e10ksb
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
(Mark One)
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 2007
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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
Commission file number
000-20333
Nocopi Technologies, Inc.
(Name of small business issuer in its charter)
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| Maryland
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87-0406496 |
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| (State or other jurisdiction of incorporation or organization)
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(I.R.S. Employer Identification No.) |
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| 9C Portland Road, West Conshohocken, PA
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19428 |
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| (Address of principal executive offices)
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(Zip Code) |
Issuer’s telephone number
(610) 834-9600
Securities registered under Section 12(b) of the Exchange Act:
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| Title of each class |
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Name of each exchange on which registered |
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| None
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Not Applicable |
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Securities registered under section 12(g) of the Exchange Act:
Common Stock $.01 par value
(Title of class)
Check whether the issues is not required to file reports pursuant to Section 13 or 15(d) of
the Exchange Act o
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 þ No o.
Check if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-B
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. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act) Yes o No þ
State issuer’s revenues for its most recent fiscal year. $1,393,800.
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 14, 2008. $15,807,000
(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. 52,275,837 shares of Common Stock, $.01 par value at March 14, 2008.
DOCUMENTS INCORPORATED BY REFERENCE
None
Transitional Small Business Disclosure Format (Check one): Yes o No þ
NOCOPI TECHNOLOGIES, INC.
TABLE OF CONTENTS
PART I
ITEM 1. BUSINESS
Background
Nocopi Technologies, Inc. (hereinafter “Nocopi”, “Registrant” or the “Company”) is a Maryland
corporation 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 and, since 2003, has focused on
developing specialty reactive inks that it believes have applications in the large educational and
toy market. 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.
While Registrant experienced a significant decline in its financial condition from the late 1990’s
through 2006, in 2007, primarily as a result of licenses signed in 2006 and early 2007 with Elmer’s
Products and two of Elmer’s operating companies, Giddy Up and Color Loco, it recorded net income
and positive cash flow from operations for the first time in a number of years. Registrant also had
positive working capital and stockholders’ equity at year-end 2007 and, during 2007, repaid
$106,000 of short-term loans that it had incurred through March 2007. At December 31, 2007, it had
no short-term loans outstanding. There can be no assurances that future revenues and earnings will
be sustained at levels achieved in 2007. During the period of adverse liquidity, Registrant relied
on capital investment and various short-term loans to provide liquidity needed to avoid a cessation
of its operations. In 2006, Registrant received $173,100 in capital investment from five new
stockholders and its Chairman of the Board and received demand and short-term loans of $81,000, net
of repayments, including $34,000 from its Chairman of the Board and another director. In 2007,
Registrant received $282,700 in capital investment from nine individual investors and a director,
received a demand loan of $7,000 from its Chairman of the Board and repaid $106,000 of short-term
loans including $44,000 lent by its Chairman of the Board and another director.
Additionally, 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. including the subsequent installments of such settlement through
March 2007 totaling $200,000 provided additional cash resources to the Registrant. Registrant may
raise additional capital, in the form of debt, equity or both, if needed, to support its working
capital requirements as well as to provide funding for other business opportunities. There are no
assurances that Registrant will be able to attract additional capital if it seeks to do so.
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 believed this technology had applications in
children’s activity products such as a coloring book without crayons and in educational testing
review products. Registrant demonstrated this technology to several potential licensees,
participated in trade shows including, in 2004 to 2008, the American International Toy Fair in New
York City receiving several industry awards. In late 2005, Registrant negotiated its first license
for the use of this technology. This license terminated in 2006. In April 2006, Registrant signed
multi-year license agreements with Giddy Up and Color Loco, two major established and leading
children’s books publishers with proven track records of innovation and major channels of
distribution and has subsequently amended these agreements to expand the licenses. In October 2006,
both Giddy Up and Color Loco became wholly owned by privately-held Elmer’s Products, Inc., an
industry leader in adhesives, arts and crafts and educational products. Products incorporating
Registrant’s technologies, including Rub-n-Color™ activity books and kits have been on sale in
leading retail outlets since January 2007 and have received coverage in the press and on
television. In February 2007, Registrant entered into a multi-year license agreement with Elmer’s
Products, Inc. whereby Registrant’s technologies are incorporated into products sold under the
Elmer’s brand. Retail sales of these products commenced in the second quarter of 2007. Management
of the Company believes that the relationship with Elmer’s offers significant
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opportunities to further increase revenues in the Educational and Toy Products markets and improve
the Company’s overall financial position. There can be no assurances that these initiatives and
business relationships will continue to generate additional operating revenues.
Entertainment and Toy Technologies and 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 attended the Toy Fair again each February from 2005 through 2008. 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
identified a number of potential licensees in the children’s and educational 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. This license terminated in 2006. In April 2006,
Registrant signed multi-year license agreements with Giddy Up and Color Loco, two major established
and leading children’s books publishers with proven track records of innovation and major channels
of distribution. Registrant has subsequently amended these agreements to expand the licenses. In
October 2006, both Giddy Up and Color Loco became wholly owned by privately-held Elmer’s Products,
Inc., an industry leader in adhesives, arts and crafts and educational products. During 2006,
revenues associated with these two licensees accounted for nearly half of Registrant’s 2006
revenues. Products incorporating Registrant’s technologies, including Rub-n-Color™ activity books
and kits have been on sale in leading retail outlets since January 2007 and have received coverage
in the press and on television. In February 2007, Registrant entered into a multi-year license
agreement with Elmer’s Products, Inc. whereby Registrant’s technologies are incorporated into
products sold under the Elmer’s brand. In March 2007, Registrant received initial ink orders from
Elmer’s and Elmer’s began actively marketing products incorporating Registrant’s technologies in
the second quarter of 2007. Revenues derived directly from Elmer’s, including Giddy Up and Color
Loco, and from its third party printers, accounted for approximately 71% of Registrant’s 2007
revenues, approximately 47% from Elmer’s and its operating companies and approximately 24% from its
third party printers. In early 2008 Registrant joined with a Elmer’s in a transaction whereby
Elmer’s acquired an interest in a patent related to reactive ink formulation held by a third party.
There are no assurances that the Registrant’s available resources, even with additional investment,
if sought and obtained, for marketing and further technical development of this new product line
will be sufficient to further increase the Company’s revenues.
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.
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 COPIMARKä. Other variations of the COPIMARKä 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 & REVEALâ 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
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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. Registrant continues to pursue
opportunities for its patented anti-counterfeiting and anti-diversion technologies as a potential
solution to counterfeit and diverted pharmaceutical products. While this market incentive has not
developed revenues to date, Registrants continues to pursue opportunities in this market and
recently met with representatives of the United States Pharmacopeia global officials on
pharmaceutical product counterfeiting and diversion. There are no assurances that initiatives
currently underway will result in additional revenues in the future.
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 NOCOPIä. Registrant also offers several inks that impede photocopying by
color copiers. This technology is called COLORBLOCâ.
Registrant, in addition to marketing its own technologies and products, acts 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.
In early 2008, Registrant introduced a new product, Secure Rub Rx, a specially designed
prescription paper base stock that incorporates all three tamper resistant characteristics mandated
by the U.S. Department of Health & Human Services for Medicaid prescriptions beginning in October
2008 including certain tamper resistant requirements that become effective in April 2008. There are
no assurances that Registrant will obtain significant additional revenues from its investment in
developing and marketing this new product.
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:
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Year Ended December 31 |
| Product Type |
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2007 |
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2006 |
Entertainment and Toy Technologies and Products |
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72 |
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48 |
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Anti-Counterfeiting and Anti-Diversion Technologies and Products |
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22 |
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42 |
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Document Security Products |
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6 |
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10 |
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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 and, in certain
cases, sales of Registrant’s inks to these licensees and their designated manufacturers. Registrant
also licenses its technologies directly to end-users.
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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.
In recent years, 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 the third quarter of 2007, Registrant engaged a sales
consultant to market the Company’s existing line of security papers, inks and ink-jet products as
well as Registrant’s newer security products including Secure Rub Rx. In Europe, its security
technologies are marketed by Contrast Technologies (formerly 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 “Rub-it and Color”
product line including licensing and direct sales through product retailers in addition to the
markets presently being served by current licensees.
Registrant has recently taken several steps to improve the marketing of its technologies. These
include, as mentioned above, the engagement of a sales consultant to market the Company’s existing
line of security papers, inks and ink-jet products as well as newly developed applications and, in
February 2008, the inauguration of a completely new web site and online store developed in
conjunction with Minerva Design, a creative marketing and communications agency associated with a
number of well known brands.
Major Customers
During 2007, Registrant made sales or obtained revenues equal to 10% or more of Registrant’s 2007
total revenues from three non-affiliated customers who individually accounted for approximately
47%, 24% and 15%, respectively, of 2007 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.
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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 & REVEALâ system and has patents
pending on the newly marketed Rub-it and 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 some other countries, patent applications are automatically published at a
specified time after filing.
Nocopi is required to pay annuities from time to time on patents to keep them in force and makes an
annual evaluation of which patents it continues to maintain. In Europe, the territory of Contrast
Technologies (formerly Euro-Nocopi, S.A.), annuities for European patents are paid by Contrast.
Research and Development
Nocopi has been involved in research and development since its inception. Although Registrant’s
financial condition had 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 continue to have funds available to maintain its research and development activities at
current or increased levels.
During the years ended December 31, 2007 and 2006, Nocopi expended approximately $164,600 and
$145,400 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
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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 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.
Contrast Technologies (formerly Euro-Nocopi, S.A.)
Contrast Technologies (formerly Euro-Nocopi, S.A.) is a former affiliate of Registrant which, since
June 2003, has held a perpetual royalty-free license to exploit Registrant’s technologies in
Europe.
