For the transition period from ______________________ to __________________________
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. ¨ Yes þ No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. ¨ Yes þ No
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. þ 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). þ Yes ¨ No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. þ
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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.
If an emerging growth company, indicate by check mark 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 Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act of 1934) ¨ Yes þ No
The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant was approximately $2,325,000 as of June 30, 2019.
As of March 17, 2020, there were 61,044,698 shares outstanding of the registrant’s common stock, $0.01 par value.
Portions of the registrant’s definitive proxy statement to be filed in conjunction with the registrant’s 2020 annual meeting of stockholders are incorporated by reference in Part III of this Annual Report on Form 10-K. The proxy statement will be filed by the registrant with the Securities and Exchange Commission not later than 120 days after the end of the registrant’s fiscal year ended December 31, 2019.
This report on Form 10-K contains forward-looking statements. Forward-looking statements involve risks and uncertainties, such as statements about our plans, objectives, expectations, assumptions or future events. In some cases, you can identify forward-looking statements by terminology such as “anticipate,” “estimate,” “plan,” “project,” “continuing,” “ongoing,” “expect,” “we believe,” “we intend,” “may,” “should,” “will,” “could” and similar expressions denoting uncertainty or an action that may, will or is expected to occur in the future. These statements involve estimates, assumptions, known and unknown risks, uncertainties and other factors that could cause actual results to differ materially from any future results, performances or achievements expressed or implied by the forward-looking statements.
Security breaches, cybersecurity attacks and other significant disruptions in our information technology systems.
The potential impact upon our business of the novel coronavirus COVID-19 pandemic that is affecting almost every country, including the United States.
PART I
Item 1.
Business
Background
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. Our website address is www.nocopi.com.
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.
Entertainment and Toy Technologies and Products
Since 2004, we have marketed our Rub-it & Color technology to the entertainment and toy products market. This technology consists of specialty inks that are produced in a variety of colors and can be revealed by rubbing with a fingernail or other firm object such as a plastic pen cap. Rub-it & Color ink technology can be used for coloring books, activity kits, play sheets, single use place mats, greeting cards, board games, promotional products, or any other paper-based application that’s needs some “fun” factor added. Safe and non-toxic, Rub-it and Color conforms to ASTM D4236 and F-963 and other toxicology tests.
Every child loves to color, and every parent has a horror story about the cleanup. Our patented, revolutionary, and award-winning Rub-it & Color takes out all the messy stuff related to children’s coloring except the fun. No more crayons ground into the carpet and car upholstery. No more spilled paint on the rug. No more messy markers ruining clothes and furniture. Rub-it & Color ink technology can be used for coloring books, activity kits, play sheets, single use place mats, greeting cards, board games, promotional products, or any other paper-based application that’s needs some “fun” factor added. Safe and non-toxic, Rub-it and Color conforms to ASTM D4236 and F-963 and other toxicology tests.
We license our Rub-it & Color technology through various license agreements, including:
A.
License agreement with a licensee who has a significant presence in the entertainment and toy products market. A license agreement, in effect from January 2012 through December 2017, permitted this licensee to exclusively market: (1) a specific line of products incorporating our technologies through a specific distribution channel but permitting us to license the covered technologies to others for applications and sale through channels of distribution not available to this licensee under the terms of the license, and (2) from January 2013 through December 2017, an additional technology on an exclusive basis in certain geographic areas of the world and on a non-exclusive basis in other geographic areas of the world. In early 2018, we entered into a new five-year license agreement with this licensee which permits the licensee to market products incorporating certain of our technologies, including the technologies permitted in the earlier license, on a non-exclusive basis throughout the world.
B.
License agreement containing guaranteed minimum royalties over the initial term of the license, which have been met, with Bendon, Inc. (“Bendon”), an international, well-known children’s coloring and activity book publishing company that permits Bendon to exclusively market products with other characteristics that incorporate our technologies through a distinctly different channel of distribution. This four-year license agreement was completed in June 2015, replacing a previous three-year license agreement. In 2018, amendments to the license agreement were negotiated that (1) extend the license for a period of four years beginning in July 2019 containing guaranteed minimum royalty payments payable over the four-year period and (2) allow Bendon to: (a) market specific new technologies not covered in the license agreement, (b) expand certain rights relative to product content and design that were specifically excluded in the license agreement and (c) market merchandise permitted by the license through all channels of distribution, some of which were previously prohibited in the license agreement.
1
C.
License agreement with a privately-held designer of creative educational products for children granting the licensee the exclusive right to utilize our Rub-it & Color ink technology in a newly-created vertical market in the United States. In addition to an annual license fee, we receive a royalty based on units of product produced. The license originated in 2011 and was renewed in June 2017 for a period of up to three years.
D.
License agreement with a privately-held children’s meal entertainment program provider that allows the licensee to use our Rub-it & Color ink technology in children’s menus, placemats, butcher paper and certain other products for restaurant use and for sale in certain children’s retail outlets. The license originated in November 2012 and was renewed in December 2014 for a period of six years, expiring in December 2020.
E.
License agreement with a privately-held international publisher of family products and publications based in Australia. The license originated in October 2015 and terminated in December 2018. The license agreement contained guaranteed minimum royalty payments and allowed the licensee to market certain products that incorporate specific technologies of our Company on an exclusive basis in certain countries and on a non-exclusive basis in other countries with the exclusion of the United States, Canada and Mexico. A new license containing guaranteed minimum royalty payments, allowing the licensee to market certain products that incorporate specific technologies of our Company on an exclusive basis in certain countries and on a non-exclusive basis in other countries with the exclusion of the United States, Canada and Mexico, was negotiated in November 2018. The new license, expanding the technologies that the licensee is authorized to incorporate into its products, became effective in January 2019 and terminates in October 2022. The licensee introduced products incorporating our technologies in 2016.
Certain of our license agreements with licensees contain renewal options and/or guaranteed minimum royalties, while others do not. We cannot assure you that any of our existing licenses will be renewed or will generate significant operating revenues for our Company in the future. In each of the years 2019 and 2018, we derived approximately 88% and 92%, respectively, of our total revenues from our licensees and their licensed printers in the entertainment and toy products market. We continue to pursue additional licensing opportunities for our Rub-it & Color ink technology in the large worldwide entertainment and toy products market through direct marketing efforts and attendance at trade shows. We also seek to renew existing license agreements with licensees.
Anti-Counterfeiting and Anti-Diversion Technologies and Products
Continuing developments in copying and printing technologies makes it easier than ever before to counterfeit a wide variety of documents. Product labels and packaging, retail receipts, event and transportation tickets and the like are all susceptible to counterfeiting, and product counterfeiting has long caused losses to manufacturers of brand name products. With improvements in the copying and printing technologies making it easier to counterfeit labeling and packaging, losses to businesses from such counterfeiting appear to have increased substantially.
Our COPIMARK and RUB & REVEAL technologies provide proprietary document authentication systems that are useful to businesses desiring to authenticate a wide variety of printed materials and products. Our COPIMARK system enables businesses to print invisibly on certain areas of a document. When authentication of certain documents is required, the invisible printing can be activated or revealed by use of a special highlighter pen. Other variations of the COPIMARK technology involve multiple color responses from a common pen, visible marks of one color that turn another color with the pen or visible and invisible marks that turn into a multicolored image. Our RUB & REVEAL system permits the invisible printing of an authenticating symbol or code that can be revealed by rubbing a fingernail over the printed area.
