United States
Securities and Exchange
Commission
Washington, D.C.
20549
Form
10-Q
(Mark One)
þ QUARTERLY REPORT PURSUANT TO
SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF
1934.
For the quarterly period ended
September 30, 2020
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)
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Maryland
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87-0406496
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|
(State or
other jurisdiction of incorporation or organization)
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(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.
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Title of each class
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Trading Symbol(s)
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Name of each exchange on which registered
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Indicate by
check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes þ No ¨
Indicate by
check mark whether the registrant has submitted electronically
every Interactive Data File required to be submitted pursuant to
Rule 405 of Regulation S-T (§232.405 of this chapter) during the
preceding 12 months (or for such shorter period that the registrant
was required to submit such files). Yes þ No ¨
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated filer, a
smaller reporting company, or an emerging growth company. See the
definitions of “large accelerated filer,” “accelerated filer,”
“smaller reporting company,” and “emerging growth company” in Rule
12b-2 of the Exchange Act.
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Large accelerated filer
¨
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Accelerated filer
¨
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Non-accelerated filer
þ
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Smaller reporting company
þ
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Emerging growth company
¨
|
If an
emerging growth company, indicate by checkmark if the registrant
has elected not to use the extended transition period for complying
with any new or revised financial accounting standards provided
pursuant to Section 13(a) of the Securities Act. ¨
Indicate by
check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes ¨ No þ
Indicate
the number of shares outstanding of each of the issuer’s classes of
common stock, as of the latest practicable date: 67,353,690 shares
of common stock, par value $0.01, as of November 9, 2020.
NOCOPI TECHNOLOGIES,
INC.
INDEX
PART I – FINANCIAL
INFORMATION
Item 1. Financial Statements
Nocopi Technologies,
Inc.
Statements of
Operations*
(unaudited)
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Three Months
ended
September 30,
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Nine Months
ended
September 30,
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2020
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|
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2019
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2020
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|
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2019
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Revenues
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Licenses, royalties and fees
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$
|
153,300
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|
$
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189,400
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$
|
425,000
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$
|
571,900
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|
Product
and other sales
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601,500
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448,100
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1,477,400
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991,100
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754,800
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637,500
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1,902,400
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1,563,000
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Cost
of revenues
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Licenses, royalties and fees
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61,900
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41,400
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170,200
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98,200
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Product
and other sales
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|
267,400
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166,600
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|
716,200
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380,300
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|
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329,300
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208,000
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886,400
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478,500
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Gross
profit
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425,500
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429,500
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1,016,000
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1,084,500
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Operating expenses
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Research
and development
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40,700
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45,200
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123,700
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122,600
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Sales
and marketing
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90,900
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81,000
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260,900
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224,200
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General
and administrative
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123,800
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84,200
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383,500
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265,200
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255,400
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210,400
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768,100
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612,000
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Net
income from operations
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170,100
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219,100
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247,900
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472,500
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Other
income (expenses)
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Interest
income
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4,200
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4,600
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12,300
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7,200
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Interest
expense and bank charges
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(1,300
|
)
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(2,600
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)
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(5,900
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)
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(8,000
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)
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2,900
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|
2,000
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6,400
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(800
|
)
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Net
income before income taxes
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173,000
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221,100
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254,300
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471,700
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Income
taxes
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9,900
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14,300
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(32,200
|
)
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30,600
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|
Net
income
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$
|
163,100
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$
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206,800
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$
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286,500
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$
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441,100
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Basic and
diluted net income per common share
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$
|
.00
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$
|
.00
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$
|
.00
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$
|
.01
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Weighted
average common shares outstanding
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Basic
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66,768,023
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59,614,698
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62,952,473
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58,949,377
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Diluted
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66,893,250
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59,990,371
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63,069,652
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59,322,141
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|
*See accompanying notes to
these financial statements.
1
Nocopi Technologies,
Inc.
Balance
Sheets*
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September
30,
|
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|
December
31,
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2020
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2019
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|
(unaudited)
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|
(audited)
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Assets
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Current assets
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Cash
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$
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1,428,900
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$
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688,000
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Accounts
receivable less $5,000 allowance for doubtful accounts
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1,023,000
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1,352,300
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Inventory
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286,600
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127,900
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Prepaid
and other
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21,200
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135,000
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|
Total
current assets
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|
2,759,700
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2,303,200
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Fixed
assets
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Leasehold improvements
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27,800
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24,200
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Furniture, fixtures and equipment
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163,700
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252,500
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191,500
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276,700
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|
Less:
accumulated depreciation and amortization
|
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|
98,100
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206,600
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93,400
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70,100
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Other
assets
|
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Long-term receivables
|
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|
671,100
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957,000
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Operating lease right of use - building
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171,000
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202,000
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842,100
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1,159,000
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|
|
Total
assets
|
|
$
|
3,695,200
|
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|
$
|
3,532,300
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Liabilities and
Stockholders' Equity
|
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Current liabilities
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Convertible debentures
|
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$
|
–
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$
|
97,900
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|
Accounts
payable
|
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|
58,300
|
|
|
|
44,300
|
|
|
Accrued
expenses
|
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|
165,500
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|
|
|
231,600
|
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Income
taxes
|
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|
22,200
|
|
|
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52,400
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|
Operating lease liability, current
|
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|
43,800
|
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41,700
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|
Total
current liabilities
|
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|
289,800
|
|
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|
467,900
|
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|
|
|
|
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|
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Other
liabilities
|
|
|
|
|
|
|
|
|
|
Accrued
expenses, non-current
|
|
|
47,000
|
|
|
|
67,000
|
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|
Deferred
income taxes
|
|
|
–
|
|
|
|
47,400
|
|
|
Operating lease liability, non-current
|
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|
127,200
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|
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|
160,300
|
|
|
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174,200
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|
274,700
|
|
|
|
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|
Stockholders' equity
|
|
|
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|
|
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|
Common
stock, $0.01 par value
|
|
|
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|
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|
Authorized – 75,000,000
shares
|
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|
|
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|
Issued and outstanding
|
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|
|
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|
2020 – 67,353,690 shares;
2019 – 61,044,698 shares
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|
673,500
|
|
|
|
610,400
|
|
|
Paid-in
capital
|
|
|
12,575,800
|
|
|
|
12,483,900
|
|
|
Accumulated deficit
|
|
|
(10,018,100
|
)
|
|
|
(10,304,600
|
)
|
|
Total
stockholders' equity
|
|
|
3,231,200
|
|
|
|
2,789,700
|
|
|
Total
liabilities and stockholders' equity
|
|
$
|
3,695,200
|
|
|
$
|
3,532,300
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|
*See accompanying notes to
these financial statements.