Employees
At March 14, 2008, Registrant had four 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, Asia, Australia and New Zealand. These licensees accounted for approximately 24% of
Registrant’s gross revenues in 2007 and approximately 37% in 2006. Certain information concerning
Registrant’s foreign and domestic operations is contained in Note 10 to Registrant’s Financial
Statements included elsewhere in this Annual Report on Form 10-KSB.
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, which was extended for five
years during 2007, now expiring in March 2013. Current monthly rent under this lease is $3,290
escalating one to three percent on each anniversary date of the lease beginning in April 2009.
Registrant is also responsible for its pro-rata share of the operating costs of the building.
Registrant incurred leasehold improvement expenditures of approximately $72,500 through
December 31, 2007 and believes that additional leasehold improvement expenditures will not be
significant. Registrant believes that this space will be adequate for its current needs and that
additional space will be available as needed.
ITEM 3. LEGAL PROCEEDINGS
Registrant is not aware of any pending litigation (other than ordinary routine litigation
incidental to its business
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where, in management’s view, the amount involved is less than 10% of Registrant’s current assets)
to which Registrant is or may be a party, or to which any of its properties is or may be subject,
nor is it aware of any pending or contemplated proceedings against it by any governmental
authority. Registrant knows of no material legal proceedings pending or threatened, or judgments
entered against, any director or officer of Registrant in his capacity as such.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the fourth quarter of the fiscal year ended December 31, 2007, no matters were submitted to
a vote of Registrant’s security holders.
PART II
ITEM 5. MARKET FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND SMALL BUSINESS ISSUER PURCHASES
OF EQUITY SECURITIES
Registrant’s Common Stock is traded on the over-the-counter market and quoted on the NASD
over-the-counter Bulletin Board under the symbol “NNUP”. The table below presents the range of high
and low bid quotations of Registrant’s Common Stock by calendar quarter for the last two full
fiscal years and for a recent date, as reported by Pink Sheets LLC. The quotations represent prices
between dealers and do not include retail markup, markdown, or commissions; hence, such quotations
do not represent actual transactions.
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High Bid |
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Low Bid |
January 1, 2006 to March 31, 2006
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$ |
.29 |
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$ |
.08 |
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April 1, 2006 to June 30, 2006
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$ |
.26 |
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$ |
.17 |
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July 1, 2006 to September 30, 2006
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$ |
.35 |
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$ |
.17 |
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October 1, 2006 to December 31, 2006
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$ |
.64 |
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$ |
.27 |
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January 1, 2007 to March 31, 2007
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$ |
.87 |
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$ |
.45 |
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April 1, 2007 to June 30, 2007
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$ |
.76 |
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$ |
.51 |
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July 1, 2007 to September 30, 2007
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$ |
.66 |
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$ |
.38 |
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October 1, 2007 to December 31, 2007
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$ |
.78 |
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$ |
.40 |
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January 1, 2008 to March 14, 2008
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$ |
.61 |
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$ |
.32 |
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As of March 14, 2008, 52,275,837 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 52,275,837 shares of Common Stock which are outstanding,
Registrant, at March 14, 2008, has reserved for the issuance of 2,632,000 shares of its Common
Stock which underlie options and warrants to purchase Common Stock of the Registrant.
The Company did not pay dividends in 2007 or 2006 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 April 2007, the Company sold an aggregate of 104,166 shares of its Common Stock, par value
$0.01 per share, to two individual investors (who were acquainted with a member of the Company’s
Board of Directors) for $50,000, or $0.48 per share; during May 2007, the Company sold an aggregate
of 364,583 shares of its Common Stock, par value $.01 per share, to five individual investors (who
were acquainted with a member of the Company’s Board of Directors and are employed by a licensee of
the Company) for $175,000, or $0.48 per share, 41,667 shares of its Common Stock, par value $.01
per share, to one individual investor (who was acquainted with a member of
7
the Company’s Board of Directors) for $20,000, or $0.48 per share and 20,833 shares of its Common
Stock, par value $.01 per share, to a member of the Company’s Board of Directors for $10,000, or
$.48 per share, and during June 2007, the Company sold 57,777 shares of its Common Stock, par value
$.01 per share, to one individual investor (who was acquainted with a member of the Company’s Board
of Directors) for $27,733, or $0.48 per share. All shares were sold in private transactions exempt
from registration pursuant to Section 4(2) of the Securities Act. No underwriters were involved in
these transactions or received any commissions or other compensation. Proceeds of the sales were
used to fund the Company’s working capital requirements.
Issuer Repurchases of Equity Securities
None
ITEM 6. MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Forward-Looking Information
The following discussion and analysis of the Company’s financial condition and results of
operations should be read 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.
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 (i) products
incorporating the Company’s technologies, such as inks, security paper and pressure sensitive
labels, and (ii) 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.
8
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.
The Company believes that, as fixed costs reductions beyond those it has achieved in recent years
may not be achievable, its operating results are substantially dependent on revenue levels. Because
revenues derived from licenses and royalties carry a much higher gross profit margin than other
revenues, operating results are also substantially affected by changes in revenue mix.
Both the absolute amounts of the Company’s revenues and the mix among the various sources of
revenue are subject to substantial fluctuation. The Company has a relatively small number of
substantial customers rather than a large number of small customers. Accordingly, changes in the
revenue received from a significant customer can have a substantial effect on the Company’s total
revenue and on its revenue mix and overall financial performance. Such changes may result from a
customer’s product development delays, engineering changes, changes in product marketing
strategies, production requirements 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 such terms, revenues from the customer may be affected.
Revenues for 2007 were $1,393,800, an increase of approximately 82%, or $627,300, from $766,500 in
2006. Licenses, royalties and fees increased in 2007 by approximately 72% to $512,000 from $298,100
in 2006. The increase in licenses, royalties and fees is due primarily to licensing revenues from
three licensees in the Entertainment and Toy products business, one of which is a new license and
two of which are licenses signed in 2006, offset in part by the termination or non-renewal of four
licenses during 2006 and 2007. Product and other sales increased by $413,400, or approximately 88%
to $881,800 in 2007 from $468,400 in 2006. The increase in product sales reflects higher sales of
inks, primarily to licensees in the Entertainment and Toy Products business, and higher sales of
the Company’s line of security paper during 2007 compared to 2006. The Company derived
approximately $1,003,100 or 72% of total revenues, from licensees in the Entertainment and Toy
Products business in 2007 compared to approximately $365,300, or 48% of total revenues, in 2006.
The Company believes that revenues from licensees in the Entertainment and Toy Products market will
grow in future periods.
Gross profit increased to $845,300 or approximately 61% of revenues in 2007 from $385,000 or
approximately 50% of revenues in 2006. 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 higher gross profit in 2007 compared to
2006, expressed both in absolute dollars and as a percentage of revenues, resulted principally from
increases in revenues represented by licenses, royalties and fees along with higher levels of ink
sales that were available to absorb fixed production costs and product mix.
Research and development expenses increased to $164,600 in 2007 from $145,400 in 2006. The increase
primarily represents higher levels of compensation and employee benefit expense in 2007 compared to
2006.
Sales and marketing expenses increased to $241,600 in 2007 from $146,400 in 2006. The increase in
2007 compared to 2006 reflects higher commission expense on the higher level of revenues in 2007
compared to 2006, increased sales promotion expenses including the development of a new Company web
site and the engagement of a sales consultant in the third quarter of 2007 to market the Company’s
existing line of security papers, inks and
9
ink-jet products as well as a new application developed
by the Company in response to recent legislation requiring tamper-resistant features in
prescription pads used by physicians nationwide in state Medicaid programs.
General and administrative expenses (exclusive of legal expenses) decreased to $180,900 in 2007
from $232,700 in 2006, a decrease of $51,800. The decrease is due primarily to $48,000 in expenses
recorded during 2006 in connection with the issuance of 400,000 options to purchase shares of the
Company’s common stock to the four members of the Company’s Board of Directors in April 2006. As
the Board of Directors eliminated the April 2007 issuance of options, no option related expense was
incurred in 2007. The Company also realized declines in insurance and patent related expenses
offset in part by higher compensation expense.
Legal expenses increased to $46,800 in 2007 from $36,300 in 2006 resulting from a higher level of
legal counseling required by the Company in 2007 compared to 2006 in connection with licensing
activity, the private placement of the Company’s common stock and other legal matters.
Other income (expense) includes, in 2007, the reversal of $175,900 of accounts payable and accrued
consulting fees that the Company, with legal counsel, has determined to be no longer statutorily
payable. Interest income increased in 2007 to $6,200 compared to $500 in 2006 as higher levels of
funds were invested in 2007. Interest, bank charges and financing fees declined in 2007 to $6,700
from $14,800 in 2006. The decline results primarily from the non-recurrence in 2007 of $7,200 of
amortization of financing costs associated with the issuance of warrants in 2006 and lower interest
expense due the repayment of short-term loans during the year.
The net income of $386,000 in 2007 compared to the net loss of $190,100 in 2006 was due primarily
to higher gross profits on the higher level of revenues, lower compensation expense related to the
elimination of the April 2007 issuance of options to the Company’s Board of Directors, and the
reversal of accounts payable and accrued expenses that are no longer statutorily payable offset in
part by higher employee compensation and commission expense.
Plan of Operation, Liquidity and Capital Resources
The Company’s cash and cash equivalents increased to $263,600 at December 31, 2007 from $53,100 at
December 31, 2006. During 2007, the Company generated $56,100 from operations, received $282,700
through the sale of 589,026 shares of its common stock, received a loan of $7,000, used $29,300 for
capital purchases and repaid all $106,000 of outstanding loans.
