U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
ACT OF 1934.
For the quarterly period ended March 31, 2006.
[ ] TRANSITION REPORT UNDER 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the transition period from _________________ to ______________
Commission file number 0-20333
NOCOPI TECHNOLOGIES, INC.
(Exact name of small business issuer as
specified in its charter)
MARYLAND 87-0406496
---------------------------- ---------------------------------
(State or other jurisdiction (IRS Employer Identification No.)
of incorporation or organization)
9C Portland Road, West Conshohocken, PA 19428
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(Address of principal executive offices)
(610) 834-9600
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(Issuer's telephone number)
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Check whether the issuer has (1) filed all reports required to be filed
by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for
such shorter period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days.
Yes |X| No |_|
State the number of shares outstanding of each of the issuer's classes
of common equity, as of May 1, 2006: Common stock, par value $.01 per share:
51,134,733 shares.
Transitional Small Business Disclosure Format (check one): Yes |_| No |X|
NOCOPI TECHNOLOGIES, INC.
INDEX
Part I. FINANCIAL INFORMATION PAGE
Item 1. Financial Statements
Statements of Operations 1
Three Months ended March 31, 2006
and March 31, 2005
Balance Sheet 2
March 31, 2006
Statements of Cash Flows 3
Three Months ended March 31, 2006
and March 31, 2005
Notes to Financial Statements 4 - 6
Item 2. Management's Discussion and Analysis of 7 - 11
Financial Condition and Results of Operations
Item 3. Controls and Procedures 12
Part II. OTHER INFORMATION 13
Signatures 14
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
NOCOPI TECHNOLOGIES, INC.
STATEMENTS OF OPERATIONS*
(UNAUDITED)
THREE MONTHS ENDED MARCH 31
2006 2005
------------------ ------------------
REVENUES
LICENSES, ROYALTIES AND FEES $44,700 $79,600
PRODUCT AND OTHER SALES 42,200 42,500
------------------ ------------------
86,900 122,100
COST OF SALES
LICENSES, ROYALTIES AND FEES 16,900 28,800
PRODUCT AND OTHER SALES 24,300 23,500
------------------ ------------------
41,200 52,300
------------------ ------------------
GROSS PROFIT 45,700 69,800
OPERATING EXPENSES
RESEARCH AND DEVELOPMENT 36,300 38,900
SALES AND MARKETING 27,900 34,400
GENERAL AND ADMINISTRATIVE (EXCLUSIVE OF LEGAL
EXPENSES) 50,700 63,300
LEGAL EXPENSES 10,000 20,500
------------------ ------------------
124,900 157,100
------------------ ------------------
LOSS FROM OPERATIONS (79,200) (87,300)
OTHER INCOME (EXPENSES)
INTEREST INCOME - 100
INTEREST AND BANK CHARGES (1,100) (600)
------------------ ------------------
(1,100) (500)
------------------ ------------------
NET LOSS ($80,300) ($87,800)
================== ==================
BASIC AND DILUTED LOSS PER COMMON SHARE ($.00) ($.00)
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 50,823,856 50,586,181
*THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
1
NOCOPI TECHNOLOGIES, INC.
BALANCE SHEET*
(UNAUDITED)
MARCH 31
2006
------------------
ASSETS
CURRENT ASSETS
CASH AND CASH EQUIVALENTS $43,400
ACCOUNTS RECEIVABLE LESS $15,000 ALLOWANCE 23,000
ARBITRATION SETTLEMENT RECEIVABLE 50,000
Inventory 42,200
PREPAID AND OTHER 29,300
------------------
TOTAL CURRENT ASSETS 187,900
FIXED ASSETS
LEASEHOLD IMPROVEMENTS 71,200
FURNITURE, FIXTURES AND EQUIPMENT 476,200
------------------
547,400
LESS: ACCUMULATED DEPRECIATION 516,300
------------------
31,100
------------------
TOTAL ASSETS $219,000
==================
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
CURRENT LIABILITIES
DEMAND LOANS $18,000
ACCOUNTS PAYABLE 447,900
ACCRUED EXPENSES 290,100
DEFERRED REVENUE 10,000
-----------------
TOTAL CURRENT LIABILITIES 766,000
STOCKHOLDERS' DEFICIENCY
COMMON STOCK, $.01 PAR VALUE
AUTHORIZED - 75,000,000 SHARES
ISSUED AND OUTSTANDING - 51,134,733 SHARES 511,400
PAID-IN CAPITAL 11,588,900
ACCUMULATED DEFICIT (12,647,300)
-----------------
(547,000)
-----------------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIENCY $219,000
=================
*THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
2
NOCOPI TECHNOLOGIES, INC.
