved. The Company does not undertake
to publicly update or revise its forward-looking statements even if experience
or future changes make it clear that any projected results (expressed or
implied) will not be realized.
Results of Operations
The Company's revenues are derived from royalties paid by licensees of the
Company's technologies, fees for the provision of technical services to
licensees and from the direct sale of products incorporating the Company's
technologies, such as inks, security paper and pressure sensitive labels, and
equipment used to support the application of the Company's technologies, such as
ink-jet printing systems. Royalties consist of guaranteed minimum royalties
payable by the Company's licensees in certain cases and additional royalties
which typically vary with the licensee's sales or production of products
incorporating the licensed technology. Service fees and sales revenues vary
directly with the number of units of service or product provided.
Because the Company has a relatively high level of fixed costs, its
operating results are substantially dependent on revenue levels. Because
revenues derived from licenses and royalties carry a much higher gross profit
margin than other revenues, operating results are also substantially affected by
changes in revenue mix.
7
Both the absolute amounts of the Company's revenues and the mix among the
various sources of revenue are subject to substantial fluctuation. The Company
has a relatively small number of substantial customers rather than a large
number of small customers. Accordingly, changes in the revenue received from a
significant customer can have a substantial effect on the Company's total
revenue and on its revenue mix and overall financial performance. Such changes
may result from a customer's product development delays, engineering changes,
changes in product marketing strategies and the like. In addition, certain
customers have, from time to time, sought to renegotiate certain provisions of
their license agreements and, when the Company agrees to revise terms, revenues
from the customer may be affected. The addition of a substantial new customer or
the loss of a substantial existing customer may also have a substantial effect
on the Company's total revenue, revenue mix and operating results.
Revenues for the third quarter of 2003 were $127,900 compared to $202,500
in the third quarter of 2002, a 37% decline. Licenses, royalties and fees
declined by $12,600, or 13%, to $82,700 in the third quarter of 2003 from
$95,300 in the third quarter of 2002. The reduction in licenses, royalties and
fees is due primarily to the termination during the second half of 2002 and
early 2003 of license arrangements with three customers offset in part by
license revenues received from one new licensee. Product sales were $45,200 in
the third quarter of 2003 compared to $107,200 in the third quarter of 2002, a
58% decrease due to lower sales of both the Company security inks and papers.
The relocation to a new facility impacted its production capabilities during the
third quarter of 2003. For the first nine months of 2003, revenues were
$426,800, 27% lower than revenues of $581,200 in the first nine months of 2002.
Licenses, royalties and fees of $253,800 in the first nine months of 2003
declined by $79,900, or 24%, from $333,700 in the first nine months of 2002 as
license fees and royalties from new licensees did not offset those lost from
terminated or discontinued license arrangements. Product sales were $173,000 in
the first nine months of 2003 compared to $247,500 in the first nine months
2002, an decline of 30%. The decrease in product sales reflects lower level of
sales of the Company's line of security papers and inks in the first nine months
of 2003 compared to the first nine months of 2002.
The Company's gross profit declined to $41,400 in the third quarter of 2003
or 32% of revenues from $104,800 or 52% of revenues in the third quarter of
2002. Licenses, royalties and fees have historically carried a higher gross
profit than product sales, which generally consist of supplies or other
manufactured products which incorporate the Company's technologies or equipment
used to support the application of its technologies. These items (except for
inks which are manufactured by the Company) are generally purchased from
third-party vendors and resold to the end-user or licensee and carry a lower
gross profit than licenses, royalties and fees. The lower gross profit in the
third quarter of 2003 compared to the third quarter of 2002 results principally
from a decrease in revenues represented by licenses, royalties and fees combined
with lower sales of ink and paper
For the first nine months of 2003, the gross profit was $193,800, or 45% of
revenues compared to $289,800, or 50% of revenues, in the first nine months of
2002. The decline in the gross profit in absolute dollars in the first nine
months of 2003 compared to the first half nine months of 2002 resulted from the
same factors as the third quarter decline.
8
Research and development expenses decreased to $54,000 in the third quarter
of 2003 from $63,000 in the third quarter of 2002. For the first nine months of
2003, research and development expenses were $152,600 compared to $192,400 in
the first nine months of 2002. The decrease in both the third quarter and first
nine months of 2003 relates primarily to the termination at December 31, 2002 of
a consulting agreement with a former executive officer and director of the
Company.