While the Company has added new licensees in the Entertainment and Toy Market over the past two
years and has obtained significant increases in revenues from licenses, royalties and product sales
from these licensees and their third party printers, its working capital requirements have
increased primarily in support of inventory and receivables related to these revenues; however,
during 2007, the Company achieved significant increases in revenues and recorded net income of
$386,000 and $56,100 of operating cash flow. The Company had positive working capital and
stockholders’ equity at December 31, 2007. During 2007, the Company raised $282,700 in a valid
private placement whereby 568,193 shares of the Company’s common stock were sold to nine
non-affiliated individual investors and 20,833 were sold to a Director of the Company. The Company
also received $7,000 in demand loans from its Chairman of the Board and the final installment
payment of $50,000 in accordance with the settlement agreement of its arbitration with Euro-Nocopi,
S.A. The Company also repaid $106,000 of short-term loans during 2007 and, at December 31, 2007, had no loans outstanding. While the Company is not actively seeking additional investment
at the present time due to the improvements in its revenues during 2007, it may seek investment in
the future, if needed, to support working capital requirements or to provide funding for new
business opportunities. Management of the Company believes that maintenance of revenues at current
levels will allow it to continue in operation for the foreseeable future. There can be no
assurances that revenues in future periods will be sustained at levels achieved in 2007.
While the investment received in 2007 and improvement in operations have positively impacted the
Company’s liquidity situation, it continues to maintain a cost containment program including
curtailment of discretionary research and development and sales and marketing expenses, where
possible. During 2007, it increased employment by one individual, acquired capital equipment to
increase its ink production capacity and, late in the third quarter of 2007, it engaged a sales
consultant to market its existing line of security papers, inks and ink-jet products as well as a
new application developed by the Company in response to recent legislation requiring
tamper-resistant features in
10
prescription pads used by physicians nationwide in state Medicaid programs.
The Company’s plan of operation for the twelve months beginning with the date of this annual report
consists of capitalizing on the specific business relationships it has developed in the
Entertainment and Toy Products business through ongoing development of applications for these
licensees. The Company believes that these opportunities can provide increases in revenues and will
continue to increase the Company’s production and technical staff as necessary. The Company will
also invest in capital equipment needed to support the anticipated ink production requirements.
Additionally, the Company will pursue opportunities to market its current technologies in specific
security and non-security markets. The Company may seek to raise additional capital, in the form of
debt, equity or both, if needed, to support its working capital requirements as well as to provide
funding for other business opportunities. There can be no assurances that the Company will be
successful in raising additional capital if such additional capital is sought.
Risk Factors
The Company’s operating results, financial condition and stock price are subject to certain risks,
some of which are beyond its control. These risks could cause the Company’s actual operating and
financial results to differ materially from those expressed in its forward looking statements,
including the risks described below and the risks identified in other documents which are filed and
furnished with the SEC:
Dependency on Major Customer. The Company’s recent growth in revenues and return of profitability
has resulted primarily from relationships developed with a major customer and two of its operating
companies. Revenues derived directly from this customer and indirectly, through its third party
printers, equaled approximately 71% of the Company’s 2007 revenues. The Company also has
substantial receivables from these businesses. While multi-year licenses exist with these
organizations, the Company is dependent on its licensees to develop new products and markets that
will generate increases in its licensing and product revenues. The inability of these licensees to
maintain at least current levels of sales of products utilizing the Company’s technologies could
adversely affect its operating results and cash flow.
Possible Inability to Develop New Business. While the Company has recently raised cash through
additional capital investment and improved its operating cash flow, it intends to limit increases
in its operating expenses. Management of the Company believes that any significant improvement in
the Company’s cash flow must result from increases in revenues from traditional sources and from
new revenue sources. The Company’s ability to develop new revenues may depend on the extent of both
its marketing activities and its research and development activities, both of which are limited.
There are no assurances that the resources that the Company can devote to marketing and to research
and development will be sufficient to increase its revenues to levels that will enable it to
maintain positive operating cash flow in the future.
Inability to Obtain Raw Materials and Products for Resale. The Company’s adverse financial
condition in previous periods required it to significantly defer payments due vendors who supply
raw materials and other components of its security inks, security paper that it purchases for
resale, professional and other services. As a result, the Company is required to pay cash in
advance of shipment to certain of its suppliers. Delays in shipments to customers caused by the
inability to obtain materials on a timely basis and the possibility that certain current vendors
may permanently discontinue to supply the Company with needed products could impact its ability to
service its customers, thereby adversely affecting its customer and licensee relationships.
Management of the Company believes that the recent capital investment and improvements in operating
cash flow have allowed the Company to improve its relationships with its vendors and professional
service providers. There are no assurances that the Company will be able to continue to maintain
its vendor relationships in an acceptable manner.
Uneven Pattern of Quarterly and Annual Operating Results. The Company’s revenues, which are derived
primarily from licensing, royalties and sales of products incorporating its technologies, are
difficult to forecast due to the long sales cycle of its technologies, the potential for customer
delay or deferral of implementation of its technologies, the size and timing of inception of
individual license agreements, the success of its licensees and strategic partners in exploiting
the market for the licensed products, modifications of customer budgets, and uneven patterns of
royalty revenue and product orders. As the Company’s revenue base is not substantial, delays in
finalizing license contracts, implementing the technology to initiate the revenue stream and
customer ordering decisions can have a material
11
adverse effect on the Company’s quarterly and
annual revenue expectations and, as its operating expenses are substantially fixed, income
expectations will be subject to a similar adverse outcome. As licensees for the entertainment and
toy products markets are added, the unpredictability of the Company’s revenue stream may be further
impacted.
Volatility of Stock Price. The market price for the Company’s common stock has historically
experienced significant fluctuations and may continue to do so. From inception through 2006, the
Company had operated at a loss and has not produced revenue levels traditionally associated with
publicly traded companies. The Company’s common stock is not listed on a national or regional
securities exchange and, consequently, it receives limited publicity regarding its business
achievements and prospects. Additionally, securities analysts and traders do not extensively follow
the Company’s stock and its stock is also thinly traded. The Company’s market price may be affected
by announcements of new relationships or modifications to existing relationships. The stock prices
of many developing public companies, particularly those with small capitalizations, have
experienced wide fluctuations not necessarily related to operating performance. Such fluctuations
may adversely affect the market price of the Company’s common stock.
Intellectual Property. The Company relies on a combination of protections provided under applicable
international patent, trademark and trade secret laws. The Company also relies on confidentiality,
non-analysis and licensing agreements to establish and protect its rights in its proprietary
technologies. While the Company actively attempts to protect these rights, its technologies could
possibly be compromised through reverse engineering or other means. In addition, the Company’s
ability to enforce its intellectual property rights through appropriate legal action had been and
may continue to be limited by its adverse liquidity. There can be no assurances that the Company
will be able to protect the basis of its technologies from discovery by unauthorized third parties
or to preclude unauthorized persons from conducting activities that infringe on its rights. The
Company’s adverse liquidity situation in previous years had also impacted its ability to obtain
patent protection on its intellectual property and to maintain protection on previously issued
patents. The Company has been advised by its patent counsel that patent maintenance fees
approximating $9,600 will be due during 2008 and it has made these payments. There can be no
assurances that the Company will be able to continue to prosecute new patents and maintain issued
patents. As a result, the Company’s customer and licensee relationships could be adversely affected
and the value of its technologies and intellectual property (including their value upon
liquidation) could be substantially diminished.
Recently Issued Accounting Standards
In June 2006, the Financial Accounting Standards Board (“FASB”) issued Interpretation No. 48 (“FIN
48”), Accounting for Uncertainty in Income Taxes. FIN 48 prescribes detailed guidance for the
financial statement recognition, measurement and disclosure of uncertain tax positions recognized
in an enterprise’s financial statements in accordance with FASB Statement No. 109, Accounting for
Income Taxes. Tax positions must meet a more-likely-than-not recognition threshold at the effective
date to be recognized upon the adoption of FIN 48 and in subsequent periods. FIN 48 is effective
for fiscal years beginning after December 15, 2006, and was effective for us beginning with the
first quarter of 2007, and the provisions of FIN 48 were applied to all tax positions under
Statement No. 109 upon initial adoption. The cumulative effect of applying the provisions of this
interpretation will be reported as an adjustment to the opening balance of retained earnings for
that fiscal year. The Company adopted FIN 48 effective January 1, 2007. The adoption of FIN 48 did
not require an adjustment to the opening balance of retained earnings at January 1, 2007.
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements (“SFAS No. 157”). SFAS No.
157 establishes a framework for measuring fair value and expands disclosures about fair value
measurements. The changes to current practice resulting from the application of SFAS No. 157 relate
to the definition of fair value, the methods used to measure fair value and the expanded
disclosures about fair value measurement. SFAS No. 157 is effective for fiscal years after November
15, 2007 and interim periods within those fiscal years. The Company does not believe that the
adoption of the provisions of SFAS No. 157 will impact the amounts reported in the financial
statements, however, additional disclosures will be required about the inputs used to develop the
measurements of fair value and the effect of certain measurements reported on the Statement of
Operations.
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and
Financial Liabilities (“SFAS No. 159”). SFAS No. 159 permits entities to choose to measure many
financial instruments and
12
certain other items at fair value that are not currently required to be
measured at fair value. The objective is to improve financial reporting by providing entities with
the opportunity to mitigate volatility in reported earnings caused by measuring related assets and
liabilities differently without having to apply complex hedge accounting provisions. SFAS No. 159
also establishes presentation and disclosure requirements designed to facilitate comparisons
between entities that choose different measurement attributes for similar types of assets and
liabilities. SFAS No. 159 is effective for financial statements issued for fiscal years beginning
after November 15, 2007 and will become effective for the Company beginning with the first quarter
of 2008. The Company has not yet determined whether it will adopt this statement and its impact on
its financial statements and footnote disclosures.