STATEMENTS OF CASH FLOWS*
(UNAUDITED)
THREE MONTHS ENDED MARCH 31
2006 2005
------------------- -------------------
OPERATING ACTIVITIES
NET LOSS ($80,300) ($87,800)
ADJUSTMENT TO RECONCILE NET LOSS TO CASH
USED IN OPERATING ACTIVITIES
DEPRECIATION 3,900 4,200
------------------ -------------------
(76,400) (83,600)
(INCREASE) DECREASE IN ASSETS
ACCOUNTS RECEIVABLE 24,500 26,400
ARBITRATION SETTLEMENT RECEIVABLE 50,000 50,000
INVENTORY (42,200) -
PREPAID AND OTHER 11,100 (11,300)
INCREASE (DECREASE) IN LIABILITIES
ACCOUNTS PAYABLE AND ACCRUED EXPENSES (7,900) 6,300
DEFERRED REVENUE - 11,300
------------------ ------------------
35,500 82,700
------------------ ------------------
NET CASH USED IN OPERATING ACTIVITIES (40,900) (900)
FINANCING ACTIVITIES
ISSUANCE OF COMMON STOCK 80,000 -
------------------ ------------------
NET CASH USED IN INVESTING ACTIVITIES 80,000 -
------------------ ------------------
INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS 39,100 (900)
CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD 4,300 24,000
------------------ ------------------
CASH AND CASH EQUIVALENTS - END OF PERIOD $43,400 $23,100
================== ==================
*THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
3
NOCOPI TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1. FINANCIAL STATEMENTS
The accompanying unaudited condensed financial statements have been prepared by
Nocopi Technologies, Inc. (the "Company"). These statements include all
adjustments (consisting only of normal recurring adjustments) which management
believes necessary for a fair presentation of the statements and have been
prepared on a consistent basis using the accounting policies described in the
summary of Accounting Policies included in the Company's 2005 Annual Report on
Form 10-KSB. Certain financial information and footnote disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to such rules and
regulations, although the Company believes that the accompanying disclosures are
adequate to make the information presented not misleading. The Notes to
Financial Statements included in the 2005 Annual Report on Form 10-KSB should be
read in conjunction with the accompanying interim financial statements. The
interim operating results for the three months ended March 31, 2006 may not be
necessarily indicative of the operating results expected for the full year.
NOTE 2. STOCK BASED COMPENSATION
In December 2004, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard SFAS 123 (revised 2004), Share-Based
Payment ("SFAS 123R"). SFAS 123(R) supersedes APB Opinion No. 25, Accounting for
Stock Issued to Employees, and amends SFAS No. 95, Statement of Cash Flows.
Generally, the approach in SFAS 123(R) is similar to the approach described in
SFAS 123. However, SFAS 123(R) requires share-based payments to employees,
including grants of employee stock options, to be recognized in the income
statement based on their fair values at the date of grant. Pro forma disclosure
is no longer an alternative.
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 the first quarter of 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.
4
The Company uses the Black-Scholes option pricing model to calculate the
grant-date fair value of an award.
There were no stock options granted during the three months ended March 31,
2006.
Prior to December 31, 2005, the Company followed the provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation". The provisions of SFAS No. 123
allowed companies to either expense the estimated fair value of stock options or
to continue to follow the intrinsic value method set forth in Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees"
("APB 25"), but disclose the pro forma effects on net income had the fair value
of the options been expensed. The Company elected to apply APB 25 in accounting
for its stock option incentive plans.
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.
There were no stock options granted during the three months ended March 31,
2005.