2
Nocopi Technologies,
Inc.
Statements of Cash
Flows*
(unaudited)
|
|
|
|
|
|
|
|
| |
|
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|
Nine Months
ended
September 30,
|
|
|
|
|
2020
|
|
|
2019
|
|
|
Operating Activities
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
286,500
|
|
|
$
|
441,100
|
|
|
Adjustments to reconcile net income to net cash provided by
operating activities
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
15,300
|
|
|
|
2,900
|
|
|
Deferred
income taxes
|
|
|
(47,400
|
)
|
|
|
(61,200
|
)
|
|
Other
assets
|
|
|
316,900
|
|
|
|
69,500
|
|
|
Other
liabilities
|
|
|
(51,000
|
)
|
|
|
192,300
|
|
|
|
|
|
520,300
|
|
|
|
644,600
|
|
|
(Increase) decrease in assets
|
|
|
|
|
|
|
|
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|
Accounts
receivable
|
|
|
329,300
|
|
|
|
(255,500
|
)
|
|
Inventory
|
|
|
(158,700
|
)
|
|
|
(27,500
|
)
|
|
Prepaid
and other
|
|
|
113,800
|
|
|
|
(37,500
|
)
|
|
Increase
(decrease) in liabilities
|
|
|
|
|
|
|
|
|
|
Accounts
payable and accrued expenses
|
|
|
(6,000
|
)
|
|
|
76,400
|
|
|
Income
taxes
|
|
|
(30,200
|
)
|
|
|
(1,100
|
)
|
|
|
|
|
248,200
|
|
|
|
(245,200
|
)
|
|
Net cash
provided by operating activities
|
|
|
768,500
|
|
|
|
399,400
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing Activities
|
|
|
|
|
|
|
|
|
|
Additions to fixed assets
|
|
|
(38,600
|
)
|
|
|
(2,200
|
)
|
|
Net cash
used in investing activities
|
|
|
(38,600
|
)
|
|
|
(2,200
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Financing Activities
|
|
|
|
|
|
|
|
|
|
Exercise
of warrants
|
|
|
11,000
|
|
|
|
–
|
|
|
Net cash
provided by financing activities
|
|
|
11,000
|
|
|
|
–
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase in cash
|
|
|
740,900
|
|
|
|
397,200
|
|
|
Cash
at beginning of year
|
|
|
688,000
|
|
|
|
400,800
|
|
|
Cash
at end of period
|
|
$
|
1,428,900
|
|
|
$
|
798,000
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
$
|
123,800
|
|
|
$
|
1,800
|
|
|
Furniture, fixtures and equipment
|
|
$
|
(123,800
|
)
|
|
$
|
(1,800
|
)
|
|
Convertible debentures
|
|
$
|
97,900
|
|
|
$
|
30,400
|
|
|
Accrued
expenses
|
|
$
|
46,100
|
|
|
$
|
12,300
|
|
|
Common
stock
|
|
$
|
(57,600
|
)
|
|
$
|
(17,100
|
)
|
|
Paid-in
capital
|
|
$
|
(86,400
|
)
|
|
$
|
(25,600
|
)
|
*See accompanying notes to
these financial statements.
3
Nocopi Technologies,
Inc.