In December 2007, the FASB issued SFAS No.141 (revised 2007), Business Combinations (“SFAS
141R”), which establishes principles and requirements for how an acquirer recognizes and measures
in its financial statements the identifiable assets acquired, the liabilities assumed, any
noncontrolling interest in the acquiree and the goodwill acquired. SFAS 141R also establishes
disclosure requirements for users of financial statements to evaluate the nature and financial
effects of the business combination. SFAS 141R is effective for us starting January 1, 2009. Since
the standard is generally applicable only for acquisitions completed in the future, we are unable
to determine the effect this standard would have on the accounting for such acquisitions.
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 page 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
Disclosure 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.
Internal Control over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial
reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934.
Internal control over financial reporting is a process to provide reasonable assurance regarding
the reliability of financial reporting and preparation of financial statements for external
purposes in accordance with U.S. GAAP. Internal control over financial reporting includes
maintenance of records that in reasonable detail accurately and fairly reflect the transactions and
dispositions of the assets of the Company, provide reasonable assurance that transactions are
recorded as necessary to permit preparation of financial statements in accordance with U.S. GAAP,
that receipts and expenditures of the Company are being made only with management authorization and
provide reasonable assurance that unauthorized acquisition, use or disposition of Company assets
that could have a material effect on the Company’s financial statements would be prevented or
detected on a timely basis. Because of its inherent limitations, internal control
13
over financial
reporting may not prevent or detect misstatements in the Company’s financial statements on a timely
basis.
Management assessed the effectiveness of the Company’s internal control over financial reporting
based on the Committee of Sponsoring organizations of the Treadway Commission in “Internal
Control-Integrated Framework.” Based on this assessment, management believes that, as of December
31, 2007, the Company’s internal control over financial reporting was effective.
Changes in Internal Control over Financial Reporting
There have been no changes in the Company’s internal controls over financial reporting during the
fourth quarter of 2007 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., 61, 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 thirty 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, 54, 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 Widener University. He is a member of both the Pennsylvania
and American Institutes of Certified Public Accountants since 1983.
Stanley G. Hart, 47, a director since March 2001, is President of three companies: S.G. Hart &
Associates, LLC, a strategic brand protection consulting company, Brand Equity Builders, Inc., a
market research and branding company and Ritter & Associates, Inc., a retail research and reporting
company. Mr. Hart has served in these positions since 2003, 2006 and 2007, respectively. 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. 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 25 years of international general
management experience within the market research, brand strategy, chemical and packaging
industries. With five years as an expatriate, Mr. Hart’s diverse experience includes new ventures,
international business, and mergers and acquisitions. 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.
Richard Levitt, 51, a director since December 1999, has been engaged in the computer and network
services segment of the computer industry since 1981. Mr. Levitt is currently a Senior Account
Executive for Dell Computer in Pittsburgh, PA. He is in the Corporate Business Group and is
responsible for developing major accounts in
14
Western Pennsylvania. Mr. Levitt has been with Dell
since November 2005. In 1995, he participated in the founding of XiTech Corporation, a Pittsburgh,
Pennsylvania-based provider of computing and computer networking hardware and network design and
implementation services which in five years grew to over 100 employees and $50 million in annual
sales. Since founding XiTech, he had served as one of its corporate principals, as a Network
Consultant and as the Manager of its Network Sales Force. Mr. Levitt left XiTech in 2004. 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.
Philip B. White, 69, of Ocean City, Maryland was elected to the Board of Directors in August 2006.
Mr. White is currently an international consultant in the private sector providing regulatory and
industry standards advice to international companies regulated by the Food and Drug Administration,
the Consumer Product Safety Commission, and the Environmental Protection Agency. He also served as
a Technical Advisor and Regulatory Liaison to Nocopi from 2002 to 2005. Before establishing his own
global consulting practice in 2000, Mr. White was Director of Medical Device Consulting at the
international firm of AAC Consulting Group (now Kendle), Rockville, Md., from 1994 to 2000. He
retired from a 33-year career with the U.S. Food and Drug Administration in 1994. His last FDA
position was Director of the Office of Standards and Regulations in the Center for Devices and
Radiological Health. Previous FDA positions included Regional Director of FDA’s enforcement
activities in the Southwestern Region, Deputy FDA Assistant Commissioner for Program Coordination,
and Supervisory Food and Drug Inspector. He has served on the Board of Directors of the American
National Standards Institute, the Association for Advancement of Medical Instrumentation, and the
Regulatory Affairs Professionals Society. He is a 1961 graduate of Wilkes University, Wilkes-Barre,
PA with a B.A. Degree in Biology. He also did graduate studies in 1967 and 1968 specializing in the
Federal Food Drug and Cosmetic Act at the New York University Graduate Law School in New York City.
Rudolph A. Lutterschmidt, 61, 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
July 2006, Mr. Lutterschmidt has been a consultant to several southeast Pennsylvania businesses
including Murex Investments, a Philadelphia investment fund, where he provided financial guidance
to two of its portfolio companies. From April 2005 to July 2006, Mr. Lutterschmidt was 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. He is
a graduate of Syracuse University, a member of Financial Executives International, the Institute of
Management Accountants and is a Certified Management Accountant.
Terry W. Stovold, 45, Director of Worldwide Technical Sales since 2003, has been employed by Nocopi
for more than twenty years. Mr. Stovold received a Forestry Technician College degree from
Algonquin College and studied business at McGill University. He holds numerous U.S. and foreign
patents in the fields of printing technology and printing inks with multiple patents pending.
The terms of the current directors will expire at the 2008 annual meeting of stockholders of the
Company.
Corporate Governance
The Board of Directors has determined that all the directors, with the exception of Michael A.
Feinstein, M.D., who serves as acting Chief Executive Officer, are independent as that term is
defined by the SEC. The Company did not make any material changes to the procedures by which
stockholders may recommend nominees to the Company’s board of directors during 2007.
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 does not presently have a written
charter. 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.
15
Gerwitz is an “audit
committee financial expert” as currently defined under the SEC rules implementing Section 407 of
the Sarbanes Oxley Act of 2002 and that Mr. Gerwitz meets the criteria for independence as defined
by the SEC.
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.
Section 16(a) Beneficial Ownership Reporting Compliance
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, 2007, all the Reporting
Persons complied with all applicable filing requirements except as follows:
Michael A. Feinstein, M.D., Chairman of the Board, directly and indirectly acquired stock of the
Company on multiple occasions and failed to file a Form 4 on a timely basis. Herman M. Gerwitz, a
director, directly acquired stock of the Company on multiple occasions and failed to file a Form 4
on a timely basis. Dr. Feinstein and Mr. Gerwitz filed Form 5’s in mid-February 2008 reporting
these and other unreported transactions. Richard Levitt, a director, directly disposed of stock of
the Company on multiple occasions and failed to file a Form 4 on a timely basis. A Form 5 covering
these and other unreported transactions has been filed in March 2008.
ITEM 10. EXECUTIVE COMPENSATION
The following table sets forth information concerning compensation for 2007 and 2006 paid to
Michael A. Feinstein, M.D., the Company’s Chairman who has served since February 2000 as the
Company’s acting Chief Executive Officer, and Terry W. Stovold, Director of Worldwide Technical
Sales, the only employee to receive compensation in 2007 greater than $100,000 (the “Named
Executive”).
| |
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| |
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Nonqualified |
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|
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|
|
| Name |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonequity |
|
|
deferred |
|
|
|
|
|
|
|
| and |
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock |
|
|
Option |
|
|
incentive plan |
|
|
compensation |
|
|
All other |
|
|
|
|
| principal |
|
|
|
|
|
Salary |
|
|
Bonus |
|
|
awards |
|
|
awards |
|
|
compensation |
|
|
earnings |
|
|
compensation |
|
|
Total |
|
| position |
|
Year |
|
|
($) |
|
|
($) |
|
|
($) |
|
|
($) |
|
|
($) |
|
|
($) |
|
|
($) |
|
|
($) |
|
| (a) |
|
(b) |
|
|
(c) |
|
|
(d) |
|
|
(e) |
|
|
(f) |
|
|
(g) |
|
|
(h) |
|
|
(i) |
|
|
(j) |
|
Michael A. Feinstein, M.D.
Chairman and Chief |
|
|
2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Executive Officer |
|
|
2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Terry W. Stovold
Director of Worldwide |
|
|
2007 |
|
|
|
36,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
122,657 |
(1) |
|
|
158,657 |
|
Technical Sales |
|
|
2006 |
|
|
|
36,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
58,060 |
(1) |
|
|
94,060 |
|
16
OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END
Option Awards
| |
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (a) |
|
(b) |
|
(c) |
|
(d) |
|
(e) |
|
(f) |
| |
|
|
|
|
|
|
|
|
|
Equity |
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
Income |
|
|
|
|
| |
|
Number |
|
Number |
|
Plan |
|
|
|
|
| |
|
Of |
|
Of |
|
Awards |
|
|
|
|
| |
|
Securities |
|
Securities |
|
Number of Securities |
|
|
|
|
| |
|
Underlying |
|
Underlying |
|
Underlying |
|
|
|
|
| |
|
Options |
|
Options |
|
Unexercised |
|
Option |
|
Option |
| |
|
(#) |
|
(#) |
|
Options |
|
Exercise |
|
Expiration |
| Name |
|
Exercisable |
|
Unexercisable |
|
(#) |
|
Price |
|
Date |
Michael A.
