United States
Securities and Exchange Commission
Washington, D.C. 20549
Form 10-Q
(Mark One)
þ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934.
For the quarterly period ended September 30, 2017March 31, 2019
or
¨ 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.
(Exact name of registrant as specified in its charter)
Maryland | 87-0406496 |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
480 Shoemaker Road, Suite 104, King of Prussia, PA 19406
(Address of principal executive offices) (Zip Code)
(610) 834-9600
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 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 ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ¨ | Accelerated filer ¨ |
Non-accelerated filer | Smaller reporting company þ |
| Emerging growth company ¨ |
If an emerging growth company, indicate by checkmark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the ExchangeSecurities Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No þ
Securities registered pursuant to Section 12(b) of the Act: None.
Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
Indicate the number of shares outstanding of each of the issuer’sissuer’s classes of common stock, as of the latest practicable date.date: 58,616,716 shares of common stock, par value $0.01, as of November 1, 2017
May 9, 2019.
NOCOPI TECHNOLOGIES, INC.
INDEX
| PAGE |
Part I. FINANCIAL INFORMATION |
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Financial Statements | 1 |
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1 | |
Balance Sheets at | 2 |
3 | |
Statements of Stockholders’ Equity for Three Months ended March 31, 2019 and March 31, 2018 | 4 |
| |
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Management’s Discussion and Analysis of Financial Condition and Results of Operations |
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Controls and Procedures |
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Part II. OTHER INFORMATION |
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Exhibits |
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| |
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PART I – FINANCIAL INFORMATION
Statements of Operations*
(unaudited)
|
| Three Months ended September 30 |
| Nine Months ended September 30 |
| |||||||||||||||||||
|
| 2017 |
| 2016 |
| 2017 |
| 2016 |
|
| Three Months ended March 31 |
| ||||||||||||
|
|
|
|
|
|
|
|
|
|
| 2019 |
| 2018 |
| ||||||||||
Revenues |
|
|
|
|
|
|
|
|
|
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|
|
|
| ||||||||||
Licenses, royalties and fees |
| $ | 178,200 |
| $ | 170,300 |
| $ | 468,900 |
| $ | 381,800 |
|
| $ | 190,500 |
| $ | 174,900 |
| ||||
Product and other sales |
|
| 224,200 |
|
|
| 373,400 |
|
|
| 634,500 |
|
|
| 648,100 |
|
|
| 218,900 |
|
|
| 250,500 |
|
|
|
| 402,400 |
|
|
| 543,700 |
|
|
| 1,103,400 |
|
|
| 1,029,900 |
|
|
| 409,400 |
|
|
| 425,400 |
|
|
|
|
|
|
|
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|
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| ||||||||||
Cost of revenues |
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| ||||||||||
Licenses, royalties and fees |
| 23,300 |
| 36,500 |
| 71,100 |
| 73,000 |
|
| 25,200 |
| 25,000 |
| ||||||||||
Product and other sales |
|
| 82,300 |
|
|
| 156,900 |
|
|
| 248,600 |
|
|
| 275,200 |
|
|
| 90,300 |
|
|
| 92,200 |
|
|
|
| 105,600 |
|
|
| 193,400 |
|
|
| 319,700 |
|
|
| 348,200 |
|
|
| 115,500 |
|
|
| 117,200 |
|
Gross profit |
|
| 296,800 |
|
|
| 350,300 |
|
|
| 783,700 |
|
|
| 681,700 |
|
|
| 293,900 |
|
|
| 308,200 |
|
|
|
|
|
|
|
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|
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|
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|
| ||||||||||
Operating expenses |
|
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|
|
| ||||||||||
Research and development |
| 36,300 |
| 33,700 |
| 109,200 |
| 103,700 |
|
| 38,000 |
| 37,100 |
| ||||||||||
Sales and marketing |
| 67,200 |
| 72,800 |
| 187,900 |
| 176,700 |
|
| 68,900 |
| 70,100 |
| ||||||||||
General and administrative |
|
| 80,400 |
|
|
| 69,900 |
|
|
| 240,000 |
|
|
| 224,200 |
|
|
| 94,100 |
|
|
| 102,700 |
|
|
|
| 183,900 |
|
|
| 176,400 |
|
|
| 537,100 |
|
|
| 504,600 |
|
|
| 201,000 |
|
|
| 209,900 |
|
Net income from operations |
|
| 112,900 |
|
|
| 173,900 |
|
|
| 246,600 |
|
|
| 177,100 |
|
|
| 92,900 |
|
|
| 98,300 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||
Other income (expenses) |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||
Interest income |
| 200 |
| – |
| 200 |
| – |
|
| 1,100 |
| 400 |
| ||||||||||
Interest expense, bank charges and accretion of interest |
|
| (3,300 | ) |
|
| (3,300 | ) |
|
| (22,600 | ) |
|
| (10,100 | ) | ||||||||
Interest expense and bank charges |
|
| (2,700 | ) |
|
| (2,900 | ) | ||||||||||||||||
|
|
| (3,100 | ) |
|
| (3,300 | ) |
|
| (22,400 | ) |
|
| (10,100 | ) |
|
| (1,600 | ) |
|
| (2,500 | ) |
Net income before income taxes |
|
| 91,300 |
|
| 95,800 |
| |||||||||||||||||
Income taxes |
|
| 5,900 |
|
| – |
| |||||||||||||||||
Net income |
| $ | 109,800 |
|
| $ | 170,600 |
|
| $ | 224,200 |
|
| $ | 167,000 |
|
| $ | 85,400 |
|
| $ | 95,800 |
|
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|
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| |||||||
Basic and diluted net income per common share |
| $ | .00 |
| $ | .00 |
| $ | .00 |
| $ | .00 |
|
| $ | .00 |
| $ | .00 |
| ||||
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Weighted average common shares outstanding |
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| ||||||||||
Basic |
| 58,599,016 |
| 58,599,016 |
| 58,599,016 |
| 58,599,016 |
|
| 58,616,716 |
| 58,616,716 |
| ||||||||||
Diluted |
| 58,896,464 |
| 58,599,655 |
| 58,891,635 |
| 58,600,384 |
|
| 59,001,489 |
| 58,911,883 |
|
*See accompanying notes to these financial statements.