Both technologies provide users with the ability to authenticate documents and detect counterfeit documents. Applications include the authentication of documents having intrinsic value, such as merchandise receipts, checks, travelers' checks, gift certificates and event tickets, and the authentication of product labeling and packaging. When applied to product labels and packaging, our systems allow detection of counterfeit products, the labels and packaging of which would not contain the authenticating marks invisibly printed on the packaging or labels of the legitimate product.
Our marketing efforts for these technologies are focused on specific industries we believe may be affected by product counterfeiting. These technologies also combat product diversion (i.e. sale of legitimate products through unauthorized distribution channels or in unauthorized markets). Another of our related technologies, our invisible inkjet technology, permits manufacturers and distributors to track the movement of products from production to ultimate consumption when coupled with proprietary software. We anticipate that the “track and trace” capability provided by this technology will be attractive to brand owners and marketers and we hope that our ongoing marketing initiatives will result in additional revenues in the future; although we cannot assure you that this will occur.
2
We currently participate in the retail receipt and document fraud market through licensing arrangements with seven printers and distributors in the United States and Canada who provide loss prevention products to retailers and other outlets. We market these technologies through the use of licensed printers and distributors and continue to use our available internal sales and technical resources to expand the number of licensees marketing our technologies in this market.
Contrast Technologies, formerly known as Euro-Nocopi, S.A., is a former affiliate of our Company that, since June 2003, has held a perpetual royalty-free license to exploit certain of our anti-counterfeiting and anti-diversion technologies in Europe.
Product Revenue
The following table illustrates the approximate percentage of our Company’s total revenues accounted for by each type of its products for each of the two last fiscal years:
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Year Ended December 31,
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Product Type
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2019
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2018
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Entertainment and Toy Technologies and Products
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88
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%
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92
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%
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Anti-Counterfeiting and Anti-Diversion Technologies and Products
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12
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%
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8
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%
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Marketing
We have identified two major markets for our technologies and products, the entertainment and toy product market and the anti-counterfeiting/anti-diversion market. Our marketing approach focuses on the sufficient flexibility in our products and technologies and our ability to provide innovative, cost effective technologies for the entertainment and toy products market as well as solutions to a wide variety of counterfeiting, diversion and copier fraud problems. As a technology company, we generate revenues primarily by collecting license fees and royalties from market-specific businesses that incorporate our technologies into their products and, in certain cases, sales of our inks to these licensees and their designated manufacturers. We also license our technologies directly to end-users. Our current marketing efforts are focused on our developed technologies that can be utilized in geographic or market areas not contractually committed to an existing licensee on an exclusive basis. We presently market our technologies through our own employees, sales travel and attendance at trade shows.
Major Customers
During 2019, we made sales or obtained revenues equal to 10% or more of our Company’s 2019 total revenues from two non-affiliated customers who individually accounted for approximately 55% and 18%, respectively, of 2019 revenues of our Company. During 2018, we made sales or obtained revenues equal to 10% or more of our Company’s 2018 total revenues from two non-affiliated customers who individually accounted for approximately 59% and 21%, respectively, of 2018 revenues of our Company.
Additional information concerning our major customers is contained in Note 12 to our Financial Statements, attached as Appendix A to this Annual Report on Form 10-K.
Manufacturing
Our Company operates a small manufacturing facility for the manufacture of its security inks that is located at our corporate headquarters at 480 Shoemaker Road, Suite 104, King of Prussia, Pennsylvania 19406, and we subcontract the manufacture of certain of our applications (mainly certain printing inks and coatings) to third party manufacturers. Our current mix of manufacturing processes are suitable for our Company, for both economic and technical reasons, and we have no plans to alter this mix in the near future. We have established a quality control program that currently entails laboratory analysis of developed technologies; and when warranted, our specially trained technicians travel to third party production facilities to install equipment, train client staff and monitor the manufacturing process.
3
Patents
Our Company has been granted various patents in the United States, Canada, South Africa, Saudi Arabia, Australia, New Zealand, Japan, France, the United Kingdom, Belgium, the Netherlands, Germany, Austria, Italy, Sweden, Switzerland, Luxembourg, and Liechtenstein. We currently have patent protection on substantially all of our security inks including the RUB & REVEAL system, and on our Rub-it & Color technology. Our latest patent protects our newly developed technology that may have applications in the entertainment and toy products market.
In the United States and some other countries, patent applications are automatically published at a specified time after filing. Since we are obligated pay annuities from time to time on our patents to keep them in force, we annually evaluate our patent portfolio to determine which patents we will continue to maintain. In Europe, annuities for European patents are paid by Contrast Technologies, formerly known as Euro-Nocopi, S.A., since Europe is where they hold a perpetual royalty-free license to exploit certain of our anti-counterfeiting and anti-diversion technologies.
Research and Development
We have been involved in the research and development of our technologies since our inception. Although several years ago our adverse financial condition forced us to limit funding for research and development, we are presently actively conducting research and development activities in the following three areas, to the extent feasible: (1) refining our present family of products, (2) developing specific customer applications, and (3) expanding our technology into new areas of implementation. During the years ended December 31, 2019 and December 31, 2018, we expended approximately $165,600 and $153,200, respectively, on research and development. We cannot assure you that we will continue to have funds available to maintain our research and development activities at current or increased levels.
Competition
Our Company has competitors in all segments of our business. The entertainment and toy products markets are highly competitive and includes numerous competitors. The loss prevention market also includes numerous competitors, including large publicly traded and privately-held companies as well as regional paper converters. In the area of document and product authentication and serialization, competitors offer competitive covert and overt surface marking technologies requiring decoding implements or analytical methods to reveal certain information that are marketed for the same anti-counterfeiting and anti-diversion purposes for which our Company markets its covert technologies. These include, among others, biological DNA codes, microtaggants, thermochromic, UV and infrared inks as well as encryption, 2D symbology and laser engraving. Nonetheless, we believe our patented and proprietary technologies provide a unique and cost-effective solution to the problem of counterfeiting and gray marketing in the document and product authentication markets it has traditionally sought to exploit.
We are a small operating company and many of our existing and potential competitors have substantially greater research and product development capabilities and financial, marketing and human resources than we do.
Employees
We currently have four full-time and two part-time employees. We believe that we have good relations with our employees.
Financial Information about Foreign and Domestic Operations
We conduct our business operations solely within the United States; however, we have licensees and customers in Europe, South America, Asia and Australia. These licensees and customers accounted for approximately 66% of our gross revenues in 2019 and approximately 32% of our gross revenues in 2018. Additional information concerning our foreign and domestic operations is contained in Note 12 to our Financial Statements, attached as Appendix A to this Annual Report on Form 10-K.
4
Item 1A.
Risk Factors
Our Company’s operating results, financial condition and stock price are subject to certain risks, some of which are beyond its control. These risks could cause our Company’s actual operating and financial results to differ materially from those expressed in its forward-looking statements, including the risks described below and the risks identified in other documents which are filed and furnished with the United States Securities and Exchange Commission.
