United States
Securities and Exchange Commission
Washington, D.C. 20549
Form 10-Q
(Mark One)
☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934.
For the quarterly period ended June 30, 20222023
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 ☒ 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 ☒ 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 | Smaller reporting company ☒ |
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 ☒
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 8,2022.9, 2023.
NOCOPI TECHNOLOGIES, INC.
INDEX
NOCOPI TECHNOLOGIES, INC.
INDEX
PAGE | |
Part I. FINANCIAL INFORMATION | |
Item 1. Financial Statements | 1 |
Statements of Comprehensive Income for Three Months and Six Months Ended June 30, 2023 and June 30, 2022 | 1 |
Balance Sheets at June 30, 2023 and December 31, 2022 | 2 |
Statements of Cash Flows for Six Months Ended June 30, 2023 and June 30, 2022 | 3 |
Statements of Stockholders’ Equity for Three Months and Six Months Ended June 30, 2023 and June 30, 2022 | 4 |
Notes to Financial Statements | 5 |
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations | 10 |
Item 3. Quantitative and Qualitative Disclosures About Market Risk | 15 |
Item 4. Controls and Procedures | 15 |
Part II. OTHER INFORMATION | |
Item 1. Legal Proceedings | 16 |
Item 1A. Risk Factors | 16 |
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds. | 16 |
Item 3. Defaults Upon Senior Securities | 16 |
Item 4. Mine Safety Disclosures | 16 |
Item 5. Other Information | 16 |
Item 6. Exhibits | 16 |
SIGNATURES | 17 |
EXHIBIT INDEX | 18 |
PART I – FINANCIAL INFORMATION
Item 1. Financial Statements.Statements
Nocopi Technologies, Inc.
Statements of Comprehensive Income*
(unaudited)
Three Months ended June 30 | Six Months ended June 30 | |||||||||||||||||||||||||||||||
2022 | 2021 | 2022 | 2021 | Three Months ended June 30 | Six Months ended June 30 | |||||||||||||||||||||||||||
2023 | 2022 | 2023 | 2022 | |||||||||||||||||||||||||||||
Revenues | ||||||||||||||||||||||||||||||||
Licenses, royalties and fees | $ | 169,800 | $ | 144,900 | $ | 307,100 | $ | 330,400 | $ | 150,200 | $ | 169,800 | $ | 273,200 | $ | 307,100 | ||||||||||||||||
Product and other sales | 344,500 | 369,000 | 546,600 | 794,900 | 449,000 | 344,500 | 918,100 | 546,600 | ||||||||||||||||||||||||
Total revenues | 514,300 | 513,900 | 853,700 | 1,125,300 | 599,200 | 514,300 | 1,191,300 | 853,700 | ||||||||||||||||||||||||
Cost of revenues | ||||||||||||||||||||||||||||||||
Licenses, royalties and fees | 46,400 | 49,500 | 85,900 | 96,600 | 49,800 | 46,400 | 108,500 | 85,900 | ||||||||||||||||||||||||
Product and other sales | 154,800 | 184,300 | 281,500 | 357,500 | 179,200 | 154,800 | 401,000 | 281,500 | ||||||||||||||||||||||||
Total cost of revenues | 201,200 | 233,800 | 367,400 | 454,100 | 229,000 | 201,200 | 509,500 | 367,400 | ||||||||||||||||||||||||
Gross profit | 313,100 | 280,100 | 486,300 | 671,200 | 370,200 | 313,100 | 681,800 | 486,300 | ||||||||||||||||||||||||
Operating expenses | ||||||||||||||||||||||||||||||||
Research and development | 32,500 | 45,800 | 72,000 | 90,300 | 35,300 | 32,500 | 80,100 | 72,000 | ||||||||||||||||||||||||
Sales and marketing | 76,700 | 74,200 | 141,500 | 157,400 | 61,100 | 76,700 | 147,400 | 141,500 | ||||||||||||||||||||||||
General and administrative | 506,700 | 117,700 | 784,400 | 263,200 | 223,300 | 506,700 | 424,500 | 784,400 | ||||||||||||||||||||||||
Total operating expenses | 615,900 | 237,700 | 997,900 | 510,900 | 319,700 | 615,900 | 652,000 | 997,900 | ||||||||||||||||||||||||
Net income (loss) from operations | (302,800 | ) | 42,400 | (511,600 | ) | 160,300 | 50,500 | (302,800 | ) | 29,800 | (511,600 | ) | ||||||||||||||||||||
Other income (expenses) | ||||||||||||||||||||||||||||||||
Interest income | 6,100 | 5,300 | 11,900 | 10,100 | 60,400 | 6,100 | 122,500 | 11,900 | ||||||||||||||||||||||||
Interest expense and bank charges | (300 | ) | (600 | ) | (700 | ) | (1,200 | ) | (4,400 | ) | (300 | ) | (5,000 | ) | (700 | ) | ||||||||||||||||
Total other income (expenses) | 5,800 | 4,700 | 11,200 | 8,900 | 56,000 | 5,800 | 117,500 | 11,200 | ||||||||||||||||||||||||
Net income (loss) before income taxes | (297,000 | ) | 47,100 | (500,400 | ) | 169,200 | 106,500 | (297,000 | ) | 147,300 | (500,400 | ) | ||||||||||||||||||||
Income taxes | — | 4,600 | — | 11,900 | 27,400 | — | 37,900 | — | ||||||||||||||||||||||||
Net income (loss) | $ | (297,000 | ) | $ | 42,500 | $ | (500,400 | ) | $ | 157,300 | $ | 79,100 | $ | (297,000 | ) | $ | 109,400 | $ | (500,400 | ) | ||||||||||||
Basic net income (loss) per common share | $ | (.00 | ) | $ | .00 | $ | (.01 | ) | $ | .00 | ||||||||||||||||||||||
Diluted net income (loss) per common share | $ | (.00 | ) | $ | .00 | $ | (.01 | ) | $ | .00 | ||||||||||||||||||||||
Net income (loss) per common share | ||||||||||||||||||||||||||||||||
Basic | $ | .01 | $ | (.04 | ) | $ | .01 | $ | (.07 | ) | ||||||||||||||||||||||
Diluted | $ | .01 | $ | (.04 | ) | $ | .01 | $ | (.07 | ) | ||||||||||||||||||||||
Basic weighted average common shares outstanding | 67,495,055 | 67,400,812 | 67,495,055 | 67,377,251 | ||||||||||||||||||||||||||||
Diluted weighted average common shares outstanding | 67,495,055 | 67,400,812 | 67,495,055 | 67,377,251 | ||||||||||||||||||||||||||||
Weighted average common shares outstanding | ||||||||||||||||||||||||||||||||
Basic | 9,251,178 | 6,751,178 | 9,251,178 | 6,751,178 | ||||||||||||||||||||||||||||
Diluted | 9,251,178 | 6,751,178 | 9,251,178 | 6,751,178 |
*See accompanying notes to these financial statements.