The following table summarizes all stock option activity of the Company since
December 31, 2005:
Weighted Average
Number Exercise Exercise
of Shares Price Price
------------------ -------------------- --------------------
Outstanding, December 31, 2005 1,675,000 $.10 to $.45 $.20
------------------ -------------------- --------------------
Canceled 325,000 $.30 and $.45 $.39
------------------ -------------------- --------------------
Outstanding, March 31, 2006 1,350,000 $.10 to $.17 $.15
------------------ -------------------- --------------------
Exercisable, March 31, 2006 1,350,000 $.10 to $.17 $.15
------------------ -------------------- --------------------
NOTE 3. GOING CONCERN
Since its inception, the Company has incurred significant losses and, as of
March 31, 2006, had accumulated losses of $12,647,300. For the years ended
December 31, 2005 and 2004, the Company's losses from operations were $213,800
and $328,500, respectively. In addition, the Company had negative working
capital of $578,100 at March 31, 2006. The Company may incur further operating
losses and experience negative cash flow in the future. Achieving profitability
and positive cash flow depends on the Company's ability to generate and sustain
significant increases in revenues and gross profits from its traditional
business. There can be no assurances that the Company will be able to generate
sufficient revenues and gross profits to achieve and sustain profitability and
positive cash flow in the future.
5
During the first quarter of 2006, the Company raised $80,000 in a valid private
placement whereby 348,078 shares of the Company's common stock were sold to two
non-affiliated individual investors and to a pension plan controlled by the
Company's Chairman of the Board. These investments, combined with continuing
expense reductions, have permitted the Company to continue in operation to the
current date. Management of the Company believes that it will need, and is
actively seeking, to obtain additional capital in the immediate future both to
fund investments needed to increase its operating revenues to levels that will
sustain its operations and to fund operating deficits that it anticipates will
continue until revenue increases can be realized. There can be no assurances
that the Company will be successful in obtaining sufficient additional capital,
or if it does, that the additional capital will enable the Company to improve
its business so as to have a material positive effect on the Company's
operations and cash flow. The Company believes that without additional capital,
whether in the form of debt, equity or both, it may be forced to cease
operations at an undetermined future date.
NOTE 4. DEMAND LOANS
The Company has unsecured loans from two individuals totaling $18,000, including
$3,000 from the Company's Chairman of the Board, outstanding at March 31, 2006.
The loans bear interest at seven per cent per year and are payable on demand.
NOTE 5. STOCKHOLDERS' DEFICIENCY
During the first quarter of 2006, the Company sold 348,078 shares of its common
stock to two non-affiliated individual investors and 164,474 to a pension plan
controlled by Michael A. Feinstein, M.D., the Company's Chairman of the Board,
for a total of $80,000 pursuant to a valid private placement.
NOTE 6. INCOME TAXES
There is no income tax benefit for the losses for the three months ended
March 31, 2006 and March 31, 2005 since Management has determined that the
realization of the net deferred tax asset is not assured and has created a
valuation allowance for the entire amount of such benefits.
NOTE 7. LOSS PER SHARE
Because the Company reported a net loss for the three months ended March 31,
2006 and March 31, 2005, common stock equivalents, consisting of stock options,
were anti-dilutive.
NOTE 8. SUBSEQUENT EVENT
On April 30, 2006, under the Company's directors' option plan (the "plan"),
options to acquire 100,000 shares of the Company's common stock were granted to
each of the four members of the Board of Directors of the Company, including one
member who is also an executive officer of the Company, at $.215 per share.
Under the terms of the plan, the options will vest on January 1, 2007 provided
the director attended at least 75% of the year's board meetings and will expire
five years from the date of grant.
6
ITEM 2.
NOCOPI TECHNOLOGIES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATION
FORWARD-LOOKING INFORMATION
The following Management's Discussion and Analysis of Results of Operations
and Financial Condition should be read in conjunction with our audited Financial
Statements and Notes thereto for the year ended December 31, 2005 included in
our Annual Report on Form 10-KSB filed with the Securities and Exchange
Commission.
The information in this discussion contains forward-looking statements
within the meaning of the Private Securities Litigation Reform Act of 1995.
Forward-looking statements involve known and unknown risks, uncertainties and
other factors, which may cause our actual results, performance or achievements
or industry results to be materially different from any future results,
performance or achievements expressed or implied by these forward-looking
statements. Such factors include those described in "Risk Factors." The
forward-looking statements included in this report may prove to be inaccurate.
In light of the significant uncertainties inherent in these forward-looking
statements, you should not consider this information to be a guarantee by us or
any other person that our objectives and plans will be achieved. The Company
does not undertake to publicly update or revise its forward-looking statements
even if experience or future changes make it clear that any projected results
(expressed or implied) will not be realized.
