3006
Longhorn Blvd., Suite 107, Austin, TX 78758
Phone
(512) 339-5020, Fax (512) 339-5021,
WWW.NANO-PROPRIETARY.COM
September
9, 2005
United
States Securities and Exchange Commission
Washington,
D.C. 20549
| Attn: |
Larry
Spirgel, Assistant Director
Ivette
Leon, Assistant Chief Accountant
Christine
Bashaw, Staff Accountant
|
Re: Response
of Nano-Proprietary, Inc. (File No. 1-11602) to Comment Letter of August
18,
2005
Ladies
and Gentlemen:
In
this
letter below, we have addressed the issues in your comment letter of August
18,
2005, relating to our Form 10-K/A for the fiscal year ended December 31,
2004,
and our Form 10-Q for the fiscal quarter ended June 30, 2005.
Comment:
Form
10-K/A for the Year Ended December 31, 2004, filed April 27,
2005
Notes
to the Consolidated Financial Statements, page 24
Note
2. Summary of Significant Accounting Policies, page 24
Revenue
Recognition
| 1. |
Tell
us, citing the appropriate accounting literature, your basis for
recognizing reimbursements under agreements to perform research
and
development for others as revenue. Indicate how much of the revenue
recognized in 2004, 2003 and 2002 was generated by these research
and
development agreements.
|
RESPONSE: Following
is a table showing the revenue for the years ended December 31, 2002, 2003,
and
2004. The lines items “Contract Research” and “Government Contracts” identify
the revenue generated by these agreements.
|
Year
ended December 31,
|
||||||
|
2004
|
2003
|
2002
|
||||
|
Revenues
|
||||||
|
Contract
Research
|
$
|
-
|
$
|
400,000
|
$
|
1,000,000
|
|
Government
Contracts
|
305,721
|
339,790
|
254,152
|
|||
|
License
fees and Royalties
|
10,852
|
2,248
|
-
|
|||
|
Other
|
65,949
|
31,921
|
160,696
|
|||
|
Total
Revenues
|
$
|
382,522
|
$
|
773,959
|
$
|
1,414,848
|
Government
Contracts - Virtually all of our government contracts are based on the
reimbursement of costs. These contracts are billed either monthly or quarterly
as called for by the contract. This is usually monthly, but may be quarterly
in
some instances. The billing method is set forth in the contract/grant documents.
It may involve billing hours at pre-established rates, or billing labor dollars
and
material
dollars marked up by pre-established overhead rates, or some combination
of the
two methods. In rare instances, we may have fixed fee contracts where the
billing is initiated as the result of predefined events, such as the issuance
of
a final report. Any fixed fee contracts are usually small. We recognize the
revenue at the time the billing is prepared and submitted to applicable
government agency. This is in compliance with FASB Statement of Financial
Concepts (SFAC) No. 5 which states that revenues are considered earned when
the
entity has substantially accomplished what it must do to be entitled to the
benefits represented by the revenues. At that time, the revenues meet the
criteria set forth in SAB 101 in that there is persuasive evidence of an
arrangement (grant agreement), services have been performed, the price is
fixed
or determinable, and collectibility is reasonably assured.
Other
contracts - From a conceptual standpoint, we always have a written contract
for
any material research agreement. This agreement sets forth the services to
be
performed, payment terms, and milestones or deliverables, if any, as well
as
numerous other terms. We normally receive either full or partial payment
up
front. In the specific case of the revenues in these three years, all revenues
came from one customer, spread over three separate phases. None of these
phases
spanned more than one reporting year. In instances where payment is received
up
front, we account for this as deferred revenue until the project is complete
or
a portion of it is earned under the terms of the contract, such as in the
case
where the contract calls for the delivery of samples at intermediate stages.
We
rely on the same guidance referenced in the paragraph on government contracts.