Spread of the Novel Strain of Coronavirus (“COVID-19”). 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. The World Health Organization has declared COVID-19 to constitute a global pandemic. Certain state and local governments have reacted by placing significant restrictions on businesses including a closure in Pennsylvania of non-essential businesses that was announced on March 20, 2020. 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, our ability to produce products for sale to our customers could be negatively impacted. Further, restrictions on our customers and licensees in areas affected by the COVID-19 could adversely affect our results of operations and financial condition. 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.
Access to Capital. Our Company anticipates that it may need to raise additional capital in the future to fund its historical and new business operations. Additional financing may not be available to us, due to, among other things, our Company not having a sufficient income stream, profit level, asset base eligible to be collateralized, or market for its securities. If we raise additional funds by issuing equity or convertible debt securities, the percentage ownership of our existing shareholders may be reduced, and these securities may have rights superior to those of our common stock. If adequate funds are not available to satisfy our long-term capital requirements, or if planned revenues are not generated, we may be required to substantially limit our operations or cease operations altogether. We cannot assure you that, if required, we will be successful in obtaining additional financing in sufficient amounts to fund our ongoing business operations.
Dependence on Major Customers. We are dependent on our licensees to develop new products and markets that will generate increases in its licensing and product revenues. The inability of our licensees to maintain at least current levels of sales of products utilizing our technologies could adversely affect our operating results and cash flow. To the extent that our licensees are adversely affected by negative economic conditions such as those that may result from the present COVID-19 pandemic, our revenues may also be negatively impacted. We derive a significant percentage of our revenues through licensing relationships with two major customers. Revenues obtained directly from these customers and indirectly, through the customers’ third party licensed printers, equaled approximately 84% of our Company’s revenues in 2019. Receivables from these two licensees and their third party authorized printers were approximately 96% of our Company’s net accounts receivable at December 31, 2019. One of the license agreements expires in 2023 and contains guaranteed minimum royalties, which historically are met. The other license agreement expires in 2022. Both license agreements contain renewal options; but there can be no assurances that one or both of the licenses will continue in force at the same or more favorable terms beyond their current termination dates, nor can there be any assurances that the relationships with these two licensees will generate increased revenues for our Company in the future.
Possible Inability to Develop New Business. Our management believes that any significant improvement in our Company’s cash flow must result from increases in revenues from traditional sources and from new revenue sources. Our Company’s ability to develop new revenues may depend on the extent of both its marketing activities and its research and development activities, both of which are limited. We cannot assure you that the resources that our Company can devote to marketing and to research and development will be sufficient to increase its revenues to levels that will enable it to maintain positive operating cash flow in the future.
Inability to Obtain Raw Materials and Products for Resale. Our Company’s adverse financial condition in years prior to 2016 has required it from time to time to significantly defer payments due to (i) vendors who supply raw materials and other components of its security inks, (ii) providers of professional and other services and (iii) certain employees to whom salary and sales commissions are owed. As a result, the Company is required to pay cash in advance of shipment to certain of its suppliers. The inability to obtain materials on a timely basis and the possibility that certain vendors may permanently discontinue supplying our Company with needed products and services may result in delayed shipments to customers and further impact our Company’s ability to service its customers, thereby adversely affecting our Company’s relationships with its customers and licensees. We cannot assure you that our Company will be able to maintain its vendor relationships in an acceptable manner.
5
Uneven Pattern of Quarterly and Annual Operating Results. Our Company’s revenues, which are derived primarily from licensing and sales of products incorporating its technologies as well as royalties from these products, are difficult to forecast; such forecasting difficulty is due to, among other reasons, the long sales cycle of our Company’s technologies, the potential for customer delay or deferral of implementation of our Company’s technologies, the size and timing of inception of individual license agreements, the success of our Company’s licensees and strategic partners in exploiting the market for the licensed products, modifications of customer budgets, and uneven patterns of royalty revenue and product orders. As our revenue base is not substantial, delays in the finalization of license contracts, the implementation of the technology to initiate the revenue stream and the ordering decisions of customers can have a material adverse effect on our Company’s quarterly and annual revenue expectations. As our operating expenses are substantially fixed, income expectations will be subject to a similar adverse outcome. As licensees for the entertainment and toy products markets are added, the predictability of our Company’s revenue stream may be further impacted.
Volatility of Stock Price. The market price for our common stock has historically experienced significant fluctuations and may continue to do so. With the exception of 2007, 2013, 2014 and 2016 through 2019 from its inception, our Company has operated at a loss and it has not produced revenue levels traditionally associated with publicly-traded companies. Our common stock is not listed on a national or regional securities exchange and, consequently, our Company receives limited publicity regarding its business achievements and prospects. Additionally, securities analysts and traders do not extensively follow our stock and it is thinly traded. The market price for our common stock may be affected by announcements of new relationships or modifications to existing relationships. The stock prices of many developing public companies, particularly those with small capitalizations, have experienced wide fluctuations not necessarily related to operating performance. Such fluctuations may adversely affect the market price of our Company’s common stock.
Intellectual Property. Our Company relies on a combination of protections as may be available under applicable domestic, foreign or international patent, trademark and trade secret laws. We also rely on confidentiality, non-analysis and licensing agreements to establish and protect our rights in its proprietary technologies. While we attempt to protect these rights, our technologies may be compromised through reverse engineering, independent invention or other means. In addition, our ability to enforce our intellectual property rights through appropriate legal action has been and will continue to be limited by its tight liquidity. We cannot assure you that our Company will be able to protect the basis of its technologies from discovery by third parties or to preclude third parties from conducting activities that infringe on our Company’s rights. Our Company’s tight liquidity adversely impacts our ability to obtain patent protection on our intellectual property and to maintain protection on previously issued patents. We cannot assure you that we will be able to continue to prosecute new patents and maintain issued patents. As a result, our customer and licensee relationships could be adversely affected, and the value of our technologies and intellectual property (including their value upon liquidation) could be substantially diminished.
Economic Conditions. Our Company’s revenue is susceptible to changes in general economic conditions. Our sales, liquidity and overall results of operations may be negatively affected by decreasing consumer confidence, slowdowns in consumer spending or other downturns in the U.S. economy as a whole or in any geographic markets from which we derive revenue. In addition, these factors may result in decreased customer and licensee demand for our products and may negatively impact our ability to develop new customers and licensees. Due to uncertainties surrounding the worldwide economy, particularly in light of the COVID-19 pandemic, we are unable to predict the effect of such conditions on our customers and licensees. Consequently, we cannot predict the scope or magnitude of the negative effect resulting from ongoing global financial uncertainties or economic slowdowns.
Potential undetected material weakness in internal controls. Our annual report does not include an attestation report of our Company’s independent registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by our Company’s registered public accounting firm pursuant to rules of the Securities and Exchange Commission that permit our Company to provide only management’s attestation in this annual report. As a result, a material weakness in our internal controls may remain undetected for a longer period.
Item 1B.
Unresolved Staff Comments
None.
Item 2.
Properties
Our corporate headquarters, research and ink production facilities are located at 480 Shoemaker Road, Suite 104, King of Prussia, Pennsylvania 19406. These premises consist of approximately 6,100 square feet of leased space. Our lease commenced in January 2014 and expires in April 2024. Current monthly rent under this lease is $4,212; this amount escalates an amount of approximately three percent each year. In addition to rent, we are also responsible for our pro-rata share of the operating costs of the building.
