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 March 31,September 30, 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)
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 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 every Interactive Data File required to be submitted 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 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 þ | 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 Securities 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.
|
|
|
Indicate the number of shares outstanding of each of the issuer’sissuer’s classes of common stock, as of the latest practicable date: 58,616,71660,324,698 shares of common stock, par value $0.01, as of May 9,November 8, 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 | |
4 | |
5 | |
|
|
Management’s Discussion and Analysis of Financial Condition and Results of Operations |
|
|
|
Controls and Procedures |
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|
Part II. OTHER INFORMATION |
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|
Unregistered Sales of Equity Securities and Use of Proceeds | |
16 | |
Exhibits |
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| |
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|
|
PART I – FINANCIAL INFORMATION
Statements of Operations*
(unaudited)
| Three Months ended |
| Nine Months ended |
| ||||||||||||||||||||
|
| Three Months ended March 31 |
|
| 2019 |
| 2018 |
| 2019 |
| 2018 |
| ||||||||||||
|
| 2019 |
| 2018 |
|
|
|
|
|
|
|
|
|
| ||||||||||
Revenues |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||
Licenses, royalties and fees |
| $ | 190,500 |
| $ | 174,900 |
|
| $ | 189,400 |
| $ | 175,200 |
| $ | 571,900 |
| $ | 2,005,700 |
| ||||
Product and other sales |
|
| 218,900 |
|
|
| 250,500 |
|
|
| 448,100 |
|
|
| 386,200 |
|
|
| 991,100 |
|
|
| 854,800 |
|
|
|
| 409,400 |
|
|
| 425,400 |
|
|
| 637,500 |
|
|
| 561,400 |
|
|
| 1,563,000 |
|
|
| 2,860,500 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||
Cost of revenues |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||
Licenses, royalties and fees |
| 25,200 |
| 25,000 |
|
| 41,400 |
| 35,100 |
| 98,200 |
| 84,300 |
| ||||||||||
Product and other sales |
|
| 90,300 |
|
|
| 92,200 |
|
|
| 166,600 |
|
|
| 137,900 |
|
|
| 380,300 |
|
|
| 323,500 |
|
|
|
| 115,500 |
|
|
| 117,200 |
|
|
| 208,000 |
|
|
| 173,000 |
|
|
| 478,500 |
|
|
| 407,800 |
|
Gross profit |
|
| 293,900 |
|
|
| 308,200 |
|
|
| 429,500 |
|
|
| 388,400 |
|
|
| 1,084,500 |
|
|
| 2,452,700 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||
Operating expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||
Research and development |
| 38,000 |
| 37,100 |
|
| 45,200 |
| 38,100 |
| 122,600 |
| 111,300 |
| ||||||||||
Sales and marketing |
| 68,900 |
| 70,100 |
|
| 81,000 |
| 74,600 |
| 224,200 |
| 313,200 |
| ||||||||||
General and administrative |
|
| 94,100 |
|
|
| 102,700 |
|
|
| 84,200 |
|
|
| 73,400 |
|
|
| 265,200 |
|
|
| 277,600 |
|
|
|
| 201,000 |
|
|
| 209,900 |
|
|
| 210,400 |
|
|
| 186,100 |
|
|
| 612,000 |
|
|
| 702,100 |
|
Net income from operations |
|
| 92,900 |
|
|
| 98,300 |
|
|
| 219,100 |
|
|
| 202,300 |
|
|
| 472,500 |
|
|
| 1,750,600 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||
Other income (expenses) |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||
Interest income |
| 1,100 |
| 400 |
|
| 4,600 |
| 700 |
| 7,200 |
| 1,400 |
| ||||||||||
Interest expense and bank charges |
|
| (2,700 | ) |
|
| (2,900 | ) |
|
| (2,600 | ) |
|
| (2,600 | ) |
|
| (8,000 | ) |
|
| (8,300 | ) |
|
|
| (1,600 | ) |
|
| (2,500 | ) |
|
| 2,000 |
|
|
| (1,900 | ) |
|
| (800 | ) |
|
| (6,900 | ) |
Net income before income taxes |
|
| 91,300 |
|
| 95,800 |
|
| 221,100 |
| 200,400 |
| 471,700 |
| 1,743,700 |
| ||||||||
Income taxes |
|
| 5,900 |
|
| – |
|
|
| 14,300 |
|
|
| 199,300 |
|
|
| 30,600 |
|
|
| 199,300 |
| |
Net income |
| $ | 85,400 |
|
| $ | 95,800 |
|
| $ | 206,800 |
|
| $ | 1,100 |
|
| $ | 441,100 |
|
| $ | 1,544,400 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Basic and diluted net income per common share |
| $ | .00 |
| $ | .00 |
|
| $ | .00 |
| $ | .00 |
| $ | .01 |
| $ | .03 |
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||
Weighted average common shares outstanding |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||
Basic |
| 58,616,716 |
| 58,616,716 |
|
| 59,614,698 |
| 58,616,716 |
| 58,949,377 |
| 58,616,716 |
| ||||||||||
Diluted |
| 59,001,489 |
| 58,911,883 |
|
| 59,990,371 |
| 59,012,626 |
| 59,322,141 |
| 58,977,284 |
|
*See accompanying notes to these financial statements.