Feinstein, M.D. |
|
|
150,000 |
|
|
|
|
|
|
|
150,000 |
|
|
$ |
.17 |
|
|
April 29, 2009 |
Michael A.
Feinstein, M.D. |
|
|
100,000 |
|
|
|
|
|
|
|
100,000 |
|
|
$ |
.10 |
|
|
April 29, 2010 |
Michael A.
Feinstein, M.D. |
|
|
100,000 |
|
|
|
|
|
|
|
100,000 |
|
|
$ |
.215 |
|
|
April 29, 2011 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Terry W. Stovold |
|
|
0 |
|
|
|
|
|
|
|
0 |
|
|
|
|
|
|
|
|
|
There are no outstanding stock awards.
Director Compensation
The following table summarizes compensation earned by the Company’s non-executive directors for the
year ended December 31, 2007. 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.
| |
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|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Fees |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
earned |
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonqualified |
|
|
|
|
| |
|
or |
|
|
|
|
|
|
|
|
|
Nonequity |
|
deferred |
|
|
|
|
| |
|
paid in |
|
Stock |
|
Option |
|
incentive plan |
|
compensation |
|
All other |
|
|
| |
|
cash |
|
awards |
|
awards |
|
compensation |
|
earnings |
|
compensation |
|
Total |
| Name |
|
($) |
|
($) |
|
($) |
|
($) |
|
($) |
|
($) |
|
($) |
| (a) |
|
(b) |
|
(c) |
|
(d) |
|
(e) |
|
(f) |
|
(g) |
|
(h) |
Herman M. Gerwitz (1) |
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
Stanley G. Hart (2) |
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
Richard Levitt (3) |
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
Philip B. White (4) |
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
|
| (1) |
|
Mr. Gerwitz holds 200,000 presently exercisable stock options. |
| |
| (2) |
|
Mr. Hart holds 350,000 presently exercisable stock options. |
| |
| (3) |
|
Mr. Levitt holds 350,000 presently exercisable stock options. |
| |
| (4) |
|
Mr. White holds 150,000 presently exercisable stock options awarded to him prior
to his appointment as a director. |
17
EQUITY COMPENSATION PLAN INFORMATION AS OF DECEMBER 31, 2007
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
Number of securities |
| |
|
|
|
|
|
|
|
|
|
remaining available for |
| |
|
|
|
|
|
Weighted-average |
|
future issuance under |
| |
|
Number of securities to |
|
exercise price of |
|
equity compensation |
| |
|
be issued upon exercise |
|
outstanding options, |
|
plans (excluding |
| |
|
of outstanding options, |
|
warrants and rights |
|
securities reflected in |
| Plan Category |
|
warrants and rights |
|
compensation plans |
|
column (a)) |
| |
|
(a) |
|
(b) |
|
(c) |
Equity Compensation
plans approved by
security holders |
|
|
575,000 |
|
|
$ |
.20 |
|
|
|
-0- |
|
Equity Compensation
plans not approved by
security holders (1) |
|
|
1,175,000 |
|
|
$ |
.15 |
|
|
|
825,000 |
|
Warrants issued in connection with
short-term loans (2) |
|
|
57,000 |
|
|
$ |
.23 |
|
|
|
-0- |
|
| |
|
|
Total |
|
|
1,807,000 |
|
|
$ |
.17 |
|
|
|
825,000 |
|
| |
|
|
|
|
|
| (1) |
|
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 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. |
| |
| (2) |
|
Warrants issued in connection with the receipt of $57,000 of short term-notes were
approved by the board of directors. The warrants expire in five years. |
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of March 14, 2008, the stock ownership of (1) each person or
group known by the Registrant to beneficially own 5% or more of Registrant’s common stock and (2)
each director and Named Executive (as set forth under the heading “Executive Compensation”)
individually, and (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 person’s 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.
18
| |
|
|
|
|
|
|
|
|
| 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 |
|
|
|
7.3 |
% |
Philip N. Hudson
P.O. Box 160892
San Antonio, TX 78280-3092 |
|
|
3,777,777 |
|
|
|
7.0 |
% |
Ross. L Campbell
675 Lewis Lane
Ambler, PA 19002 (3) |
|
|
3,264,457 |
|
|
|
6.1 |
% |
|
|
|
|
|
|
|
|
|
Directors, Officers and Named Executive |
|
|
|
|
|
|
|
|
Michael A Feinstein, M.D.
(4) |
|
|
3,186,281 |
|
|
|
6.1 |
% |
Herman M. Gerwitz
(5) |
|
|
392,500 |
|
|
|
* |
|
Stanley G. Hart
(6) |
|
|
350,000 |
|
|
|
* |
|
Richard Levitt (7) |
|
|
600,000 |
|
|
|
1.1 |
% |
Philip B. White
(8) |
|
|
357,833 |
|
|
|
* |
|
Terry W. Stovold |
|
|
0 |
|
|
|
* |
|
All Executive Officers and Directors as a Group (6
individuals) (9) |
|
|
4,987,214 |
|
|
|
9.2 |
% |
|
|
|
| * |
|
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. |
| |
| (4) |
|
Includes 640,000 shares held by a pension plan of which Dr. Feinstein is a trustee,
100,000 shares held in an IRA and 350,000 presently exercisable stock options. |
| |
| (5) |
|
Includes 50,000 shares held by a trust on behalf of a child of Mr. Gerwitz and 200,000
presently exercisable stock options. |
| |
| (6) |
|
Includes 350,000 presently exercisable stock options. |
| |
| (7) |
|
Includes 350,000 presently exercisable stock options. |
| |
| (8) |
|
Includes 150,000 presently exercisable stock options and 150,000 presently exercisable
stock options held by Mr. White’s wife. |
| |
| (9) |
|
Includes 1,650,000 presently exercisable stock options. |
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
During 2007 and 2006, the Company received unsecured loans totaling $26,000 from Michael A.
Feinstein, M.D., the Company’s Chairman of the Board and, during 2007, repaid $29,000 including
$3,000 outstanding at the beginning of 2006. The loans bear interest at 7%.
During 2006, the Company received an unsecured loan of $15,000 from Herman M. Gerwitz, a director.
The loan bears interest at 7%. The loan was repaid, with interest, in 2007.
During 2006, the Company sold 164,474 unregistered shares of its common stock to a pension plan
controlled by Michael A. Feinstein, M.D., its Chairman of the Board, for $25,000 ($.152 per share).
During 2007, the Company sold 20,833 unregistered shares of its common stock to Philip B. White, a
director for $10,000 ($.48 per share).
19
During 2006, each of the Company’s then four directors, Dr. Feinstein and Messrs. Gerwitz, Hart and
Levitt, received options to purchase 100,000 shares of the Company’s common stock at $.215 per
share. The options expire in 2011.
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 2007 and 2006, 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 $25,000 and $24,500, respectively.
Audit-Related Fees
During 2007 and 2006, 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 2007 and 2006, the aggregate fees billed for professional services rendered by our principal
accountant for tax compliance, tax advice and tax planning were $4,000 and $3,000, respectively.
All Other Fees
During 2007 and 2006, 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. All non-audit
services were approved by the audit committee. We do not rely on pre-approval policies and
procedures.
20
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: March 31, 2008 |
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.
Michael A. Feinstein, M.D.
|
|
Chairman of the Board
and Chief Executive
Officer (Principal
Executive Officer)
|
|
March 31, 2008 |
|
|
|
|
|
/s/ Rudolph A. Lutterschmidt
Rudolph A. Lutterschmidt
|
|
Vice President, Chief
Financial Officer and
Chief Accounting
Officer (Principal
Financial and
Accounting Officer)
|
|
March 31, 2008 |
|
|
|
|
|
/s/ Herman M. Gerwitz
Herman M. Gerwitz
|
|
Director
|
|
March 31, 2008 |
|
|
|
|
|
/s/ Stanley G. Hart
Stanley G. Hart
|
|
Director
|
|
March 31, 2008 |
|
|
|
|
|
/s/ Richard Levitt
Richard Levitt
|
|
Director
|
|
March 31, 2008 |
|
|
|
|
|
/s/ Philip B. White
Philip B. White
|
|
Director
|
|
March 31, 2008 |
21
INDEX TO FINANCIAL STATEMENTS
| |
|
|
|
|
|
|
|
F-2 |
|
|
|
|
|
|
|
|
|
F-3 |
|
| |
|
|
|
F-4 |
|
|
|
|
|
|
|
|
|
F-5 |
|
|
|
|
|
|
|
|
|
F-6 |
|
|
|
|
|
|
|
|
F-7 to F-14 |
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and Board of Directors
of Nocopi Technologies, Inc.
West Conshohocken, Pennsylvania
We have audited the accompanying balance sheets of Nocopi Technologies, Inc. as of December
31, 2007 and 2006 and the related statements of operations, stockholders’ equity (deficiency),
and cash flows for the years then ended. 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. The Company is not required to have, nor were we engaged to perform, an audit of
its internal control over financial reporting. Our audit included consideration of internal
control over financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an opinion on the
effectiveness of the Company’s internal control over financial reporting. Accordingly, we
express no such opinion. An audit also includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing the accounting
principles used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. 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, 2007 and 2006,
and the results of its operations and its cash flows for each of the years then ended in
conformity with accounting principles generally accepted in the United States.
/s/ MORISON COGEN, LLP
Bala Cynwyd, Pennsylvania
March 25, 2008
F-2
Nocopi Technologies, Inc.