Nocopi Technologies, Inc.
Balance Sheets*
(unaudited)
June 30 | December 31 | |||||||
2023 | 2022 | |||||||
Assets | ||||||||
Current assets | ||||||||
Cash | $ | 5,463,200 | $ | 5,337,800 | ||||
Accounts receivable less $12,000 allowance for doubtful accounts | 1,345,600 | 1,103,500 | ||||||
Inventory | 368,100 | 486,400 | ||||||
Prepaid and other | 107,900 | 103,300 | ||||||
Total current assets | 7,284,800 | 7,031,000 | ||||||
Fixed assets | ||||||||
Leasehold improvements | 65,600 | 58,400 | ||||||
Furniture, fixtures and equipment | 169,100 | 164,400 | ||||||
Fixed assets, gross | 234,700 | 222,800 | ||||||
Less: accumulated depreciation and amortization | 186,000 | 167,800 | ||||||
Total fixed assets | 48,700 | 55,000 | ||||||
Other assets | ||||||||
Long-term receivable | 2,149,500 | 2,463,100 | ||||||
Operating lease right of use – building | 43,400 | 68,300 | ||||||
Other assets | 2,192,900 | 2,531,400 | ||||||
Total assets | $ | 9,526,400 | $ | 9,617,400 | ||||
Liabilities and Stockholders' Equity | ||||||||
Current liabilities | ||||||||
Accounts payable | $ | 68,000 | $ | 97,700 | ||||
Accrued expenses | 188,600 | 173,700 | ||||||
Income taxes | 148,300 | 287,100 | ||||||
Operating lease liability – current | 43,400 | 50,700 | ||||||
Total current liabilities | 448,300 | 609,200 | ||||||
Other liabilities | ||||||||
Accrued expenses – non-current | 150,300 | 172,200 | ||||||
Operating lease liability – non-current | — | 17,600 | ||||||
Total other liabilities | 150,300 | 189,800 | ||||||
Stockholders' equity | ||||||||
Common stock, $ Authorized – shares Issued and outstanding – shares | par value92,500 | 92,500 | ||||||
Paid-in capital | 16,659,600 | 16,659,600 | ||||||
Accumulated deficit | (7,824,300 | ) | (7,933,700 | ) | ||||
Total stockholders' equity | 8,927,800 | 8,818,400 | ||||||
Total liabilities and stockholders' equity | $ | 9,526,400 | $ | 9,617,400 |
June 30 | December 31 | |||||||
2022 | 2021 | |||||||
Assets | ||||||||
Current assets | ||||||||
Cash | $ | 1,593,400 | $ | 1,846,700 | ||||
Accounts receivable less $12,000 allowance for doubtful accounts | 1,079,000 | 970,800 | ||||||
Inventory | 454,600 | 422,700 | ||||||
Prepaid and other | 59,500 | 160,000 | ||||||
Total current assets | 3,186,500 | 3,400,200 | ||||||
Fixed assets | ||||||||
Leasehold improvements | 58,400 | 58,400 | ||||||
Furniture, fixtures and equipment | 164,100 | 164,100 | ||||||
Fixed assets, gross | 222,500 | 222,500 | ||||||
Less: accumulated depreciation and amortization | 151,200 | 134,200 | ||||||
Total fixed assets | 71,300 | 88,300 | ||||||
Other assets | ||||||||
Long-term receivable | — | 185,000 | ||||||
Operating lease right of use – building | 92,400 | 115,800 | ||||||
Other assets | 92,400 | 300,800 | ||||||
Total assets | $ | 3,350,200 | $ | 3,789,300 | ||||
Liabilities and Stockholders' Equity | ||||||||
Current liabilities | ||||||||
Accounts payable | $ | 54,400 | $ | 3,700 | ||||
Accrued expenses | 198,500 | 151,500 | ||||||
Operating lease liability – current | 49,000 | 47,500 | ||||||
Total current liabilities | 301,900 | 202,700 | ||||||
Other liabilities | ||||||||
Accrued expenses – non-current | — | 13,000 | ||||||
Operating lease liability – non-current | 43,400 | 68,300 | ||||||
Total other liabilities | 43,400 | 81,300 | ||||||
Stockholders' equity | ||||||||
Common stock, $ Authorized – shares Issued and outstanding – shares | par value675,000 | 675,000 | ||||||
Paid-in capital | 12,577,100 | 12,577,100 | ||||||
Accumulated deficit | (10,247,200 | ) | (9,746,800 | ) | ||||
Total stockholders' equity | 3,004,900 | 3,505,300 | ||||||
Total liabilities and stockholders' equity | $ | 3,350,200 | $ | 3,789,300 |
*See accompanying notes to these financial statements.
Nocopi Technologies, Inc.
Statements of Cash Flows*
(unaudited)
Six Months ended June 30 | Six Months ended June 30 | |||||||||||||||
2022 | 2021 | 2023 | 2022 | |||||||||||||
Operating Activities | ||||||||||||||||
Net income (loss) | $ | (500,400 | ) | $ | 157,300 | $ | 109,400 | $ | (500,400 | ) | ||||||
Adjustments to reconcile net income (loss) to net cash provided by operating activities | ||||||||||||||||
Depreciation and amortization | 17,000 | 12,700 | 18,200 | 17,000 | ||||||||||||
Other assets | 208,400 | 209,900 | 338,500 | 208,400 | ||||||||||||
Other liabilities | (36,400 | ) | (35,100 | ) | (46,800 | ) | (36,400 | ) | ||||||||
Net income adjusted for non-cash operating activities | (311,400 | ) | 344,800 | 419,300 | (311,400 | ) | ||||||||||
(Increase) decrease in assets | ||||||||||||||||
Accounts receivable | (108,200 | ) | 311,700 | (242,100 | ) | (108,200 | ) | |||||||||
Inventory | (31,900 | ) | (161,700 | ) | 118,300 | (31,900 | ) | |||||||||
Prepaid and other | 100,500 | 68,400 | (4,600 | ) | 100,500 | |||||||||||
Increase (decrease) in liabilities | ||||||||||||||||
Accounts payable and accrued expenses | 97,700 | 37,300 | (14,800 | ) | 97,700 | |||||||||||
Taxes on income | — | (26,100 | ) | (138,800 | ) | |||||||||||
Total increase in operating capital | 58,100 | 229,600 | (282,000 | ) | 58,100 | |||||||||||
Net cash provided by (used in) operating activities | (253,300 | ) | 574,400 | 137,300 | (253,300 | ) | ||||||||||
Investing Activities | ||||||||||||||||
Additions to fixed assets | — | (31,600 | ) | (11,900 | ) | — | ||||||||||
Net cash used in investing activities | — | (31,600 | ) | (11,900 | ) | — | ||||||||||
Financing Activities | ||||||||||||||||
Exercise of warrants | — | 2,800 | ||||||||||||||
Net cash provided by financing activities | — | 2,800 | ||||||||||||||
Increase (decrease) in cash | (253,300 | ) | 545,600 | 125,400 | (253,300 | ) | ||||||||||
Cash at beginning of year | 1,846,700 | 1,362,800 | 5,337,800 | 1,846,700 | ||||||||||||
Cash at end of period | $ | 1,593,400 | $ | 1,908,400 | $ | 5,463,200 | $ | 1,593,400 | ||||||||
Supplemental Disclosure of Non Cash Investing Activities | ||||||||||||||||
Disposal of furniture, fixtures and equipment | ||||||||||||||||
Accumulated depreciation and amortization | $ | — | $ | 600 | ||||||||||||
Furniture, fixtures and equipment | $ | — | $ | (600 | ) |
*See accompanying notes to these financial statements.
