United States
Securities and Exchange Commission
Washington, D.C. 20549
Form
(Mark One)
For the quarterly period ended
or
For the transition period from _________________ to ______________
Commission File Number:
(Exact name of registrant as specified in its charter)
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
(Address of principal executive offices) (Zip Code)
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None.
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
Indicate by check mark whether
the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
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).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer ☐ | Accelerated filer ☐ |
| Smaller reporting company | |
| Emerging growth company |
If an emerging growth company, indicate by checkmark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Securities Act. ☐
Indicate by check mark whether
the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: shares of common stock, par value $0.01, as of May 15, 2023.
NOCOPI TECHNOLOGIES, INC.
INDEX
| PAGE | |
| Part I. FINANCIAL INFORMATION | |
| Item 1. Financial Statements | 1 |
| Statements of Comprehensive Income (Loss) for the Three Months Ended March 31, 2023 and March 31, 2022 | 1 |
| Balance Sheets at March 31, 2023 and December 31, 2022 | 2 |
| Statements of Cash Flows for the Three Months Ended March 31, 2023 and March 31, 2022 | 3 |
| Statements of Stockholders’ Equity for the Three Months ended March 31, 2023 and March 31, 2022 | 4 |
| Notes to Financial Statements | 5 |
| Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations | 10 |
| Item 3. Quantitative and Qualitative Disclosures About Market Risk | 15 |
| Item 4. Controls and Procedures | 15 |
| Part II. OTHER INFORMATION | |
| Item 1. Legal Proceedings | 16 |
| Item 1A. Risk Factors | 16 |
| Item 2. Unregistered Sales of Equity Securities and Use of Proceeds. | 16 |
| Item 3. Defaults Upon Senior Securities | 16 |
| Item 4. Mine Safety Disclosures | 16 |
| Item 5. Other Information | 16 |
| Item 6. Exhibits | 16 |
| SIGNATURES | 17 |
| EXHIBIT INDEX | 18 |
PART I – FINANCIAL INFORMATION
Item 1. Financial Statements.
Nocopi Technologies, Inc.
Statements of Comprehensive Income (Loss)*
(unaudited)
Three Months ended March 31 | ||||||||
| 2023 | 2022 | |||||||
| Revenues | ||||||||
| Licenses, royalties and fees | $ | $ | ||||||
| Product and other sales | ||||||||
| Total revenues | ||||||||
| Cost of revenues | ||||||||
| Licenses, royalties and fees | ||||||||
| Product and other sales | ||||||||
| Total cost of revenues | ||||||||
| Gross profit | ||||||||
| Operating expenses | ||||||||
| Research and development | ||||||||
| Sales and marketing | ||||||||
| General and administrative | ||||||||
| Total operating expenses | ||||||||
| Net loss from operations | ( | ) | ( | ) | ||||
| Other income (expenses) | ||||||||
| Interest income | ||||||||
| Interest expense and bank charges | ( | ) | ( | ) | ||||
| Total other income (expenses) | ||||||||
| Net income (loss) before income taxes | ( | ) | ||||||
| Income taxes | ||||||||
| Net income (loss) | $ | $ | ( | ) | ||||
| Basic net income (loss) per common share | $ | $ | ( | ) | ||||
| Diluted net income (loss) per common share | $ | $ | ( | ) | ||||
| Weighted average common shares outstanding | ||||||||
| Basic | ||||||||
| Diluted | ||||||||
*See accompanying notes to these financial statements.
| 1 |
Nocopi Technologies, Inc.
Balance Sheets*
(unaudited)
| March 31 | December 31 | |||||||
| 2023 | 2022 | |||||||
| Assets | ||||||||
| Current assets | ||||||||
| Cash | $ | $ | ||||||
| Accounts receivable less $ | ||||||||
| Inventory | ||||||||
| Prepaid and other | ||||||||
| Total current assets | ||||||||
| Fixed assets | ||||||||
| Leasehold improvements | ||||||||
| Furniture, fixtures and equipment | ||||||||
| Fixed assets, gross | ||||||||
| Less: accumulated depreciation and amortization | ||||||||
| Total fixed assets | ||||||||
| Other assets | ||||||||
| Long-term receivables | ||||||||
| Operating lease right of use – building | ||||||||
| Other assets | ||||||||
| Total assets | $ | $ | ||||||
| Liabilities and Stockholders' Equity | ||||||||
| Current liabilities | ||||||||
| Accounts payable | $ | $ | ||||||
| Accrued expenses | ||||||||
| Income taxes | ||||||||
| Operating lease liability – current | ||||||||
| Total current liabilities | ||||||||
| Other liabilities | ||||||||
| Accrued expenses, non-current | ||||||||
| Operating lease liability – non-current | ||||||||
| Total other liabilities | ||||||||
| Stockholders' equity | ||||||||
| Common stock, $ par value Authorized – shares Issued and outstanding – shares | ||||||||
| Paid-in capital | ||||||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| Total stockholders' equity | ||||||||
| Total liabilities and stockholders' equity | $ | $ | ||||||
*See accompanying notes to these financial statements.
| 2 |
Nocopi Technologies, Inc.