Balance Sheets*
|
| March 31 |
| December 31 |
|
| September 30, |
| December 31, |
| ||||||
|
| 2019 |
| 2018 |
|
| 2019 |
| 2018 |
| ||||||
|
| (unaudited) |
| (audited) |
|
| (unaudited) |
| (audited) |
| ||||||
Assets | Assets |
| Assets |
| ||||||||||||
Current assets |
|
|
|
|
|
|
|
|
|
| ||||||
Cash |
| $ | 544,000 |
| $ | 400,800 |
|
| $ | 798,000 |
| $ | 400,800 |
| ||
Accounts receivable less $5,000 allowance for doubtful accounts |
| 642,800 |
| 579,000 |
|
| 834,500 |
| 579,000 |
| ||||||
Inventory |
| 146,100 |
| 133,500 |
|
| 161,000 |
| 133,500 |
| ||||||
Prepaid and other |
|
| 36,700 |
|
|
| 43,600 |
|
|
| 81,100 |
|
|
| 43,600 |
|
Total current assets |
|
| 1,369,600 |
|
|
| 1,156,900 |
|
|
| 1,874,600 |
|
|
| 1,156,900 |
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Fixed assets |
|
|
|
|
|
|
|
|
|
| ||||||
Leasehold improvements |
| 19,700 |
| 19,700 |
|
| 19,700 |
| 19,700 |
| ||||||
Furniture, fixtures and equipment |
|
| 185,400 |
|
|
| 185,400 |
|
|
| 185,800 |
|
|
| 185,400 |
|
|
| 205,100 |
| 205,100 |
|
| 205,500 |
| 205,100 |
| ||||||
Less: accumulated depreciation and amortization |
|
| 199,000 |
|
| 197,600 |
|
|
| 198,700 |
|
|
| 197,600 |
| |
|
| 6,100 |
| 7,500 |
|
|
| 6,800 |
|
|
| 7,500 |
| |||
Other assets |
|
|
|
|
|
|
|
|
|
| ||||||
Long-term receivables |
| 1,255,000 |
|
| 1,352,000 |
|
| 1,070,700 |
| 1,352,200 |
| |||||
Operating lease right of use – building |
|
| 231,500 |
|
|
| – |
| ||||||||
Operating lease right of use - building |
|
| 212,000 |
|
|
| – |
| ||||||||
|
|
| 1,486,500 |
|
|
| 1,352,200 |
|
|
| 1,282,700 |
|
|
| 1,352,200 |
|
Total assets |
| $ | 2,862,200 |
|
| $ | 2,516,600 |
|
| $ | 3,164,100 |
|
| $ | 2,516,600 |
|
|
|
|
|
| ||||||||||||
Liabilities and Stockholders' Equity | Liabilities and Stockholders' Equity |
| Liabilities and Stockholders' Equity |
| ||||||||||||
|
|
|
|
|
| |||||||||||
Current liabilities |
|
|
|
|
|
|
|
|
|
| ||||||
Convertible debentures |
| $ | 128,300 |
| $ | 128,300 |
|
| $ | 97,900 |
| $ | 128,300 |
| ||
Accounts payable |
| 18,400 |
| 16,500 |
|
| 41,400 |
| 16,500 |
| ||||||
Accrued expenses |
| 190,800 |
| 163,000 |
|
| 202,200 |
| 163,000 |
| ||||||
Income taxes |
| 98,900 |
| 38,600 |
|
| 37,500 |
| 38,600 |
| ||||||
Operating lease liability – current |
|
| 39,700 |
|
|
| – |
| ||||||||
Operating lease liability, current |
|
| 41,000 |
|
|
| – |
| ||||||||
Total current liabilities |
|
| 476,100 |
|
|
| 346,400 |
|
|
| 420,000 |
|
|
| 346,400 |
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Other liabilities |
|
|
|
|
|
|
|
|
|
| ||||||
Accrued expenses, non-current |
| 87,900 |
| 94,700 |
|
| 75,000 |
| 94,700 |
| ||||||
Deferred income taxes |
| 54,400 |
| 108,800 |
|
| 47,600 |
| 108,800 |
| ||||||
Operating lease liability – non-current |
|
| 191,700 |
|
|
| – |
| ||||||||
Operating lease liability, non-current |
|
| 171,000 |
|
|
| – |
| ||||||||
|
|
| 334,000 |
|
|
| 203,500 |
|
|
| 293,600 |
|
|
| 203,500 |
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Stockholders' equity |
|
|
|
|
|
|
|
|
|
| ||||||
Common stock, $0.01 par value |
|
|
|
|
|
|
|
|
|
| ||||||
Authorized – 75,000,000 shares |
|
|
|
|
|
|
|
|
|
| ||||||
Issued and outstanding – 58,616,716 shares |
| 586,200 |
| 586,200 |
| |||||||||||
Issued and outstanding |
|
|
|
|
| |||||||||||
2019 – 60,324, 698 shares; 2018 – 58,616,716 shares |
| 603,300 |
| 586,200 |
| |||||||||||
Paid-in capital |
| 12,440,000 |
| 12,440,000 |
|
| 12,465,600 |
| 12,440,000 |
| ||||||
Accumulated deficit |
|
| (10,974,100 | ) |
|
| (11,059,500 | ) |
|
| (10,618,400 | ) |
|
| (11,059,500 | ) |
Total stockholders' equity |
|
| 2,052,100 |
|
|
| 1,966,700 |
|
|
| 2,450,500 |
|
|
| 1,966,700 |
|
Total liabilities and stockholders' equity |
| $ | 2,862,200 |
|
| $ | 2,516,600 |
|
| $ | 3,164,100 |
|
| $ | 2,516,600 |
|
*See accompanying notes to these financial statements.