3 |
Nocopi Technologies, Inc.
Statements of Stockholders’ Equity*
For the Periods December 31, 2022 through June 30, 2023 and December 31, 2021 through June 30, 2022 and December 31, 2020 through June 30, 2021
(unaudited)
Common stock | Paid-in | Accumulated | ||||||||||||||||||
Shares | Amount | Capital | Deficit | Total | ||||||||||||||||
Balance at December 31, 2021 | 67,495,055 | $ | 675,000 | $ | 12,577,100 | $ | (9,746,800 | ) | $ | 3,505,300 | ||||||||||
Net loss | — | — | (203,400 | ) | (203,400 | ) | ||||||||||||||
Balance at March 31, 2022 | 67,495,055 | 675,000 | 12,577,100 | (9,950,200 | ) | 3,301,900 | ||||||||||||||
Net loss | — | — | — | (297,000 | ) | (297,000 | ) | |||||||||||||
Balance – June 30, 2022 | 67,495,055 | $ | 675,000 | $ | 12,577,100 | $ | (10,247,200 | ) | $ | 3,004,900 |
Common stock | Paid-in | Accumulated | ||||||||||||||||||
Shares | Amount | Capital | Deficit | Total | ||||||||||||||||
Balance at December 31, 2022 | 9,251,178 | $ | 92,500 | $ | 16,659,600 | $ | (7,933,700 | ) | $ | 8,818,400 | ||||||||||
Net income | - | - | 30,300 | 30,300 | ||||||||||||||||
Balance at March 31, 2023 | 9,251,178 | 92,500 | 16,659,600 | (7,903,400 | ) | 8,848,700 | ||||||||||||||
Net income | — | — | — | 79,100 | 79,100 | |||||||||||||||
Balance – June 30, 2023 | 9,251,178 | $ | 92,500 | $ | 16,659,600 | $ | (7,824,300 | ) | $ | 8,927,800 |
Common stock | Paid-in | Accumulated | ||||||||||||||||||
Shares | Amount | Capital | Deficit | Total | ||||||||||||||||
Balance – December 31, 2020 | 67,353,690 | $ | 673,500 | $ | 12,575,800 | $ | (9,796,200 | ) | $ | 3,453,100 | ||||||||||
Net income | — | — | — | 114,800 | 114,800 | |||||||||||||||
Balance – March 31, 2021 | 67,353,690 | 673,500 | 12,575,800 | (9,681,400 | ) | 3,567,900 | ||||||||||||||
Exercise of warrants | 141,365 | 1,500 | 1,300 | 2,800 | ||||||||||||||||
Net income | — | — | — | 42,500 | 42,500 | |||||||||||||||
Balance June 30, 2021 | 67,495,055 | $ | 675,000 | $ | 12,577,100 | $ | (9,638,900 | ) | $ | 3,613,200 |
Common stock | Paid-in | Accumulated | ||||||||||||||||||
Shares | Amount | Capital | Deficit | Total | ||||||||||||||||
Balance – December 31, 2021 | 6,751,178 | $ | 67,500 | $ | 13,184,600 | $ | (9,746,800 | ) | $ | 3,505,300 | ||||||||||
Net loss | — | — | — | (203,400 | ) | (203,400 | ) | |||||||||||||
Balance – March 31, 2022 | 6,751,178 | 67,500 | 13,184,600 | (9,950,200 | ) | 3,301,900 | ||||||||||||||
Net loss | — | — | — | (297,000 | ) | (297,000 | ) | |||||||||||||
Balance June 30, 2022 | 6,751,178 | $ | 67,500 | $ | 13,184,600 | $ | (10,247,200 | ) | $ | 3,004,900 |
* See accompanying notes to these financial statements.
4 |
NOCOPI TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
Note 1.Financial Statements
The accompanying unaudited condensed financial statements have been prepared by Nocopi Technologies, Inc. (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 Note 2 Significant Accounting Policies included in the Notes to Financial Statements included in our Company’s Annual Report on Form 10-K for the year ended December 31, 2021,2022, as filed with the Securities and Exchange Commission on March 30, 2022,31, 2023, as amended on April 29, 202228, 2023 (the “2021“2022 Annual Report”). 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 20212022 Annual Report should be read in conjunction with the accompanying interim financial statements. The interim operating results for the three months and six months ended June 30, 20222023 may not be necessarily indicative of the operating results expected for the full year.
A novel strain of coronavirus, COVID-19, that was first identified in Wuhan, China in December 2019 has surfaced in many countries around the world including the United States. Many countries continue to experience reoccurrences of COVID-19 to the current date. The World Health Organization has declared COVID-19 to constitute a global pandemic. Certain state and local governments reacted by placing significant restrictions on businesses including a closure in Pennsylvania of non-essential businesses that was announced on March 20, 2020. While most Pennsylvania businesses have been allowed to reopen, often at limited capacity and with certain restrictions, as of the current date, there can be no assurances that future closures will be avoided. A requirement to close our Company for a considerable period of time could result in a negative impact on our Company’s financial condition and results of operations. Additionally, as our Company imports certain raw materials from China, if an extended disruption of the supply of these raw materials were to occur, such as the vessel delays resulting from the congestion experienced in certain Chinese ports due to a COVID-19 outbreak in the second quarter of 2021 and continuing to the present time, our ability to produce products for sale to our customers could be negatively impacted. Additionally, certain of the Company’s licensees in the entertainment and toy products market who utilize printers in China to produce their products have been affected by the COVID-19 related cargo surge beginning in the third quarter of 2021 and continuing to the present time at major Chinese and United States ports as well as the world-wide container shortage resulting in significantly higher shipping costs, and have responded by deferring or scaling back production of their orders and, in some cases, rescheduling the shipping of completed orders. Such deferrals may affect the number and value of orders placed by the Company’s licensed printers in the entertainment and toy products market. Further, restrictions on our customers and licensees in areas affected by the COVID-19 could adversely affect our results of operations and financial condition. Our Company’s operating results for the first half of 2022 are reflective of the effects of the ongoing cargo surge as well as lockdowns in certain Chinese cities, including the two month lockdown in Shanghai, during the first half of 2022 that affected businesses and production in those areas. As the COVID-19 pandemic continues to spread with the Omicron variant, the latest variants, BA.4 and BA.5, as well as other recently identified variants and sub-variants, any future financial impact cannot be reasonably estimated at this time. We cannot predict the scope or magnitude of the negative effect that may result from the impact of the COVID-19 pandemic on the Company’s financial condition and results of operations. Our Company’s results of operations were negatively affected in earlier periods in part as a result of a significant increase in the cost of raw materials utilized by our Company in the manufacture of certain of its products as a result of price increases related to the impact of the ongoing COVID-19 pandemic on the availability and supply of these raw materials. While prices of these raw materials have declined at the present time, there can be no assurances that raw material prices will remain at current levels or decrease to pre-COVID-19 pandemic levels in future periods. As the COVID-19 pandemic continues to spread both in its original form and in the recently identified variants of COVID-19 along with the potential re-imposition of COVID-19 restrictions that may be considered by federal, state and local governments, any future financial impact cannot be reasonably estimated at this time.