Statements of Cash Flows*
(unaudited)
Three Months ended March 31 | ||||||||
| 2023 | 2022 | |||||||
| Operating Activities | ||||||||
| Net income (loss) | $ | $ | ( | ) | ||||
| Adjustments to reconcile net income (loss) to net cash provided by operating activities | ||||||||
| Depreciation and amortization | ||||||||
| Other assets | ||||||||
| Other liabilities | ( | ) | ( | ) | ||||
| Net income adjusted for non-cash operating activities | ( | |||||||
| (Increase) decrease in assets | ||||||||
| Accounts receivable | ( | ) | ||||||
| Inventory | ( | ) | ||||||
| Prepaid and other | ( | ) | ||||||
| Increase in liabilities | ||||||||
| Accounts payable and accrued expenses | ||||||||
| Income taxes | ||||||||
| Total increase in operating capital | ( | ) | ||||||
| Net cash provided by operating activities | ||||||||
| Investing Activities | ||||||||
| Additions to fixed assets | ( | ) | ||||||
| Net cash used in investing activities | ( | ) | ||||||
| Increase in cash | ||||||||
| Cash at beginning of year | ||||||||
| Cash at end of period | $ | $ | ||||||
*See accompanying notes to these financial statements.
| 3 |
Nocopi Technologies, Inc.
Statements of Stockholders’ Equity*
For the Three Months ended March 31, 2023 and March 31, 2022
(unaudited)
| Common stock | Paid-in | Accumulated | ||||||||||||||||||
| Shares | Amount | Capital | Deficit | Total | ||||||||||||||||
| Balance at December 31, 2022 | $ | $ | $ | ( | ) | $ | ||||||||||||||
| Net income | ||||||||||||||||||||
| Balance at March 31, 2023 | $ | $ | $ | ( | ) | $ | ||||||||||||||
| Common stock | Paid-in | Accumulated | ||||||||||||||||||
| Shares | Amount | Capital | Deficit | Total | ||||||||||||||||
| Balance at December 31, 2021 | $ | $ | $ | ( | ) | $ | ||||||||||||||
| Net loss | ( | ) | ( | ) | ||||||||||||||||
| Balance at March 31, 2022 | $ | $ | $ | ( | ) | $ | ||||||||||||||
* See accompanying notes to these financial statements.
| 4 |
NOCOPI TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
Note 1. Financial Statements
The accompanying unaudited condensed financial statements have been prepared by Nocopi Technologies, Inc. (our “Company”). These statements include all adjustments (consisting only of normal recurring adjustments) which management believes necessary for a fair presentation of the statements and have been prepared on a consistent basis using the accounting policies described in Note 2 Significant Accounting Policies included in the Notes to Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022, as filed with the Securities and Exchange Commission on March 31, 2023, as amended on April 28, 2023 (the “2022 Annual Report”). Certain financial information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations, although our Company believes that the accompanying disclosures are adequate to make the information presented not misleading. The Notes to Financial Statements included in the 2022 Annual Report should be read in conjunction with the accompanying interim financial statements. The interim operating results for the three months ended March 31, 2023 may not be necessarily indicative of the operating results expected for the full year.
Our Company follows Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 220 in reporting comprehensive income (loss). 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 (loss), comprehensive income (loss) is equal to net income (loss).
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 March 31, 2023, our Company did not have an active stock option plan. There was unrecognized portion of expense related to stock option grants at March 31, 2023.
5
NOCOPI TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
Note 3. Cash and Cash Equivalents
March 31 2023 | December 31 2022 | |||||||
| Cash and cash equivalents | ||||||||
| Cash and money market funds | $ | $ | ||||||
| U.S. Treasury Bills | ||||||||
| Cash and cash equivalents | $ | $ | ||||||
The amortized cost and fair value of securities held to maturity at March 31, 2023 are as follows:
Amortized Cost | Fair Value | |||||||
| U.S. Treasury Bills | ||||||||
| Due April 20, 2023 | $ | $ | ||||||
| Due July 13, 2023 | ||||||||
| Total | $ | $ | ||||||
Note 4. Long-term Receivables
As of March 31, 2023, the Company had long-term receivables
of $
The three agreements grant licenses for the use of certain patented ink technology as it exists at the time that it is granted which is considered functional intellectual property. Under Topic 606, a performance obligation to transfer a license for functional intellectual property is satisfied at a point in time and the fixed consideration could be recognized upfront when the Company transfers control of the licensee if certain criteria are met. Specifically, the minimum royalty guarantee could be recognized upfront if the following conditions are met:
| · | The royalty payment is fixed or determinable |
| · | Collection of the royalty payment is considered probable |
| · | The licensee has the ability to benefit from the licensed technology |
The Company determined that the above conditions were
met upon execution of the agreements and, in the year ended December 31, 2022, recognized $
The current portion of the three new license agreements
and one license agreement entered into in prior years, in the amount of $
6
NOCOPI TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
The following table summarizes the future minimum payments due under the three new license agreements as of March 31, 2023:
| Year Ending December 31: | ||||||
| 2023 | $ | |||||
| 2024 | ||||||
| 2025 | ||||||
| 2026 | ||||||
| 2027 | ||||||
| 2028 | ||||||
| Total | $ | |||||
The Company has evaluated the collectability of the long-term receivables and believes them to be fully collectible as of March 31, 2023. However, there can be no assurance that the receivables will not be impaired in the future due to changes in the licensees’ financial condition or other factors.