Statements of Cash Flows*
(unaudited)
|
| Three Months ended March 31 |
|
| Nine Months ended |
| ||||||||||
|
| 2019 |
| 2018 |
|
| 2019 |
|
| 2018 |
| |||||
Operating Activities |
|
|
|
|
|
|
|
|
|
|
| |||||
Net income |
| $ | 85,400 |
| $ | 95,800 |
|
| $ | 441,100 |
|
| $ | 1,544,400 |
| |
Adjustments to reconcile net income to net cash provided by (used in) operating activities |
|
|
|
|
|
|
|
|
|
|
|
|
| |||
Depreciation and amortization |
| 1,400 |
| 1,800 |
|
|
| 2,900 |
|
|
| 5,300 |
| |||
Deferred income taxes |
| (54,400 | ) |
| – |
|
|
| (61,200 | ) |
|
| 106,000 |
| ||
Non-current assets and liabilities – net |
| 90,300 |
| – |
| |||||||||||
Other assets |
|
| 69,500 |
|
|
| (1,423,800 | ) | ||||||||
Other liabilities |
|
| 192,300 |
|
|
| 99,600 |
| ||||||||
Cumulative effect of accounting change |
|
| – |
|
|
| 96,100 |
|
|
| – |
|
|
| 96,100 |
|
|
|
| 122,700 |
|
|
| 193,700 |
|
|
| 644,600 |
|
|
| 427,600 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||
(Increase) decrease in assets |
|
|
|
|
| |||||||||||
Increase in assets |
|
|
|
|
|
|
|
| ||||||||
Accounts receivable |
| (63,800 | ) |
| (90,500 | ) |
|
| (255,500 | ) |
|
| (308,000 | ) | ||
Inventory |
| (12,600 | ) |
| 2,000 |
|
|
| (27,500 | ) |
|
| (20,100 | ) | ||
Prepaid and other |
| 6,900 |
|
| (14,900 | ) |
|
| (37,500 | ) |
|
| (8,000 | ) | ||
Increase (decrease) in liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
| |||
Accounts payable and accrued expenses |
| 29,700 |
|
| (4,900 | ) |
|
| 76,400 |
|
|
| (159,000 | ) | ||
Taxes on income |
| 60,300 |
| – |
| |||||||||||
Income taxes |
|
| (1,100 | ) |
|
| 93,300 |
| ||||||||
Deferred revenue |
| – |
|
|
| (99,400 | ) |
|
| – |
|
|
| (99,400 | ) | |
|
|
| 20,500 |
|
|
| (207,700 | ) |
|
| (245,200 | ) |
|
| (501,200 | ) |
Net cash provided by (used in) operating activities |
| 143,200 |
|
| (14,000 | ) |
|
| 399,400 |
|
|
| (73,600 | ) | ||
|
|
|
|
|
|
|
|
| ||||||||
Investment Activities |
|
|
|
|
|
|
|
| ||||||||
Additions to fixed assets |
|
| (2,200 | ) |
|
| (500 | ) | ||||||||
Net cash used in investing activities |
|
| (2,200 | ) |
|
| (500 | ) | ||||||||
|
|
|
|
|
|
|
|
| ||||||||
Increase (decrease) in cash |
|
| 397,200 |
|
|
| (74,100 | ) | ||||||||
Cash at beginning of year |
|
| 400,800 |
|
|
| 360,400 |
|
|
| 400,800 |
|
|
| 360,400 |
|
Cash at end of period |
| $ | 544,000 |
| $ | 346,400 |
|
| $ | 798,000 |
|
| $ | 286,300 |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||
Supplemental Disclosure of Non Cash Lease Activities |
|
|
|
|
| |||||||||||
Supplemental Disclosure of Non-Cash Investing and Financing Activities |
|
|
|
|
|
|
|
| ||||||||
Operating lease right of use – building |
| $ | 241,100 |
| $ | – |
|
| $ | 241,100 |
|
| $ | – |
| |
Operating lease liability |
| $ | (241,100 | ) |
| $ | – |
|
| $ | (241,100 | ) |
| $ | – |
|
Accumulated depreciation and amortization |
| $ | 1,800 |
|
| $ | – |
| ||||||||
Furniture, fixtures and equipment |
| $ | (1,800 | ) |
| $ | – |
| ||||||||
Convertible debentures |
| $ | 30,400 |
|
| $ | – |
| ||||||||
Accrued expenses |
| $ | 12,300 |
|
| $ | – |
| ||||||||
Common stock |
| $ | (17,100 | ) |
| $ | – |
| ||||||||
Paid-in capital |
| $ | (25,600 | ) |
| $ | – |
|
*See accompanying notes to these financial statements.
Statements of Stockholders’ Equity*
For the Periods December 31, 2018 through March 31,September 30, 2019 and December 31, 2017 through March 31,September 30, 2018
(unaudited)
|
| Common stock |
| Paid-in |
| Accumulated |
|
|
|
| Common stock |
| Paid-in |
| Accumulated |
|
|
| ||||||||||||||||||||||
|
| Shares |
|
| Amount |
| Capital |
| Deficit |
| Total |
|
| Shares |
|
| Amount |
| Capital |
| Deficit |
| Total |
| ||||||||||||||||
Balance – December 31, 2018 |
| 58,616,716 |
|
| $ | 586,200 |
|
| $ | 12,440,000 |
|
| $ | (11,059,500 | ) |
| $ | 1,966,700 |
|
| 58,616,716 |
|
| $ | 586,200 |
|
| $ | 12,440,000 |
|
| $ | (11,059,500 | ) |
| $ | 1,966,700 |
| ||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
| 85,400 |
|
|
| 85,400 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 85,400 |
|
|
| 85,400 |
|
Balance – March 31, 2019 |
|
| 58,616,716 |
|
| $ | 586,200 |
|
| $ | 12,440,000 |
|
| $ | (10,974,100 | ) |
| $ | 2,052,100 |
|
| 58,616,716 |
|
|
| 586,200 |
|
| 12,440,000 |
|
| (10,974,100 | ) |
|
| 2,052,100 |
| |||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||||||
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
| 148,900 |
|
|
| 148,900 |
| ||||||||||||||||||||
Balance – June 30, 2019 |
| 58,616,716 |
|
|
| 586,200 |
|
| 12,440,000 |
|
| (10,825,200 | ) |
|
| 2,201,000 |
| |||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||||||
Issuance of common stock |
| 1,707,982 |
|
|
| 17,100 |
|
| 25,600 |
|
|
|
|
| 42,700 |
| ||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||||||
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
| 206,800 |
|
|
| 206,800 |
| ||||||||||||||||||||
Balance – September 30, 2019 |
|
| 60,324,698 |
|
| $ | 603,300 |
|
| $ | 12,465,600 |
|
| $ | (10,618,400 | ) |
| $ | 2,450,500 |
|
|
| Common stock |
| Paid-in |
| Accumulated |
|
|
|
| Common stock |
| Paid-in |
| Accumulated |
|
|
| ||||||||||||||||||||||
|
| Shares |
| Amount |
| Capital |
| Deficit |
| Total |
|
| Shares |
| Amount |
| Capital |
| Deficit |
| Total |
| ||||||||||||||||||
Balance – December 31, 2017 |
| 58,616,716 |
| $ | 586,200 |
| $ | 12,440,000 |
| $ | (12,811,000 | ) |
| $ | 215,200 |
|
| 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 |
|
|
|
|
|
|
|
|
|
|
| 96,100 |
|
| 96,100 |
| ||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
| 95,800 |
|
|
| 95,800 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 95,800 |
|
|
| 95,800 |
|
Balance – March 31, 2018 |
|
| 58,616,716 |
|
| $ | 586,200 |
|
| $ | 12,440,000 |
|
| $ | (12,619,100 | ) |
| $ | 407,100 |
|
| 58,616,716 |
|
| 586,200 |
|
| 12,440,000 |
|
| (12,619,100 | ) |
|
| 407,100 |
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||||
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
| 1,447,500 |
|
|
| 1,447,500 |
| ||||||||||||||||||||
Balance – June 30, 2018 |
| 58,616,716 |
|
| 586,200 |
|
| 12,440,000 |
|
| (11,171,600 | ) |
|
| 1,854,600 |
| ||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||||
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
| 1,100 |
|
|
| 1,100 |
| ||||||||||||||||||||
Balance – September 30, 2018 |
|
| 58,616,716 |
|
| $ | 586,200 |
|
| $ | 12,440,000 |
|
| $ | (11,170,500 | ) |
| $ | 1,855,700 |
|
* 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. (our(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 our Company's 2018 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 our Company believes that the accompanying disclosures are adequate to make the information presented not misleading. The Notes to Financial Statements included in the 2018 Annual Report on Form10-KForm 10-K should be read in conjunction with the accompanying interim financial statements. The interim operating results for the three and nine months ended March 31,September 30, 2019 may not be necessarily indicative of the operating results expected for the full year.