Our Company follows Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 220 in reporting comprehensive income.income (loss). Comprehensive income (loss) 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 (loss). Since our Company has no items of other comprehensive income (loss), comprehensive income (loss) is equal to net income (loss).
5
NOCOPI TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
Note 2.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 June 30, 2022,2023, our Company did not have an active stock option plan. There was unrecognized portion of expense related to stock option grants at June 30, 2022.2023.
5 |
NOCOPI TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
Note 3. 3. Cash and Cash Equivalents
Schedule of Cash and Cash Equivalents | ||||||||
June 30 2023 | December 31 2022 | |||||||
Cash and cash equivalents | ||||||||
Cash and money market funds | $ | 2,130,800 | $ | 917,400 | ||||
U.S. Treasury Bills | 3,332,400 | 4,420,400 | ||||||
Cash and cash equivalents | $ | 5,463,200 | $ | 5,337,800 |
The amortized cost and fair value of securities held to maturity at June 30, 2023 are as follows:
Schedule of amortized cost and fair value of securities held to maturity | ||||||||
Amortized Cost | Fair Value | |||||||
U.S. Treasury Bills | ||||||||
Due July 13, 2023 | 1,111,700 | 1,123,400 | ||||||
Due October 5, 2023 | 1,099,400 | 1,109,800 | ||||||
Due January 25, 2024 | 1,084,100 | 1,092,700 | ||||||
Total | $ | 3,295,200 | $ | 3,325,900 |
Note 4. Long-term Receivables
As of June 30, 2023, the Company had long-term receivables of $2,149,500 from three licensees representing the present value of fixed guaranteed royalty payments that will be payable over varying periods of two through five years that commenced in the second half of 2022 and terminate in the second quarter of 2028. The fixed guaranteed royalty payments result from amendments to license agreements with two existing licensees and a license agreement with a new licensee. The receivable represents the present value of the fixed minimum annual payments due under the license agreements, discounted at the Company's incremental borrowing rate of 4%.
The three agreements grant licenses for the use of certain patented ink technology as it exists at the time that it is granted which is considered functional intellectual property. Under Topic 606, a performance obligation to transfer a license for functional intellectual property is satisfied at a point in time and the fixed consideration could be recognized upfront when the Company transfers control of the licensee if certain criteria are met. Specifically, the minimum royalty guarantee could be recognized upfront if the following conditions are met:
· | The royalty payment is fixed or determinable |
· | Collection of the royalty payment is considered probable |
· | The licensee has the ability to benefit from the licensed technology |
The Company determined that the above conditions were met upon execution of the agreements and, in the year ended December 31, 2022, recognized $2,810,600 of royalty revenue along with $206,600 of commission expense net of imputed interest of $131,300. The commissions are payable over the term of the license agreements and are due when payments are received by the Company. As of June 30, 2023, the accrued commission payable balance was approximately $194,700.
The current portion of the three new license agreements and one license agreement entered into in prior years, in the amount of $623,600 and $507,500, is included in accounts receivable on the balance sheets as of June 30, 2023 and December 31, 2022, respectively.
NOCOPI TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
The following table summarizes the future minimum payments due under the three new license agreements as of June 30, 2023:
Schedule of future minimum payments | ||||||
Year Ending December 31: | ||||||
2023 | $ | 315,000 | ||||
2024 | 642,000 | |||||
2025 | 570,000 | |||||
2026 | 570,000 | |||||
2027 | 557,500 | |||||
2028 | 260,000 | |||||
Total | $ | 2,914,500 |
The Company has evaluated the collectibility of the long-term receivables and believes them to be fully collectible as of June 30, 2023. However, there can be no assurance that the receivables will not be impaired in the future due to changes in the licensees’ financial condition or other factors.
The long-term receivables are recorded at its present value as of June 30, 2023, and will be amortized over the term of the license agreements using the effective interest method. The unamortized balance of the long-term receivables as of June 30, 2023 is $2,149,500.
Note 5.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.thereafter. The line of credit is subject to an annual review and quiet period. There have beenwere no borrowings under the line of credit since its inception.
Note 4. Stock Warrants
During the second quarter The line of 2021, holderscredit was closed as of the remaining warrants that had been outstanding exercised their options to purchase a total of 141,365 shares of our Company’s common stock at $0.02 per share. The warrants were granted in 2014 to two individuals who acquired convertible debentures from the Company in 2014. The warrants were 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 was accreted through interest expense over the term of the notes payable. At June 30, 2022, our Company had no warrants outstanding.2023.
Note 5. 6.Income Taxes
At June 30, 2023, our Company had federal and state taxable income of approximately $138,400 and $88,400, respectively. State income taxes in the six months ended June 30, 2023 resulted from limitations placed on income tax net operating loss deductions by the Commonwealth of Pennsylvania. There iswas no income tax benefit for the losses for the three and six months ended June 30, 2022 because our Company has determined that the realization of the net deferred tax asset iswas not assured. Our Company has created a valuation allowance for the entire amount of such benefits. There is no provision for federal income taxes for the three and six months ended June 30, 2021 due to the availability of net operating loss carryforwards.
The components for federal and state income tax expense resulting from the limitation on the use of net operating losses are:
Components for State Income Tax Expense | ||||||||||||||||||||||||||||||||
State Income Tax Expense | ||||||||||||||||||||||||||||||||
Three Months ended June 30 | Six Months ended June 30 | Three Months ended June 30 | Six Months ended June 30 | |||||||||||||||||||||||||||||
2022 | 2021 | 2022 | 2021 | 2023 | 2022 | 2023 | 2022 | |||||||||||||||||||||||||
Current federal taxes | $ | 21,000 | $ | — | $ | 29,100 | $ | — | ||||||||||||||||||||||||
Current state taxes | $ | — | $ | 4,600 | $ | — | $ | 11,900 | 6,400 | — | 8,800 | — | ||||||||||||||||||||
Deferred state taxes | — | — | — | — | ||||||||||||||||||||||||||||
Income tax expense (benefit) | $ | — | $ | 4,600 | $ | — | $ | 11,900 | $ | 27,400 | $ | — | $ | 37,900 | $ | — |
There was 0no change in unrecognized tax benefits during the period ended June 30, 20222023 and there was 0no accrual for uncertain tax positions as of June 30, 2022.2023. Tax years from 20182020 through 20212022 remain subject to examination by U.S. federal and state jurisdictions.jurisdictions
6
NOCOPI TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
In accordance with FASB 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. Diluted earnings (loss) per share are computed using weighted average number of common shares plus dilutive common share equivalents outstanding during the period. Since our Company did not have any common stock equivalents outstanding as of June 30, 20222023 and June 30, 2021,2022, basic and diluted earnings (loss) per share were the same.