Balance Sheets*
|
| September 30 |
| December 31 |
|
| March 31 |
| December 31 |
| ||||||
|
| 2017 |
| 2016 |
|
| 2019 |
| 2018 |
| ||||||
|
| (unaudited) |
| (audited) |
|
| (unaudited) |
| (audited) |
| ||||||
Assets | Assets |
| Assets |
| ||||||||||||
Current assets |
|
|
|
|
|
|
|
|
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| ||||||
Cash |
| $ | 362,800 |
| $ | 199,100 |
|
| $ | 544,000 |
| $ | 400,800 |
| ||
Accounts receivable less $5,000 allowance for doubtful accounts |
| 197,900 |
| 243,400 |
|
| 642,800 |
| 579,000 |
| ||||||
Inventory |
| 111,800 |
| 70,900 |
|
| 146,100 |
| 133,500 |
| ||||||
Prepaid and other |
|
| 21,500 |
|
|
| 29,600 |
|
|
| 36,700 |
|
|
| 43,600 |
|
Total current assets |
|
| 694,000 |
|
|
| 543,000 |
|
|
| 1,369,600 |
|
|
| 1,156,900 |
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| ||||||
Fixed assets |
|
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|
|
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|
|
|
|
| ||||||
Leasehold improvements |
| 19,700 |
| 19,700 |
|
| 19,700 |
| 19,700 |
| ||||||
Furniture, fixtures and equipment |
|
| 183,200 |
|
|
| 178,300 |
|
|
| 185,400 |
|
|
| 185,400 |
|
|
| 202,900 |
| 198,000 |
|
| 205,100 |
| 205,100 |
| ||||||
Less: accumulated depreciation and amortization |
|
| 188,400 |
|
|
| 183,000 |
|
|
| 199,000 |
|
| 197,600 |
| |
|
|
| 14,500 |
|
|
| 15,000 |
|
| 6,100 |
| 7,500 |
| |||
Other assets |
|
|
|
|
| |||||||||||
Long-term receivables |
| 1,255,000 |
|
| 1,352,000 |
| ||||||||||
Operating lease right of use – building |
|
| 231,500 |
|
|
| – |
| ||||||||
|
|
| 1,486,500 |
|
|
| 1,352,200 |
| ||||||||
Total assets |
| $ | 708,500 |
|
| $ | 558,000 |
|
| $ | 2,862,200 |
|
| $ | 2,516,600 |
|
|
|
|
|
| ||||||||||||
Liabilities and Stockholders' Equity (Deficiency) |
| |||||||||||||||
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| |||||||||||
Liabilities and Stockholders' Equity | Liabilities and Stockholders' Equity |
| ||||||||||||||
Current liabilities |
|
|
|
|
|
|
|
|
|
| ||||||
Demand loans |
| $ | – |
| $ | 10,000 |
| |||||||||
Convertible debentures |
| 128,300 |
| 128,300 |
|
| $ | 128,300 |
| $ | 128,300 |
| ||||
Accounts payable |
| 43,800 |
| 33,100 |
|
| 18,400 |
| 16,500 |
| ||||||
Accrued expenses |
| 396,500 |
| 459,900 |
|
| 190,800 |
| 163,000 |
| ||||||
Deferred revenue |
|
| 82,100 |
|
|
| 106,300 |
| ||||||||
Income taxes |
| 98,900 |
| 38,600 |
| |||||||||||
Operating lease liability – current |
|
| 39,700 |
|
|
| – |
| ||||||||
Total current liabilities |
|
| 650,700 |
|
|
| 737,600 |
|
|
| 476,100 |
|
|
| 346,400 |
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Stockholders' equity (deficiency) |
|
|
|
|
| |||||||||||
Other liabilities |
|
|
|
|
| |||||||||||
Accrued expenses, non-current |
| 87,900 |
| 94,700 |
| |||||||||||
Deferred income taxes |
| 54,400 |
| 108,800 |
| |||||||||||
Operating lease liability – non-current |
|
| 191,700 |
|
|
| – |
| ||||||||
|
|
| 334,000 |
|
|
| 203,500 |
| ||||||||
|
|
|
|
|
| |||||||||||
Stockholders' equity |
|
|
|
|
| |||||||||||
Common stock, $0.01 par value |
|
|
|
|
|
|
|
|
|
| ||||||
Authorized – 75,000,000 shares |
|
|
|
|
|
|
|
|
|
| ||||||
Issued and outstanding – 58,599,016 shares |
| 586,000 |
| 586,000 |
| |||||||||||
Issued and outstanding – 58,616,716 shares |
| 586,200 |
| 586,200 |
| |||||||||||
Paid-in capital |
| 12,439,800 |
| 12,426,600 |
|
| 12,440,000 |
| 12,440,000 |
| ||||||
Accumulated deficit |
|
| (12,968,000 | ) |
|
| (13,192,200 | ) |
|
| (10,974,100 | ) |
|
| (11,059,500 | ) |
Total stockholders' equity (deficiency) |
|
| 57,800 |
|
|
| (179,600 | ) | ||||||||
Total liabilities and stockholders' equity (deficiency) |
| $ | 708,500 |
|
| $ | 558,000 |
| ||||||||
Total stockholders' equity |
|
| 2,052,100 |
|
|
| 1,966,700 |
| ||||||||
Total liabilities and stockholders' equity |
| $ | 2,862,200 |
|
| $ | 2,516,600 |
|
*See accompanying notes to these financial statements.
Statements of Cash Flows*
(unaudited)
|
| Nine Months ended September 30 |
|
| Three Months ended March 31 |
| ||||||||||
|
| 2017 |
| 2016 |
|
| 2019 |
| 2018 |
| ||||||
Operating Activities |
|
|
|
|
|
|
|
|
|
| ||||||
Net income |
| $ | 224,200 |
| $ | 167,000 |
|
| $ | 85,400 |
| $ | 95,800 |
| ||
Adjustments to reconcile net income to net cash provided by operating activities |
|
|
|
|
| |||||||||||
Adjustments to reconcile net income to net cash provided by (used in) operating activities |
|
|
|
|
| |||||||||||
Depreciation and amortization |
| 5,400 |
| 5,500 |
|
| 1,400 |
| 1,800 |
| ||||||
Accretion of interest – convertible debentures |
|
| 13,200 |
|
|
| 500 |
| ||||||||
Deferred income taxes |
| (54,400 | ) |
| – |
| ||||||||||
Non-current assets and liabilities – net |
| 90,300 |
| – |
| |||||||||||
Cumulative effect of accounting change |
|
| – |
|
|
| 96,100 |
| ||||||||
|
|
| 242,800 |
|
|
| 173,000 |
|
|
| 122,700 |
|
|
| 193,700 |
|
|
|
|
|
|
|
|
|
|
|
| ||||||
(Increase) decrease in assets |
|
|
|
|
|
|
|
|
|
| ||||||
Accounts receivable |
| 45,500 |
| (159,800 | ) |
| (63,800 | ) |
| (90,500 | ) | |||||
Inventory |
| (40,900 | ) |
| (36,700 | ) |
| (12,600 | ) |
| 2,000 |
| ||||
Prepaid and other |
| 8,100 |
| 10,700 |
|
| 6,900 |
|
| (14,900 | ) | |||||
Increase (decrease) in liabilities |
|
|
|
|
|
|
|
|
|
| ||||||
Accounts payable and accrued expenses |
| (52,700 | ) |
| 75,600 |
|
| 29,700 |
|
| (4,900 | ) | ||||
Taxes on income |
| 60,300 |
| – |
| |||||||||||
Deferred revenue |
|
| (24,200 | ) |
|
| (22,200 | ) |
| – |
|
|
| (99,400 | ) | |
|
|
| (64,200 | ) |
|
| (132,400 | ) |
|
| 20,500 |
|
|
| (207,700 | ) |
Net cash provided by operating activities |
|
| 178,600 |
|
|
| 40,600 |
| ||||||||
|
|
|
|
|
| |||||||||||
Investment Activities |
|
|
|
|
| |||||||||||
Additions to fixed assets |
|
| (4,900 | ) |
|
| (1,400 | ) | ||||||||
Net cash used in investing activities |
|
| (4,900 | ) |
|
| (1,400 | ) | ||||||||
|
|
|
|
|
| |||||||||||
Financing Activities |
|
|
|
|
| |||||||||||
Repayment of demand loans |
|
| (10,000 | ) |
|
| (13,500 | ) | ||||||||
Net cash used in financing activities |
|
| (10,000 | ) |
|
| (13,500 | ) | ||||||||
|
|
|
|
|
| |||||||||||
Increase in cash |
| 163,700 |
| 25,700 |
| |||||||||||
Net cash provided by (used in) operating activities |
| 143,200 |
|
| (14,000 | ) | ||||||||||
Cash at beginning of year |
|
| 199,100 |
|
|
| 11,400 |
|
|
| 400,800 |
|
|
| 360,400 |
|
Cash at end of period |
| $ | 362,800 |
|
| $ | 37,100 |
|
| $ | 544,000 |
| $ | 346,400 |
| |
|
|
|
|
|
| |||||||||||
Supplemental Disclosure of Non Cash Lease Activities |
|
|
|
|
| |||||||||||
Operating lease right of use – building |
| $ | 241,100 |
| $ | – |
| |||||||||
Operating lease liability |
| $ | (241,100 | ) |
| $ | – |
|
*See accompanying notes to these financial statements.