6
We incurred leasehold improvement expenditures of approximately $27,800 through March 17, 2020, and we believe that additional leasehold improvement expenditures will not be significant. We consider this space adequate for our current needs and additional space is available as needed.
Item 3.
Legal Proceedings
None.
Item 4.
Mine Safety Disclosures
Not applicable.
7
PART IV
Item 15.
Exhibits, Financial Statement Schedules
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(a)
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The following Audited Financial Statements are filed as part of this Form 10-K Report:
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Report of Independent Registered Public Accounting Firm
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Balance Sheets
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Statements of Operations
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Statement of Stockholders’ Equity
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Statements of Cash Flows
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Notes to Financial Statements
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(b)
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The following exhibits are filed as part of this report.
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See Exhibit Index.
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Item 16.
Form 10-K Summary
None.
16
SIGNATURES
Pursuant to the requirements of Section 13 of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
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NOCOPI TECHNOLOGIES, INC.
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Date: March 30, 2020
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By:
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/s/ Michael A. Feinstein, M.D.
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Michael A. Feinstein, M.D.
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Chairman of the Board, President and Chief Executive Officer (Principal Executive Officer)
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Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
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Signature
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Title
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Date
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/s/ Michael A. Feinstein, M.D.
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Chairman of the Board, President and Chief Executive Officer (Principal Executive Officer)
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March 30, 2020
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Michael A. Feinstein, M.D.
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/s/ Rudolph A. Lutterschmidt
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Vice President, Chief Financial Officer and Chief Accounting Officer (Principal Financial and Accounting Officer)
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March 30, 2020
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Rudolph A. Lutterschmidt
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/s/ Herman M. Gerwitz
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Director
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March 30, 2020
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Herman M. Gerwitz
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/s/ Marc Rash
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Director
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March 30, 2020
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Marc Rash
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/s/ Philip B. White
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Director
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March 30, 2020
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Philip B. White
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17
INDEX TO FINANCIAL STATEMENTS
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Report of Independent Registered Public Accounting Firm
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F-2
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Balance Sheets as of December 31, 2019 and 2018
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F-3
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Statements of Operations for the Years ended December 31, 2019 and 2018
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F-4
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Statement of Stockholders’ Equity for the Years ended December 31, 2019 and 2018
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F-5
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Statements of Cash Flows for the Years ended December 31, 2019 and 2018
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F-6
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Notes to Financial Statements
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F-7
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F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and
Stockholders of Nocopi Technologies, Inc.
Opinion on the Financial Statements
We have audited the accompanying balance sheets of Nocopi Technologies, Inc. (the Company) as of December 31, 2019 and 2018, and the related statements of operations, stockholders’ deficiency, and cash flows for each of the two years in the period ended December 31, 2019, and the related notes (collectively referred to as the financial statements). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2019 and 2018, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2019, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ Morison Cogen LLP
We have served as the Company’s auditor since 2001.
Blue Bell, Pennsylvania
March 30, 2020
F-2
Nocopi Technologies, Inc.
Balance Sheets*
|
|
|
|
|
|
|
|
|
|
|
|
December 31
|
|
|
|
|
2019
|
|
|
2018
|
|
|
Assets
|
|
|
|
|
|
|
|
Current assets
|
|
|
|
|
|
|
|
Cash
|
|
$
|
688,000
|
|
|
$
|
400,800
|
|
|
Accounts receivable less $5,000 allowance for doubtful accounts
|
|
|
1,352,300
|
|
|
|
579,000
|
|
|
Inventory
|
|
|
127,900
|
|
|
|
133,500
|
|
|
Prepaid and other
|
|
|
135,000
|
|
|
|
43,600
|
|
|
Total current assets
|
|
|
2,303,200
|
|
|
|
1,156,900
|
|
|
Fixed assets
|
|
|
|
|
|
|
|
|
|
Leasehold improvements
|
|
|
24,200
|
|
|
|
19,700
|
|
|
Furniture, fixtures and equipment
|
|
|
252,500
|
|
|
|
185,400
|
|
|
|
|
|
276,700
|
|
|
|
205,100
|
|
|
Less: accumulated depreciation and amortization
|
|
|
206,600
|
|
|
|
197,600
|
|
|
|
|
|
70,100
|
|
|
|
7,500
|
|
|
Other assets
|
|
|
|
|
|
|
|
|
|
Long-term receivables
|
|
|
957,000
|
|
|
|
1,352,200
|
|
|
Operating lease right of use - building
|
|
|
202,000
|
|
|
|
–
|
|
|
|
|
|
1,159,000
|
|
|
|
1,352,200
|
|
|
Total assets
|
|
$
|
3,532,300
|
|
|
$
|
2,516,600
|
|
|
Liabilities and Stockholders’ Equity
|
|
|
|
|
|
|
|
|
|
Current liabilities
|
|
|
|
|
|
|
|
|
|
Convertible debentures
|
|
$
|
97,900
|
|
|
$
|
128,300
|
|
|
Accounts payable
|
|
|
44,300
|
|
|
|
16,500
|
|
|
Accrued expenses
|
|
|
231,600
|
|
|
|
163,000
|
|
|
Income taxes
|
|
|
52,400
|
|
|
|
38,600
|
|
|
Operating lease liability – current
|
|
|
41,700
|
|
|
|
–
|
|
|
Total current liabilities
|
|
|
467,900
|
|
|
|
346,400
|
|
|
|
|
|
|
|
|
|
|
|
|
Other liabilities
|
|
|
|
|
|
|
|
|
|
Accrued expenses, non-current
|
|
|
67,000
|
|
|
|
94,700
|
|
|
Deferred income taxes
|
|
|
47,400
|
|
|
|
108,800
|
|
|
Operating lease liability – non-current
|
|
|
160,300
|
|
|
|
–
|
|
|
|
|
|
274,700
|
|
|
|
203,500
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders’ equity
|
|
|
|
|
|
|
|
|
|
Series A preferred stock, $1.00 par value
|
|
|
|
|
|
|
|
|
|
Authorized – 300,000 shares
|
|
|
|
|
|
|
|
|
|
Issued and outstanding – none
|
|
|
–
|
|
|
|
–
|
|
|
Common stock, $0.01 par value
|
|
|
|
|
|
|
|
|
|
Authorized – 75,000,000 shares
|
|
|
|
|
|
|
|
|
|
Issued and outstanding – 2019 - 61,044,698 shares; 2018 - 58,616,716 shares
|
|
|
610,400
|
|
|
|
586,200
|
|
|
Paid-in capital
|
|
|
12,483,900
|
|
|
|
12,440,000
|
|
|
Accumulated deficit
|
|
|
(10,304,600
|
)
|
|
|
(11,059,500
|
)
|
|
|
|
|
2,789,700
|
|
|
|
1,966,700
|
|
|
Total liabilities and stockholders’ equity
|
|
$
|
3,532,300
|
|
|
$
|
2,516,600
|
|
*The accompanying notes are an integral part of these financial statements.
F-3
Nocopi Technologies, Inc.