The only difference is that government contracts virtually always have a
billing
associated with them. In some cases, our private research contracts may also
have a billing associated with intermediate stages. This was not the case
with
the $1.4 million recognized in 2002 and 2003.
| 2. |
Further,
on page 24 you state that you recognize revenue on research contracts
when
it is earned pursuant to the terms of the contract. Please tell
about the
terms of such contracts, and citing the appropriate accounting
literature
the persuasive evidence that you rely upon in your determination
to
recognize revenue in accordance with these
contracts.
|
RESPONSE:
See
the answer to Item 1above. The “terms of the contract” phrase would refer to
items discussed in there, such as hours incurred, or costs incurred, under
“government contracts”, or the completion of intermediate stages in “Other
contracts”.
| 3. |
Referring
to research and development projects performed for third parties,
please
tell us if you are required to repay the funding agent for any
portion of
the funds received if the project fails. If you are required to
repay the
funding agent for any portion, please tell us how you account for
this
liability.
|
RESPONSE: We
do
not enter into agreements that would require us to repay any funds if the
desired results are not obtained. We occasionally have projects that are
done in
phases, where there is funding associated with each phase and moving from
phase
I to phase II (for example) is contingent on the results of phase I. If phase
I
was not successful, then there would not be a phase II, however that would
not
affect the payment for phase I. There are no agreements that are contingent
upon
successful results.
Rule
13a-14(a) Certifications
| 4. |
We
note that you incorporate the certifications required by Rule 13a-14(a)
by
reference to your Form 10-K filed March 7, 2005. You are required
to
provide revised certifications in your amendment. Please amend
your Form
10-K/A to include revised certifications per Item 601(b)(31) of
Regulation
S-K.
|
RESPONSE: We
have made the corresponding change in our Form 10-K/A filed with this response
letter.
Section
1350 Certifications
| 5. |
Further,
amend to include revised Section 1350
certifications.
|
RESPONSE: We
have made the corresponding change in our Form 10-K/A filed with this response
letter.
Form
10-Q for the Quarter Ended June 30, 2005
Item
4. Controls and Procedures, page 13
| 6. |
We
note your disclosure that “…we
conducted an evaluation of the effectiveness of the design and
operation
of our disclosure controls and procedures, as defined in Rules
13a-14(c)
and 15d-14(c) under the Securities and Exchange Act of 1934 within
90 days
of the filing date of this report (the “Evaluation
Date”).
Please note that filings after August 14, 2003 must comply with
the
disclosure requirements of revised Item 307. That is, you must
disclose
the conclusion of your certifying officers regarding the effectiveness
of
your disclosure controls and procedures as
of the end of the period covered by the report,
based upon the evaluation of these controls and procedures. Please
confirm
for us supplementally that, if true, your certifying officers concluded
that your disclosure controls and procedures were effective as
of the end
of the period covered by this
report.
|
RESPONSE: We
hereby supplementally confirm that our disclosure controls and procedures
were
effective as of the end of the period covered by the report and will change
the
disclosure in our future filings.
| 7. |
We
note your disclosure that “there were no significant
changes in our internal controls over financial reporting or in
other
factors that could significantly affect these controls subsequent
to the
Evaluation Date.” Item 308(c) of Regulation S-K requires the disclosure of
any
change in your internal control over financial reporting identified
in
connection with an evaluation thereof that occurred during
your last fiscal quarter that has materially affected, or is reasonably
likely to materially affect, your internal control over financial
reporting.
Please confirm for us supplementally that there was no change in
your
internal control over financial reporting that occurred during
the quarter
ended June 30, 2005 that has materially affected, or is reasonably
likely
to materially affect, your internal control over financial reporting.
In
future filings, provide the disclosure required by Item 308(c)
of
Regulation S-K.
|
RESPONSE: We
hereby supplementally confirm that there were no change in our internal control
over financial reporting that occurred during the quarter ended June 30,
2005
that has materially affected, or is reasonably likely to materially affect,
our
internal control over financial reporting. We will provide this disclosure
in
future filings.
In
addition, we hereby acknowledge that:
| · |
We
are responsible for the adequacy and accuracy of the disclosures
in our
filings.
|
| · |
Comments
by the SEC staff or changes to our disclosure in response to staff
comments do not foreclose the Commission from taking any action
with
respect to the filings
|
| · |
We
may not assert staff comments as a defense in any proceeding initiated
by
the Commission or any person under the federal securities laws
of the
United States.
|
If
you
have any other questions or comments, you can contact me at (248) 391-0612
or by
email at dbaker@ameritech.net,
or Don
Locke by phone at (919) 807-5623 or by email at don.locke@summus.com.
|
Very
truly yours,
/s/
Douglas P. Baker
Douglas
P. Baker
Chief
Financial Officer
|