Statements of Stockholders’ Equity*
For the Periods December 31, 2018 through March 31, 2019 and December 31, 2017 through March 31, 2018
(unaudited)
|
| Common stock |
|
| Paid-in |
|
| Accumulated |
|
|
|
| ||||||||
|
| Shares |
|
| Amount |
|
| Capital |
|
| Deficit |
|
| Total |
| |||||
Balance – December 31, 2018 |
|
| 58,616,716 |
|
| $ | 586,200 |
|
| $ | 12,440,000 |
|
| $ | (11,059,500 | ) |
| $ | 1,966,700 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
| 85,400 |
|
|
| 85,400 |
|
Balance – March 31, 2019 |
|
| 58,616,716 |
|
| $ | 586,200 |
|
| $ | 12,440,000 |
|
| $ | (10,974,100 | ) |
| $ | 2,052,100 |
|
|
| Common stock |
|
| Paid-in |
|
| Accumulated |
|
|
|
| ||||||||
|
| Shares |
|
| Amount |
|
| Capital |
|
| Deficit |
|
| Total |
| |||||
Balance – December 31, 2017 |
|
| 58,616,716 |
|
| $ | 586,200 |
|
| $ | 12,440,000 |
|
| $ | (12,811,000 | ) |
| $ | 215,200 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative effect of accounting change at January 1, 2018, Note 2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
| 96,100 |
|
|
| 96,100 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
| 95,800 |
|
|
| 95,800 |
|
Balance – March 31, 2018 |
|
| 58,616,716 |
|
| $ | 586,200 |
|
| $ | 12,440,000 |
|
| $ | (12,619,100 | ) |
| $ | 407,100 |
|
* See accompanying notes to these financial statements.
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
Note 1. Financial Statements
The accompanying unaudited condensed financial statements have been prepared by Nocopi Technologies, Inc. (the(our “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 theour Company's 20162018 Annual Report on Form 10-K. 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 theour Company believes that the accompanying disclosures are adequate to make the information presented not misleading. The Notes to Financial Statements included in the 20162018 Annual Report on Form 10-KForm10-K should be read in conjunction with the accompanying interim financial statements. The interim operating results for the three months and nine months ended September 30, 2017March 31, 2019 may not be necessarily indicative of the operating results expected for the full year.
TheOur Company follows Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 220 in reporting comprehensive income. Comprehensive income is a more inclusive financial reporting methodology that includes disclosure of certain financial information that historically has not been recognized in the calculation of net income. Since theour Company has no items of other comprehensive income, comprehensive income is equal to net income.
Note 2. Going ConcernRevenues
Since its inception,On January 1, 2018, our Company adopted ASU 214-09,Revenue from Contracts with Customers (“Topic 606”), using the modified retrospective method. Results for periods beginning on or after January 1, 2018 are presented under Topic 606; however, prior period amounts are not adjusted and continue to be reported in accordance with Topic 605,Revenue Recognition, which was in effect for those periods.
Our Company has incurred significant lossesrecorded a decrease to the opening balance of the accumulated deficit of $96,100 and a corresponding charge to deferred revenue as of September 30, 2017, had accumulated lossesJanuary 1, 2018 due to the cumulative impact of $12,968,000. For the nine monthsadoption of Topic 606. The impact to the revenue for the quarter ended September 30, 2017, the Company had net income from operationsMarch 31, 2018 as a result of $246,600. At September 30, 2017, the Company had positive working capitalapplying Topic 606 was not material. The disclosure of $43,300 and stockholders’ equity of $57,800. For the year ended December 31, 2016, the Company’s net income from operations was $271,800. The Company, whichdisaggregated revenue is substantially dependent on its licensees to generate licensing revenues, may incur operating losses and experience negative cash flowdisclosed in the future. Sustaining profitability and positive cash flow depends on the Company’s ability to maintain the increases in revenues and gross profits that it realized in 2016 and through the first nine months of 2017 from its traditional business. There can be no assurances that the Company will be able to generate sufficient revenues and gross profits to sustain profitability and positive cash flow in the future.Note 10.
Receipt of funds in earlier periods from investors and from demand loan holders have allowed the Company to remain in operation through the current date. ManagementThe adoption of the Company believes that it may need additional capital ifnew guidance affected our recognition of revenue from licenses and royalties. Under our previous accounting practice, we recognized revenue from licenses and royalties on a straight-line basis over the Company is unable toterm of the related license agreement. As a result of our adoption of the new guidance, we will recognize revenue from licensees and royalties at least maintaina point in time when the revenue level and profits achieved during 2016 andterm begins.
The change in accumulated deficit on our Balance Sheet at March 31, 2018, including the first nine monthsaggregate impact of 2017. There can be no assurances that the Company will be successfulchange in obtaining sufficient additional capital, if needed, or if it does, that the additional capital will enable the Company to impact its revenues soaccounting principles which was effective on January 1, 2018, was 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.follows:
Accumulated deficit – January 1, 2018 |
| $ | (12,811,000 | ) |
Net earnings |
|
| 95,800 |
|
Cumulative effect of accounting change |
|
| 96,100 |
|
Accumulated deficit – March 31, 2018 |
| $ | (12,619,100 | ) |
5
NOCOPI TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
Note 3. Stock Based Compensation
TheOur Company follows FASB ASC 718,Compensation – Stock Compensation, and uses the Black-Scholes option pricing model to calculate the grant-date fair value of an award. At September 30, 2017, theMarch 31, 2019, our Company did not have an active stock option plan. There was no unrecognized portion of expense related to stock option grants at September 30, 2017.March 31, 2019.
Note 4. Demand LoansLine of Credit
DuringIn November 2018, our Company negotiated a $150,000 revolving line of credit with a bank to provide a source of working capital, if required. The line of credit is secured by all the third quarterassets of 2017, theour Company repaid the remaining $10,000 principal balance of an unsecured loan from an individual and at September 30, 2017 had no demand loans outstanding. During the nine months ended September 30, 2016, the Company repaid the remaining $13,500 principal balance of an unsecured loan from a second individual. The loans borebears interest at the bank’s prime rate for a period of one year and its prime rate plus 1.5% thereafter. The line of credit is subject to an annual ratereview and quiet period. There have been no borrowings under the line of 8%.credit since its inception.