Statements of Operations*
|
|
|
|
|
|
|
|
|
|
.
|
|
Years ended December 31
|
|
|
|
|
2019
|
|
|
2018
|
|
|
Revenues
|
|
|
|
|
|
|
|
Licenses, royalties and fees
|
|
$
|
793,800
|
|
|
$
|
2,242,500
|
|
|
Product and other sales
|
|
|
1,743,600
|
|
|
|
1,099,200
|
|
|
|
|
|
2,537,400
|
|
|
|
3,341,700
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues
|
|
|
|
|
|
|
|
|
|
Licenses, royalties and fees
|
|
|
169,100
|
|
|
|
115,400
|
|
|
Product and other sales
|
|
|
672,600
|
|
|
|
445,800
|
|
|
|
|
|
841,700
|
|
|
|
561,200
|
|
|
Gross profit
|
|
|
1,695,700
|
|
|
|
2,780,500
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
165,600
|
|
|
|
153,200
|
|
|
Sales and marketing
|
|
|
329,900
|
|
|
|
387,300
|
|
|
General and administrative
|
|
|
393,900
|
|
|
|
369,400
|
|
|
|
|
|
889,400
|
|
|
|
909,900
|
|
|
Net income from operations
|
|
|
806,300
|
|
|
|
1,870,600
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expenses)
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
11,700
|
|
|
|
2,900
|
|
|
Interest expense and bank charges
|
|
|
(10,800
|
)
|
|
|
(12,300
|
)
|
|
|
|
|
900
|
|
|
|
(9,400
|
)
|
|
Net income before income taxes
|
|
|
807,200
|
|
|
|
1,861,200
|
|
|
Income taxes
|
|
|
52,300
|
|
|
|
205,800
|
|
|
Net income
|
|
$
|
754,900
|
|
|
$
|
1,655,400
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per common share
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
.01
|
|
|
$
|
.03
|
|
|
Diluted
|
|
$
|
.01
|
|
|
$
|
.03
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
59,443,207
|
|
|
|
58,616,716
|
|
|
Diluted
|
|
|
59,836,570
|
|
|
|
58,980,420
|
|
*The accompanying notes are an integral part of these financial statements.
F-4
Nocopi Technologies, Inc.
Statement of Stockholders’ Equity*
For the Period January 1, 2018 through December 31, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock
|
|
|
Paid-in
|
|
|
Accumulated
|
|
|
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Deficit
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance – January 1, 2018
|
|
|
58,616,716
|
|
|
$
|
586,200
|
|
|
$
|
12,440,000
|
|
|
$
|
(12,811,000
|
)
|
|
$
|
215,200
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative effect of accounting change at January 1, 2018, Note 2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
96,100
|
|
|
|
96,100
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,655,400
|
|
|
|
1,655,400
|
|
|
Balance – December 31, 2018
|
|
|
58,616,716
|
|
|
|
586,200
|
|
|
|
12,440,000
|
|
|
|
(11,059,500
|
)
|
|
|
1,966,700
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock
|
|
|
720,000
|
|
|
|
7,100
|
|
|
|
18,300
|
|
|
|
|
|
|
|
25,400
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Conversion of debentures and accrued interest to common stock
|
|
|
1,707,982
|
|
|
|
17,100
|
|
|
|
25,600
|
|
|
|
|
|
|
|
42,700
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
754,900
|
|
|
|
754,900
|
|
|
Balance – December 31, 2019
|
|
|
61,044,698
|
|
|
$
|
610,400
|
|
|
$
|
12,483,900
|
|
|
$
|
(10,304,600
|
)
|
|
$
|
2,789,700
|
|
*The accompanying notes are an integral part of these financial statements.
F-5
Nocopi Technologies, Inc.
Statements of Cash Flows*
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31
|
|
|
|
|
2019
|
|
|
2018
|
|
|
Operating Activities
|
|
|
|
|
|
|
|
Net income
|
|
$
|
754,900
|
|
|
$
|
1,655,400
|
|
|
Adjustments to reconcile net income to net cash provided by operating activities
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
10,800
|
|
|
|
7,100
|
|
|
Deferred income taxes
|
|
|
(61,400
|
)
|
|
|
108,800
|
|
|
Other assets
|
|
|
193,200
|
|
|
|
(1,352,200
|
)
|
|
Other liabilities
|
|
|
174,300
|
|
|
|
94,700
|
|
|
Common stock issued for services
|
|
|
25,400
|
|
|
|
–
|
|
|
Cumulative effect of accounting change
|
|
|
–
|
|
|
|
96,100
|
|
|
|
|
|
1,097,200
|
|
|
|
609,900
|
|
|
(Increase) decrease in assets
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(773,300
|
)
|
|
|
(286,900
|
)
|
|
Inventory
|
|
|
5,600
|
|
|
|
(22,900
|
)
|
|
Prepaid and other
|
|
|
(91,400
|
)
|
|
|
(8,300
|
)
|
|
Increase (decrease) in liabilities
|
|
|
|
|
|
|
|
|
|
Accounts payable and accrued expenses
|
|
|
108,700
|
|
|
|
(190,100
|
)
|
|
Income taxes
|
|
|
13,800
|
|
|
|
38,600
|
|
|
Deferred revenue
|
|
|
–
|
|
|
|
(99,400
|
)
|
|
|
|
|
(736,600
|
)
|
|
|
(569,000
|
)
|
|
Net cash provided by operating activities
|
|
|
360,600
|
|
|
|
40,900
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing Activities
|
|
|
|
|
|
|
|
|
|
Additions to fixed assets
|
|
|
(73,400
|
)
|
|
|
(500
|
)
|
|
Net cash used in investing activities
|
|
|
(73,400
|
)
|
|
|
(500
|
)
|
|
Increase in cash
|
|
|
287,200
|
|
|
|
40,400
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
|
|
|
|
|
|
|
|
|
|
Beginning of year
|
|
|
400,800
|
|
|
|
360,400
|
|
|
End of year
|
|
$
|
688,000
|
|
|
$
|
400,800
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for interest
|
|
$
|
–
|
|
|
$
|
1,000
|
|
|
Cash paid for taxes
|
|
$
|
100,000
|
|
|
$
|
44,600
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental Disclosure of Non-Cash Investing and Financing Activities
|
|
|
|
|
|
|
|
|
|
Operating lease right of use – building
|
|
$
|
241,100
|
|
|
$
|
–
|
|
|
Operating lease liability
|
|
$
|
(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
|
)
|
|
$
|
–
|
|
*The accompanying notes are an integral part of these financial statements.
F-6
NOCOPI TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 2019 and 2018
1.
Organization of the Company
Nocopi Technologies, Inc. (the “Company”) is organized under the laws of the State of Maryland. Its main business activities are the development and distribution of document security products and the licensing of its patented reactive ink technologies for the Entertainment and Toy and the Document and Product Authentication markets in the United States and foreign countries. Our Company operates in one principal industry segment.
2.
Significant Accounting Policies
Financial Statement Presentation – Amounts included in the accompanying financial statements have been rounded to the nearest hundred, except for number of shares and per share information.
Estimates – The preparation of the financial statements in conformity with Accounting Principles Generally Accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent liabilities at the dates of financial statements and the reported amounts of revenues and expenses during the reported periods. Actual results could differ from those estimates.
Cash consists of demand deposits with a major U.S. bank.