Our 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 our Company has no items of other comprehensive income, comprehensive income is equal to net income.
Note 2. Revenues
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 recorded a decrease to the opening balance of the accumulated deficit of $96,100 and a corresponding charge to deferred revenue as of January 1, 2018 due to the cumulative impact of the adoption of Topic 606. The impact to the revenue for the quarter ended March 31, 2018 as a result of applying Topic 606 was not material. The disclosure of disaggregated revenue is disclosed in Note 10.
The adoption of the new 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 term of the related license agreement. As a result of our adoption of the new guidance, we will recognize revenue from licensees and royalties at a point in time when the term begins.
During the second quarter of 2018, we negotiated an amendment to a license agreement with a licensee that, in addition to expanding the technologies that the licensee is permitted to market, provides for a four year extension to the license agreement that contains guaranteed royalties payable in installments over the term of the amendment to the license agreement.Since the performance obligation is to grant the license for the use of certain patented ink technology as it exists at the time that it is granted, the promise to grant the license is a performance obligation satisfied at a point in time in accordance with Topic 606.In accordance with Topic 606, we recorded $1,521,700 net of imputed interest of licenses, royalties and fees and $106,500 of selling expenses in the first nine months of 2018 related to the amendment to the license agreement. The related receivable and payable are recorded as other assets and other liabilities on the balance sheet.
The change in accumulated deficit on our Balance Sheet at March 31,September 30, 2018, including the aggregate impact of the change in accounting principles which was effective on January 1, 2018, was as 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 | ) |
Accumulated deficit – January 1, 2018 |
| $ | (12,811,000 | ) |
Net earnings |
|
| 1,544,400 |
|
Cumulative effect of accounting change at January 1, 2018 |
|
| 96,100 |
|
Accumulated deficit – September 30, 2018 |
| $ | (11,170,500 | ) |
5
NOCOPI TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
Note 3. Stock Based Compensation
Our 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 March 31,September 30, 2019, our Company did not have an active stock option plan. There was no unrecognized portion of expense related to stock option grants at March 31,September 30, 2019.
Note 4. Line of Credit
In 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 assets of our Company and bears 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 review and quiet period. There have been no borrowings under the line of credit since its inception.
Note 5. Convertible Debentures
At March 31,September 30, 2019, our Company had convertible debentures totaling $128,300$97,900 outstanding, which are due during the third quarter of 2019.2020. The convertible debentures bear interest at 7%. During the third quarter of 2019, our Company’s Board of Directors approved and the holders of $97,900 of the $128,300 of convertible debentures previously outstanding agreed to extend the maturity dates of those convertible debentures for one year to the third quarter of 2020 with no change in the terms or conditions of the debentures. At the option of the lender, the debentures and accrued interest are convertible in whole or part into common stock of our Company at $0.025 per share. During the third quarter of 2018, our Company’s Board of Directors approved and2019, the holders of all $128,300approximately $30,400 of previously outstanding convertible debentures agreedelected to extend the maturity datesconvert those debentures plus approximately $12,300 of those convertible debentures for one year to the third quarteraccrued interest into 1,707,982 shares of 2019 with no change in the terms or conditionsrestricted stock of the debentures.our Company.
Our Company also granted warrants in earlier periods to purchase 691,365 shares of our 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 our 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.
The following table summarizes our Company’s warrant position at March 31,September 30, 2019 and December 31, 2018:
|
|
|
|
|
| Weighted Average |
|
|
|
|
|
| Weighted Average |
| ||||||||||
|
| Number |
| Exercise |
| Exercise |
|
| Number |
| Exercise |
| Exercise |
| ||||||||||
|
| of Shares |
| Price |
| Price |
|
| of Shares |
| Price |
| Price |
| ||||||||||
Outstanding warrants - |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||
December 31, 2018 |
|
| 691,365 |
|
| $ | 0.02 |
|
| $ | 0.02 |
|
|
| 691,365 |
|
| $ | 0.02 |
|
| $ | 0.02 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Outstanding warrants - |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
March 31, 2019 |
|
| 691,365 |
|
| $ | 0.02 |
|
| $ | 0.02 |
| ||||||||||||
September 30, 2019 |
|
| 691,365 |
|
| $ | 0.02 |
|
| $ | 0.02 |
| ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Weighted average remaining |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
contractual life (years) |
|
| 1.58 |
|
|
|
|
|
|
| 1.08 |
|
|
|
|
| ||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Exercisable warrants - |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
March 31, 2019 |
|
| 691,365 |
|
| $ | 0.02 |
|
| $ | 0.02 |
| ||||||||||||
September 30, 2019 |
|
| 691,365 |
|
| $ | 0.02 |
|
| $ | 0.02 |
| ||||||||||||
|
|
|
|
|
|
|
|
|
The aggregate intrinsic value of warrants outstanding and exercisable as of September 30, 2019 was approximately $12,100. The aggregate intrinsic value is calculated as the difference between the exercise price of the underlying warrants and the closing stock price of $0.0375 for our Company’s common stock on September 30, 2019.
6
NOCOPI TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
Note 6. Other Income (Expenses)
Other income (expenses) for the three and nine months ended March 31,September 30, 2019 and March 31, 2018 includes interest on convertible debentures held by nine investors.investors and interest earned on invested funds.