4
NOCOPI TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
Note 5. Convertible Debentures
At September 30, 2017, theMarch 31, 2019, our Company had convertible debentures totaling $128,300 outstanding, of which $95,000 were due during the third quarter of 2017 and $33,300 are due during the third quarter of 2018.2019. The convertible debentures bear interest at 7%. At the option of the lender, the debentures and accrued interest are convertible in whole or part into common stock of theour Company at $0.025 per share. During the firstthird quarter of 2017, the2018, our Company’s Board of Directors approved and the holders of $33,300 of convertible debentures that had matured during the third quarter of 2016, one of which is held by a Director of the Company, accepted an offer of extension whereby the maturity dates of the convertible debentures are extended for two years and the conversion rate of the debentures and accrued interest into Common Stock of the Company is reduced from $0.05 to $0.025. In accordance with FASB ASC 470, this modification of the convertible debentures was recorded as a debt discount to the notes payable of approximately $13,200 with an offsetting credit to additional-paid in capital. In the three months ended March 31, 2017, the entire $13,200 was accreted through interest expense.
Early in the fourth quarter of 2017, the holders of $95,000all $128,300 of convertible debentures agreed to extend the maturity dates of those convertible debentures for one year to the third quarter of 2019 with no change in the terms or conditions of the debentures.
TheOur Company also granted warrants to purchase 691,365 shares of theour Company’s common stock at $0.02 per share to the holders of the debentures. The warrants are exercisable two years after issuance and expire seven years after issuance. The fair value of the warrants was determined using the Black-Scholes pricing model. The relative fair value of the warrants was recorded as a discount to the notes payable with an offsetting credit to additional paid-in capital since theour Company determined that the warrants were an equity instrument in accordance with FASB ASC 815. The debt discount related to the warrant issuances has been accreted through interest expense over the term of the notes payable. For the three months ended September 30, 2017 and September 30, 2016, $0 was accreted through interest expense. For the nine months ended September 30, 2017 and September 30, 2016, $0 and approximately $500, respectively, was accreted through interest expense.
The following table summarizes allour Company’s warrant activity of the Company sinceposition at March 31, 2019 and December 31, 2016:2018:
|
|
|
|
|
| Weighted Average |
|
|
|
|
|
| Weighted Average |
| ||||||||||
|
| Number |
| Exercise |
| Exercise |
|
| Number |
| Exercise |
| Exercise |
| ||||||||||
|
| of Shares |
| Price |
| Price |
|
| of Shares |
| Price |
| Price |
| ||||||||||
Outstanding warrants - |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||
December 31, 2016 |
|
| 721,365 |
|
| $0.01 to $0.07 |
|
| $ | 0.021 |
| |||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Warrants expired |
|
| 12,300 |
| $0.06 and $0.07 |
| $ | 0.063 |
| |||||||||||||||
December 31, 2018 |
|
| 691,365 |
|
| $ | 0.02 |
|
| $ | 0.02 |
| ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Outstanding warrants - |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
September 30, 2017 |
|
| 709,065 |
|
| $0.01 to $0.03 |
|
| $ | 0.020 |
| |||||||||||||
March 31, 2019 |
|
| 691,365 |
|
| $ | 0.02 |
|
| $ | 0.02 |
| ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Weighted average remaining |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
contractual life (years) |
|
| 3.01 |
|
|
|
|
|
|
|
| 1.58 |
|
|
|
|
| |||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Exercisable warrants - |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
September 30, 2017 |
|
| 709,065 |
|
| $0.01 to $0.03 |
|
| $ | 0.020 |
| |||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||||||
Weighted average remaining |
|
|
|
|
|
|
|
|
| |||||||||||||||
contractual life (years) |
|
| 3.01 |
|
|
|
|
|
| |||||||||||||||
March 31, 2019 |
|
| 691,365 |
|
| $ | 0.02 |
|
| $ | 0.02 |
|
Note 6. Other Income (Expenses)
Other income (expenses) in the three months and nine months ended September 30, 2017 and September 30, 2016 includes interest on unsecured loans from two individuals and on convertible debentures held by nine investors. Also included in other income (expenses) is accretion of debt discounts in the nine months ended September 30, 2017 related to the extension of the maturity dates of $33,300 of convertible debentures.
56
NOCOPI TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
Note 6. Other Income (Expenses)
Other income (expenses) for the three months ended March 31, 2019 and March 31, 2018 includes interest on debentures held by nine investors.
Note 7. Income Taxes
There is no provision for federal income taxes for the three months ended March 31, 2019 and nine months ended September 30, 2017 and September 30, 2016March 31, 2018 due to the availability of net operating loss carryforwards. TheOur Company has createdestablished a valuation allowance for the entire amount of such benefits.benefits resulting from our Company’s net operating loss carryforwards because our Company has determined that the realization of the net deferred tax asset is not assured.
The components for state income tax expense resulting from the limitation on the use of net operating losses are:
|
| Three months ended |
| |||||
|
| March 31, |
| |||||
|
| 2019 |
|
| 2018 |
| ||
Current state taxes |
| $ | 60,300 |
|
|
| – |
|
Deferred state taxes |
|
| (54,400 | ) |
|
| – |
|
|
| $ | 5,900 |
|
|
| – |
|
There was no change in unrecognized tax benefits during the period ended September 30, 2017March 31, 2019 and there was no accrual for uncertain tax positions as of September 30, 2017.March 31, 2019.
Tax years from 20132015 through 20162018 remain subject to examination by U.S. federal and state jurisdictions.
Note 8. Related Party Transactions
During the ninethree months ended September 30, 2017 and September 30, 2016 theMarch 31, 2018, our Company paid $151,700 and $15,000, respectively,$70,900 to Michael A. Feinstein, M.D., theour Company’s Chairman of the Board and Chief Executive Officer, representing a portion of previously deferred salary owed to him under an employment agreement with theour Company. During each of the ninethree month periodsperiod ended September 30, 2017 and September 30, 2016,March 31, 2018, Dr. Feinstein deferred $63,800$21,250 of salary. At September 30, 2017,The deferred salary was fully repaid to Dr. Feinstein during 2018 and, at March 31, 2019, there was no deferred salary owed approximately $213,300 of salary deferred byto him. There iswas no interest payable on the deferred salary.
Note 9. Earnings (Loss) per Share
In accordance withFASB ASC 260,Earnings per Share, basic earnings (loss) per common share is computed using net earnings (loss) divided by the weighted average number of common shares outstanding for the periods presented. The computation of diluted earnings per common share involves the assumption that outstanding common shares are increased by shares issuable upon exercise of those stock options and warrants for which the market price exceeds the exercise price. The number of shares issuable upon the exercise of such stock options and warrants is decreased by shares that could have been purchased by theour Company with related proceeds. For the three months ended March 31, 2019 and nine months ended September 30, 2017,March 31, 2018, the number of incremental common shares resulting from the assumed conversion of warrants was 297,448384,773 and 292,619,295,167, respectively. For the three months and nine months ended September 30, 2016, the number of incremental common shares resulting from the assumed conversion of warrants was 639 and 1,368, respectively.