Note 7. 8.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 the Company’s total revenues were:
Company's Revenues As Percentage Of Revenue | ||||||||||||||||||||||||||||||||
Three Months ended June 30 | Six Months ended | Three Months ended June 30 | Six Months ended June 30 | |||||||||||||||||||||||||||||
2022 | 2021 | 2022 | 2021 | 2023 | 2022 | 2023 | 2022 | |||||||||||||||||||||||||
Customer A | 63 | % | 38 | % | 55 | % | 54 | % | 67 | % | 63 | % | 69 | % | 55 | % | ||||||||||||||||
Customer B | 22 | % | 17 | % | 24 | % | 18 | % | 20 | % | 22 | % | 16 | % | 24 | % | ||||||||||||||||
Customer C | — | 32 | % | 6 | % | 14 | % |
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:
Schedule of Non-affiliated Customers with Accounts Receivable More Than 10% | ||||||||||||||||
June 30 | December 31 | June 30 | December 31 | |||||||||||||
2022 | 2021 | 2023 | 2022 | |||||||||||||
Customer A | 37 | % | 30 | % | 11 | % | 6 | % | ||||||||
Customer B | 54 | % | 65 | % | 77 | % | 84 | % | ||||||||
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:
Company's Revenue by Geographic Region | ||||||||||||||||||||||||||||||||
Three Months ended June 30 | Six Months ended June 30 | Three Months ended June 30 | Six Months ended June 30 | |||||||||||||||||||||||||||||
2022 | 2021 | 2022 | 2021 | 2023 | 2022 | 2023 | 2022 | |||||||||||||||||||||||||
North America | $ | 160,900 | $ | 141,200 | $ | 284,800 | $ | 310,900 | $ | 145,800 | $ | 160,900 | $ | 273,600 | $ | 284,800 | ||||||||||||||||
South America | — | 2,600 | 1,600 | 4,100 | — | — | — | 1,600 | ||||||||||||||||||||||||
Asia | 330,000 | 362,100 | 527,900 | 775,600 | 435,200 | 330,000 | 876,700 | 527,900 | ||||||||||||||||||||||||
Australia | 23,400 | 8,000 | 39,400 | 34,700 | 18,200 | 23,400 | 41,000 | 39,400 | ||||||||||||||||||||||||
$ | 514,300 | $ | 513,900 | $ | 853,700 | $ | 1,125,300 | $ | 599,200 | $ | 514,300 | $ | 1,191,300 | $ | 853,700 |
7
NOCOPI TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
Note 8. 9.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 6.5%. 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.
Total lease expense under operating leases for the three and six months ended June 30, 20222023 was $13,400 and $26,700, respectively. Total lease expense under operating leases for the three and six months ended June 30, 20212022 was $13,400 and $26,700, respectively.
Maturities of lease liabilities are as follows:
Maturities of Lease Liabilities | ||||||||
Operating Leases | Operating Leases | |||||||
Year ending December 31 | ||||||||
2022 | $ | 27,500 | ||||||
2023 | 56,200 | 28,300 | ||||||
2024 | 18,900 | 18,900 | ||||||
Total lease payments | 102,600 | 47,200 | ||||||
Less imputed interest | (10,200 | ) | (3,800 | ) | ||||
Total | $ | 92,400 | $ | 43,400 |
Note 9. 10.Subsequent Events Employee Retention Tax Credit
The CARES Act, signed into law on March 27, 2020 with subsequent amendments, provides for refundable employee retention credit to employers whose operations were suspended due to COVID-19 or whose revenue significantly decreased. On August 1, 2022 ourJune 15, 2023, the Company entered intofiled a stock purchase agreementForm 941-X to claim a refundable employee retention credit for the first quarter and third quarter 2021 payroll in connection with a private placement forthe total gross proceedsamount of $3.5 84,000million.. The purchase agreement provides forCompany will record the issuance of an aggregate of shares of our Company’s common stock, par value $0.01 per share, to two investors at a purchase price of $per share,credit as adjusted for our Company’s contemplated one-for-ten (1:10) reverse stock split of our common stock. To enable the private placement transaction, our Board of Directors (“Board”) approved a 1-for-10 (1:10) reverse stock split of our common stock. The effective date of the reverse stock split is Friday, August 26, 2022. The closing of the purchase agreement is expected to occur as soon as possible following the consummation of the reverse stock split. If the closing has not occurred by September 15, 2022, any purchaser namedother income in the stock purchase agreement may, at its sole discretion, terminateStatement of Comprehensive Income in the purchase agreement by providing written notice to our Company. The closingperiod the refund is subject to the occurrence of the reverse stock split and our Company’s satisfaction of certain additional conditions. There is no guarantee that the closing of the purchase agreement will occur.received.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.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:
· | Expected operating results, such as revenue, | |
· | 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, | |
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 | |
· | Strategic actions, including business acquisitions and our success in integrating acquired businesses. | |
· | 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 | |
· | Developments and changes in | |
· | Security breaches, cybersecurity attacks and other significant disruptions in our information technology systems. | |
· | Such other factors as discussed throughout Part I, Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations in this Quarterly Report on Form 10-Q, and throughout Part II, Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations and in Item 1A. Risk Factors of our Annual Report on Form 10-K for the year ended December 31, |
10 |
Any forward-looking statement made by us in this Report on Form 10-Q 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.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, 2021,2022, filed with the Securities and Exchange Commission on March 30, 2022,31, 2023, as amended on April 29, 2022.28, 2023.
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 ““CompanCompanyy,” “we,“we,” “our”“our” or “us”“us” and other similar terms means Nocopi Technologies, Inc., a Maryland corporation.
Effects of COVID-19
To serve our customers while also providing for the safety of our employees and service providers, we have adapted various steps to protect our employees. Any employee who is uncomfortable coming into our facilities may choose not to come in. We have a large enough facility to enable all of our employees to social distance and we follow Centers for Disease Control and Prevention (CDC) guidelines. Our production employees work with chemicals and they have always used masks, respirators, etc., even before COVID-19. As a result, we continue to maintain the same level of productivity and effectiveness as prior to the COVID-19 pandemic.