Statements of
Stockholders’ Equity*
For the Periods December
31, 2019 through September 30, 2020 and December 31, 2018 through
September 30, 2019
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
Common
stock
|
|
|
Paid-in
|
|
|
Accumulated
|
|
|
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Deficit
|
|
|
Total
|
|
|
Balance – December 31, 2019
|
|
|
61,044,698
|
|
|
$
|
610,400
|
|
|
$
|
12,483,900
|
|
|
$
|
(10,304,600
|
)
|
|
$
|
2,789,700
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
52,600
|
|
|
|
52,600
|
|
|
Balance – March 31, 2020
|
|
|
61,044,698
|
|
|
|
610,400
|
|
|
|
12,483,900
|
|
|
|
(10,252,000
|
)
|
|
|
2,842,300
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
70,800
|
|
|
|
70,800
|
|
|
Balance – June 30, 2020
|
|
|
61,044,698
|
|
|
|
610,400
|
|
|
|
12,483,900
|
|
|
|
(10,181,200
|
)
|
|
|
2,913,100
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Conversion of debentures and interest
|
|
|
5,758,992
|
|
|
|
57,600
|
|
|
|
86,400
|
|
|
|
|
|
|
|
144,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise of warrants
|
|
|
550,000
|
|
|
|
5,500
|
|
|
|
5,500
|
|
|
|
|
|
|
|
11,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
163,100
|
|
|
|
163,100
|
|
|
Balance – September 30, 2020
|
|
|
67,353,690
|
|
|
$
|
673,500
|
|
|
$
|
12,575,800
|
|
|
$
|
(10,018,100
|
)
|
|
$
|
3,231,200
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
Common
stock
|
|
|
Paid-in
|
|
|
Accumulated
|
|
|
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Deficit
|
|
|
Total
|
|
|
Balance – December 31, 2018
|
|
|
58,616,716
|
|
|
$
|
586,200
|
|
|
$
|
12,440,000
|
|
|
$
|
(11,059,500
|
)
|
|
$
|
1,966,700
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
85,400
|
|
|
|
85,400
|
|
|
Balance – March 31, 2019
|
|
|
58,616,716
|
|
|
|
586,200
|
|
|
|
12,440,000
|
|
|
|
(10,974,100
|
)
|
|
|
2,052,100
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
148,900
|
|
|
|
148,900
|
|
|
Balance – June 30, 2019
|
|
|
58,616,716
|
|
|
|
586,200
|
|
|
|
12,440,000
|
|
|
|
(10,825,200
|
)
|
|
|
2,201,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Conversion of debentures and interest
|
|
|
1,707,982
|
|
|
|
17,100
|
|
|
|
25,600
|
|
|
|
|
|
|
|
42,700
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
206,800
|
|
|
|
206,800
|
|
|
Balance – September 30, 2019
|
|
|
60,324,698
|
|
|
$
|
603,300
|
|
|
$
|
12,465,600
|
|
|
$
|
(10,618,400
|
)
|
|
$
|
2,450,500
|
|
* 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 the summary of Accounting Policies
included in our Company's 2019 Annual Report on Form 10-K. Certain
financial information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to
such rules and regulations, although our Company believes that the
accompanying disclosures are adequate to make the information
presented not misleading. The Notes to Financial Statements
included in the 2019 Annual Report on Form10-K should be read in
conjunction with the accompanying interim financial statements. The
interim operating results for the three and nine months ended
September 30, 2020 may not be necessarily indicative of
the operating results expected for the full year.
In March 2020, the World Health Organization
declared the outbreak of a novel coronavirus (COVID-19) as a
pandemic which continues to spread throughout the United States. On
March 19, 2020 the Governor of Pennsylvania declared a health
emergency and issued an order to close all nonessential businesses
until further notice. The mandated closure of nonessential
businesses in Pennsylvania remains in effect as of the current date
and is expected to continue for the foreseeable future in the
portion of the state in which we conduct our business operations.
While certain businesses in Pennsylvania have been granted
permission to resume operations, they may be subject to significant
restrictions on their operations by both state and local government
mandates. Our operations are deemed to be essential and thus we
remain open. However, disruptions to our business operations due to
COVID-19 with a resultant impact on our results of operations could
continue to occur as a result of quarantines of employees and
suppliers in areas affected by the outbreak, availability of raw
materials required to manufacture our products, disruption of
supply chains that provide our raw materials, price increases of
raw materials and supplies used in our production processes,
facility closures of domestic and international customers who
purchase and use our products, and travel and logistics
restrictions affecting our inbound and outbound shipments in
connection with the COVID-19 outbreak. While we expect this global
COVID-19 pandemic to continue to negatively impact our results of
operations, cash flow and financial position, the related 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. Comprehensive income is a more inclusive financial
reporting methodology that includes disclosure of certain financial
information that historically has not been recognized in the
calculation of net income. Since our Company has no items of
other comprehensive income, comprehensive income is equal to net
income.
Note 2. 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 September 30, 2020, our Company did not
have an active stock option plan. There was no unrecognized portion
of expense related to stock option grants at
September 30, 2020.
Note 3.
Line of Credit
In November 2018, our Company
negotiated a $150,000 revolving line of credit with a bank to
provide a source of working capital, if required. The line of
credit is secured by all the assets of our Company and bears
interest at the bank’s prime rate for a period of one year and its
prime rate plus 1.5% thereafter. The line of credit is subject to
an annual review and quiet period. There have been no borrowings
under the line of credit since its inception.
Note 4. Convertible
Debentures
During the third quarter of
2020, the holders of all previously outstanding convertible
debentures totaling approximately $97,900 that were due during the
third quarter of 2020 elected to convert those debentures plus
approximately $46,100 of accrued interest into 5,758,992 shares of
restricted stock of our Company. At September 30, 2020, our Company
had no convertible debentures outstanding. The convertible
debentures bore interest at 7%. 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.
5
NOCOPI TECHNOLOGIES, INC.
NOTES TO FINANCIAL
STATEMENTS
(UNAUDITED)
Our Company also granted
warrants in earlier periods to purchase 691,365 shares of our
Company’s common stock at $0.02 per share to the holders of the
debentures. The warrants are exercisable two years after issuance
and expire seven years after issuance. The fair value of the
warrants was determined using the Black-Scholes pricing model. The
relative fair value of the warrants was recorded as a discount to
the notes payable with an offsetting credit to additional paid-in
capital since our Company determined that the warrants were an
equity instrument in accordance with FASB ASC 815. The
debt discount related to the warrant issuances has been accreted
through interest expense over the term of the notes payable. During
the third quarter of 2020, holders of 550,000 warrants exercised
their warrants to purchase a total of 550,000 shares of our
Company’s common stock.