Note 10. Major Customer and Geographic Information
TheOur Company’s revenues, expressed as a percentage of total revenues, from non-affiliated customers that equaled 10% or more of theour Company’s total revenues were:
|
| Three Months ended September 30 |
|
| Nine Months ended September 30 |
|
| Three Months ended March 31 |
| |||||||||||||||
|
| 2017 |
|
| 2016 |
|
| 2017 |
|
| 2016 |
|
| 2019 |
|
| 2018 |
| ||||||
Customer A |
|
| 48 | % |
|
| 60 | % |
|
| 43 | % |
| 37 | % |
|
| 34 | % |
|
| 40 | % | |
Customer B |
| 27 | % |
| 21 | % |
| 25 | % |
| 22 | % |
| 30 | % |
|
| 27 | % | |||||
Customer C |
| 4 | % |
| 3 | % |
| 9 | % |
| 19 | % |
| 12 | % |
|
| 15 | % |
The
7
NOCOPI TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
Our Company’s non-affiliate customers, whose individual balances amounted to more than 10% of theour Company’s net accounts receivable, expressed as a percentage of net accounts receivable, were:
|
| September 30 |
|
| December 31 |
| ||
|
| 2017 |
|
| 2016 |
| ||
Customer A |
|
| 20 | % |
|
| 26 | % |
Customer B |
|
| 45 | % |
|
| 47 | % |
Customer C |
|
| 8 | % |
|
| 5 | % |
|
| March 31 |
|
| December 31 |
| ||
|
| 2019 |
|
| 2018 |
| ||
Customer B |
|
| 87 | % |
|
| 86 | % |
TheOur Company performs ongoing credit evaluations of its customers and generally does not require collateral. TheOur Company also maintains allowances for potential credit losses. The loss of a major customer could have a material adverse effect on theour Company’s business operations and financial condition.
6
NOCOPI TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
TheOur Company’s revenues by geographic region are as follows:
|
| Three Months ended September 30 |
| Nine Months ended September 30 |
|
| Three Months ended March 31 |
| ||||||||||||||||
|
| 2017 |
| 2016 |
| 2017 |
| 2016 |
|
| 2019 |
| 2018 |
| ||||||||||
North America |
| $ | 181,800 |
| $ | 184,900 |
| $ | 493,600 |
| $ | 411,300 |
|
| $ | 216,600 |
| $ | 184,900 |
| ||||
South America |
|
| 1,500 |
| – |
| 1,500 |
| – |
|
| – |
| 1,500 |
| |||||||||
Europe |
|
| 100 |
| – |
| 300 |
| – |
| ||||||||||||||
Asia |
|
| 211,600 |
| 351,400 |
| 585,800 |
| 596,400 |
|
| 192,800 |
| 239,000 |
| |||||||||
Australia |
|
| 7,400 |
|
|
| 7,400 |
|
|
| 22,200 |
|
|
| 22,200 |
| ||||||||
|
| $ | 402,400 |
|
| $ | 543,700 |
|
| $ | 1,103,400 |
|
| $ | 1,029,900 |
|
| $ | 409,400 |
|
| $ | 425,400 |
|
Note 11. Subsequent EventLeases
In October 2017,Our Company conducts its operations in leased facilities under a warrant holder exercised warrantsnon-cancelable operating lease expiring in 2024.
Due to purchase 17,700 shares of common stockthe adoption of the new lease standard under the optional transition method which allows the entity to apply the new lease standard at the adoption date, our Company at exercise prices ranging from $0.01has capitalized the present value of the minimum lease payments commencing January 1, 2019, using an estimated incremental borrowing rate of 6%. The minimum lease payments do not include common area annual expenses which are considered to $0.03.be non-lease components.
As of January 1, 2019 the operating lease right-of-use asset and operating lease liability amounted to $241,100 with no cumulative-effect adjustment to the opening balance of accumulated deficit.
There are no other material operating leases. Our Company has elected not to recognize right-of-use assets and lease liabilities arising from short-term leases.
Future minimum lease payments under non-cancelable operating leases with initial or remaining terms of one year or more at March 31, 2019 are: $37,800 – 2019; $51,600 – 2020; $53,100 – 2021; $54,600 – 2022; $56,200 – 2023 and $18,900 – 2024.
Total lease expense under operating leases for the three months ended March 31, 2019 and March 31, 2018 was $13,300 and $11,300, respectively.
Maturities of lease liabilities were as follows:
|
|
|
|
| Operating Leases |
| |
Year ending December 31 |
|
|
|
|
|
|
|
2019 |
|
|
|
| $ | 50,000 |
|
2020 |
|
|
|
|
| 51,600 |
|
2021 |
|
|
|
|
| 53,100 |
|
2022 |
|
|
|
|
| 54,600 |
|
2023 |
|
|
|
|
| 56,200 |
|
2024 |
|
|
|
|
| 18,900 |
|
Total lease payments |
|
|
|
|
| 284,400 |
|
Less imputed interest |
|
|
|
|
| (43,300 | ) |
Total |
|
|
|
| $ | 241,100 |
|
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Forward-Looking Information
This report on Form 10-Q contains, and our officers and representatives may from time to time make, "forward-looking statements" within the meaning of the safe harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. Forward-looking statements can be identified by words such as: "anticipate," "intend," "plan," "goal," "seek," "believe," "project," "estimate," "expect," "strategy," "future," "likely," "may," "should," "will" and similar references to future periods. Examples of forward-looking statements include, among others, statements we makeregarding regarding:
·
Expected operating results, such as revenue growth and earnings
·
Anticipated levels of capital expenditures for fiscal year 2017 and beyond
·
Current or future volatility in market conditions
·
Our belief that we have sufficient liquidity to fund our business operations during the next twelve months
·
Strategy for customer retention, growth, product development, market position, financial results and reserves
· | Expected operating results, such as revenue growth and earnings | |
· | Anticipated levels of capital expenditures for fiscal year 2019 and beyond | |
· | Current or future volatility in market conditions | |
· | Our belief that we have sufficient liquidity to fund our business operations during the next twelve months | |
· | Strategy for customer retention, growth, product development, market position, financial results and reserves | |
· | Strategy for risk management |
Forward-looking statements are neither historical facts nor assurances of future performance. Instead, they are based only on our current beliefs, expectations and assumptions regarding the future of our business, future plans and strategies, projections, anticipated events and trends, the economy and other future conditions. Because forward-looking statements relate to the future, they are subject to inherent uncertainties, risks and changes in circumstances that are difficult to predict and many of which are outside of our control. Our actual results and financial condition may differ materially from those indicated in the forward-looking statements. Therefore, you should not rely on any of these forward-looking statements. Important factors that could cause our actual results and financial condition to differ materially from those indicated in the forward-looking statements include, among others, the following:
·
The extent to which we are successful in gaining new long-term relationships with customers or retaining significant existing customers and the level of service failures that could lead customers to use competitors' services.
·
Our ability to improve our current credit rating with our vendors and the impact on our raw materials and other costs and competitive position of doing so.
·
The impact of losing our intellectual property protections or the loss in value of our intellectual property.
·
Changes in customer demand.
·
The adequacy of our cash flow and earnings and other conditions which may affect our ability to timely service our debt obligations.
·
The occurrence of hostilities, political instability or catastrophic events.