The impact of COVID-19 on our Company had little effect on the financial results through the first six months of 2021; however, beginning in the third quarter of 2021, certain of the Company’s licensees in the entertainment and toy products market who utilize printers in China to produce their products have been adversely affected by the cargo surge related to congestion experienced in certain Chinese ports due to a COVID-19 outbreak that began in the second quarter of 2021. The cargo surge continues to the present time, now adversely affecting major United States ports. The world-wide cargo surge along with a container shortage resulted in significantly higher shipping costs since the third quarter of 2021. Certain of our Company’s licensees in the entertainment and toy products market have responded by deferring or scaling back production and size of future orders and, in some cases, rescheduling the shipping of completed orders. Ink orders from our Company’s licensed printers in China have fallen significantly beginning in the third quarter of 2021 compared to earlier periods. These supply chain disruptions are being experienced by many businesses including our Company’s licensees. A continuance of these supply chain disruptions that are forecast to persist into mid-2023 may negatively impact the number and value of orders placed by our Company’s licensed printers in the entertainment and toy products market with a resultant negative impact on our Company’s results of operations and cash flow in future periods.
We did not suffer a drop off in total earned royalties in the entertainment and toy products market as a result of COVID-19 through the third quarter of 2021 as retail demand continued to be strong for the products marketed by our licensees in the entertainment and toy products market. Beginning in the fourth quarter of 2021 and continuing through the second quarter of 2022, reflecting the significantly higher shipping costs caused by the COVID-19 related cargo surge at major China and United States ports and the world-wide container shortage, ink orders from the printers of our licensees in the entertainment and toy products market were significantly below historical levels. We continue to experience a negative impact on revenues in our smaller anti-counterfeiting and anti-diversion products market due to reduced production activity at certain printing facilities that utilize these technologies and anticipate that these conditions may continue for a period of time. Licensing revenues in the entertainment and toy products market declined in both the fourth quarter of 2021 and the first quarter of 2022; however, in the second quarter of 2022, licensing revenues in the entertainment and toy products market increased by approximately 38% compared to the second quarter of 2021. While the products of our licensees in the larger entertainment and toy products market are sold by both large and smaller retailers, most of whom are now open, and are also available for purchase online, we believe that revenues may not continue to be achieved at levels experienced in earlier periods due to the negative economic conditions that are expected to continue over the balance of the year and beyond as a result of COVID-19, increasing inflation, interest rate increases, the probability of an economic recession in the United States and globally along with and other factors affecting consumer spending. A slowdown and/or a reallocation in overall consumer spending resulting from the record inflationary conditions being experienced world-wide may affect the sales of products marketed by our licensees. Our major licensees in the entertainment and toy products market are large, well-known businesses in this market with whom we believe our long-term relationship will not be adversely affected by the COVID-19 pandemic, supply chain disruptions, effects of the ongoing Russia-Ukraine war and the record inflation currently being experienced in the major markets for our products.
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 adversely affected.
11 |
Revenues for the second quarter of 20222023 were $514,300$599,200 compared to $513,900$514,300 in the second quarter of 2021,2022, an increase of $400.$84,900, or approximately 17%. Licenses, royalties and fees increaseddecreased by $24,900,$19,600, or approximately 17%12%, to $150,200 in the second quarter of 2023 from $169,800 in the second quarter of 2022 from $144,900 in the second quarter of 2021.2022. The increasedecrease in licenses, royalties and fees in the second quarter of 20222023 compared to the second quarter of 20212022 is due primarily to higherlower royalties from our Company’s licensees in entertainment and toy products market offset in part by lower revenues from our Company’s licensees in the security markets which continue to be negatively affected by the COVID-19 pandemic and the variants of COVID-19 that have recently been identified.markets. We cannot assure you that the marketing and product development activities of our Company’s licensees or other businesses in the entertainment and toy products market will produce a significant increase in revenues for our Company, nor can the timing of any potential revenue increases be predicted, particularly given the uncertain economic conditions presently being experienced worldwide as a result of the ongoing COVID-19 pandemic that is continuing to negatively impact all worldwide economies.experienced.
Product and other sales decreasedincreased by $24,500,$104,500, or approximately 7%30%, to $449,000 in the second quarter of 2023 from $344,500 in the second quarter of 2022 from $369,0002022. Sales of ink increased in the second quarter of 2021. Sales of ink decreased in the second quarter of 20222023 compared to the second quarter of 20212022 due primarily to lowerhigher ink shipments to the third party authorized printersprinter used by two of our Company’s major licensees in the entertainment and toy products market. In the second quarter of 2022,2023, our Company derived revenues of approximately $471,300$578,800 from our licensees and their authorized printers in the entertainment and toy products market compared to revenues of approximately $461,100$471,200 in the second quarter of 2021.2022.
For the first six months of 2022,2023, revenues were $853,700,$1,191,300, representing a decreasean increase of $271,600,$337,600, or approximately 24%40%, from revenues of $1,125,300$853,700 in the first six months of 2021.2022. Licenses, royalties and fees decreased by $23,300,$33,900, or approximately 7%11%, to $273,200 in the first six months of 2023 from $307,100 in the first six months of 2022 from $330,400 in the first six months of 2021.2022. The decrease in licenses, royalties and fees is due primarily to higher royalties from our Company’s licensees in the entertainment and toy products market offset by lower revenues from our Company’s licensees in the security markets which continue to be negatively affected by the COVID-19 pandemic and the variants of COVID-19 that have recently been identified.market. We cannot assure you that the marketing and product development activities of our Company’s licensees or other businesses in the entertainment and toy products market will produce a significant increase in revenues for our Company, nor can the timing of any potential revenue increases be predicted, particularly given the uncertain economic conditions presently being experienced worldwide as a result of the COVID-19 pandemic that is continuing to negatively impact all worldwide economies along with recently identified variants of the COVID-19 virus.experienced.
Product and other sales decreasedincreased by $248,300,$371,500, or approximately 31%68%, to $918,100 in the first six months of 2023 from $546,600 in the first six months of 2022 from $794,9002022. Sales of ink increased in the first six months of 2021. Sales of ink decreased in the first six months of 20222023 compared to the first six of 20212022 due primarily to lowerhigher ink shipments to the third party authorized printersprinter used by two of our Company’s major licensees in the entertainment and toy products market and lower ink shipments to our Company’s licensees in the retail receipt and document fraud market. Our Company derived revenues of approximately $777,800$1,120,300 from licensees and their authorized printers in the entertainment and toy products market in the first six months of 20222023 compared to revenues of approximately $1,022,700$777,800 in the first six months of 2021.2022.
Our Company’s gross profit increased to $370,200 in the second quarter of 2023, or approximately 62% of revenues, from $313,100 in the second quarter of 2022, or approximately 61% of revenues, from $280,100 in the second quarter of 2021, or approximately 55% 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 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 second quarter of 2022 compared to the second quarter of 2021 results primarily from higher revenues from licenses, royalties and fees and a favorable mix of product and other sales in the second quarter of 2022 compared to the second quarter of 2021.