The following table
summarizes our Company’s warrant position at September 30, 2020 and
December 31, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
Weighted
Average
|
|
|
|
|
Number
|
|
|
Exercise
|
|
|
Exercise
|
|
|
|
|
of
Shares
|
|
|
Price
|
|
|
Price
|
|
|
Outstanding warrants -
|
|
|
|
|
|
|
|
|
|
|
December
31, 2019
|
|
|
691,365
|
|
|
$
|
0.02
|
|
|
$
|
0.02
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding warrants -
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2020
|
|
|
141,365
|
|
|
$
|
0.02
|
|
|
$
|
0.02
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average remaining
|
|
|
|
|
|
|
|
|
|
|
|
|
|
contractual life (years)
|
|
|
.77
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Currently exercisable warrants -
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2020
|
|
|
141,365
|
|
|
$
|
0.02
|
|
|
$
|
0.02
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The aggregate intrinsic value
of warrants outstanding and exercisable as of September 30, 2020
was approximately $22,300. The aggregate intrinsic value is
calculated as the difference between the exercise price of the
underlying warrants and the closing stock price of $0.1775 for our
Company’s common stock on September 30, 2020.
Note 5. Other Income
(Expenses)
Other income (expenses) for
the three and nine months ended September 30, 2020 and 2019
includes interest on convertible debentures held by nine investors
and interest earned on invested funds.
Note 6. Income Taxes
There is no provision for
federal income taxes for the three and nine months ended
September 30, 2020 and 2019 due to the availability of
net operating loss carryforwards. Our Company has established a
valuation allowance for the entire amount of benefits resulting
from our Company’s net operating loss carryforwards because our
Company has determined that the realization of the net deferred tax
asset is not assured.
The components for state
income tax expense resulting from the limitation on the use of net
operating losses are:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
Three months
ended
|
|
|
Nine months
ended
|
|
|
|
|
September
30
|
|
|
September
30
|
|
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
|
Current state taxes
|
|
$
|
9,900
|
|
|
$
|
21,100
|
|
|
$
|
15,200
|
|
|
$
|
91,800
|
|
|
Deferred state taxes
|
|
|
–
|
|
|
|
(6,800
|
)
|
|
|
(47,400
|
)
|
|
|
(61,200
|
)
|
|
|
|
$
|
9,900
|
|
|
$
|
14,300
|
|
|
$
|
(32,200
|
)
|
|
$
|
30,600
|
|
During the first quarter of
2020, our Company reversed $47,400 of accrued Pennsylvania income
taxes that are not payable.
There was no change in
unrecognized tax benefits during the period ended September 30,
2020 and there was no accrual for uncertain tax positions as of
September 30, 2020.
Tax years from 2017 through
2019 remain subject to examination by U.S. federal and state
jurisdictions.
6
NOCOPI TECHNOLOGIES, INC.
NOTES TO FINANCIAL
STATEMENTS
(UNAUDITED)
Note 7. Earnings per
Share
In accordance with FASB ASC
260, Earnings per Share, basic earnings per common share is
computed using net earnings divided by the weighted average number
of common shares outstanding for the periods presented. The
computation of diluted earnings per common share involves the
assumption that outstanding common shares are increased by shares
issuable upon exercise of those warrants for which the market price
exceeds the exercise price. The number of shares issuable upon the
exercise of such warrants is decreased by shares that could have
been purchased by our Company with related proceeds. For the three
and nine months ended September 30, 2020, the number of incremental
common shares resulting from the assumed conversion of warrants was
125,227 and 117,179, respectively. For the three and nine months
ended September 30, 2019, the number of incremental common shares
resulting from the assumed conversion of warrants was 375,673 and
372,764, respectively.
Note 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 our Company’s total revenues
were:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
Three Months
ended
September
30
|
|
|
Nine Months
ended
September
30
|
|
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
|
Customer A
|
|
|
74
|
%
|
|
|
65
|
%
|
|
|
65
|
%
|
|
|
47
|
%
|
|
Customer B
|
|
|
3
|
%
|
|
|
–
|
|
|
|
10
|
%
|
|
|
6
|
%
|
|
Customer C
|
|
|
10
|
%
|
|
|
14
|
%
|
|
|
12
|
%
|
|
|
21
|
%
|
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:
|
|
|
|
|
|
|
|
| |
|
|
|
September
30
|
|
|
December
31
|
|
|
|
|
2020
|
|
|
2019
|
|
|
Customer A
|
|
|
28
|
%
|
|
|
26
|
%
|
|
Customer C
|
|
|
66
|
%
|
|
|
67
|
%
|
Our Company performs ongoing
credit evaluations of its customers and generally does not require
collateral. Our Company also maintains allowances for potential
credit losses. The loss of a major customer could have a material
adverse effect on our Company’s business operations and financial
condition.
Our Company’s revenues by
geographic region are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
Three Months
ended
September
30
|
|
|
Nine Months
ended
September
30
|
|
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
|
North America
|
|
$
|
155,700
|
|
|
$
|
190,600
|
|
|
$
|
446,100
|
|
|
$
|
633,000
|
|
|
South America
|
|
|
700
|
|
|
|
–
|
|
|
|
2,100
|
|
|
|
–
|
|
|
Europe
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
100
|
|
|
Asia
|
|
|
583,400
|
|
|
|
418,300
|
|
|
|
1,424,000
|
|
|
|
901,300
|
|
|
Australia
|
|
|
15,000
|
|
|
|
28,600
|
|
|
|
30,200
|
|
|
|
28,600
|
|
|
|
|
$
|
754,800
|
|
|
$
|
637,500
|
|
|
$
|
1,902,400
|
|
|
$
|
1,563,000
|
|
7
NOCOPI TECHNOLOGIES, INC.
NOTES TO FINANCIAL
STATEMENTS
(UNAUDITED)
Note 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 nine months ended
September 30, 2020 was $13,300 and $40,000, respectively. Total
lease expense under operating leases for the three and nine months
ended September 30, 2019 was $13,300 and $40,000, respectively.