Sales and marketing expenses were $30,700 in the third quarter of 2003
compared to $62,600 in the third quarter of 2002. For the first nine months of
2003, sales and marketing expenses were $148,800 compared to $211,900 in the
first nine months of 2002. The decrease in both the third quarter and first nine
of 2003 relates primarily to the departure of a sales executive late in the
first quarter of 2003. Sales and marketing expenses in the first nine months of
2003 includes fees of approximately $18,000 paid to a member of the partnership
that acquired 3,333,333 shares of the Company's common stock in late 2002 who
was engaged as a sales and marketing consultant in accordance with the terms of
the subscription agreement.
General and administrative expenses (exclusive of legal expenses) decreased
to $49,000 and $193,100, respectively, in the third quarter and first nine
months of 2003 from $57,800 and $219,000, in the third quarter and first nine
months of 2002 as the Company continued to strictly limit its expenditures to
conserve its cash resources.
Legal expenses decreased to $18,000 and $66,800, respectively, in the third
quarter and first nine months of 2003 from $102,900 and $317,200 in the third
quarter and first nine months of 2002. Legal fees for the third quarter and
first nine months 2003 associated with the Euro-Nocopi, S.A. arbitration
proceedings that were settled in June 2003 were offset against the settlement
proceeds. In 2002, the arbitration related legal fees were included in legal
expenses.
Other income (expense) includes interest income on funds invested and
interest expense on the Demand Loans. Net proceeds from arbitration settlement
includes the net gain of $909,400 in the first nine months of 2003 representing
the proceeds of the arbitration settlement with Euro-Nocopi, S.A., net of the
Company's $110,600 investment in Euro-Nocopi, S.A. and legal expenses incurred
during 2003 related to the arbitration. The net proceeds of the arbitration
settlement of $34,100 recognized in the third quarter of 2003 includes a $36,900
refund of fees previously paid to the arbitration panel as a result of the
termination of the arbitration proceedings.
The net loss of $79,300 in the third quarter of 2003 compared to $184,600
in the third quarter of 2002 represents lower overhead costs, primarily legal
expenses, offset in part by the lower gross profit associated with the revenue
decline. The net earnings of $532,200 in the first nine months of 2003 compared
to the net loss of $656,700 in the first half of 2002 results primarily from the
settlement of the arbitration proceedings with Euro-Nocopi, S.A. during the
second quarter of 2003 offset in part by the lower gross profit.
9
Plan of Operation, Liquidity and Capital Resources
The Company's cash and cash equivalents increased to $197,900 at September
30, 2003 from $139,000 at December 31, 2002. During the first nine of 2003, the
Company received $900,000 in settlement of its arbitration proceedings with
Euro-Nocopi, S.A. and a further $4,500 in demand loans from its Chairman of the
Board and used $830,600 to fund operations, working capital requirements,
including the payment of certain accumulated professional fees and other
obligations, and leasehold improvements at the new operating facility it
occupied in the third quarter of 2003. The Company also repaid its Chairman of
the Board $15,000 of the demand loans previously provided by him.
The loss of a number of customers during the past three years and the loss
of periodic fees under the license agreement with Euro-Nocopi, S.A. commencing
in 2000 have had a material adverse effect on the Company's revenues and results
of operations and upon its liquidity and capital resources. The receipt of
$900,000 in June 2003 in conjunction with the settlement of its arbitration
proceedings with Euro-Nocopi, S.A. has permitted the Company to continue in
operation to the current date. As a result of the settlement, the significant
legal fees incurred in the arbitration have been eliminated. Additionally, the
Company has reduced staff and, during the third quarter of 2003, completed its
relocation to a new facility that it believes will enable the Company to further
reduce its operating expenses. Management of the Company believes that it will
need to obtain additional capital in the future both to fund investments needed
to increase its operating revenues to levels that will sustain its operations
and to fund operating deficits that it anticipates will continue until revenue
increases can be realized. There can be no assurances that the Company will be
successful in obtaining sufficient additional capital, or if it does, that the
additional capital will enable the Company to improve its business so as to have
a material positive effect on the Company's operations and cash flow. The
Company believes that without additional investment, it may be forced to cease
operations at an undetermined future date.
Uncertainties That May Affect the Company, its Operating Results and Stock Price
The Company's operating results and stock price are dependent upon a number
of factors, some of which are beyond the Company's control. These include:
Possible Inability to Continue in Operation Without New Capital Investment. The
Company had a negative working capital of $559,400 at September 30, 2003.
Additionally, it experienced negative cash flow from operations of $432,500 in
the year ended December 31, 2002. Management of the Company believes that while
certain staff reductions initiated in 2003 and the move of the Company's
operations to a new facility, which was completed during the third quarter of
2003, will reduce the Company's negative cash flow, it anticipates that the
negative cash flow will continue until it can achieve revenue increases.