For the first six months of 2022,2023, gross profit was $486,300,$681,800, or approximately 57% of revenues, compared to $671,200,$486,300, or approximately 60%57% of revenues, in the first six months of 2021.2022. The lowerhigher gross profit in the first six months of 20222023 compared to the first six months of 2021 results2022 was primarily from lower licenses, royalties and feesdue to an increase in the first six months of 2022 and lower revenuesgross profit from product and other sales in the first six months of 2022 compared to the first six months of 2021.sales.
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 fees as well as overall gross profit. The gross profit from licenses, royalties and fees increaseddecreased to approximately 67% in the second quarter of 2023 compared to approximately 73% in the second quarter of 2022 compared to approximately 66% in the second quarter of 2021 and to approximately 72%60% of revenues from licenses, royalties and fees in the first six months of 20222023 from approximately 71%72% in the first six months of 2021.2022.
12 |
The gross profit, 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. The gross profit from product and other sales increased to approximately 60% of revenues in the second quarter of 2023 compared to approximately 55% of revenues in the second quarter of 2022 compared to approximately 50% of revenues in the second quarter of 2021.2022. For the first six months of 2022,2023, the gross profit, expressed as a percentage of revenues, decreasedincreased to approximately 48%56% of revenues from product and other sales compared to approximately 55%48% of revenues from product and other sales in the first six months of 2021. The increase2022
Research and development expenses increased in gross profitthe second quarter of 2023 to $35,300 from product and other sales$32,500 in the second quarter of 2022 comparedand to the second quarter of 2021 is due primarily to a favorable mix of products in the second quarter of 2022 compared to the second quarter of 2021. The decrease in gross profit from product and other sales$80,100 in the first six months of 2022 compared to the first six months of 2021 is due primarily to lower ink shipments to the third party authorized printers used by two of our Company’s major licensees in the entertainment and toy products market.
Research and development expenses decreased in the second quarter of 2022 to $32,5002023 from $45,800 in the second quarter of 2021 and to $72,000 in the first six months of 2022 from $90,300 in the first six months of 2021 due primarily to lowerhigher employee relatedand lab expenses in the second quarter and first six months of 20222023 compared to the second quarter and first six months of 2022.
Sales and marketing expenses increaseddecreased to $61,100 in the second quarter of 2023 from $76,700 in the second quarter of 2022 from $74,200and increased to $147,400 in the second quarterfirst six months of 2021 and decreased to2023 from $141,500 in the first six months of 2022 from $157,400 in the first six months of 2021.2022. The increase in the second quarter of 20222023 compared to the second quarter of 20212022 is due primarily to higherlower commission and employee related expenses in the second quarter of 20222023 compared to the second quarter of 2021.2022. The decrease in the first six months of 20222023 compared to the first six months of 20212022 is due primarily to lowerhigher commission expense on the lowerhigher level of revenues in the first six months of 20222023 compared to the first six months of 2021.2022.
General and administrative expenses increaseddecreased in the second quarter and first six months of 2023 to $223,300 and $424,500, respectively, from $506,700 and $784,400, respectively, in the second quarter and first six months of 2022 due primarily to $506,700lower professional fees offset in part by higher employee related expenses and $784,400, respectively, from $117,700 and $263,200, respectively,higher insurance expense in the second quarter and first six months of 2021 due primarily to significantly higher professional fees in the second quarter and first six months of 20222023 compared to the second quarter and first six months of 2021.2022.
Income taxes in the second quarter and first six months of 20212023 include federal and state income taxes. The state income taxes result from limitations placed on income tax net operating loss deductions by the Commonwealth of Pennsylvania.
The net income of $79,100 in the second quarter of 2023 compared to net loss of $297,000 in the second quarter of 2022 compared to netresulted primarily from a higher gross profit on a higher level of product sales, lower operating expenses and interest income $42,500 in the second quarter of 2021 resulted primarily from higher operating expenses in the second quarter of 20222023 compared to the second quarter of 2021.2022. The net income of $109,400 in the first six months of 2023 compared to net loss of $500,400 in the first six months of 2022 compared to net income of $157,300 in the first six months of 2021 resulted primarily from a lowerhigher gross profit on a lowerhigher level of licenses, royalties and fees and product and other sales in the first six months of 20222023 compared to the first six months of 20212022, lower operating expenses and higher operating expensesinterest income in the first six months of 20222023 compared to the first six months of 2021.2022.
Plan of Operation, Liquidity and Capital Resources
During the first six months of 2022,2023, our Company’s cash decreasedincreased to $1,593,400$5,463,200 at June 30, 20222023 from $1,846,700$5,337,800 at December 31, 2021.2022. During the first six months of 2022,2023, our Company used $253,300 to fundgenerated $137,300 from its operating activities.activities and used $11,900 for capital expenditures.
During the first six months of 2022,2023, our Company’s revenues decreasedincreased approximately 24%40% primarily as a result of lowerhigher sales of ink to thean authorized printersprinter of our Company’s licensees in the entertainment and toy products market.
Additionally,market offset in part by lower royalty revenues from our Company’s licensees in the entertainment and toy products market. Our total overhead expenses increased in the six months of 2022 to $997,900 compared to $510,900 in the first six months of 2021 and our Company’s income tax expense decreased in the first six months of 2023 to $652,000 compared to $997,900 in the first six months of 2022, our Company’s interest income and our Company’s income tax expense increased in the first six months of 2023 compared to the first six months of 2021.2022. As a result of these factors, our Company sustainedgenerated net income of $109,400 in the first six months of 2023 compared to a net loss of $500,400 in the first six months of 2022 compared to net income of $157,300 in the first six months of 2021.2022. Our Company had negativepositive operating cash flow of $253,300$137,300 during the first six months of 2022.2023. At June 30, 2022,2023, our Company had positive working capital of $2,884,600$6,836,500 and stockholders’ equity of $3,004,900.$8,927,800. For the full year of 2021,2022, our Company had net income of $49,400$1,813,100 and had positivenegative operating cash flow of $512,700.$8,100. At December 31, 2021,2022, our Company had working capital of $3,197,500$6,421,800 and stockholders’ equity of $3,505,300.$8,818,400.
On August 1, 2022 our Company entered into a stock purchase agreement in connection with a private placement for total gross proceeds of $3.5 million. The purchase agreement provides for the issuance of an aggregate of 2,500,000 shares of our Company’s common stock, par value $0.01 per share, to two investors at a purchase price of $1.40 per share, as adjusted for our Company’s contemplated one-for-ten (1:10) reverse stock split of our common stock. To enable the private placement transaction, our Board approved a 1-for-10 (1:10) reverse stock split of our common stock. The effective date of the reverse stock split is Friday, August 26, 2022. The closing of the purchase agreement is expected to occur as soon as possible following the consummation of the reverse stock split. If the closing has not occurred by September 15, 2022, any purchaser named in the stock purchase agreement may, at its sole discretion, terminate the purchase agreement by providing written notice to our Company. The closing is subject to the occurrence of the reverse stock split and our Company’s satisfaction of certain additional conditions. There is no guarantee that the closing of the purchase agreement will occur or, if completed, that the proceeds derived from the purchase agreement will enable our Company to generate additional revenues and positive cash flow.