Accounts receivable and credit policies – Accounts receivable are uncollateralized customer obligations due under normal trade terms requiring payment within 30 days from the invoice date. Accounts receivable are stated at the amount billed to the customer. Customer account balances with invoices dated over 90 days old are considered delinquent.
The carrying amount of accounts receivable is reduced by an allowance that reflects management’s best estimate of the amounts that will not be collected. Management individually reviews all accounts receivable balances that exceed 90 days from invoice date and based on an assessment of current creditworthiness, estimates the portion, if any, of the balance that will not be collected.
Inventory consists primarily of ink components and is stated at the lower of cost (determined by the first-in, first-out method) or net realizable value.
Fixed assets are carried at cost less accumulated depreciation and amortization. Furniture, fixtures and equipment are generally depreciated on the straight-line method over their estimated service lives. Leasehold improvements are amortized on a straight-line basis over the shorter of five years or the term of the lease. Major renovations and betterments are capitalized. Maintenance, repairs and minor items are expensed as incurred. Upon disposal, assets and related depreciation are removed from the accounts and the net amount, less proceeds from disposal, is charged or credited to income.
Patent costs are charged to expense as incurred.
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.
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 fixed fee licensees at a point in time when the term begins if the contract provides for patented ink technology only as it exists at the time that it is granted. However, for license agreements that provide for rights to future ink technology, revenue will be recognized over the term of the license agreement.
F-7
NOCOPI TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 2019 and 2018
Revenue for per-unit license agreement will be recognized in the period that the Company receives the related royalty report. Revenue for product sales will be recognized upon shipment to the customer. There are no contract assets or contract liabilities and therefore no unsatisfied performance obligations. The Company does not offer any warranties, however, damaged products can be returned for credit or refund. For disaggregation of revenue by customers and geographic region, see Note 12.
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 year ended December 31, 2018 related to the amendment to the license agreement. The related non-current receivable and payable are recorded as other assets and other liabilities on the balance sheet.
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 change in accumulated deficit on our Balance Sheet at December 31, 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 income
|
|
|
1,655,400
|
|
|
Cumulative effect of accounting change at January 1, 2018
|
|
|
96,100
|
|
|
Accumulated deficit – December 31, 2018
|
|
$
|
(11,059,500
|
)
|
Income taxes – Deferred income taxes are provided for all temporary differences and net operating loss and tax credit carryforwards. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized.
Fair value – The carrying amounts reflected in the balance sheets for receivables, accounts payable and accrued expenses approximate fair value due to the short maturities of these instruments. The carrying amount of the convertible debentures approximates fair value since the interest rate associated with the debt approximates the current market interest rates.
Convertible debentures, for which the embedded conversion feature does not qualify for derivative treatment, are evaluated to determine if the effective or actual rate of conversion per the terms of the convertible note agreement is below market value. In these instances, our Company accounts for the value of the beneficial conversion feature as a debt discount, which is then accreted to interest expense over the life of the related debt using the straight-line method, which approximates the effective interest method.
F-8
NOCOPI TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 2019 and 2018
Stock-based payments – Our Company accounts for stock-based compensation under the provisions of Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) 718, "Compensation - Stock Compensation", which requires the measurement and recognition of compensation expense for all stock-based awards made to employees and directors based on estimated fair values on the grant date. Our Company estimates the fair value of stock-based awards on the date of grant using the Black-Scholes model. The value of the portion of the award that is ultimately expected to vest is recognized as expense over the shorter of the vesting period or the requisite service periods using the straight-line method. Our Company accounts for stock-based compensation awards to non-employees in accordance with FASB ASC 505-50, "Equity- Based Payments to Non-Employees (“ASC 505-50”). Under ASC 505-50, our Company determines the fair value of the warrants or stock-based compensation awards granted as either the fair value of the consideration received or the fair value of the equity instruments issued, whichever is more reliably measurable. All issuances of stock options or other equity instruments to non-employees as consideration for goods or services received by our Company are accounted for based on the fair value of the equity instruments issued. Any stock options issued to non-employees are recorded as an expense and additional paid in capital in stockholders’ equity over the applicable service periods. Non-employee equity based payments are recorded as an expense over the service period, as if our Company had paid cash for the services. At the end of each financial reporting period, prior to vesting or prior to the completion of the services, the fair value of the equity based payments will be re-measured and the non-cash expense recognized during the period will be adjusted accordingly. Since the fair value of equity based payments granted to non-employees is subject to change in the future, the amount of the future expense will include fair value re-measurements until the equity based payments are fully vested or the service completed. As of June 30, 2018 our Company changed its accounting policy for non-employee equity based payments by adopting FASB ASU 2018-07, which expands Topic 718 to include transactions for acquiring goods and services, from nonemployees.
Earnings per share – Our Company follows FASB ASC 260 resulting in the presentation of basic and diluted earnings per share. Basic earnings per common share are based on the weighted average number of shares outstanding during the periods presented. Diluted earnings per share are computed using weighted average number of common shares plus dilutive common share equivalents outstanding during the period. Potential common shares that would have the effect of increasing diluted earnings per share are considered to be anti-dilutive, i.e. the exercise prices of the outstanding stock options were greater than the market price of the common stock.
The table below presents the computation of basic and diluted weighted average common shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
|
2018
|
|
|
Basic shares outstanding
|
|
|
59,443,207
|
|
|
|
58,616,716
|
|
|
Incremental shares from assumed conversion of warrants
|
|
|
393,363
|
|
|
|
363,704
|
|
|
Diluted shares outstanding
|
|
|
59,836,570
|
|
|
|
58,980,420
|
|
Comprehensive income – Our Company follows FASB 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.
Recoverability of Long-Lived Assets
Our Company follows FASB ASC 360-35, “Impairment or Disposal of Long-Lived Assets.” The Statement requires that long-lived assets and certain identifiable intangibles be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. Our Company is not aware of any events or circumstances which indicate the existence of an impairment which would be material to our Company’s annual financial statements.
F-9
NOCOPI TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 2019 and 2018
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. The Company adopted the standard effective January 1, 2019 under the optional transition method which allows the entity to apply the new lease standard at the adoption date and recognize a cumulative-effect adjustment, if any, to the opening balance of retained earnings in the period of adoption. The standard had a material impact on the balance sheet. As of January 1, 2019, the operating lease right of use asset and operating lease liability amounted to $241,000 with no cumulative-effect adjustment.
In July 2018, the FASB issued ASU No. 2018-11, Leases (Topic 842), Targeted Improvements. The amendments in this Update relieve businesses and organizations from having to present prior comparative years’ results when they adopt the new standard. It also lets landlords and other lessors avoid breaking out the parts of a rental contract that are not specifically being leased, such as the cost of snow removal services, and account for them separately from the base rent. The amendments in this Update are the same as the effective dates and transition requirements in ASU No. 2016-02, Leases.
In May 2017, the FASB issued ASU No. 2017-09, Compensation – Stock Compensation (Topic 718), Scope of Modification Accounting. The amendments in this Update provide guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting. The amendments in this Update are effective for all entities for annual periods, and interim periods within those annual periods, beginning after December 15, 2017. The amendments in this Update should be applied prospectively to an award modified on or after the adoption date. The adoption on January 1, 2018 of the amendments in this Update did not have a material impact on its financial statements.