Maturities
of lease liabilities are as follows:
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
Operating
Leases
|
|
|
Year ending December
31
|
|
|
|
|
|
|
|
|
2020
|
|
|
|
|
$
|
13,000
|
|
|
2021
|
|
|
|
|
|
53,100
|
|
|
2022
|
|
|
|
|
|
54,600
|
|
|
2023
|
|
|
|
|
|
56,200
|
|
|
2024
|
|
|
|
|
|
18,900
|
|
|
Total
lease payments
|
|
|
|
|
|
195,800
|
|
|
Less
imputed interest
|
|
|
|
|
|
(24,800
|
)
|
|
Total
|
|
|
|
|
$
|
171,000
|
|
8
Item 2. Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
Forward-Looking
Information
This report on Form 10-Q
contains, and our officers and representatives may from time to
time make, "forward-looking statements" within the meaning of the
safe harbor provisions of the U.S. Private Securities Litigation
Reform Act of 1995. Forward-looking statements can be identified by
words such as: "anticipate," "intend," "plan," "goal," "seek,"
"believe," "project," "estimate," "expect," "strategy," "future,"
"likely," "may," "should," "will" and similar references to future
periods. Examples of forward-looking statements include, among
others, statements we make regarding:
|
|
| |
|
|
·
|
The ongoing impact of the
COVID-19 coronavirus pandemic on our business operations, revenues,
employees, suppliers and customers
|
|
|
·
|
Expected operating results,
such as revenue growth and earnings
|
|
|
·
|
Anticipated levels of capital
expenditures for fiscal year 2020 and beyond
|
|
|
·
|
Current or future volatility
in market conditions
|
|
|
·
|
Our belief that we have
sufficient liquidity to fund our business operations during the
next twelve months
|
|
|
·
|
Strategy for customer
retention, growth, product development, market position, financial
results and reserves
|
|
|
·
|
Strategy for risk
management
|
Forward-looking statements
are neither historical facts nor assurances of future performance.
Instead, they are based only on our current beliefs, expectations
and assumptions regarding the future of our business, future plans
and strategies, projections, anticipated events and trends, the
economy and other future conditions. Because forward-looking
statements relate to the future, they are subject to inherent
uncertainties, risks and changes in circumstances that are
difficult to predict and many of which are outside of our control.
Our actual results and financial condition may differ materially
from those indicated in the forward-looking statements. Therefore,
you should not rely on any of these forward-looking statements.
Important factors that could cause our actual results and financial
condition to differ materially from those indicated in the
forward-looking statements include, among others, the
following:
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The extent to which the
COVID-19 pandemic may impact our future financial and operational
performance will be dependent on many factors that we may not be
able to predict because they continue to change and evolve
depending on both national and local circumstances among them
government restrictions affecting our employees, customers and
suppliers, changes in our revenues due to lower customer demand as
a result of the pandemic and a potential inability to obtain raw
materials due to lower availability. We continue to monitor the
impact of COVID-19 on our business but we cannot accurately predict
the extent to which it will adversely affect our future results of
operations, financial condition or cash flows.
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The extent to which we are
successful in gaining new long-term relationships with customers or
retaining significant existing customers and the level of service
failures that could lead customers to use competitors'
services.
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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.
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The impact of losing our
intellectual property protections or the loss in value of our
intellectual property.
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Changes in customer
demand.
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The adequacy of our cash flow
and earnings and other conditions which may affect our ability to
timely service our debt obligations.
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Such other factors as
discussed throughout Part I, Item 2. Management's Discussion and
Analysis of Financial Condition and Results of Operations in this
report, and throughout Part II, Item 7. Management's Discussion and
Analysis of Financial Condition and Results of Operations and in
Item 1A. Risk Factors of our Annual Report on Form 10-K for the
year ended December 31, 2019 and this Quarterly Report on Form
10-Q. Any forward-looking statement made by us in this report is
based only on information currently available to us and speaks only
as of the date on which it is made. We undertake no obligation to
publicly update any forward-looking statement, whether written or
oral, that may be made from time to time, whether as a result of
new information, future developments or otherwise.
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Any forward-looking
statement made by us in this report is based only on information
currently available to us and speaks only as of the date on which
it is made. We undertake no obligation to publicly update any
forward-looking statement, whether written or oral, that may be
made from time to time, whether as a result of new information,
future developments or otherwise.
9
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, 2019,
filed with the Securities and Exchange Commission on March 30,
2020, as amended on April 29, 2020.
Background Overview
Nocopi
Technologies, Inc. develops and markets specialty reactive inks for
applications in the large educational and toy products market. We
also develop and market technologies for document and product
authentication, which we believe can reduce losses caused by
fraudulent document reproduction or by product counterfeiting
and/or diversion. We derive our revenues primarily from licensing
our technologies on an exclusive or non-exclusive basis to
licensees who incorporate our technologies into their product
offering and from selling products incorporating our technologies
to the licensees or to their licensed printers.
Unless the
context otherwise requires, all references to the “Company,”
“we,” “our” or “us” and other similar terms
means Nocopi Technologies, Inc., a Maryland corporation.
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’s financial results during the third
quarter and first nine months of 2020 resulted primarily from a
significant increase in the price of raw materials used in certain
of our Company’s products caused by shortages of these ingredients
as a result of the COVID-19 pandemic along with a mix of our
Company’s products purchased by our licensees’ third party printers
toward certain products with formulations that require ingredients
whose prices have increased as a result of COVID-19. We expect
these higher raw material prices to negatively affect subsequent
quarters until the shortages are alleviated. We expect the fourth
quarter to see a similar impact from COVID-19 and the various
operational adjustments we made. The full extent of the impact to
our Company due to the impact of the COVID-19 pandemic for our
fourth quarter and beyond cannot be currently determined. The
extent to which the COVID-19 pandemic may impact our future
financial and operational performance will be dependent on many
factors that we may not be able to predict because they continue to
change and evolve depending on both national and local
circumstances among them government restrictions affecting our
employees, customers and suppliers, changes in our revenues due to
lower customer demand as a result of the pandemic and a potential
inability to obtain raw materials due to lower availability. We
continue to monitor the impact of COVID-19 on our business but we
cannot accurately predict the extent to which it will adversely
affect our future results of operations, financial condition or
cash flows.