·
Such other factors as discussed throughout Part I, Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations in this report, and throughout Part II, Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations and in Part I, Item 1A. Risk Factors of our Annual Report on Form 10-K for the year ended December 31, 2016.
· | The extent to which we are successful in gaining new long-term relationships with customers or retaining significant existing customers and the level of service failures that could lead customers to use competitors' services. | |
· | Our ability to improve our current credit rating with our vendors and the impact on our raw materials and other costs and competitive position of doing so. | |
· | The impact of losing our intellectual property protections or the loss in value of our intellectual property. | |
· | Changes in customer demand. | |
· | The adequacy of our cash flow and earnings and other conditions which may affect our ability to timely service our debt obligations. | |
· | The occurrence of hostilities, political instability or catastrophic events. | |
· | Such other factors as discussed throughout Part I, Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations in this report, and throughout Part II, Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations and in Part I, Item 1A. Risk Factors of our Annual Report on Form 10-K for the year ended December 31, 2018. |
Any forward-looking statement made by us in this report is based only on information currently available to us and speaks only as of the date on which it is made. We undertake no obligation to publicly update any forward-looking statement, whether written or oral, that may be made from time to time, whether as a result of new information, future developments or otherwise.
The following discussion and analysis should be read in conjunction with our Condensed financial statements, included herewith. This discussion should not be construed to imply that the results discussed herein will necessarily continue into the future, or that any conclusion reached herein will necessarily be indicative of actual operating results in the future. Such discussion represents only the best present assessment of our management. This information should also be read in conjunction with our audited historical financial statements which are included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2016,2018, filed with the Securities and Exchange Commission on March 30, 2017.29, 2019.
Background Overview
Nocopi Technologies, Inc. develops and markets specialty reactive inks for applications in the large educational and toy products market. We also develop and market technologies for document and product authentication, which we believe can reduce losses caused by fraudulent document reproduction or by product counterfeiting and/or diversion. We derive our revenues primarily from licensing our technologies on an exclusive or non-exclusive basis to licensees who incorporate our technologies into their product offering and from selling products incorporating our technologies to the licensees or to their licensed printers.
Unless the context otherwise requires, all references to the “Company,” “we,” “our” or “us” and other similar terms means Nocopi Technologies, Inc., a Maryland corporation.
Results of Operations
TheOur Company’s revenues are derived from (i)(a) royalties paid by licensees of the Company’s technologies; (ii)our technologies, (b) fees for the provision of technical services to licensees;licensees and (iii)(c) from the direct sale of (a)(i) products incorporating the Company’sour technologies, such as inks, security paper and pressure sensitive labels, and (b)(ii) equipment used to support the application of the Company’sour technologies, such as ink-jet printing systems. Royalties consist of guaranteed minimum royalties payable by the Company’sour licensees and/orin certain cases and 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.
TheOur 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 (i) upon shipment of products; (ii) when the price is fixed or determinable; and (iii) when collectability 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) collectability is reasonably assured.
a. | License fees for the use of our technology and royalties with guaranteed minimum amounts are recognized at a point in time when the term begins; | |
b. | Product sales are recognized at the time of the transfer of goods to customers at an amount that our Company expects to be entitled to in exchange for these goods, which is at the time of shipment; and | |
c. | Fees for technical services are recognized at the time of the transfer of services to customers at an amount that our Company expects to be entitled to in exchange for the services, which is when the service has been rendered. |
The Company believesWe believe that, as fixed cost reductions beyond those it haswe have achieved in recent years may not be achievable, itsour 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 amountsamount of theour Company’s revenues and the mix among the various sources of revenue are subject to substantial fluctuation. The Company hasWe have 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 theour Company’s total revenue, and on its revenue mix and overall financial performance. Such changes may result from a substantial 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 theour Company agrees to revise such 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 thirdfirst quarter of 20172019 were $402,400$409,400 compared to $543,700$425,400 in the thirdfirst quarter of 2016,2018, a decrease of $141,300,$16,000, or approximately 26%4%. Licenses, royalties and fees increased by $7,900,$15,600, or approximately 5%9%, to $178,200 in the thirdfirst quarter of 20172019 to $190,500 from $170,300$174,900 in the thirdfirst quarter of 2016.2018. The increase in licenses, royalties and fees is due primarily to higher licensingroyalty revenue received from fourtwo licensees including one licensee addedoffset in the second half of 2016.part by lower royalty revenue received from a licensee. There can be no assurances that the marketing and product development activities of theour Company’s licensees or other businesses in the entertainment and toy products market will produce sustained increasesa significant increase in revenues for theour Company, nor can the timing of any potential revenue increases be predicted, particularly given the uncertain economic conditions being experienced worldwide.
Product and other sales decreased by $149,200,$31,600, or approximately 40%13%, to $224,200$218,900 in the thirdfirst quarter of 20172019 from $373,400$250,500 in the thirdfirst quarter of 2016.2018. Sales of ink decreased in the thirdfirst quarter of 20172019 compared to the thirdfirst quarter of 20162018 due primarily to a decrease inlower ink shipments to the volume of ink shipped in the third quarter of 2017 to a third party authorized printerprinters used by onetwo of theour Company’s major licensees in the entertainment and toy products market compared to the third quarter of 2016, along with loweroffset in part by higher ink shipments to theour Company’s licensees in the retail receipt and document fraud market. This new printer was appointed late inIn the secondfirst quarter of 2016 and, at that time, placed a significant amount of ink orders that were shipped in the third quarter of 2016. In 2017, this printer’s orders and shipments were more equally balanced between the second and third quarters. In the third quarter of 2017, the2019, our Company derived revenues of approximately$344,900 $335,900 from itsour Company’s licensees and their authorized printers in the entertainment and toy products market compared to revenues of approximately $490,100 in the third quarter of 2016.
For the first nine months of 2017, revenues were $1,103,400, representing an increase of $73,500, or approximately 7% higher than revenues of $1,029,900$369,300 in the first nine monthsquarter of 2016. Licenses, royalties and fees of $468,900 in the first nine months of 2017 were $87,100, or approximately 23%, higher than licenses, royalties and fees of $381,800 in the first nine months of 2016. The increase in licenses, royalties and fees is due primarily to higher licensing revenue received from four licensees including one licensee added in the second half of 2016.2018.
Product and other sales decreased by $13,600, or approximately 2%, to $634,500 in the first nine months of 2017 from $648,100 in the first nine months of 2016. Sales of ink decreased in the first nine months of 2017 compared to the first nine months of 2016 due primarily to lower ink shipments to the Company’s licensees in the retail receipt and document fraud market. The Company derived revenues of approximately $932,600 from licensees and their authorized printers in the entertainment and toy products market in the first nine months of 2017 compared to revenues of approximately $883,800 in the first nine months of 2016.
TheOur Company’s gross profit decreased to $296,800$293,900, or approximately 72% of gross revenues, in the thirdfirst quarter of 2017,2019 from $308,200, or approximately 74%72% of gross revenues, from $350,300 in the thirdfirst quarter of 2016, or approximately 64% of revenues.2018. Licenses, royalties and fees have historically carried a higher gross profit than product and other sales. Such other sales, which generally consist of either supplies or other manufactured products which incorporate theour Company’s technologies or equipment used to support the application of its technologies. These items (except for inks which are manufactured by theour Company) are generally purchased from third-party vendors and resold to the end-user or licensee and carry a lower gross profit than licenses, royalties and fees. The lower gross profit in the third quarter of 2017 compared to the third quarter of 2016 results primarily from lower gross revenues from product and other sales offset in part by higher gross revenues from licenses, royalties and fees in the third quarter of 2017 compared to the third quarter of 2016.