Management believes that it will need to obtain additional capital in the future
both to fund investments needed to increase its operating revenues to levels
that will sustain its operations and to fund operating deficits that it
anticipates will continue until revenue increases can be realized. There can be
no assurances that the Company will be successful in obtaining sufficient
additional capital, or if it does, that the additional capital will enable the
Company to improve its business so as to have a material positive effect on the
Company's operations and cash flow. The Company believes that without additional
investment, it may be forced to cease operations at an undetermined future date.
It is uncertain whether the Company's assets will retain any value if the
Company ceases operations. There are no assurances that the Company will be able
to secure additional equity investment before it may be forced to cease
operations.
10
Possible Inability to Develop New Business. Even if the Company is able to raise
cash through additional capital investment or otherwise, it must improve its
operating cash flow. Because the Company has already significantly reduced its
operating expenses, Management believes that any significant improvement in the
Company's cash flow must result from increases in its revenues from traditional
sources and from new revenue sources. The Company's ability to develop new
revenues may depend on the extent of both its marketing activities and its
research and development activities. There are no assurances that the resources
the Company, even with additional investment, can devote to marketing and to
research and development will be sufficient to increase the Company's revenues
to levels resulting in positive cash flow.
Inability to Obtain Raw Materials and Products for Resale. The Company's adverse
financial condition has required it to significantly defer payments due vendors
who supply raw materials and other components of the Company's security inks,
security paper that the Company purchases for resale and professional and other
services. As a result, the Company is required to pay cash in advance of
shipment to certain of its suppliers. Delays in shipments to customers caused by
the Company's inability to obtain materials on a timely basis and the
possibility that certain current vendors may permanently discontinue to supply
the Company with needed products could impact the Company's ability to service
its customers and adversely affect its customer and licensee relationships.
While receipt of funds in conjunction with the settlement of the arbitration
with Euro-Nocopi, S.A. has improved the Company's financial condition, there can
be no assurances that the Company will be able to maintain its vendor
relationships in an acceptable manner.
Uneven Pattern of Quarterly and Annual Operating Results. The Company's
revenues, which are derived primarily from licensing and royalties, are
difficult to forecast due to the long sales cycle of the Company's technologies,
the potential for customer delay or deferral of utilizing the Company's
technologies, the size and timing of inception of individual license agreements,
the success of the Company's licensees and strategic partners in exploiting the
market for licensed products, modifications of customer budgets, and uneven
patterns of royalty revenue and product orders. Because the Company's revenue
base is not substantial, such delays from one or a small group of customers can
have a material adverse effect on the Company's quarterly and annual revenues
and, as the Company's operating expenses are substantially fixed, on quarterly
and annual operating results.
Volatility of Stock Price. The market price for the Company's common stock has
historically experienced significant fluctuations. The Company has, since its
inception, operated at a loss and has not produced revenue levels traditionally
associated with publicly traded companies. The Company's common stock is not
listed on a national or regional securities exchange and, consequently, the
Company receives limited publicity regarding its business achievements and
prospects, and securities analysts and traders do not extensively follow it.
These factors may result in the company continuing to experience significant
fluctuations in the price of its stock which are not necessarily related to its
operating performance.
11
Intellectual Property. The Company relies on a combination of protections
provided under applicable international patent, trademark and trade secret laws.
It also relies on confidentiality, non-analysis and licensing agreements to
establish and protect its rights in its proprietary technologies. While the
Company actively attempts to protect these rights, the Company's technologies
could possibly be compromised through reverse engineering or other means. In
addition, the Company's ability to enforce its intellectual property rights
through appropriate legal action has been and will continue to be limited by the
Company's adverse liquidity. There can be no assurances that the Company will be
able to protect the basis of its technologies from discovery by unauthorized
third parties or to preclude unauthorized persons from conducting activities
that infringe on the Company's rights. The Company's adverse liquidity situation
has also impacted its ability to obtain patent protection on its intellectual
property and to maintain protection on previously issued patents. The Company
has been advised by its patent counsel that patent maintenance fees
approximating $20,000 will be due during 2003. The Company has not yet made a
decision on keeping any or all of these patents in force. There can be no
assurances that the Company will be able to continue to prosecute new patents
and maintain issued patents. As a result, the Company's customer and licensee
relationships could be adversely affected and the value of the Company's
technologies and intellectual property (including their value upon a liquidation
of the Company) could be substantially diminished.