To date, we
have not suffered a drop off in customer orders and total earned
royalties in the entertainment and toy products market as a result
of COVID-19, but we continue to experience a negative impact on
revenues in our smaller anti-counterfeiting and anti-diversion
products market due to closures of certain printing facilities that
utilize these technologies and anticipate that these closures may
continue for a period of time. We continue to retain revenues at
historical levels in the entertainment and toy products market
through the current date despite the downturns in the overall
economy. While the products of our licensees in the larger
entertainment and toy products market are sold by both large and
smaller retailers, some of whom remain open, and are also available
for purchase online, we believe that revenues may not continue to
be achieved at levels experienced to the current date 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. A slowdown
in overall consumer spending 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 current COVID-19 pandemic.
10
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:
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a.
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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;
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b.
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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
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c.
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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.
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We believe
that, as fixed cost reductions beyond those we have achieved in
recent years may not be achievable, our operating results are
substantially dependent on revenue levels. Because revenues derived
from licenses and royalties carry a much higher gross profit margin
than other revenues, operating results are also substantially
affected by changes in revenue mix.
Both the
absolute amount of our Company’s revenues and the mix among the
various sources of revenue are subject to substantial fluctuation.
We have a relatively small number of substantial customers rather
than a large number of small customers. Accordingly, changes in the
revenue received from a significant customer can have a substantial
effect on our Company’s total revenue, revenue mix and overall
financial performance. Such changes may result from a substantial
customer’s product development delays, engineering changes, changes
in product marketing strategies, production requirements and the
like. In addition, certain customers have, from time to time,
sought to renegotiate certain provisions of their license
agreements and, when our Company agrees to revise such terms,
revenues from the customer may be affected.
Revenues
for the third quarter of 2020 were $754,800 compared to $637,500 in
the third quarter of 2019, an increase of $117,300, or
approximately 18%. Licenses, royalties and fees decreased by
$36,100, or approximately 19%, to $153,300 in the third quarter of
2020 from $189,400 in the third quarter of 2019. The decrease in
licenses, royalties and fees in the third quarter of 2020 compared
to the third quarter of 2019 is due primarily to lower royalties
from our Company’s licensees in both the entertainment and security
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 being
experienced worldwide as a result of the COVID-19 pandemic that is
continuing to negatively impact all worldwide economies.
Product and
other sales increased by $153,400, or approximately 34%, to
$601,500 in the third quarter of 2020 from $448,100 in the third
quarter of 2019. Sales of ink increased in the third quarter of
2020 compared to the third quarter of 2019 due primarily to higher
ink shipments to the third party authorized printers used by two of
our Company’s major licensees in the entertainment and toy products
market offset in part by lower ink shipments to our Company’s
licensees in the retail receipt and document fraud market. In the
third quarter of 2020, our Company derived revenues of
approximately $699,100 from our licensees and their authorized
printers in the entertainment and toy products market compared to
revenues of approximately $555,900 in the third quarter of
2019.
For the
first nine months of 2020, revenues were $1,902,400, representing
an increase of $339,400, or approximately 22%, from revenues of
$1,563,000 in the first nine months of 2019. The decrease in
licenses, royalties and fees is due primarily to lower guaranteed
licensing revenue of approximately $200,000 in the first six months
of 2020 from one licensee in the entertainment and toy products
market as a result of the adoption of ASU 214-09, Revenue from
Contracts with Customers in the second quarter of 2018. 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 being experienced worldwide as a
result of the COVID-19 pandemic that is continuing to negatively
impact all worldwide economies.
11
Product and
other sales increased by $486,300, or approximately 49%, to
$1,477,400 in the first nine months of 2020 from $991,100 in the
first nine months of 2019. Sales of ink increased in the nine
months of 2020 compared to the first nine months of 2019 due
primarily to higher ink shipments to the third party authorized
printers used by two of our Company’s major licensees in the
entertainment and toy products market offset in part by lower ink
shipments to our Company’s licensees in the retail receipt and
document fraud market. Our Company derived revenues of
approximately $1,727,800 from licensees and their authorized
printers in the entertainment and toy products market in the first
nine months of 2020 compared to revenues of approximately
$1,327,900 in the first nine months of 2019.
Our
Company’s gross profit decreased to $425,500 in the third quarter
of 2020, or approximately 56% of revenues, from $429,500 in the
third quarter of 2019 or approximately 67% of revenues. Licenses,
royalties and fees have historically carried a higher gross profit
than product and other sales. Such other sales 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
lower gross profit in the third quarter of 2020 compared to the
third quarter of 2019 results primarily from lower gross revenues
from licenses, royalties and fees offset in part by higher product
and other sales in the third quarter of 2020 compared to the third
quarter of 2019.
For the
first nine months of 2020, gross profit was $1,016,000, or
approximately 53% of revenues, compared to $1,084,500, or
approximately 69% of revenues in 2019. The lower gross profit in
the first nine months of 2020 compared to the first nine months of
2019 results primarily from lower licenses, royalties and fees due
to the adoption of Topic 606 in 2018 offset in part by higher
gross revenues from product and other sales in the first nine
months of 2020 compared to the first nine months of 2019. 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 decreased to approximately 60% in the third quarter of 2020
compared to approximately 78% in the third quarter of 2019 and to
approximately 60% of revenues from licenses, royalties and fees in
the first nine months of 2020 from approximately 83% in the first
nine months of 2019.