For the first nine months of 2017, gross profit was $783,700, or approximately 71% of revenues, compared to $681,700, or approximately 66% of revenues, in the first nine months of 2016. The higher gross profit in the first nine months of 2017 compared to the first nine months of 2016 results from higher gross revenues from licenses, royalties and fees along with a higher gross profit from product and other sales in the first nine months of 2017 compared to the first nine months of 2016 resulting from a favorable mix of products sold in the first nine months of 2017 compared to the first nine months of 2016.
As the variable component of cost of revenues related to licenses, royalties and fees is a low percentage of these revenues and the fixed component is not substantial, period to period changes in revenues from licenses, royalties and fees can significantly affect both the gross profit from licenses, royalties and feesthese sources as well as our Company’s overall gross profit. Primarily due to higher revenues from licenses, royalties and fees in the third quarter of 2017 compared to the third quarter of 2016, theThe gross profit from licenses, royalties and fees increased to approximately 87% of revenues in the third quarter of 2017 from approximately 79% of revenues in the third quarter of 2016. The gross profit from licenses, royalties and fees was approximately 85% in the first nine months of 2017 compared to approximately 81% in first nine months of 2017 resulting from the same factors as the third quarter of 2017 compared to2019 from approximately 86% in the thirdfirst quarter of 2016.2018.
The gross profit of product and other sales, expressed as a percentage of revenues, of product and other sales is dependent on both the overall sales volumes of product and other sales and on the mix of the specific goods produced and/or sold. ThePrimarily due to lower sales of inks and other products and a favorable product mix in the first quarter of 2019 compared to the first quarter of 2018, there was a lower gross profit from product and other sales increasedof approximately 59% of revenues in the first quarter of 2019 compared to a gross profit of approximately 63% of revenues in the thirdfirst quarter of 2017 compared to approximately 58% of revenues in the third quarter of 2016. This increase in the gross profit, expressed as a percentage of revenues was due primarily to a change in mix of products sold during the third quarter of 2017 compared to the third quarter of 2016. For the first nine months of 2017, the gross profit, expressed as a percentage of revenues, increased to approximately 61% of revenues from product and other sales compared to approximately 58% of revenues from product and other sales in the first nine months of 2016 resulting from the same factors as the third quarter of 2017 compared to the third quarter of 2016.2018.
Research and development expenses of $36,300 in the third quarter of 2017 and $109,200$38,000 in the first nine monthsquarter of 20172019 were comparable to $33,700 in the third quarter of 2016 and $103,700$37,100 in the first nine monthsquarter of 2016.2018.
Sales and marketing expenses decreased to $67,200$68,900 in the thirdfirst quarter of 20172019 from $72,800$70,100 in the thirdfirst quarter of 20162018 due primarily to lower commission expense on the lower level of sales in the third quarter of 2017 compared to the third quarter of 2016. Sales and marketing expenses increased to $187,900revenues in the first nine monthsquarter of 2017 compared to $176,700 the first nine months of 2016 due primarily to higher commission expense on the higher level of sales in the first nine months of 20172019 compared to the first nine monthsquarter of 2016.2018.
General and administrative expenses increaseddecreased in the thirdfirst quarter and first nine months of 20172019 to $80,400 and $240,000, respectively, from $69,900 and $224,200$94,100 compared to $102,700 in the thirdfirst quarter and first nine months of 2016, respectively,2018 due primarily to higher employment costs, insurance expenseslower legal and fees offset in part by lower legalpatent related expenses in the thirdfirst quarter and first nine months of 20172019 compared to the thirdfirst quarter and first nine months of 2016.2018.
Other income (expenses) in the thirdfirst quarter of 2019 and first nine months of 2017 and 20162018 included interest on unsecured loans from two individuals and on convertible debentures held by nine investors. Also included in other income (expenses) is accretion of debt discounts in the first nine months of 2017 related to the extension of the maturity dates of $33,300 of convertible debentures. Other income (expenses) decreased to $3,100 in the third quarter of 2017 from $3,300 in the third quarter of 2016. Other income (expenses) increased to $22,400 in the first nine months of 2017 from $10,100 in the first nine months 2016. This increase is due primarily to accretion of debt discounts in the first nine months of 2017 related to the extension of the maturity dates of $33,300 of convertible debentures
Income taxes in the first quarter of 2017.2019 result from limitations placed on income tax net operating loss deductions by the Commonwealth of Pennsylvania.
The lower net income of $109,800$85,400 in the thirdfirst quarter of 20172019 compared to the net income of $170,600$95,800 in the thirdfirst quarter of 20162018 resulted primarily from a lower gross profit on a lower level of revenues in the thirdfirst quarter of 20172019 compared to the thirdfirst quarter of 2016 along with higher2018 and income taxes resulting from a change in Pennsylvania tax law offset in part by lower operating expenses in the thirdfirst quarter of 2017 compared to the third quarter of 2016. The net income of $224,200 in the first nine months of 2017 compared to the net income of $167,000 in the first nine months of 2016 resulted primarily from a higher gross profit on a higher level of revenues in the first nine months of 20172019 compared to the first nine monthsquarter of 2016 offset in part by higher operating expenses and accretion of debt discounts in the first nine months of 2017 compared to the first nine months of 2016.2018.
Plan of Operation, Liquidity and Capital Resources
During the first nine monthsquarter of 2017, the2019, our Company’s cash increased to $362,800$544,000 at September 30, 2017March 31, 2019 from $199,100$400,800 at December 31, 2016.2018. During the first nine monthsquarter of 2017, the2019, our Company generated $178,600$143,200 from its operating activities, used $4,900 for capital equipment and repaid $10,000 to an individual lender.activities.
During the first nine monthsquarter of 2017, the2019, our Company’s revenues increaseddecreased approximately 7%4% primarily as a result of lower sales of ink to the authorized printers of our Company’s licensees in the entertainment and toy products market offset in part by higher licensing and royalty revenues from newa licensee in the entertainment and existing licensees. The Company’s first nine months of 2017 total overhead expenses increased compared to the 2016 first nine monthstoy products market.
Our total overhead expenses and theour Company’s net interest expense increased related to accretion of interestdecreased in the first nine monthsquarter of 20172019 compared to the first nine monthsquarter of 2016.2018 and our Company’s income tax expense increased in the first quarter of 2019 compared to the first quarter of 2018. As a result of these factors, theour Company recorded a highergenerated net profitincome of $85,400 in the first nine monthsquarter of 20172019 compared to the$95,800 in first nine monthsquarter of 2016. The2018. Our Company had positive operating cash flow of $178,600$143,200 during the first nine monthsquarter of 2017.2019. At September 30, 2017, theMarch 31, 2019, our Company had positive working capital of $43,300$893,500 and stockholders’ equity of $57,800.$2,052,100. For the full year of 2016, the2018, our Company had net income of $258,500$1,655,400 and had positive operating cash flow of $202,600.$40,900. At December 31, 2016, the2018, our Company had negativepositive working capital of $194,600$810,500 and a $179,600 stockholders’ deficiency.equity of $1,966,700.