RESULTS OF OPERATIONS
The Company's revenues are derived from royalties paid by licensees of
the Company's technologies, fees for the provision of technical services to
licensees and from the direct sale of products incorporating the Company's
technologies, such as inks, security paper and pressure sensitive labels, as
well as 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 and/or additional royalties which
typically vary with the licensee's sales or production of products incorporating
the licensed technology. Technical services, in the form of on-site or telephone
consultations by members of the Company's technical staff, may be offered to
licensees of the Company's technologies. The consulting fees are billed at
agreed upon per diem or hourly rates at the time the services are rendered.
Service fees and sales revenues vary directly with the number of units of
service or product provided.
7
The Company recognizes revenue on its lines of business as follows:
a) License fees and royalties are recognized when the license term begins.
Upon inception of the license term, revenue is recognized in a manner consistent
with the nature of the transaction and the earnings process, which generally is
ratably over the license term;
b) Product sales are recognized upon shipment of products, when the price is
fixed or determinable and collectibility is reasonably assured; and
c) Fees for technical services are recognized when (i) the service has been
rendered; (ii) an arrangement exists; (iii) the price is fixed or determinable
based upon a per diem or hourly rate; and (iv) collectibility is reasonably
assured.
While the Company's fixed costs have been reduced as a result of its
relocation to a new location in 2003 and because the Company believes that
further fixed cost reductions may not be achievable, its operating results are
substantially dependent on revenue levels. Because revenues derived from
licenses and royalties carry a much higher gross profit margin than other
revenues, operating results are also substantially affected by changes in
revenue mix.
Both the absolute amounts of the Company's revenues and the mix among the
various sources of revenue are subject to substantial fluctuation. The Company
has a relatively small number of substantial customers rather than a large
number of small customers. Accordingly, changes in the revenue received from a
significant customer can have a substantial effect on the Company's total
revenue and on its revenue mix and overall financial performance. Such changes
may result from a customer's product development delays, engineering changes,
changes in product marketing strategies and the like. In addition, certain
customers have, from time to time, sought to renegotiate certain provisions of
their license agreements and, when the Company agrees to revise terms, revenues
from the customer may be affected. The addition of a substantial new customer or
the loss of a substantial existing customer may also have a substantial effect
on the Company's total revenue, revenue mix and operating results.
Revenues for the first quarter of 2006 were $86,900 compared to $122,100 in
the first quarter of 2005, a 29% decrease. Licenses, royalties and fees
decreased by $34,900, or 43%, in the first quarter of 2006 to $44,700 from
$79,600 in the first quarter of 2005. The decrease in licenses, royalties and
fees is due primarily to the non-renewal of one license agreement during late
2005. Product sales of $42,200 in the first quarter of 2006 approximated the
product sales of $42,500 in the first quarter of 2005.
The Company's gross profit decreased to $45,700 in the first quarter of
2006 or 53% of revenues from $69,800 or 57% of revenues in the first quarter of
2005. 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 first quarter 2006 gross
profit, in absolute dollars and as a percentage of revenues, was negatively
impacted by the decline in revenues from licenses, royalties and fees.
8
Research and development expenses of $36,300 in the first quarter of 2006
approximated the $38,900 in the first quarter of 2005.
Sales and marketing expenses decreased to $27,900 in the first quarter of
2006 from $34,400 in the first quarter of 2005. The decrease reflects lower
commissions, sales promotion and business show expense in the first quarter of
2006 compared to the first quarter of 2005.
General and administrative expenses (exclusive of legal expenses) decreased
by $12,600 in the first quarter of 2006 to $50,700 from $63,300 in the first
quarter of 2005. The decrease results primarily from lower patent acquisition
activity in the first quarter of 2006 compared to the first quarter of 2005.
Legal expenses declined to $10,000 in the first quarter of 2006 from
$20,500 in the first quarter of 2005 resulting from a lower level of legal
counseling utilized by the Company in the first quarter of 2006 compared to the
first quarter of 2005
Other income (expense) increased in the first quarter of 2006 compared to
the first quarter of 2005 as interest expense was incurred on the demand loans
received in the latter half of 2005.
The net loss of $80,300 in the first quarter of 2006 compared to the net
loss of $87,800 in the first quarter of 2005 results primarily from a the
Company's continued cost containment efforts offset in part by a lower gross
profit during the first three months of 2006 compared to the first three months
of 2005.