Note 7. Income Taxes
There is no provision for federal income taxes for the three and nine months ended March 31,September 30, 2019 and March 31,September 30, 2018 due to the availability of net operating loss carryforwards. Our Company has established a valuation allowance for the entire amount of 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 |
|
| Three months ended |
| Nine months ended |
| ||||||||||||||||
|
| March 31, |
|
| September 30, |
| September 30, |
| ||||||||||||||||
|
| 2019 |
|
| 2018 |
|
| 2019 |
| 2018 |
| 2019 |
| 2018 |
| |||||||||
Current state taxes |
| $ | 60,300 |
|
|
| – |
|
| $ | 21,100 |
| $ | 93,300 |
| $ | 91,800 |
| $ | 93,300 |
| |||
Deferred state taxes |
|
| (54,400 | ) |
|
| – |
|
|
| (6,800 | ) |
|
| 106,000 |
|
|
| (61,200 | ) |
|
| 106,000 |
|
|
| $ | 5,900 |
|
|
| – |
|
| $ | 14,300 |
|
| $ | 199,300 |
|
| $ | 30,600 |
|
| $ | 199,300 |
|
There was no change in unrecognized tax benefits during the period ended March 31,September 30, 2019 and there was no accrual for uncertain tax positions as of March 31,September 30, 2019.
Tax years from 20152016 through 2018 remain subject to examination by U.S. federal and state jurisdictions.
Note 8. Related Party Transactions
During the threenine months ended March 31,September 30, 2018, our Company paid $70,900$235,400 to Michael A. Feinstein, M.D., our Company’s Chairman of the Board and Chief Executive Officer, representing a portionthe balance of previously deferred salary owed to him under an employment agreement with our Company. During the threefive month period ended MarchMay 31, 2018, Dr. Feinstein deferred $21,250$35,400 of salary. The deferred salary was fully repaid to Dr. Feinstein during 2018 and, at March 31, 2019,September 30, 2018, there was no remaining deferred salary owed to him. There was no interest payable on the deferred salary.
Note 9. Earnings per Share
In accordance with FASB ASC 260,Earnings per Share, basic earnings per common share is computed using net earnings 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 warrants for which the market price exceeds the exercise price. The number of shares issuable upon the exercise of such warrants is decreased by shares that could have been purchased by our Company with related proceeds. For the three and nine months ended March 31,September 30, 2019, the number of incremental common shares resulting from the assumed conversion of warrants was 375,673 and March 31,372,764, respectively. For the three and nine months ended September 30, 2018, the number of incremental common shares resulting from the assumed conversion of warrants was 384,773395,910 and 295,167,360,568, respectively.
7
NOCOPI TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
Note 10. Major Customer and Geographic Information
Our Company’s revenues, expressed as a percentage of total revenues, from non-affiliated customers that equaled 10% or more of our Company’s total revenues were:
|
| Three Months ended March 31 |
| |||||
|
| 2019 |
|
| 2018 |
| ||
Customer A |
|
| 34 | % |
|
| 40 | % |
Customer B |
|
| 30 | % |
|
| 27 | % |
Customer C |
|
| 12 | % |
|
| 15 | % |
7
NOCOPI TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
|
| Three Months ended September 30, |
|
| Nine Months ended September 30, |
| ||||||||||
|
| 2019 |
|
| 2018 |
|
| 2019 |
|
| 2018 |
| ||||
Customer A |
|
| 65 | % |
|
| 49 | % |
|
| 47 | % |
|
| 20 | % |
Customer B |
|
| 14 | % |
|
| 22 | % |
|
| 21 | % |
|
| 64 | % |
Customer C |
|
| – |
|
|
| 11 | % |
|
| 6 | % |
|
| 6 | % |
Our Company’s non-affiliate customers whose individual balances amounted to more than 10% of our Company’s net accounts receivable, expressed as a percentage of net accounts receivable, were:
|
| March 31 |
|
| December 31 |
| ||
|
| 2019 |
|
| 2018 |
| ||
Customer B |
|
| 87 | % |
|
| 86 | % |
|
| September 30, |
|
| December 31, |
| ||
|
| 2019 |
|
| 2018 |
| ||
Customer A |
|
| 13 | % |
|
| 6 | % |
Customer B |
|
| 79 | % |
|
| 86 | % |
Our Company performs ongoing credit evaluations of its customers and generally does not require collateral. Our Company also maintains allowances for potential credit losses. The loss of a major customer could have a material adverse effect on our Company’s business operations and financial condition.
Our Company’s revenues by geographic region are as follows:
|
| Three Months ended March 31 |
|
| Three Months ended September 30, |
| Nine Months ended September 30, |
| ||||||||||||||||
|
| 2019 |
| 2018 |
|
| 2019 |
| 2018 |
| 2019 |
| 2018 |
| ||||||||||
North America |
| $ | 216,600 |
| $ | 184,900 |
|
| $ | 190,600 |
| $ | 208,400 |
| $ | 633,000 |
| $ | 2,067,700 |
| ||||
South America |
| – |
| 1,500 |
|
| – |
| – |
| – |
| 1,500 |
| ||||||||||
Europe |
| – |
| 100 |
| 100 |
| 200 |
| |||||||||||||||
Asia |
| 192,800 |
| 239,000 |
|
| 418,300 |
| 352,900 |
| 901,300 |
| 791,100 |
| ||||||||||
Australia |
|
| 28,600 |
|
| – |
|
| 28,600 |
|
| – |
| |||||||||||
|
| $ | 409,400 |
|
| $ | 425,400 |
|
| $ | 637,500 |
| $ | 561,400 |
| $ | 1,563,000 |
| $ | 2,860,500 |
|
Note 11. Leases
Our Company conducts its operations in leased facilities under a non-cancelable operating lease expiring in 2024.
Due to the 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 has 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 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,September 30, 2019 are: $37,800$12,600 – 2019; $51,600 – 2020; $53,100 – 2021; $54,600 – 2022; $56,200 – 2023 and $18,900 – 2024.
8
NOCOPI TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
Total lease expense under operating leases for the three and nine months ended March 31,September 30, 2019 and March 31, 2018 was $13,300 and $40,000, respectively. Total lease expense under operating leases for the three and nine months ended September 30, 2018 was $11,300 and $33,800, respectively.