Balance Sheets*
| |
|
|
|
|
|
|
|
|
| |
|
December 31 |
| |
|
2007 |
|
2006 |
Assets |
|
|
|
|
|
|
|
|
Current assets |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
263,600 |
|
|
$ |
53,100 |
|
Accounts receivable less allowance for
doubtful
accounts (2007 — $5,000; 2006 — $20,000) |
|
|
221,900 |
|
|
|
92,000 |
|
Arbitration settlement receivable |
|
|
— |
|
|
|
50,000 |
|
Inventory |
|
|
92,300 |
|
|
|
58,300 |
|
Prepaid and other |
|
|
56,200 |
|
|
|
24,800 |
|
| |
|
|
Total current assets |
|
|
634,000 |
|
|
|
278,200 |
|
|
|
|
|
|
|
|
|
|
Fixed assets |
|
|
|
|
|
|
|
|
Leasehold improvements |
|
|
72,500 |
|
|
|
71,200 |
|
Furniture, fixtures and equipment |
|
|
509,400 |
|
|
|
481,400 |
|
| |
|
|
|
|
|
581,900 |
|
|
|
552,600 |
|
Less: accumulated depreciation and
amortization |
|
|
548,500 |
|
|
|
528,500 |
|
| |
|
|
|
|
|
33,400 |
|
|
|
24,100 |
|
| |
|
|
|
|
$ |
667,400 |
|
|
$ |
302,300 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Stockholders’ Equity (Deficiency) |
|
|
|
|
|
|
|
|
Current liabilities |
|
|
|
|
|
|
|
|
Demand and other short-term loans |
|
|
— |
|
|
$ |
99,000 |
|
Accounts payable |
|
$ |
364,200 |
|
|
|
409,400 |
|
Accrued expenses |
|
|
137,200 |
|
|
|
296,600 |
|
Accrued income taxes |
|
|
800 |
|
|
|
— |
|
Deferred revenue |
|
|
5,000 |
|
|
|
5,800 |
|
| |
|
|
Total current liabilities |
|
|
507,200 |
|
|
|
810,800 |
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders’ equity (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
2007 - 52,275,837 shares; 2006 -
51,686,811 shares |
|
|
522,800 |
|
|
|
516,900 |
|
Paid-in capital |
|
|
12,008,500 |
|
|
|
11,731,700 |
|
Accumulated deficit |
|
|
(12,371,100 |
) |
|
|
(12,757,100 |
) |
| |
|
|
|
|
|
160,200 |
|
|
|
(508,500 |
) |
| |
|
|
|
|
$ |
667,400 |
|
|
$ |
302,300 |
|
| |
|
|
|
|
|
| * |
|
The accompanying notes are an integral part of these financial statements. |
F-3
Nocopi Technologies, Inc.
Statements of Operations*
| |
|
|
|
|
|
|
|
|
| |
|
Years ended December 31 |
|
| |
|
2007 |
|
|
2006 |
|
Revenues |
|
|
|
|
|
|
|
|
Licenses, royalties and fees |
|
$ |
512,000 |
|
|
$ |
298,100 |
|
Product and other sales |
|
|
881,800 |
|
|
|
468,400 |
|
|
|
|
|
|
|
|
|
|
|
1,393,800 |
|
|
|
766,500 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues |
|
|
|
|
|
|
|
|
Licenses, royalties and fees |
|
|
106,100 |
|
|
|
102,800 |
|
Product and other sales |
|
|
442,400 |
|
|
|
278,700 |
|
|
|
|
|
|
|
|
|
|
|
548,500 |
|
|
|
381,500 |
|
|
|
|
|
|
|
|
Gross profit |
|
|
845,300 |
|
|
|
385,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses |
|
|
|
|
|
|
|
|
Research and development |
|
|
164,600 |
|
|
|
145,400 |
|
Sales and marketing |
|
|
241,600 |
|
|
|
146,400 |
|
General and administrative
(exclusive of legal expenses) |
|
|
180,900 |
|
|
|
232,700 |
|
Legal expenses |
|
|
46,800 |
|
|
|
36,300 |
|
|
|
|
|
|
|
|
|
|
|
633,900 |
|
|
|
560,800 |
|
|
|
|
|
|
|
|
Net income (loss) from operations |
|
|
211,400 |
|
|
|
(175,800 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expenses) |
|
|
|
|
|
|
|
|
Reversal of accounts payable and accrued
expenses |
|
|
175,900 |
|
|
|
— |
|
Interest income |
|
|
6,200 |
|
|
|
500 |
|
Interest, bank charges and financing cost |
|
|
(6,700 |
) |
|
|
(14,800 |
) |
|
|
|
|
|
|
|
|
|
|
175,400 |
|
|
|
(14,300 |
) |
|
|
|
|
|
|
|
Net income (loss) before income taxes |
|
|
386,800 |
|
|
|
(190,100 |
) |
Income taxes |
|
|
800 |
|
|
|
— |
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
386,000 |
|
|
$ |
(190,100 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per common share |
|
|
|
|
|
|
|
|
Basic |
|
$ |
.01 |
|
|
$ |
(.00 |
) |
Diluted |
|
$ |
.01 |
|
|
$ |
(.00 |
) |
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding |
|
|
|
|
|
|
|
|
Basic |
|
|
52,078,349 |
|
|
|
51,224,394 |
|
Diluted |
|
|
53,392,882 |
|
|
|
51,224,394 |
|
|
|
|
| * |
|
The accompanying notes are an integral part of these financial statements. |
F-4
Nocopi Technologies, Inc.
Statements of Stockholders’ Equity (Deficiency)*
For the Period January 1, 2006 through December 31, 2007
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Common stock |
|
|
Paid-in |
|
|
Accumulated |
|
| |
|
Shares |
|
|
Amount |
|
|
Capital |
|
|
Deficit |
|
Balance — January 1, 2006 |
|
|
50,586,181 |
|
|
$ |
505,900 |
|
|
$ |
11,514,400 |
|
|
|
($12,567,000 |
) |
| |
Sales of common stock |
|
|
1,088,408 |
|
|
|
10,900 |
|
|
|
162,200 |
|
|
|
|
|
| |
Adjustment of share issuance |
|
|
12,222 |
|
|
|
100 |
|
|
|
(100 |
) |
|
|
|
|
| |
Fair value of warrants issued for
deferred finance charges |
|
|
|
|
|
|
|
|
|
|
7,200 |
|
|
|
|
|
| |
Stock option compensation |
|
|
|
|
|
|
|
|
|
|
48,000 |
|
|
|
|
|
| |
Net loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(190,100 |
) |
| |
|
|
Balance — December 31, 2006 |
|
|
51,686,811 |
|
|
|
516,900 |
|
|
|
11,731,700 |
|
|
|
(12,757,100 |
) |
| |
Sales of common stock |
|
|
589,026 |
|
|
|
5,900 |
|
|
|
276,800 |
|
|
|
|
|
| |
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
386,000 |
|
| |
|
|
Balance — December 31, 2007 |
|
|
52,275,837 |
|
|
$ |
522,800 |
|
|
$ |
12,008,500 |
|
|
|
($12,371,100 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| * |
|
The accompanying notes are an integral part of these financial statements. |
F-5
Nocopi Technologies, Inc.