Recently Issued Accounting Pronouncements
In November 2002, the FASB issued FASB Interpretation No. 45 ("FIN 45"),
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others". FIN 45 requires that upon
issuance of a guarantee, a guarantor must recognize a liability for the fair
value of an obligation assumed under a guarantee. FIN 45 also requires
additional disclosures by a guarantor in its interim and annual financial
statements about the obligations associated with guarantees issued. The
recognition provisions of FIN 45 will be effective for any guarantees that are
issued or modified after December 31, 2002. The Company has adopted the
disclosure requirements and is currently evaluating the effects of the
recognition provisions of FIN 45: The adoption of this statement did not have a
material impact on the Company's results of operations or financial position.
In January 2003, the FASB issued FASB Interpretation No. 46 ("FIN 46"),
Consolidation of Variable Interest Entities - an interpretation of ARB No. 51.
FIN 46 requires a variable interest entity to be consolidated by a company if
that company is subject to a majority of the risk of loss from the variable
interest entity's activities, is entitled to receive a majority of the entity's
residual returns, or both. FIN 46 provisions are effective for all arrangements
entered into after January 31, 2003. For those arrangements entered into prior
to January 31, 2003, FIN 46 provisions are required to be adopted at the
beginning of the first interim or annual period beginning after June 15, 2003.
The adoption of FIN 46 did not have a material impact on the Company's results
of operations or financial position.
12
In April 2003, the FASB issued FASB Statement No. 149 ("Statement 149"),
Amendment of Statement 133 on Derivative Instruments and Hedging Activities.
This Statement amends and clarifies financial accounting and reporting for
derivative instruments, including certain derivative instruments embedded in
other contracts and for hedging activities under FASB Statement No. 133,
Accounting for Derivative Instruments and Hedging Activities. Statement 149 is
generally effective for derivatives entered into or modified after June 30, 2003
and hedging relationships designated after June 30, 2003. The adoption of this
new standard had no effect on the consolidated financial position or results of
operations of the Company as of and for the three and nine months ended
September 30, 2003.
In May 2003, the FASB issued FASB Statement No. 150 ("Statement 150"),
Accounting for Certain Financial Instruments with Characteristics of both
Liabilities and Equity. Statement 150 clarifies the accounting for certain
financial instruments with characteristics of both liabilities and equity and
requires that those instruments be classified as liabilities on the balance
sheet. Previously, many of those financial instruments were classified as
equity. Statement 150 is effective for financial instruments entered into or
modified after May 31, 2003 and otherwise is effective at the beginning of the
first interim period beginning after June 15, 2003. The Company does not expect
the adoption of Statement 150 to have a significant impact on its operating
results or financial position.
On April 22, 2003, the FASB announced its decision to require all companies to
expense the fair value of employee stock options. Companies will be required to
measure the cost according to the fair value of the options. Although the new
guidelines have not yet been released, it is expected that they will be
finalized soon and be effective in 2004. When final rules are announced, the
Company will assess the impact to its financial statements.
13
Item 3. Disclosure Controls and Procedures
The Company has carried out an evaluation, under the supervision and with the
participation of the Company's management, including the Company's Chief
Executive Officer and Chief Financial Officer, of the effectiveness of the
Company's disclosure controls and procedures pursuant to Exchange Act Rule 13
a-14. Based upon that evaluation, the Company's Chief Executive Officer and
Chief Financial Officer concluded that the Company's disclosure controls and
procedures are effective in timely alerting them to material information
relating to the Company that is required to be included in the Company's
periodic filings with the Securities and Exchange Commission. There have been no
significant changes in the Company's internal controls or, to the Company's
knowledge, in other factors that could significantly affect those internal
controls subsequent to the date the Company carried out its evaluation.
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PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Not Applicable
Item 2. Changes in Securities
Not Applicable
Item 3. Defaults Upon Senior Securities
Not Applicable
Item 4. Submission of Matters to a Vote of Security Holders
Not Applicable
Item 5. Other Information
Not Applicable
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
31.1 Certificate of Chief Executive Officer required by Rule
13a-14(a).
31.2 Certificate of Chief Financial Officer required by Rule
13a-14(a).
32. Certificate of Chief Executive Officer and Chief Financial
Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
(b) No Current Reports on Form 8-K have been filed by the Registrant
during the quarter ended September 30, 2003.
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SIGNATURES
----------
Pursuant to the requirement of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NOCOPI TECHNOLOGIES, INC.
DATE: November 14, 2003 /s/ Michael A. Feinstein, M.D.
----------------------------------------
Michael A Feinstein, M.D.
Chairman of the Board
DATE: November 14, 2003 /s/ Rudolph A. Lutterschmidt
----------------------------------------
Rudolph A. Lutterschmidt
Vice President & Chief Financial Officer
16