Maturities of lease liabilities wereare as follows:
|
|
|
|
| Operating Leases |
|
|
|
|
| Operating Leases |
| ||
Year ending December 31 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019 |
|
|
|
| $ | 50,000 |
|
|
|
|
| $ | 12,600 |
|
2020 |
|
|
|
|
| 51,600 |
|
|
|
|
|
| 51,600 |
|
2021 |
|
|
|
|
| 53,100 |
|
|
|
|
|
| 53,100 |
|
2022 |
|
|
|
|
| 54,600 |
|
|
|
|
|
| 54,600 |
|
2023 |
|
|
|
|
| 56,200 |
|
|
|
|
|
| 56,200 |
|
2024 |
|
|
|
|
| 18,900 |
|
|
|
|
|
| 18,900 |
|
Total lease payments |
|
|
|
|
| 284,400 |
|
|
|
|
|
| 247,000 |
|
Less imputed interest |
|
|
|
|
| (43,300 | ) |
|
|
|
|
| (35,000 | ) |
Total |
|
|
|
| $ | 241,100 |
|
|
|
|
| $ | 212,000 |
|
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 make regarding:regarding:
· | 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, 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, 2018, filed with the Securities and Exchange Commission on March 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
Our Company’s revenues are derived from (a) royalties paid by licensees of our technologies, (b) fees for the provision of technical services to licensees and (c) from the direct sale of (i) products incorporating our technologies, such as inks, security paper and pressure sensitive labels, and (ii) equipment used to support the application of our technologies, such as ink-jet printing systems. Royalties consist of guaranteed minimum royalties payable by our licensees in certain cases and additional royalties which typically vary with the licensee’s sales or production of products incorporating the licensed technology. Service fees and sales revenues vary directly with the number of units of service or product provided.
Our Company recognizes revenue on its lines of business as follows:
| 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. |
We believe that, as fixed cost reductions beyond those we have achieved in recent years may not be achievable, our 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 amount of our Company’s revenues and the mix among the various sources of revenue are subject to substantial fluctuation. We 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 our Company’s total revenue, 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 our Company agrees to revise such terms, revenues from the customer may be affected.
Revenues for the firstthird quarter of 2019 were $409,400$637,500 compared to $425,400$561,400 in the firstthird quarter of 2018, a decreasean increase of $16,000,$76,100, or approximately 4%14%. Licenses, royalties and fees increased by $15,600,$14,200, or approximately 9%8%, to $189,400 in the firstthird quarter of 2019 to $190,500 from $174,900$175,200 in the firstthird quarter of 2018. The increase in licenses, royalties and fees in the third quarter of 2019 compared to the third quarter of 2018 is due primarily to higher royalty revenue receivedroyalties from twofive licensees offset in part by lower royaltyguaranteed licensing revenue receivedof approximately $100,000 in the third quarter of 2019 from a licensee. There can be no assurances that the marketing and product development activities of our Company’s licensees or other businessesone licensee in the entertainment and toy products market as a result of the adoption of ASU 214-09,Revenue from Contracts with Customers (see below) in the second quarter of 2018. We cannot assure you that we will produce a significant increasecontinue to obtain higher royalties on an ongoing basis from licensees in revenues for our Company, nor can the timingentertainment and toy products market, especially upon the occurrence of any potential revenue increases be predicted, particularly given the uncertainan economic conditions being experienced worldwide.downturn or other unfavorable conditions.
Product and other sales decreasedincreased by $31,600,$61,900, or approximately 13%16%, to $218,900$448,100 in the firstthird quarter of 2019 from $250,500$386,200 in the firstthird quarter of 2018. Sales of ink decreasedincreased in the firstthird quarter of 2019 compared to the firstthird quarter of 2018 due primarily to lowerhigher ink shipments to thea third party authorized printersprinter used by twoone of our Company’s major licensees in the entertainment and toy products market offset in part by higherlower ink shipments to our Company’s licensees in the retail receipt and document fraud market. In the firstthird quarter of 2019, our Company derived revenues of approximately $335,900$555,900 from our Company’s licensees and their authorized printers in the entertainment and toy products market compared to revenues of approximately $369,300$485,700 in the third quarter of 2018.
For the first nine months of 2019, revenues were $1,563,000, representing a decrease of $1,297,500, or approximately 45%, from revenues of $2,860,500 in the first nine months of 2018. Revenues in the first nine months of 2018 included, in accordance with ASU 214-09,Revenue from Contracts with Customers (“Topic 606”), revenue of $1,521,700 representing the present value of guaranteed royalty payments that are payable over a four-year period beginning in the third quarter of 2019 as a result of an amendment to a license agreement with a licensee that, in addition to expanding the technologies that our licensee is permitted to market, provides for a four year extension to the license agreement beginning in July 2019.Since the performance obligation is to grant the license for the use of certain patented ink technology as it exists at the time that it is granted, the promise to grant the license is a performance obligation satisfied at a point in time in accordance with Topic 606.Previously, we recognized revenue from licenses and royalties on a straight-line basis over the term of the related license agreement. Licenses, royalties and fees decreased by $1,433,800, or approximately 71%, to $571,900 in the first nine months of 2019 from $2,005,700 in the first nine months of 2018. The decrease in licenses, royalties and fees in the first nine months of 2019 compared to the first nine months of 2018 is due primarily to the adoption of Topic 606 described above. See “Plan of Operation, Liquidity and Capital Resources” and “Note 2 to our Condensed Financial Statements” for comparative information on the impact of the adoption of Topic 606 to our Company’s condensed financial statements.
Product and other sales increased by $136,300, or approximately 16%, to $991,100 in the first nine months of 2019 from $854,800 in the first nine months of 2018. Sales of ink increased in the nine months of 2019 compared to the first nine of 2018 due primarily to higher ink shipments to the third party authorized printer used by one of our Company’s major licensees in the entertainment and toy products market and higher ink shipments to our Company’s licensees in the retail receipt and document fraud market. Our Company derived revenues of approximately $1,327,900 from licensees and their authorized printers in the entertainment and toy products market in the first nine months of 2019 compared to revenues of approximately $2,661,700 in the first nine months of 2018. The decrease in revenues from our licensees and their authorized printers in the entertainment and toy products market in the first nine months of 2019 compared to the first nine months of 2018 is due primarily to the adoption of Topic 606.