Through September 30, 2017, theOur Company repaid all $63,000 of short-term loans that had been outstanding at January 1, 2015. In 2015, the Company repaid $10,000has $128,300 of convertible debentures and, in 2017, extended the maturity dates of $33,300 of convertible debentures from 2016 to 2018 and extended the maturity dates of $95,000 of convertible debentures fromoutstanding that are due during the third quarter of 2017 to the third quarter of 2018. Borrowings and sales of common stock in years prior to January 1, 2015 have2019. These borrowings allowed theour Company to remain in operation through 2016. There can belate 2016 when our Company’s cash flow increased significantly.
Our Company has a $150,000 revolving line of credit with a bank that provides a source of working capital, if required. At March 31, 2019, there were no assurances thatoutstanding borrowings under the Company will be ableline of credit.
We may need to secure sufficientobtain additional funding through investments or borrowings that will allow the Company to fund losses that it presently believes may be experiencedcapital in the future to support the working capital requirements associated with our existing revenue base and to fund the potential negative impact on our profitability that could occur if our licensees experience significant declines in sales of products utilizing our Company’s technologies. We cannot assure you that we will be successful in obtaining sufficient additional capital, or if we do so, that the additional capital will enable our Company is unableto continue to operate profitably in the future and develop new revenue sources to have a material positive effect on our Company’s operations and cash flow.
We continue to maintain revenue levelsa cost containment program including curtailment, where possible, of discretionary research and profits consistent with 2016development and the first nine months of 2017. The Company believes that without additional investment, it may then be forced to cease operations at an undetermined date in the future.sales and marketing expenses.
The Company’sOur plan of operation for the twelve months beginning with the date of this quarterly report consists of concentrating available human and financial resources to continue to capitalize on the specific business relationships theour Company has developed in the entertainment and toy products market includingmarket. This includes two licensees withthat have been marketing products incorporating our Company’s technologies since 2012. These two licensees maintain a significant presence in the entertainment and toy products market that have been marketing products incorporating the Company’s technologies since 2012 along with a licensee added in 2015 who has been marketing products incorporating the Company’s available technologies in certain international markets since 2016. These licensees in the entertainment and toy products market are well known and highly regarded participants in this market. The Company believesWe anticipate that thethese two licensees that the Company has developed in the entertainment and toy products market will expand their current offerings incorporating the Company’sthat incorporate our technologies currently being marketed and will introduce and market new products incorporatingthat will incorporate our technologies available technologies covered by theto them under their license agreements that are not currently being marketed by them. The Company planswith our Company. We will continue to continue developingdevelop various applications for these licensees while expanding itslicensees. We also plan to expand our licensee base in the entertainment and toy market. The Company hasWe currently have additional licensees marketing or developing products incorporating the Company’sour technologies in certain geographic and niche markets of the overall entertainment and toy products market. The
Our Company maintains its presence in the retail loss prevention anti-counterfeiting and anti-diversion marketsmarket and believes that revenue growth in these marketsthis market can be achieved through increased security ink sales to its licensees in this market. The CompanyWe will continue to adjust itsour production and technical staff as necessary. The Company will also,necessary and, subject to available financial resources, invest in capital equipment needed to support potential growth in ink production requirements beyond itsour current capacity. Additionally, the Companywe will pursue opportunities to market itsour current technologies in specific security and non-security markets. There can be no assurances that these efforts will enable theour Company to generate additional revenues and positive cash flow.
TheOur Company has received and continues to seek additional capital, in the form of debt, equity or both, to support itsour working capital requirements. There can be no assurancesrequirementsand to provide funding for other business opportunities. We cannot assure you that the Companywe will be successful in raising additional capital, or that such additional capital, if obtained, will enable theour Company to generate additional revenues and positive cash flow.
The Company generatesAs previously stated, we generate a significant portion of itsour total revenues from licensees in the entertainment and toy products market. These licensees generally sell their products through retail outlets. DuringIn the year,future, such sales may be adversely affected by changes in consumer spending that may occur as a result of an uncertain economic environment. As a result, the Company’sour revenues, results of operations and liquidity may be negatively impacted as they were in previousearlier years.
Contractual Obligations
As of March 31, 2019, there were no material changes in our contractual obligations from those disclosed in our Annual Report on Form 10-K filed with the SEC on March 29, 2019, other than those appearing in the notes to the financial statements appearing elsewhere in this Quarterly Report on Form 10-Q.
Recently Adopted Accounting Pronouncements
AsIn February 2016, the FASB issued ASU No. 2016-02,Leases (Topic 842) and subsequent related updates. The core principle of September 30, 2017Topic 842 is that a lessee should recognize the assets and forliabilities that arise from operating leases. The Company adopted the standard effective January 1, 2019 under the optional transition method which allows the entity to apply the new lease standard at the adoption date and recognize a cumulative-effect adjustment, if any, to the opening balance of retained earnings in the period then ended, there were no recently adopted accounting pronouncements thatof adoption. The standard had a material effectimpact on the Company’s financial statements.balance sheet (see Note 11).
Recently Issued Accounting Pronouncements Not Yet Adopted
In May 2014, the FASBAs of March 31, 2019, there are no recently issued ASU No. 2014-09,Revenue from Contracts with Customers (Topic 606). The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration toaccounting standards not yet adopted which the entity expects to be entitled in exchange for those goods or services. This guidance will supersede current revenue recognition guidance which is effective for the Companywould have a material effect on January 1, 2018. Under the new standard, the Company may be required to recognize revenue from license fees at the point in time when the license is granted as opposed to the recognition as earned over the license term which has been our historical practice. The Company has not determined the method to be used in applying the amendments in this standard.Company’s financial statements.
Off-Balance Sheet Arrangements
TheOur Company does not have any off-balance sheet arrangements.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures.TheOur Company’s management, with the participation of theour Company’s Principal Executive Officer and Principal Financial Officer, evaluated the effectiveness of theour Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) as of September 30, 2017.March 31, 2019. Based on this evaluation, theour Company’s Principal Executive Officer and Principal Financial Officer concluded that, as of September 30, 2017 theMarch 31, 2019, our Company’s disclosure controls and procedures were effective, in that they provide reasonable assurance that information required to be disclosed by theour Company in the reports that it files or submits under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and is accumulated and communicated to theour Company’s management, including theour Company’s Principal Executive Officer and Principal Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
Changes in Internal Control Over Financial Reporting. There were no changes in our internal control over financial reporting during the quarter ended September 30, 2017March 31, 2019 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II - OTHER INFORMATION
(a) ExhibitsThe following exhibits are included herein:
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Pursuant to the requirement of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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| NOCOPI TECHNOLOGIES, INC. |
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DATE: |
| /s/ Michael A. Feinstein, M.D. |
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| Michael A. Feinstein, M.D. |
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| Chairman of the Board, President & Chief Executive Officer |
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DATE: |
| /s/ Rudolph A. Lutterschmidt |
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| Rudolph A. Lutterschmidt |
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| Vice President & Chief Financial Officer |
Exhibit No. | Description of Exhibit | Location | ||
3.1 |
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