PLAN OF OPERATION, LIQUIDITY AND CAPITAL RESOURCES
The Company's cash and cash equivalents increased to $43,400 at March 31,
2006 from $4,300 at December 31, 2005. During the quarter, the Company received
$80,000 through the sale of 348,078 shares of its common stock and used $40,900
to fund operations.
The continued loss of a number of customers during the past four years have
had a material adverse effect on the Company's revenues and results of
operations and upon its liquidity and capital resources. During the first three
months of 2006, the Company raised $80,000 in a valid private placement whereby
348,078 shares of the Company's common stock were sold to two non-affiliated
individual investors and to a pension plan controlled by the Company's Chairman
of the Board. These investments, combined with the third of four installment
payments of $50,000 in accordance with the settlement agreement of its
arbitration with Euro-Nocopi, S. A., and the receipt of funds early in the
second quarter of 2006 from a new licensee have permitted the Company to
continue in operation to the current date. Management of the Company believes
that it will need to obtain, and it is actively seeking, additional capital in
the immediate future both to fund investments needed to increase its operating
revenues to levels that will sustain its operations and to fund operating
deficits that it anticipates will continue until revenue increases can be
realized. There can be no assurances that the Company will be successful in
obtaining sufficient additional capital, or if it does, that the additional
capital will enable the Company to improve its business so as to have a material
positive effect on the Company's operations and cash flow. The Company believes
that without additional investment, it may be forced to cease operations at an
undetermined future date.
9
The Company, in response to the ongoing adverse liquidity situation, has
maintained a cost reduction program including staff reductions and curtailment
of discretionary research and development and sales and marketing expenses,
where possible.
RISK FACTORS
The Company's operating results, financial condition and stock price are subject
to certain risks, some of which are beyond the Company's control. These risks
could cause actual operating and financial results to differ materially from
those expressed in the Company's forward looking statements, including the risks
described below and the risks identified in other documents which are filed and
furnished with the SEC:
Inability to Continue in Operation Without New Equity Investment. The Company
had a negative working capital of $578,100 at March 31, 2006 and experienced
negative cash flow from operations of $40,900 in the three months ended March
31, 2006. Additionally, it experienced negative cash flow from operations of
$37,700 in the year ended December 31, 2005. Management of the Company believes
that while certain staff reductions initiated in 2003 and continuing into 2004
as well as the move of the Company's operations to a new facility in 2003, will
reduce the Company's negative cash flow, it anticipates that the negative cash
flow will continue until it can achieve revenue increases. Management believes
that it will need to obtain additional capital in the immediate future both to
fund investments needed to increase its operating revenues to levels that will
sustain its operations and to fund operating deficits that it anticipates will
continue until revenue increases can be realized. There can be no assurances
that the Company will be successful in obtaining sufficient additional capital,
or if it does, that the additional capital will enable the Company to improve
its business so as to have a material positive effect on the Company's
operations and cash flow. The Company believes that without additional
investment, it may be forced to cease operations at an undetermined future date.
It is uncertain whether the Company's assets will retain any value if the
Company ceases operations. There are no assurances that the Company will be able
to secure additional equity investment before it may be forced to cease
operations.
Inability to Obtain Raw Materials and Products for Resale. The Company's adverse
financial condition has required it to significantly defer payments due vendors
who supply raw materials and other components of the Company's security inks and
security paper that the Company purchases for resale and professional and other
services. As a result, the Company is required to pay cash in advance of
shipment to certain of its suppliers. Delays in shipments to customers caused by
the Company's inability to obtain materials on a timely basis and the
possibility that certain current vendors may permanently discontinue to supply
the Company with needed products could impact the Company's ability to service
its customers and adversely affect its customer and licensee relationships.
While receipt of funds in conjunction with the settlement of the arbitration
with Euro-Nocopi, S.A. and sales of shares of the Company's common stock in 2006
have allowed the Company to continue in operation to the current date, there can
be no assurances that the Company will be able to maintain its vendor
relationships in an acceptable manner.