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 decreased to
approximately 56% of revenues in the third quarter of 2020 compared
to approximately 63% of revenues in the third quarter of 2019. For
the first nine months of 2020, the gross profit, expressed as a
percentage of revenues, decreased to approximately 52% of revenues
from product and other sales compared to approximately 62% of
revenues from product and other sales in the first nine months of
2019. The decrease in both the third quarter and first nine months
of 2020 compared to the third quarter and first nine months of 2019
is due to: a) 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 in the third quarter and first nine months of
2020 compared to the third quarter and first nine months of 2019
(we are not passing along these cost increases to our customers at
this time); b) an unfavorable mix of products sold whereby the
increases in purchases of our Company’s products by the licensed
printers of its licensees in the entertainment and toy products
market in the third quarter and first nine months of 2020 compared
to the third quarter and first nine months of 2019 were of products
manufactured by our Company whose raw material prices were most
affected by shortages created by the COVID-19 pandemic and c)
increased production salaries related to a staffing addition,
higher duties and equipment depreciation in the third quarter and
first nine months of 2020 compared to the third quarter and first
nine months of 2019.
Research
and development expenses of $40,700 and $123,700 in the third
quarter and first nine months of 2020, respectively, were
comparable to $45,200 and $122,600 in the third quarter and first
nine months of 2019, respectively.
Sales and
marketing expenses increased in the third quarter of 2020 to
$90,900 from $81,000 in the third quarter of 2019. Sales and
marketing expenses increased in the first nine months of 2020 to
$260,900 from $224,200 in the first nine months of 2019. This
increase is due primarily to higher commission expense on the
higher level of sales in the third quarter and first nine months of
2020 compared to the third quarter and first nine months of
2019.
General and
administrative expenses increased in the third quarter of 2020 to
$123,800 from $84,200 in the third quarter of 2019. General and
administrative expenses increased in the first nine months of 2020
to $383,500 from $265,200 in the first nine months of 2019. The
increase in third quarter of 2020 compared to the third quarter of
2019 is due primarily to higher public relations and salary
expenses in the third quarter of 2020 compared to the third quarter
of 2019. The increase in the first nine months of 2020 compared to
the first nine months of 2019 is due primarily to higher public
relations and salary expenses in the first nine months of 2020
compared to the first nine months of 2019.
12
Other
income (expenses) in the third quarter and first nine months of
2020 and 2019 included interest on convertible debentures held by
seven investors and interest earned on invested funds.
Income
taxes in the third quarter and first nine months of 2020 and 2019
result from limitations placed on income tax net operating loss
deductions by the Commonwealth of Pennsylvania. In the first
quarter of 2020, our Company reversed $47,400 of accrued
Pennsylvania income taxes that are not payable.
The lower
net income of $163,100 in the third quarter of 2020 compared to net
income of $206,800 in the third quarter of 2019 resulted primarily
from a lower gross profit on a lower level of licenses, royalties
and fees, higher cost of revenues and higher operating expenses in
the third quarter of 2020 compared to the third quarter of 2019.
The lower net income of $286,500 in the first nine months of 2020
compared to net income of $441,100 in the first nine months of 2019
resulted primarily from a lower gross profit on a lower level of
licenses, royalties and fees, higher cost of revenues and higher
operating expenses in the first nine months of 2020 compared to the
first nine months of 2019 offset in part by the reversal of income
taxes in the first quarter of 2020.
Plan of Operation,
Liquidity and Capital Resources
During the
first nine months of 2020, our Company’s cash increased to
$1,428,900 at September 30, 2020 from $688,000 at
December 31, 2019. During the first nine months of 2020,
our Company generated $768,500 from its operating activities,
received $11,000 upon the exercise of warrants and used $38,600 for
capital expenditures.
During the
first nine months of 2020, our Company’s revenues increased
approximately 22% primarily as a result of higher sales of ink to
the authorized printers of our Company’s licensees in the
entertainment and toy products market offset in part by lower
royalty revenues from two licensees in the entertainment and toy
products market.
Our
Company’s total overhead expenses increased in the first nine
months of 2020 compared to the first nine months of 2019 and our
Company’s net interest expense decreased in the first nine months
of 2020 compared to the first nine months of 2019. As a result of
these factors, our Company generated net income of $286,500 in the
first nine months of 2020 compared to $441,100 in the first nine
months of 2019. Our Company had positive operating cash flow of
$768,500 during the first nine months of 2020 and at September 30,
2020, had positive working capital of $2,469,900 and stockholders’
equity of $3,231,200. For the full year of 2019, our Company had
net income of $754,900 and had positive operating cash flow of
$360,600. At December 31, 2019, our Company had positive
working capital of $1,835,300 and stockholders’ equity of
$2,789,700.
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. 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.
Our plan of
operation for the twelve months beginning with the date of this
quarterly report consists of concentrating available human and
financial resources to continue to capitalize on the specific
business relationships our Company has developed in the
entertainment and toy products market. This includes two licensees
that have been marketing products incorporating our Company’s
technologies since 2012. These two licensees maintain a significant
presence in the entertainment and toy products market and are well
known and highly regarded participants in this market. We
anticipate that these two licensees will expand their current
offerings that incorporate our technologies and will introduce and
market new products that will incorporate our technologies
available to them under their license agreements with our Company.
We will continue to develop various applications for these
licensees. We also plan to expand our licensee base in the
entertainment and toy market. We currently have additional
licensees marketing or developing products incorporating our
technologies in certain geographic and niche markets of the overall
entertainment and toy products market.
13
Our Company
maintains its presence in the retail loss prevention market and
believes that revenue growth in this market can be achieved through
increased security ink sales to its licensees in this market. We
will continue to adjust our production and technical staff as
necessary and, subject to available financial resources, invest in
capital equipment needed to support potential growth in ink
production requirements beyond our current capacity. Additionally,
we will pursue opportunities to market our current technologies in
specific security and non-security markets. There can be no
assurances that these efforts will enable our Company to generate
additional revenues and positive cash flow.