Our Company’s gross profit decreasedincreased to $293,900, or approximately 72% of gross revenues,$429,500 in the firstthird quarter of 2019, from $308,200, or approximately 72%67% of gross revenues, from $388,400 in the firstthird quarter of 2018.2018 or approximately 69% of revenues. 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 our Company’s technologies or equipment used to support the application of its technologies. These items (except for inks which are manufactured by our Company) are generally purchased from third-party vendors and resold to the end-user or licensee and carry a lower gross profit than licenses, royalties and fees. The higher gross profit in the third quarter of 2019 compared to the third quarter of 2018 results primarily from higher gross revenues from licenses, royalties and fees and product and other sales in the third quarter of 2019 compared to the third quarter of 2018.
For the first nine months of 2019, gross profit was $1,084,500, or approximately 69% of revenues, compared to $2,452,700, or approximately 86% of revenues in 2018. The lower gross profit in the first nine months of 2019 compared to the first nine months of 2018 results primarily from lower licenses, royalties and fees due to the adoption of Topic 606 in 2018 offset in part by higher gross revenues from product and other sales in the first nine months of 2019 compared to the first nine months of 2018.
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 these sourceslicenses, royalties and fees as well as our Company’s overall gross profit. The gross profit from licenses, royalties and fees increaseddecreased to approximately 87%78% in the third quarter of 2019 compared to approximately 80% in the third quarter of 2018 and to approximately 83% of revenues from licenses, royalties and fees in the first quarternine months of 2019 from approximately 86%96% in the first quarternine months of 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. Primarily 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 lowerThe gross profit from product and other sales of approximately 59% of revenues in the first quarter of 2019 compareddecreased to a gross profit of approximately 63% of revenues in the firstthird quarter of 2019 compared to approximately 64% of revenues in the third quarter of 2018. For the first nine months of 2019 and 2018, the gross profit, expressed as a percentage of revenues, was approximately 62% of revenues from product and other sales.
Research and development expenses of $38,000$45,200 and $122,600 in the third quarter and first quarternine months of 2019, respectively, were comparable to $37,100$38,100 and $111,300 in the third quarter and first quarternine months of 2018.2018, respectively.
Sales and marketing expenses decreasedincreased in the third quarter of 2019 to $68,900$81,000 from $74,600 in the third quarter of 2018. Sales and marketing expenses decreased in the first nine months of 2019 to $224,200 from $313,200 in the first nine months of 2018. The increase in the third quarter of 2019 from $70,100compared to the third quarter of 2018 is due primarily to higher commission expense on the higher level of revenues in the third quarter of 2019 compared to the third quarter of 2018. The decrease in the first quarternine months of 2019 compared to the first nine months of 2018 is due primarily to lower commission expense on the lower level of revenuessales in the first quarternine months of 2019 compared to the first nine months of 2018 related to the additional revenue generated in 2018 as a result of the adoption of Topic 606 in the second quarter of 2018.
General and administrative expenses increased in the third quarter of 2019 to $84,200 from $73,400 in the third quarter of 2018. General and administrative expenses decreased in the first quarternine months of 2019 to $94,100 compared to $102,700$265,200 from $277,600 in the first quarternine months of 2018 due primarily to lower legal and patent related expenses2018. The increase in the firstthird quarter of 2019 compared to the third quarter of 2018 is due primarily to higher employment and public company expenses in the third quarter of 2019 compared to the third quarter of 2018. The decrease in the first quarternine months of 2019 compared to the first nine months of 2018 is due primarily to lower patent related expenses and lower legal expenses in the first nine months of 2019 compared to the first nine months of 2018.
Other income (expenses) in the third quarter and first quarternine months of 2019 and 2018 included interest on convertible debentures held by nine investors.investors and interest earned on invested funds.
Income taxes in the third quarter and first quarternine months of 2019 resultand 2018 resulted from limitations placed on income tax net operating loss deductions by the Commonwealth of Pennsylvania.
The lower net income of $85,400$206,800 in the firstthird quarter of 2018 compared to net income of $1,100 in the third quarter of 2018 resulted primarily from higher gross profit on a higher level of revenues and lower Pennsylvania income taxes in the third quarter of 2019 compared to $95,800the third quarter of 2018 offset in part by higher overhead expenses in the third quarter of 2019 compared to the third quarter of 2018. The net income of $441,100 in the first quarternine months of 2019 compared to net income of $1,544,400 in the first nine months of 2018 resulted primarily from a lower gross profit on a lower level of revenues in the first quarternine months of 2019 compared to the first nine months of 2018 related to the adoption of Topic 606 in the second quarter of 2018 and income taxes resulting from a change in Pennsylvania tax law offset in part by lower operatingoverhead expenses and lower Pennsylvania income taxes in the first quarternine months of 2019 compared to the first quarternine months of 2018.
Plan of Operation, Liquidity and Capital Resources
During the first quarternine months of 2019, our Company’s cash increased to $544,000$798,000 at March 31,September 30, 2019 from $400,800 at December 31, 2018. During the first quarternine months of 2019,2018, our Company generated $143,200$399,400 from its operating activities.activities and used $2,200 for capital equipment purchases.
DuringIn the first quarternine months of 2019, our Company’s revenues decreased approximately 4% primarily45% to $1,563,000 from $2,860,500 in the first nine months of 2018 of which an increase of 17%, or $224,200, is attributable to an increase in revenues from historical operations in the first nine months of 2019 compared to the first nine months of 2018 offset by a decrease of $1,521,700, or 62%, that is attributable the reduction of our Company’s revenues in the first nine months of 2019 compared to the first nine months of 2018 as a result of lower salesthe adoption of ink to the authorized printers of our Company’s licenseesTopic 606 in the entertainment and toy products market offset in part by higher royalty revenues from a licensee in the entertainment and toy products market.second quarter of 2018.
Our Company’s total overhead expenses, interest expense and our Company’s net interestincome tax expense decreased in the first quarternine months of 2019 compared to the first quarter of 2018 and our Company’s income tax expense increased in the first quarter of 2019 compared to the first quarternine months of 2018. As a result of these factors, our Company generated net income of $85,400$441,100 in the first quarternine months of 2019 compared to $95,800$1,544,400 in the first quarternine months of 2018. Our Company had positive operating cash flow of $143,200$399,400 during the first quarternine months of 2019. At March 31, 2019 our Companyand at September 30, 2019, had positive working capital of $893,500$1,454,600 and stockholders’ equity of $2,052,100.$2,450,500. For the full year of 2018, our Company had net income of $1,655,400 and had positive operating cash flow of $40,900. At December 31, 2018, our Company had positive working capital of $810,500 and stockholders’ equity of $1,966,700.