Statements of Cash Flows*
| |
|
|
|
|
|
|
|
|
| |
|
Years ended December 31 |
|
| |
|
2007 |
|
|
2006 |
|
Operating Activities |
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
386,000 |
|
|
$ |
(190,100 |
) |
Adjustments to reconcile net income (loss)
to cash
provided by (used in) operating activities |
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
20,000 |
|
|
|
23,300 |
|
Increase (decrease) in allowance for
doubtful accounts |
|
|
(15,000 |
) |
|
|
5,000 |
|
Reversal of accounts payable and accrued
expenses |
|
|
(175,900 |
) |
|
|
— |
|
Compensation expense — stock option grants |
|
|
— |
|
|
|
48,000 |
|
|
|
|
|
|
|
|
|
|
|
215,100 |
|
|
|
(113,800 |
) |
|
|
|
|
|
|
|
|
|
(Increase) decrease in assets |
|
|
|
|
|
|
|
|
Accounts receivable |
|
|
(114,900 |
) |
|
|
(49,500 |
) |
Arbitration settlement receivable |
|
|
50,000 |
|
|
|
50,000 |
|
Inventory |
|
|
(34,000 |
) |
|
|
(58,300 |
) |
Prepaid and other |
|
|
(31,400 |
) |
|
|
15,600 |
|
Increase (decrease) in liabilities |
|
|
|
|
|
|
|
|
Accounts payable and accrued expenses |
|
|
(28,700 |
) |
|
|
(39,900 |
) |
Accrued income taxes |
|
|
800 |
|
|
|
— |
|
Deferred revenue |
|
|
(800 |
) |
|
|
(4,200 |
) |
|
|
|
|
|
|
|
|
|
|
(159,000 |
) |
|
|
(86,300 |
) |
|
|
|
|
|
|
|
Net cash provided by (used in) operating
activities |
|
|
56,100 |
|
|
|
(200,100 |
) |
|
|
|
|
|
|
|
|
|
Investing Activities |
|
|
|
|
|
|
|
|
Additions to fixed assets |
|
|
(29,300 |
) |
|
|
(5,200 |
) |
|
|
|
|
|
|
|
Net cash used in investing activities |
|
|
(29,300 |
) |
|
|
(5,200 |
) |
|
|
|
|
|
|
|
|
|
Financing Activities |
|
|
|
|
|
|
|
|
Issuance of common stock |
|
|
282,700 |
|
|
|
173,100 |
|
Proceeds from demand and other loans |
|
|
7,000 |
|
|
|
91,000 |
|
Demand and other loan repayments |
|
|
(106,000 |
) |
|
|
(10,000 |
) |
|
|
|
|
|
|
|
Net cash provided by financing activities |
|
|
183,700 |
|
|
|
254,100 |
|
|
|
|
|
|
|
|
Increase in cash and cash equivalents |
|
|
210,500 |
|
|
|
48,800 |
|
Cash and cash equivalents |
|
|
|
|
|
|
|
|
Beginning of year |
|
|
53,100 |
|
|
|
4,300 |
|
|
|
|
|
|
|
|
End of year |
|
$ |
263,600 |
|
|
$ |
53,100 |
|
|
|
|
|
|
|
|
Supplemental Disclosure of Cash Flow Information |
|
|
|
|
|
|
|
|
Interest paid |
|
$ |
5,500 |
|
|
|
— |
|
|
|
|
|
|
|
|
|
| |
Supplemental Disclosure of Non Cash Investing and Financing Activities |
|
|
|
|
|
|
|
|
Deferred Financing Cost |
|
|
|
|
|
|
|
|
Issuance of warrants for deferred
financing cost |
|
|
— |
|
|
$ |
7,200 |
|
|
|
|
|
|
|
|
|
|
|
|
| * |
|
The accompanying notes are an integral part of these financial statements. |
F-6
NOCOPI TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 2007 and 2006
| 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 reactive ink technologies for the Entertainment and
Toy and the Document and Product Authentication markets in the United States and foreign
countries. The Company operates in one principal industry segment. |
| |
| 2. |
|
Significant Accounting Policies |
| |
| |
|
Financial Statement Presentation — Amounts included in the accompanying financial statements
have been rounded to the nearest hundred, except for number of shares and per share
information. |
| |
| |
|
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. |
| |
| |
|
Accounts receivable — as amounts become uncollectible, they will be charged to an allowance or
operations in the period when a determination of uncollectibility is made. Any estimates of
potentially uncollectible customer accounts receivable will be made based on an analysis of
individual customer and historical write-off experience. The Company’s analysis includes the
age of the receivable account, creditworthiness and general economic conditions. |
| |
| |
|
Inventory consists primarily of ink components and paper and is stated at the lower of cost
(determined by the first-in, first-out method) or market. |
| |
| |
|
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 |
F-7
| |
|
result of the Company’s adverse liquidity situation during previous periods. |
| |
| |
|
Revenues — In accordance with Securities and Exchange Commission (“SEC”) Staff Accounting
Bulletin (“SAB”) No. 104, Revenue Recognition, the Company recognizes revenue when (i)
persuasive evidence of a customer or distributor arrangement exists or acceptance occurs, (ii)
a retailer, distributor or wholesaler receives the goods, (iii) the price is fixed or
determinable, and (iv) collectibility of the sales revenue is reasonably assured. Subject to
these criteria, the Company will generally recognize revenue upon shipment of product. Revenue
from license fees and royalties will be recognized as earned over the license term. |
| |
| |
|
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. |
| |
| |
|
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. |
| |
| |
|
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. The table below presents the computation of basic and diluted weighted average common
shares outstanding: |
| |
|
|
|
|
|
|
|
|
| |
|
2007 |
|
|
2006 |
|
Basic shares outstanding |
|
|
52,078,349 |
|
|
|
51,224,394 |
|
Incremental shares from
assumed conversion of stock options and warrants |
|
|
1,314,533 |
|
|
|
|
|
|
|
|
|
|
|
|
Diluted shares outstanding |
|
|
53,392,882 |
|
|
|
51,224,394 |
|
|
|
|
|
|
|
|
| |
|
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. |
F-8
| |
|
Recently Issued Accounting Standards |
| |
| |
|
In June 2006, the Financial Accounting Standards Board (“FASB”) issued Interpretation No. 48
(“FIN 48”), Accounting for Uncertainty in Income Taxes. FIN 48 prescribes detailed guidance
for the financial statement recognition, measurement and disclosure of uncertain tax positions
recognized in an enterprise’s financial statements in accordance with FASB Statement No. 109,
Accounting for Income Taxes. Tax positions must meet a more-likely-than-not recognition
threshold at the effective date to be recognized upon the adoption of FIN 48 and in subsequent
periods. FIN 48 is effective for fiscal years beginning after December 15, 2006, and was
effective for us beginning with the first quarter of 2007, and the provisions of FIN 48 were
applied to all tax positions under Statement No. 109 upon initial adoption. The cumulative
effect of applying the provisions of this interpretation will be reported as an adjustment to
the opening balance of retained earnings for that fiscal year. The Company adopted FIN 48
effective January 1, 2007. The adoption of FIN 48 did not require an adjustment to the opening
balance of retained earnings at January 1, 2007. |
| |
| |
|
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements (“SFAS No. 157”).
SFAS No. 157 establishes a framework for measuring fair value and expands disclosures about
fair value measurements. The changes to current practice resulting from the application of
SFAS No. 157 relate to the definition of fair value, the methods used to measure fair value
and the expanded disclosures about fair value measurement. SFAS No. 157 is effective for
fiscal years after November 15, 2007 and interim periods within those fiscal years. The
Company does not believe that the adoption of the provisions of SFAS No. 157 will impact the
amounts reported in the financial statements, however, additional disclosures will be required
about the inputs used to develop the measurements of fair value and the effect of certain
measurements reported on the Statement of Operations. |
| |
| |
|
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and
Financial Liabilities (“SFAS No. 159”). SFAS No. 159 permits entities to choose to measure
many financial instruments and certain other items at fair value that are not currently
required to be measured at fair value. The objective is to improve financial reporting by
providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities
differently without having to apply complex hedge accounting provisions. SFAS No. 159 also
establishes presentation and disclosure requirements designed to facilitate comparisons
between entities that choose different measurement attributes for similar types of assets and
liabilities. SFAS No. 159 is effective for financial statements issued for fiscal years
beginning after November 15, 2007 and will become effective for the Company beginning with the
first quarter of 2008. The Company has not yet determined whether it will adopt this statement
and its impact on its financial statements and footnote disclosures. |
| |
| |
|
In December 2007, the FASB issued SFAS No.141 (revised 2007), Business Combinations
(“SFAS 141R”), which establishes principles and requirements for how an acquirer recognizes
and measures in its financial statements the identifiable assets acquired, the liabilities
assumed, any noncontrolling interest in the acquiree and the goodwill acquired. SFAS 141R also
establishes disclosure requirements for users of financial statements to evaluate the nature
and financial effects of the business combination. SFAS 141R is effective for us starting
January 1, 2009. Since the standard is generally applicable only for acquisitions completed in
the future, we are unable to determine the effect this standard would have on the accounting
for such acquisitions. |
F-9
| 3. |
|
Concentration of Credit Risk |
| |
| |
|
Certain financial instruments potentially subject the Company to concentrations of credit
risk. These financial instruments consist primarily of cash and cash equivalents and
accounts receivables. The Company places its temporary cash investments with high credit
quality financial instruments to limit its credit exposure. There is a concentration of
credit risk with respect to accounts receivable due to the number of major customers. |
| |
| 4. |
|
Demand and Other Short-Term Loans |
| |
| |
|
During 2007, the Company received an unsecured loan of $7,000 from Michael A.
Feinstein, M.D., its Chairman of the Board to finance the Company’s working capital
requirements. During 2007, the Company repaid loans in the amount of $106,000 provided by
five individuals from 2005 to 2007 including $29,000 lent by Dr. Feinstein and a $15,000 loan
from Herman M. Gerwitz, a Director. At December 31, 2007, the Company had no loans
outstanding. |
| |
| |
|
During 2006, the Company received unsecured loans totaling $34,000 from two individuals of
which $19,000 was lent by Michael A. Feinstein, M.D., its Chairman of the Board, and $15,000
by Herman M. Gerwitz, a Director. The loans bear interest at 7% per year and are payable on
demand. During the third quarter of 2006, the Company received unsecured short-term loans
totaling $57,000 from four individuals who were non-affiliates of the Company. The loans bear
interest at 7% per year and were repaid during 2006 and 2007. Additionally the Company granted 57,000
warrants to purchase common stock of the Company to these four individuals at prices ranging
from $0.21 to $0.27. The warrants expire in five years. A deferred financing cost of $7,200
representing the fair value of the warrants was amortized to income over the four month term
of the short-term loans. The fair value of the warrants was determined using the Black-Scholes
pricing model with the following assumptions: expected life-5 years; interest rate-4.88%;
volatility-60% and dividend yield-0. In December 2006, the Company repaid the entire $10,000
due one of the four individual lenders. The loans were used to finance the Company’s working
capital requirements. |
| |
| 5. |
|
Stockholders’ Equity (Deficiency) |
| |
| |
|
During 2007, the Company sold 568,193 shares of its common stock to nine non-affiliated
individual investors and 20,833 shares to Philip B. White, a Director, for a total of $282,700
pursuant to a valid private placement. |
| |
| |
|
During 2006, the Company sold 923,934 shares of its common stock to five non-affiliated
individual investors and 164,474 shares to a pension plan controlled by Michael A. Feinstein,
M.D., the Company’s Chairman of the Board, for a total of $173,100 pursuant to a valid private
placement. Additionally, the Company’s Board of Directors, in the third quarter of 2006,
approved the issuance of an additional 12,222 shares of the Company’s common stock to a
non-affiliate who purchased common stock in a private placement in 2004 to correct the
purchase price based on the date of receipt of the investment. |
F-10
| 6. |
|
Other Income (Expenses) |
| |
| |
|
Included in Other income (expenses) for the year ended December 31, 2007 is $175,900 related
to the reversal of certain accounts payable and accrued consulting fees that the Company,
with legal counsel, has determined to be no longer statutorily payable. |
| |
| 7. |
|
Income Taxes |
| |
| |
|
The Company recorded a provision of $800 for estimated state income taxes for the year ended
December 31, 2007. Management of the Company believes that it will be able to use available
net operating loss carryforwards to offset federal and all other state income taxes in 2007.