10
Uneven Pattern of Quarterly and Annual Operating Results. The Company's
revenues, which are derived primarily from licensing and royalties, are
difficult to forecast due to the long sales cycle of the Company's technologies,
the potential for customer delay or deferral of implementation of the Company's
technologies, the size and timing of inception of individual license agreements,
the success of the Company's licensees and strategic partners in exploiting the
market for the licensed products, modifications of customer budgets, and uneven
patterns of royalty revenue and product orders. As the Company's revenue base is
not substantial, delays in finalizing license contracts, implementing the
technology to initiate the revenue stream and customer ordering decisions can
have a material adverse effect on the Company's quarterly and annual revenue
expectations and, as the Company believes that further reductions in the fixed
component of the Company's operating expenses may not be achievable, income
expectations will be subject to a similar adverse outcome.
Volatility of Stock Price. The market price for the Company's common stock has
historically experienced significant fluctuations and may continue to do so. The
Company has, since its inception, operated at a loss and has not produced
revenue levels traditionally associated with publicly traded companies. The
Company's common stock is not listed on a national or regional securities
exchange and, consequently, the Company receives limited publicity regarding its
business achievements and prospects, few securities analysts and traders follow
it and it is thinly traded. The market price may be affected by announcements of
new relationships or modifications to existing relationships. The stock prices
of many developing public companies, particularly those with small
capitalizations, have experienced wide fluctuations not necessarily related to
operating performance. Such fluctuations may adversely affect the market price
of the Company's common stock.
Intellectual Property. The Company relies on a combination of protections
provided under applicable international patent, trademark and trade secret laws.
It also relies on confidentiality, non-analysis and licensing agreements to
establish and protect its rights in its proprietary technologies. While the
Company actively attempts to protect these rights, the Company's technologies
could possibly be compromised through reverse engineering or other means. In
addition, the Company's ability to enforce its intellectual property rights
through appropriate legal action has been and will continue to be limited by the
Company's adverse liquidity. There can be no assurances that the Company will be
able to protect the basis of its technologies from discovery by unauthorized
third parties or to preclude unauthorized persons from conducting activities
that infringe on the Company's rights. The Company's adverse liquidity situation
has also impacted its ability to obtain patent protection on its intellectual
property and to maintain protection on previously issued patents. The Company
has been advised by its patent counsel that patent maintenance fees
approximating $7,000 will be due during 2006. The Company has not yet made a
decision on keeping any or all of these patents in force. There can be no
assurances that the Company will be able to continue to prosecute new patents
and maintain issued patents. As a result, the Company's customer and licensee
relationships could be adversely affected and the value of the Company's
technologies and intellectual property (including their value upon a liquidation
of the Company) could be substantially diminished.
OFF-BALANCE SHEET ARRANGEMENTS
The Company does not have any off-balance sheet arrangements.
11
ITEM 3. 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.
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
There have been no changes in the Company's internal controls over financial
reporting during our most recent fiscal quarter that have materially affected,
or are reasonably likely to materially affect, our internal controls over
financial reporting.
12
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Not Applicable
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
On February 8, 2006, Registrant sold 164,474 shares of its Common
Stock, par value $.01 per share, to a pension plan controlled by the
Chairman of the Board of the Registrant for $25,000, or approximately
$.15 per share, and on March 21, 2006, sold an aggregate of 384,078
shares of its Common Stock, par value $.01 per share, to two individual
investors (who were acquainted with a member of Registrant's Board of
Directors) for $55,000, or approximately $.14 per share, in private
transactions exempt from registration pursuant to Section 4(2) of the
Securities Act. No underwriters were involved in the transactions or
received any commissions or other compensation. Proceeds of the sales
were used to fund working capital requirements.
Item 3. Defaults Upon Senior Securities
Not Applicable
Item 4. Submission of Matters to a Vote of Security Holders
Not Applicable
Item 5. Other Information
Not Applicable
Item 6. Exhibits
(a) Index of Exhibits
31.1 Certificate of Chief Executive Officer required by Rule 13a-14(a).
31.2 Certificate of Chief Financial Officer required by Rule 13a-14(a).
32. Certificate of Chief Executive Officer and Chief Financial Officer
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
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SIGNATURES
Pursuant to the requirement of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NOCOPI TECHNOLOGIES, INC.
DATE: May 15, 2006 /s/ Michael A. Feinstein, M.D.
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Michael A. Feinstein, M.D.
Chairman of the Board
DATE: May 15, 2006 /s/ Rudolph A. Lutterschmidt
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Rudolph A. Lutterschmidt
Vice President & Chief Financial Officer
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