Our Company has $128,300$97,900 of convertible debentures outstanding that are due during the third quarter of 2019. These borrowings allowed2020. During the third quarter of 2019, holders of $97,900 of $128,300 of the convertible debentures previously outstanding agreed to extend the maturity dates of the convertible debentures for one year to the third quarter of 2020 with no change in the terms or conditions of the debentures.
In November 2018, our Company to remain in operation through late 2016 when our Company’s cash flow increased significantly.
Our Company hasnegotiated a $150,000 revolving line of credit (“Lineof Credit”) with a bank that providesto provide a source of working capital, if required. At March 31, 2019, there wereThe Line of Credit is secured by all the assets of our Company and bears 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 review and quiet period. There have been no outstanding borrowings under the lineLine of credit.
Credit since its inception. We may need to obtain additional capital in the future to further 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.develop new revenue sources. We cannot assure you that we will be successful in obtaining sufficientsuch additional capital, or if we do so, that the additional capital will enable our Company to 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.
needed. We continue to maintain a cost containment program including curtailment, where possible, of discretionary research and development and sales and marketing expenses.
Our 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 our Company has developed in the entertainment and toy products market. This includes two licensees that 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 and are well known and highly regarded participants in this market. We anticipate that these two licensees will expand their current offerings that incorporate our technologies and will introduce and market new products that will incorporate our technologies available to them under their license agreements with our Company. We will continue to develop various applications for these licensees. We also plan to expand our licensee base in the entertainment and toy market. We currently have additional licensees marketing or developing products incorporating our technologies in certain geographic and niche markets of the overall entertainment and toy products market.
Our Company maintains its presence in the retail loss prevention market and believes that revenue growth in this market can be achieved through increased security ink sales to its licensees in this market. We will continue to adjust our production and technical staff as necessary and, subject to available financial resources, invest in capital equipment needed to support potential growth in ink production requirements beyond our current capacity. Additionally, we will pursue opportunities to market our current technologies in specific security and non-security markets. There can be no assurances that these efforts will enable our Company to generate additional revenues and positive cash flow.
Our Company has received and continues tomay seek additional capital, in the form of debt, equity or both, to support our working capital requirements and to provide funding for other business opportunities. We cannot assure you that we will be successful in raising additional capital, or that such additional capital, if obtained, will enable our Company to generate additional revenues and positive cash flow.
As previously stated, we generate a significant portion of our total revenues from licensees in the entertainment and toy products market. These licensees generally sell their products through retail outlets. In the future, such sales may be adversely affected by changes in consumer spending that may occur. If such changes occur, as a result of an uncertain economic environment. As a result, our revenues, results of operations and liquidity may be negatively impacted as they were in earlier 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.similarly impacted.
Recently Adopted Accounting Pronouncements
In February 2016, the FASB issued ASU No. 2016-02,Leases (Topic 842) and subsequent related updates. The core principle of Topic 842 is that a lessee should recognize the assets and liabilities that arise from operating leases. TheOur 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 of adoption. The standard had a material impact on the balance sheet (see Note 11).
Recently Issued Accounting Pronouncements Not Yet Adopted
As of March 31,September 30, 2019, there are no recently issued accounting standards not yet adopted which would have a material effect on our Company’s financial statements.
Off-Balance Sheet Arrangements
Our Company does not have any off-balance sheet arrangements.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures.Our Company’s management, with the participation of our Company’s Principal Executive Officer and Principal Financial Officer, evaluated the effectiveness of our 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 March 31,September 30, 2019. Based on this evaluation, our Company’s Principal Executive Officer and Principal Financial Officer concluded that, as of March 31,September 30, 2019, our Company’s disclosure controls and procedures were effective, in that they provide reasonable assurance that information required to be disclosed by our 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 our Company’s management, including our 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 March 31,September 30, 2019 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II - OTHER INFORMATION
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Date | Security/Value | |
July 2019 | Common Stock – 1,707,982 shares of common stock issued pursuant to exercise of convertible debentures with an exercise price of $0.025 per share. |
No underwriters were utilized, and no commissions or fees were paid with respect to any of the above transactions. We relied on Section 4(a)(2) and/or Regulation D of the Securities Act of 1933, as amended, since the transactions did not involve any public offering.
The following exhibits are included herein:
Exhibit No. |
| Description of Exhibit |
| Location |
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| Incorporated by reference to the Company’s Annual Report on Form |
4.2 | Form of Letter Agreement re: Convertible Debenture Purchase Agreement Election | Filed herewith | ||
31.1 |
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| Filed herewith | |
31.2 |
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| Filed herewith | |
32.1 |
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| Filed herewith | |
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| XBRL Instance Document |
| Filed herewith |
101.SCH | XBRL Taxonomy Extension Schema | Filed herewith | ||
101.CAL | XBRL Taxonomy Extension Calculation Linkbase | Filed herewith | ||
101.DEF | XBRL Taxonomy Extension Definition Linkbase | Filed herewith | ||
101.LAB | XBRL Taxonomy Extension Label Linkbase | Filed herewith | ||
101.PRE | XBRL Taxonomy Extension Presentation Linkbase | Filed herewith |
Pursuant to the requirement of the Securities Exchange Act of 1934, theour 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 |
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| Incorporated by reference to the Company’s Annual Report on Form |
4.2 | Form of Letter Agreement re: Convertible Debenture Purchase Agreement Election | Filed herewith | ||
31.1 |
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| Filed herewith | |
31.2 |
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| Filed herewith | |
32.1 |
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| Filed herewith | |
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| XBRL Instance Document |
| Filed herewith |
101.SCH | XBRL Taxonomy Extension Schema | Filed herewith | ||
101.CAL | XBRL Taxonomy Extension Calculation Linkbase | Filed herewith | ||
101.DEF | XBRL Taxonomy Extension Definition Linkbase | Filed herewith | ||
101.LAB | XBRL Taxonomy Extension Label Linkbase | Filed herewith | ||
101.PRE | XBRL Taxonomy Extension Presentation Linkbase | Filed herewith |
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