There is no income tax benefit for 2006 due to the availability of net operating loss
carryforwards (“NOL’s”) 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, 2007 and 2006, the Company had NOL’s approximating $7,919,000 and $9,171,000,
respectively. The operating losses at December 31, 2007 are available to offset future taxable
income
through the year 2026. 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 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, 2007 and
2006. The Company has established a 100% valuation allowance of approximately $3,247,000 and
$3,760,000 at December 31, 2007 and 2006, respectively, for the deferred tax assets due to the
uncertainty of their realization. |
| |
| |
|
The Company adopted the provisions of FASB Interpretation No. 48, Accounting for Uncertainty
in Income Taxes (“FIN 48”), on January 1, 2007. There were no unrecognized tax benefits as of
the date of adoption and no unrecognized tax benefits at December 31, 2007. There were no
interest and penalties recognized in the statement of operations and in the balance sheet. Tax
years from 2004 through 2007 remain subject to examination by major tax jurisdictions. |
| |
| 8. |
|
Commitments and Contingencies |
| |
| |
|
The Company conducts its operations in leased facilities and leases equipment under
non-cancelable operating leases expiring at various dates to 2013. |
| |
| |
|
Future minimum lease payments under non-cancelable operating leases with initial or remaining
terms of one year or more at December 31, 2007 are: $40,500 – 2008; $40,900 – 2009;
$40,900 –2010; $42,200 – 2011; $43,400 – 2012 and $10,900 – 2013. |
| |
| |
|
Total rental expense under operating leases was $37,600 in each of the years 2007 and 2006. |
| |
| |
|
From time to time, the Company may be subject to legal proceedings and claims that arise in
the ordinary course of its business. |
F-11
| 9. |
|
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.
The 1996 Stock Option Plan terminated in June 2006 and no further stock options can be granted
under the plan; however, options granted before June 2006 may be exercised through their
expiration date. |
| |
| |
|
On January 1, 2006, the Company adopted SFAS 123(R) using the modified prospective method as
permitted under SFAS 123(R). Under this transition method, compensation cost recognized in
2006 includes compensation cost for all share-based payments granted prior to but not yet
vested as of December 31, 2005, based on the grant-date fair value estimated in accordance with
the provisions of SFAS 123. In accordance with the modified prospective method of adoption, the
Company’s results of operations and financial position for prior periods have not been
restated. |
| |
| |
|
The Company uses the Black-Scholes option pricing model to calculate the grant-date fair value
of an award. |
| |
| |
|
In accordance with APB 25 and related interpretations, compensation expense for stock options
was recognized in income based on the excess, if any, of the quoted market price of the stock
at the grant date of the award or other measurement date over the amount an employee must pay
to acquire the stock. Generally, the exercise price for stock options granted to employees was
equal to the fair market value of the Company’s common stock at the date of grant, thereby
resulting in no recognition of compensation expense by the Company prior to December 31, 2005.
During the year ended December 31, 2006, the Company’s net loss increased by $12,000 as a
result of the adoption of SFAS 123(R) as there was a stock-based compensation grant to an
executive officer during the period. As of December 31, 2007 and 2006, there was no
unrecognized compensation expenses related to non-vested market-based share awards. |
F-12
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, 2005 |
|
|
1,675,000 |
|
|
$ |
.17 to $.45 |
|
|
|
.24 |
|
Options granted |
|
|
400,000 |
|
|
|
.22 |
|
|
|
.22 |
|
Options canceled |
|
|
325,000 |
|
|
.30 and .45 |
|
|
.39 |
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2006 and 2007 |
|
|
1,750,000 |
|
|
$ |
.10 to $.22 |
|
|
$ |
.16 |
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
Exercise |
|
Weighted |
| |
|
Option |
|
Price Range |
|
Average |
| |
|
Shares |
|
Per Share |
|
Exercise Price |
Exercisable at year end: |
|
|
|
|
|
|
|
|
|
|
|
|
2006 |
|
|
1,350,000 |
|
|
$ |
.10 to $.17 |
|
|
$ |
.15 |
|
2007 |
|
|
1,750,000 |
|
|
$ |
.10 to $.22 |
|
|
$ |
.16 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options available for future grant under all plans: |
|
|
|
|
|
|
|
|
|
|
|
|
2006 and 2007 |
|
|
825,000 |
|
|
|
|
|
|
|
|
|
The following table summarizes information about stock options outstanding at December 31, 2007:
| |
|
|
|
|
Range of exercise prices |
|
$ |
.10 to $.22 |
|
|
|
|
|
|
|
|
|
|
Number outstanding at
December 31, 2007 |
|
|
1,750,000 |
|
|
|
|
|
|
|
|
|
|
Weighted average remaining contractual life (years) |
|
|
2.04 |
|
|
|
|
|
|
|
|
|
|
Weighted average exercise price |
|
$ |
.16 |
|
|
|
|
|
|
|
|
|
|
Exercisable options: |
|
|
|
|
Number outstanding at
December 31, 2007 |
|
|
1,750,000 |
|
|
|
|
|
|
|
|
|
|
Weighted average remaining
Contractual life (years) |
|
|
2.04 |
|
|
|
|
|
|
|
|
|
|
Weighted average exercise price |
|
$ |
.16 |
|
|
|
|
|
| |
|
There were no stock options granted during 2007. On April 30, 2006, the Company, under its
directors stock option plan, granted options to each of its then four directors to purchase
100,000 shares each of its common stock at an exercise price of $0.215 per share, vesting on
January 1, 2007, and expiring in five years. The options were contingent on the directors
attending a certain percentage of Board of Directors meetings during 2006. In accordance with
the fair value method as described in accounting requirements of SFAS No. 123, The Company
recognized consulting expense of $48,000 during the year ended December 31, 2006. The fair value
was |
F-13
| |
|
determined using the Black-Scholes pricing model with the following assumptions: expected
life-5 years; interest rate-4.92%; volatility-59% and dividend yield-0. |
| |
| |
|
At December 31, 2007, the Company has reserved 2,632,000 shares of common stock for possible
future issuance upon exercise of stock options and warrants. 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 2007 or 2006. |
| 10. |
|
Major Customer and Geographic Information |
| |
| |
|
The Company’s three largest non-affiliated customers accounted for approximately 86% and 65% of
revenues in 2007 and 2006, respectively, and approximately 100% and 75% of net accounts
receivable at December 31, 2007 and 2006, respectively. The Company performs ongoing credit
evaluations of its customers and generally does not require collateral. The Company also
maintains allowances for potential credit losses. |
| |
| |
|
The Company’s revenues by geographic region are as follows: |
| |
|
|
|
|
|
|
|
|
| |
|
2007 |
|
|
2006 |
|
North America |
|
$ |
1,054,500 |
|
|
$ |
479,700 |
|
Asia |
|
|
330,200 |
|
|
|
274,800 |
|
Europe |
|
|
8,300 |
|
|
|
1,200 |
|
Australia and New Zealand |
|
|
800 |
|
|
|
10,800 |
|
|
|
|
|
|
|
|
|
|
$ |
1,393,800 |
|
|
$ |
766,500 |
|
|
|
|
|
|
|
|
| 11. |
|
Subsequent Event |
| |
| |
|
In January 2008, the Company signed an agreement with a licensee of the Company whereby the
licensee acquired an interest in a patent held by an unrelated third party. The Company’s
contribution, through royalty offsets, to the licensee’s acquisition of these patent rights is
$40,000. The Company received, among other things, certain assurances regarding its continuing
ability to manufacture and sell products to this licensee. |
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 (12) |
|
|
|
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
|
|
Stock Purchase Agreement with Westvaco Brand Security, Inc. (6) |
|
|
|
10.8
|
|
Registration Rights Agreement with Westvaco Brand Security, Inc. (6) |
|
|
|
10.9
|
|
Subscription Agreement with Entrevest I Associates (7) |
|
|
|
10.10
|
|
Lease Agreement dated March 19, 2003 relating to premises at
9 Portland Road, West Conshohocken, PA 19428 (7) |
|
|
|
10.11
|
|
Settlement Agreement with Euro-Nocopi, S.A. (8) |
|
|
|
10.12
|
|
Agreement of Terms with Entrevest I Associates (9) |
|
|
|
10.13
|
|
Conversion Agreement (10) |
|
|
|
10.14
|
|
Patent License Agreement with Giddy Up, LLC and Color Loco, LLC (13) |
|
|
|
10.15
|
|
Addendum #1 to Patent License Agreement with Giddy Up, LLC and Color Loco, LLC (13) |
|
|
|
10.16
|
|
Amendment dated July 18, 2007 to Lease Agreement dated March 19, 2003
relating to premises at 9 Portland Road, West Conshohocken, PA 19428 (14) |
|
|
|
14.1
|
|
Code of Ethics (11) |
|
|
|
31.1*
|
|
Certification of Chief Financial Officer required by Rule 13a-14(a). |
| |
|
|
| Exhibit |
|
|
| Number |
|
Description |
|
|
|
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 |
| |
| (12) |
|
Incorporated by reference to Registrant’s Annual Report on Form 10-KSB for the Year Ended
December 31, 2005 |
| |
| (13) |
|
Incorporated by reference to Registrant’s Annual Report on Form 10-KSB for the Year Ended
December 31, 2006 |
| |
| (14) |
|
Incorporated by reference to Registrant’s Quarterly Report on Form 10-QSB for the Three
Months Ended September 30, 2007 |