Recently Issued Accounting Pronouncements Not Yet Adopted
As of December 31, 2019, there are no recently issued accounting standards not yet adopted which would have a material effect on the Company’s financial statements.
3.
Concentration of Credit Risk
Certain financial instruments potentially subject our Company to concentrations of credit risk. These financial instruments consist primarily of cash and accounts receivables. At December 31, 2019, our Company’s deposits with a financial institution were $438,000 in excess of the FDIC deposit insurance coverage of $250,000. There is a concentration of credit risk with respect to accounts receivable due to the number of major customers.
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.
5.
Convertible Debentures
At December 31, 2019, our Company had convertible debentures totaling $97,900 outstanding, which are due during the third quarter of 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 2019, the holders of approximately $30,400 of previously outstanding convertible debentures elected to convert those debentures plus approximately $12,300 of accrued interest into 1,707,982 shares of restricted stock of our Company.
F-10
NOCOPI TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 2019 and 2018
Our Company also granted warrants 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.
6.
Stockholders’ Equity
In October 2019, our Company issued 720,000 shares of restricted common stock to an investor relations firm as a portion of compensation for services. The common stock vests on a pro rata basis over one year. The fair value of the common stock amounting to $25,400 on the inception date of agreement is being amortized to expense over the first year of the engagement.
7.
Other Income (Expenses)
Other income (expenses) in the years ended December 31, 2019 and December 31, 2018 includes interest on convertible debentures held by seven investors.
8.
Income Taxes
There is no provision for federal income taxes for the years ended December 31, 2019 and December 31, 2018 due to the availability of net operating loss carryforwards. At December 31, 2019 and December 31, 2018, our Company had NOL’s approximating $1,622,000 and $2,478,000, respectively. The operating losses at December 31, 2019 are available to offset future taxable income; however, if not utilized, they expire in varying amounts through the year 2032. The utilization of these NOL’s to reduce future income taxes will depend on the generation of sufficient taxable income prior to their expiration. There were no material temporary differences for the years ended December 31, 2019 and December 31, 2018. Our Company has established a 100% valuation allowance of $454,200 and $693,800 at December 31, 2019 and December 31, 2018, respectively, for the deferred tax assets due to the uncertainty of their realization.
F-11
NOCOPI TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 2019 and 2018
The components for state income tax expense resulting from the limitation on the use of net operating losses are:
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31
|
|
|
|
|
2019
|
|
|
2018
|
|
|
Current state taxes
|
|
$
|
52,400
|
|
|
$
|
93,400
|
|
|
Deferred state taxes
|
|
|
–
|
|
|
|
108,800
|
|
|
|
|
$
|
52,400
|
|
|
$
|
202,200
|
|
The reconciliation of the statutory federal rate to our Company’s effective tax rate follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
|
2018
|
|
|
|
|
Amount
|
|
|
%
|
|
|
Amount
|
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax at U.S. federal income tax rate
|
|
$
|
158,600
|
|
|
|
21
|
|
|
$
|
398,200
|
|
|
|
21
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
State tax net of federal tax effect
|
|
|
52,300
|
|
|
|
7
|
|
|
|
202,200
|
|
|
|
7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Utilization of operating losses
|
|
|
(158,600
|
)
|
|
|
(21
|
)
|
|
|
(398,200
|
)
|
|
|
(21
|
)
|
|
|
|
$
|
52,300
|
|
|
|
7
|
|
|
$
|
202,200
|
|
|
|
7
|
|
F-12
NOCOPI TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 2019 and 2018
The components of deferred tax assets and liabilities as of December 31, 2019 and 2018 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax asset for NOL carryforwards
|
|
|
|
|
|
|
|
|
|
$
|
454,200
|
|
|
$
|
693,800
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liability - other
|
|
|
|
|
|
|
|
|
|
|
(47,400
|
)
|
|
|
(108,800
|
)
|
|
Valuation allowance
|
|
|
|
|
|
|
|
|
|
|
(454,200
|
)
|
|
|
(693,800
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(47,400
|
)
|
|
$
|
(108,800
|
)
|
The income tax provision consists of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
|
|
|
|
|
|
|
|
$
|
119,700
|
|
|
$
|
97,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred
|
|
|
|
|
|
|
|
|
|
|
(67,400
|
)
|
|
|
108,800
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
52,300
|
|
|
$
|
205,800
|
|
Our Company has adopted the provisions of FASB ASC 740-10-50-15, “Unrecognized Tax Benefit Related Disclosures.” There were no unrecognized tax benefits as of the date of adoption and no unrecognized tax benefits at December 31, 2019. There was no change in unrecognized tax benefits during the year ended December 31, 2019 and there was no accrual for uncertain tax positions as of December 31, 2019.
Interest and penalties totaling $3,600 in 2018 were recognized as income tax expense in the statement of operations and in the balance sheet. Tax years from 2016 through 2019 remain subject to examination by U.S. federal and state tax jurisdictions.
9.
Related Party Transactions
During the year ended December 31, 2018, our Company paid $235,400 to Michael A. Feinstein, M.D., our Company’s Chairman of the Board and Chief Executive Officer, representing the balance of previously deferred salary owed to him under an employment agreement with our Company. During the five month period ended May 31, 2018, Dr. Feinstein deferred $35,400 of salary. In June 2018, the periodic salary payments provided for in Dr. Feinstein’s employment agreement resumed. At December 31, 2019, there was no remaining deferred salary owed to Dr. Feinstein. There was no interest payable on the deferred salary.
10.
Commitments and Contingencies
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.
F-13
NOCOPI TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 2019 and 2018
Future minimum lease payments under non-cancelable operating leases with initial or remaining terms of one year or more at December 31, 2019 are: $51,600 – 2020; $53,100 – 2021; $54,600 – 2022; $56,200 – 2023 and $18,900 – 2024.
Total lease expense under operating leases was $53,300 and $45,100 in each of the years ended December 31, 2019 and December 31, 2018, respectively.
Maturities of lease liabilities are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Leases
|
|
|
Year ending December 31
|
|
|
|
|
|
|
|
|
2020
|
|
|
|
|
$
|
51,600
|
|
|
2021
|
|
|
|
|
|
53,100
|
|
|
2022
|
|
|
|
|
|
54,600
|
|
|
2023
|
|
|
|
|
|
56,200
|
|
|
2024
|
|
|
|
|
|
18,900
|
|
|
Total lease payments
|
|
|
|
|
|
234,400
|
|
|
Less imputed interest
|
|
|
|
|
|
(32,400
|
)
|
|
Total
|
|
|
|
|
$
|
202,000
|
|
Our Company has an employment agreement, expiring in May 2021, with Michael A. Feinstein, M.D., its Chairman of the Board and Chief Executive Officer. The employment agreement contains one-year renewal provisions that became effective after the original term. Dr. Feinstein receives base compensation of $120,000 per year effective January 1, 2020 plus a performance bonus determined by our Company’s Board of Directors. Our Company has an employment agreement, expiring in March 2021, with Terry W. Stovold, its Chief Operating Officer, whereby Mr. Stovold receives a salary set by our Company’s Board of Directors, currently set at $75,000, along with a commission of seven percent on sales generated by his efforts. The employment agreement contains one-year renewal provisions that became effective after the original term. Future minimum compensation payments under these employment agreements are: $195,000 to be paid in 2020 and $68,800 to be paid in 2021.