Our Company
has received, and 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 2020 and
beyond due to the COVID-19 virus and its effect on the global
economy. As a result, our revenues, results of operations and
liquidity may be negatively impacted.
Contractual Obligations
As of
September 30, 2020, 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, 2020, as amended on
April 29, 2020, 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
September 30, 2020, there were no recently adopted accounting
standards that had a material effect on our Company’s financial
statements.
Recently Issued Accounting Pronouncements
Not Yet Adopted
As of
September 30, 2020, there are no recently issued accounting
standards not yet adopted which would have a material effect on our
Company’s financial statements.
Off-Balance Sheet
Arrangements
Our Company
does not have any off-balance sheet arrangements.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures. Our
Company’s management, with the participation of our Company’s
Principal Executive Officer and Principal Financial Officer,
evaluated the effectiveness of our Company’s disclosure controls
and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under
the Securities Exchange Act of 1934, as amended) as of September
30, 2020. Based on this evaluation, our Company’s Principal
Executive Officer and Principal Financial Officer concluded that,
as of September 30, 2020, 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 September 30, 2020 that have materially affected, or
are reasonably likely to materially affect, our internal control
over financial reporting.
14
PART II - OTHER
INFORMATION
Item 1A. Risk Factors
The following risk factors supplement the Risk
Factors described in the Company’s annual report
on Form 10-K for the year ended December 31, 2019, as
amended, and should be read in conjunction therewith.
We expect the COVID-19 pandemic to continue
to negatively impact our results of operations, cash flow and
financial position.
The negative
impact of COVID-19 on our Company’s financial results during the
third quarter and first nine months of 2020 resulted primarily from
a significant increase in the price of raw materials used in
certain of our Company’s products caused by shortages of these
ingredients as a result of the COVID-19 pandemic along with a mix
of our Company’s products purchased by our licensees’ third party
printers toward certain products with formulations that require
ingredients whose prices have increased as a result of COVID-19. We
expect these higher raw material prices to negatively affect
subsequent quarters until the shortages are alleviated. We expect
the fourth quarter to see a similar impact from COVID-19 and the
various operational adjustments we made.
Other disruptions to our business operations due to
COVID-19 with a resultant impact on our results of operations are
expected to continue to occur as a result of quarantines of
employees and suppliers in areas affected by the outbreak,
availability of raw materials required to manufacture our products,
disruption of supply chains that provide our raw materials, price
increases of raw materials and supplies used in our production
processes, facility closures of domestic and international
customers who purchase and use our products, and travel and
logistics restrictions affecting our inbound and outbound shipments
in connection with the COVID-19 outbreak. While we expect this
global COVID-19 pandemic to continue to negatively impact our
results of operations, cash flow and financial position, the
related financial impact cannot be reasonably estimated at this
time.
The extent
to which the COVID-19 pandemic will negatively impact our results
of operations, cash flow and financial position is highly uncertain
and cannot be reasonably estimated at this time.
The COVID-19
pandemic has created significant worldwide uncertainty, volatility
and economic disruption. The extent to which COVID-19 will
negatively impact our results of operations, cash flow and
financial position is dependent upon numerous factors, many of
which are highly uncertain, rapidly changing and uncontrollable.
These factors include, but are not limited to: (i) the duration and
scope of the pandemic; (ii) governmental, business and individual
actions that have been and continue to be taken in response to the
pandemic, including travel restrictions, quarantines, social
distancing, work-from-home and shelter-in-place orders and
shut-downs; (iii) the impact on U.S. and global economies and the
timing and rate of economic recovery; (iv) potential adverse
effects on the financial markets and access to capital; (v)
potential goodwill or other impairment charges; and (vi) the
ability of our licensees and other customers to sell products that
utilize or incorporate our technology.
Item 2. Unregistered Sales of Equity
Securities and Use of Proceeds
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Date
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Security/Value
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July 2020
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5,758,992 shares of common
stock at $0.025 per share pursuant to the conversion of $97,900 of
7% convertible debentures plus approximately $46,000 of accrued
interest.
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July 2020
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Common Stock – 550,000 shares
of common stock at $0.02 per share pursuant to warrant exercises
for total proceeds of $11,000.
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No
underwriters were utilized, and no commissions or fees were paid
with respect to any of the above transactions. We relied on Section 4(a)(2) and/or
Regulation D of the Securities Act of 1933, as amended, since the
transactions did not involve any public offering.
Item 5. Other Information
During the
third quarter of 2020, the holders of outstanding convertible
debentures totaling approximately $97,900 that were due during the
third quarter of 2020 elected to convert those debentures plus
approximately $46,100 of accrued interest into 5,758,992 shares of
our Company’s common stock. The convertible debentures bore
interest at 7%. The conversion price was $0.025 per share.
15
During the
third quarter of 2020, holders of 550,000 warrants exercised their
warrants to purchase a total of 550,000 shares of our Company’s
common stock at an exercise price of $0.02 per share. Our Company
received $11,000 upon the exercise of these warrants.
Item 6. Exhibits
The following exhibits are included
herein:
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SIGNATURES
Pursuant to
the requirement of the Securities Exchange Act of 1934, our Company
has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
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NOCOPI TECHNOLOGIES, INC.
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|
|
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DATE: November 13, 2020
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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 & Chief
Executive Officer
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DATE: November 13, 2020
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/s/ Rudolph A. Lutterschmidt
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Rudolph A. Lutterschmidt
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Vice President & Chief Financial
Officer
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17
EXHIBIT INDEX
18