In November 2018, our Company negotiated a $150,000 revolving line of credit (“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.inception, therefore the line of credit has been closed as of June 30, 2023. 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 develop new revenue sources. We cannot assure you that we will be successful in obtaining such additional capital, if needed. We continue to maintain a cost containment program including curtailment, where possible, of discretionary research and development and sales and marketing expenses.
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Our Planplan of Operationoperation for the twelve months beginning with the date of this quarterly reportQuarterly 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. We cannot assure you that these efforts will enable our Company to generate additional revenues and positive cash flow.
Our future growth strategy includes expanding our business through acquisitions of other companies with competing or complementary services, technologies or businesses in order to expand our product and service offerings to grow our free cash flow. We are currently actively engaged in the process to identify acquisition candidates and negotiate transactions. As of the date of this report on Form 10-Q, we have no agreements to make any acquisition. We expect to fund our business expansion through the issuance of debt or equity securities, the payment of cash, the exchange of services, or any combination thereof.
Our Company has received, and may in the future 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. Beyond the Line of Credit, we cannot assure you that if we require additional capital, that we will be successful in obtaining such 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 as a result of an uncertain economic environment throughout the balance of 2022in 2023 and beyond due to any future effects of the ongoing COVID-19 pandemic and its effect on the global economy, geopolitical instability including the Russia-Ukraine war and the supply chain disruptions related to both as well as the record inflation and significantly higher interest rates currently being experienced in the United States along with the probability of an economic recession both in the United States and globally. As a result, our revenues, results of operations and liquidity may be further negatively impacted.impacted in future periods.
Contractual Obligations
As of June 30, 2022,2023, 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 30, 2022,31, 2023, as amended on April 29, 2022,28, 2023, 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
As of June 30, 2022,2023, there were no recently adopted accounting standards that had a material effect on our Company’s financial statements.
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Recently Issued Accounting Pronouncements Not Yet Adopted
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments – Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments. The amendments in this Update affect loans, debt securities, trade receivables, and any other financial assets that have the contractual right to receive cash. The ASU requires an entity to recognize expected credit losses rather than incurred losses for financial assets. For public entities, the amendments are effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. ASU No. 2019-10 extends the effective dates for two years for smaller reporting companies and nonpublic companies.
In August 2020, the FASB issued ASU No. 2020-06, Debt – Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging – Contracts in Entity’s Own Equity (Subtopic 815-40), Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity. The amendments in this Update affect entities that issue convertible instruments and/or contracts in an entity’s own equity. For convertible instruments, the instruments primarily affected are those issued with beneficial conversion features or cash conversion features because the accounting models for those specific features are removed. However, all entities that issue convertible instruments are affected by the amendments to the disclosure requirements in this Update. For contracts in an entity’s own equity, the contracts primarily affected are freestanding instruments and embedded features that are accounted for as derivatives under the current guidance because of failure to meet the settlement conditions of the derivatives scope exception related to certain requirements of the settlement assessment. FASB simplified the settlement assessment by removing the requirements (1) to consider whether the contract would be settled in registered shares, (2) to consider whether collateral is required to be posted, and (3) to assess shareholder rights. Those amendments also affect the assessment of whether an embedded conversion feature in a convertible instrument qualifies for the derivatives scope exception. Additionally, the amendments in this Update affect the diluted EPS calculation for instruments that may be settled in cash or shares and for convertible instruments. The amendments in this Update are effective for public business entities that meet the definition of a Securities and Exchange Commission (SEC) filer, excluding entities eligible to be smaller reporting companies as defined by the SEC, for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years. For all other entities, the amendments are effective for fiscal years beginning after December 15, 2023, including interim periods within those fiscal years. Early adoption is permitted, but no earlier than fiscal years beginning after December 15, 2020, including interim periods within those fiscal years. FASB specified that an entity should adopt the guidance as of the beginning of its annual fiscal year. FASB decided to allow entities to adopt the guidance through either a modified retrospective method of transition or a fully retrospective method of transition.
Off-Balance Sheet Arrangements
Our Company does not have any off-balance sheet arrangements.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.Risk
Not Applicable
Item 4. Controls and Procedures.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 June 30, 2022.2023. Based on this evaluation, our Company’s Principal Executive Officer and Principal Financial Officer concluded that, as of June 30, 2022,2023, 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 June 30, 20222023 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
None
Item 1A. Risk Factors.
Not applicable
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.Proceeds
None.
Item 3. Defaults Upon Senior Securities.
Not applicableNone
Item 4. Mine Safety Disclosures.
Not applicable
Item 5. Other Information.Information
None. None
Item 6. Exhibits.Exhibits
The following exhibits are included herein:(a) Exhibits
Exhibit Number | Description | Location | ||
Certification of Chief Executive Officer required by Rule 13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | Filed herewith | |||
31.2 | Certification of Chief Financial Officer required by Rule 13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | Filed herewith | ||
32.1 | Certifications of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | Filed herewith | ||
Inline XBRL Instance Document–the instance document does not appear in the Interactive Data File as its XBRL tags are embedded within the Inline XBRL document | ||||
101.SCH | Inline XBRL Taxonomy Extension Schema | |||
101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase | |||
101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase | |||
101.LAB | Inline XBRL Taxonomy Extension Label Linkbase | |||
101.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase | |||
104 | Cover page formatted as Inline XBRL and contained in Exhibit 101 |
SIGNATURES
Pursuant to the requirementsrequirement of the Securities Exchange Act of 1934, the registrantour Company has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
NOCOPI TECHNOLOGIES, INC. | ||
DATE: August | /s/ Michael A. Feinstein, M.D. | |
Michael A. Feinstein, M.D. | ||
Chairman of the Board, President & Chief Executive Officer | ||
DATE: August | /s/ | |
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EXHIBIT INDEX
Exhibit Number | Description | Location | ||
Certification of Chief Executive Officer required by Rule 13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | Filed herewith | |||
31.2 | Certification of Chief Financial Officer required by Rule 13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | Filed herewith | ||
32.1 | Certifications of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | Filed herewith | ||
Inline XBRL Instance Document–the instance document does not appear in the Interactive Data File as its XBRL tags are embedded within the Inline XBRL document | ||||
101.SCH | Inline XBRL Taxonomy Extension Schema | |||
101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase | |||
101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase | |||
101.LAB | Inline XBRL Taxonomy Extension Label Linkbase | |||
101.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase | |||
104 | Cover page formatted as Inline XBRL and contained in Exhibit 101 |
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