From time to time, our Company may be subject to legal proceedings and claims that arise in the ordinary course of its business.
11.
Stock Options, Warrants and 401(k) Savings Plan
Our Company follows FASB ASC 718, Share Based Payment, which requires that the cost resulting from all share-based payment transactions be recognized in the Company’s financial statements. FASB ASC 718 requires all share-based payments to employees, including grants of employee stock options, to be recognized in the statement of operations based on their fair values.
At December 31, 2019, our Company did not have an active stock option plan. Our Company uses the Black-Scholes option pricing model to calculate the grant-date fair value of an award. There was no compensation expense recognized during the years ended December 31, 2019 and December 31, 2018 and there was no unrecognized portion of expense at December 31, 2019.
At December 31, 2019, our Company had 691,365 warrants to purchase common stock of our Company outstanding at an exercise price of $0.02 and expiring at various dates through July 2021. The warrants are held by ten investors who acquired convertible debentures from our Company in 2013 and 2014.
F-14
NOCOPI TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 2019 and 2018
A summary of outstanding warrants follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
Exercise
|
|
|
Average
|
|
|
|
|
Number of
|
|
|
Price Range
|
|
|
Exercise
|
|
|
|
|
Shares
|
|
|
Per Share
|
|
|
Price
|
|
|
Outstanding at December 31, 2018 and December 31, 2019
|
|
691,365
|
|
|
$0.02
|
|
|
$0.02
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average remaining contractual life (years)
|
|
.83
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
Exercise
|
|
|
|
Average
|
|
|
|
|
Number of
|
|
|
|
Price Range
|
|
|
|
Exercise
|
|
|
|
|
Shares
|
|
|
|
Per Share
|
|
|
|
Price
|
|
|
Exercisable warrants at year end:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
691,365
|
|
|
$0.02
|
|
|
$0.02
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average remaining contractual life (years)
|
|
.83
|
|
|
|
|
|
|
|
|
|
The aggregate intrinsic value of warrants outstanding and exercisable as of December 31, 2019 was approximately $38,000. The aggregate intrinsic value is calculated as the difference between the exercise price of the underlying warrants and the closing stock price of $0.075 for our Company’s common stock on December 31, 2019. At December 31, 2019, our Company has reserved 6,297,543 shares of common stock for possible future issuance upon exercise of 691,365 warrants and for the conversion of approximately $97,900 of convertible debentures and accrued interest into 5,606,178 shares of common stock.
Our Company sponsors a 401(k) savings plan, covering substantially all employees, providing for employee and employer contributions. Employer contributions are made at the discretion of our Company. There were no contributions charged to expense during 2019 or 2018.
12.
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:
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Year ended December 31
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2019
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2018
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Customer A
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55%
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21%
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Customer B
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18%
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59%
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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:
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December 31
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2019
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2018
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Customer A
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26%
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6%
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Customer B
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67%
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86%
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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.
F-15
NOCOPI TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 2019 and 2018
Our Company’s revenues by geographic region are as follows:
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Year ended December 31
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2019
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2018
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North America
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$
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856,300
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$
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2,280,000
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South America
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–
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1,500
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Europe
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600
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200
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Asia
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1,630,500
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|
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1,020,000
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Australia
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50,000
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40,000
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$
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2,537,400
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$
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3,341,700
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13.
Subsequent Event
In December 2019, a novel strain of coronavirus (“COVID-19”) was reported in Wuhan, China. The World Health Organization has declared COVID-19 to constitute a global pandemic. On March 19, 2020 the Governor of Pennsylvania declared a health emergency and issued an order to close all nonessential businesses until further notice. Our operations are deemed to be essential and thus we remain open. However, disruptions to our business operations could occur as a result of quarantines of employees and suppliers in areas affected by the outbreak, facility closures, and travel and logistics restrictions in connection with the outbreak. While we expect this matter to negatively impact its results of operations, cash flow and financial position, the related financial impact cannot be reasonably estimated at this time.
F-16
Exhibit Index
The following Exhibits are filed as part of this Annual Report on Form 10-K:
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Exhibit
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Number
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Description
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Location
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3.1
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Amended and Restated Articles of Incorporation
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Incorporated by reference to the Company’s Form 10-Q filed on November 14, 2008
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3.2
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Amended and Restated Bylaws
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Incorporated by reference to the Company’s Form 8-K filed on March 12, 2019
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4.1
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Form of Certificate of Common Stock
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Incorporated by reference to the Company’s Annual Report on Form 10-KSB filed on April 7, 2006
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4.2
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Securities registered under Section 12 of the Exchange Act
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Filed herewith
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10.1†
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Amended Summary Plan Description for Nocopi Technologies, Inc. 401(k) Profit Sharing Plan
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Incorporated by reference to the Company’s Annual Report on Form 10-KSB filed on April 15, 1999
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10.2
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Director Indemnification Agreement
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Incorporated by reference to the Company’s Quarterly Report on Form 10-QSB filed on November 15, 1999
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10.3
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Officer Indemnification Agreement
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Incorporated by reference to the Company’s Quarterly Report on Form 10-QSB filed on November 15, 1999
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10.4†
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Employment Agreement with Michael A. Feinstein, M.D.
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Incorporated by reference to the Company’s Quarterly Report on Form 10-Q filed on August 14, 2008
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10.5†
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Employment Agreement Amendment - Michael A. Feinstein, M.D.
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Incorporated by reference to the Company’s Form 8-K filed on December 17, 2019
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10.6†
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Amended Summary Plan Description for Nocopi Technologies, Inc. 401(k) Profit Sharing Plan
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Incorporated by reference to the Company’s Annual Report on Form 10-K filed on March 31, 2010
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10.7†
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Employment Agreement with Terry W. Stovold
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Incorporated by reference to the Company’s Annual Report on Form 10-K filed on March 30, 2012
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10.8
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Form of Convertible Debenture Purchase Agreement and Exhibits
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Incorporated by reference to the Company’s Annual Report on Form 10-K filed on September 11, 2015
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10.9
|
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Form of Letter Agreement re: Convertible Debenture Purchase Agreement Election
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Incorporated by reference to the Company’s Quarterly Report on Form 10-Q filed on November 13, 2019
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10.10
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Lease Agreement dated December 12, 2013 relating to premises at 480 Shoemaker Road, King of Prussia, PA 19406
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Incorporated by reference to the Company’s Annual Report on Form 10-K filed on September 11, 2015
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10.11
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Lease Extension Agreement dated September 28, 2018
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Incorporated by reference to the Company’s Annual Report on Form 10-K filed on March 29, 2019
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10.12
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Business Loan Agreement, Promissory Note and Commercial Security Agreement dated November 28, 2018 between the Company and Santander Bank
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Incorporated by reference to the Company’s Annual Report on Form 10-K filed on March 29, 2019
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10.13
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Form of Letter Agreement re: Convertible Debenture Purchase Agreement Election
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Incorporated by reference to the Company’s Quarterly Report on Form 10-Q filed on November 13, 2019
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14.1
|
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Code of Ethics
|
|
Incorporated by reference to the Company’s Annual Report on Form 10-KSB filed on March 31, 2005
|
———————
† Compensation plans and arrangements for executives and others.
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