The long-term receivables are recorded at its present
value as of March 31, 2023, and will be amortized over the term of the license agreements using the effective interest method. The unamortized
balance of the long-term receivables as of March 31, 2023 is $
Note 5. Line of Credit
In November 2018, our Company negotiated a $
Note 6. Income Taxes
At March 31, 2023, our Company had federal and state
taxable income of approximately $
The components for federal and state income tax expense are:
Three Months ended March 31 | ||||||||
| 2023 | 2022 | |||||||
| Current federal taxes | $ | $ | ||||||
| Current state taxes | ||||||||
| Income tax expense (benefit) | $ | $ | ||||||
There was
Tax years from
In accordance with FASB ASC 260, Earnings per Share, basic earnings (loss) per common share is computed using net earnings (loss) divided by the weighted average number of common shares outstanding for the periods presented. Diluted earnings (loss) per share are computed using weighted average number of common shares plus dilutive common share equivalents outstanding during the period. Since our Company did not have any common stock equivalents outstanding as of March 31, 2023 and March 31, 2022, basic and diluted earnings (loss) per share were the same.
7
NOCOPI TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
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 the Company’s total revenues were:
Three Months ended March 31 | ||||||||
| 2023 | 2022 | |||||||
| Customer A | % | % | ||||||
| Customer B | % | % | ||||||
| Customer C | % | % | ||||||
Our Company’s non-affiliate customers whose individual balances amounted to more than 10% of our Company’s net accounts receivable, expressed as a percentage of net accounts receivable, were:
| March 31 | December 31 | |||||||
| 2023 | 2022 | |||||||
| Customer A | % | % | ||||||
| Customer B | % | % | ||||||
Our Company performs ongoing credit evaluations of its customers and generally does not require collateral. Our Company also maintains allowances for potential credit losses. The loss of a major customer could have a material adverse effect on our Company’s business operations and financial condition.
Our Company’s revenues by geographic region are as follows:
Three Months ended March 31 | ||||||||
| 2023 | 2022 | |||||||
| North America | $ | $ | ||||||
| South America | ||||||||
| Asia | ||||||||
| Australia | ||||||||
| $ | $ | |||||||
8
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
As of January 1, 2019 the operating lease right-of-use
asset and operating lease liability amounted to $
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 each
of the three month periods ended March 31, 2023 and March 31, 2022 was $
Maturities of lease liabilities were as follows:
| Operating Leases | ||||
| Year ending December 31 | ||||
| 2023 | $ | |||
| 2024 | ||||
| Total lease payments | ||||
| Less imputed interest | ( | ) | ||
| Total | $ | |||
| 9 |
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:
| · | Expected operating results, such as revenue, expenses and capital expenditures | |
| · | 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, and risk management |
Forward-looking statements are neither historical facts nor assurances of future performance. Instead, they are based only on our current beliefs, expectations and assumptions regarding the future of our business, future plans and strategies, projections, anticipated events and trends, the economy and other future conditions. Because forward-looking statements relate to the future, they are subject to inherent uncertainties, risks and changes in circumstances that are difficult to predict and many of which are outside of our control. Our actual results and financial condition may differ materially from those indicated in the forward-looking statements. Therefore, you should not rely on any of these forward-looking statements. Important factors that could cause our actual results and financial condition to differ materially from those indicated in the forward-looking statements include, among others, the following:
| · | The extent to which 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 being customers and suppliers, 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. | |
| · | 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. | |
| · | Strategic actions, including business acquisitions and our success in integrating acquired businesses. | |
| · | Our ability to improve our current credit rating with our vendors and the impact on our raw materials and other costs and competitive position of doing so. | |
| · | The impact of losing our intellectual property protections or the loss in value of our intellectual property. | |
| · | Changes in customer demand. | |
| · | The adequacy of our cash flow and earnings and other conditions which may affect our ability to timely service our debt obligations. | |
| · | The occurrence of hostilities, political instability or catastrophic events. | |
| · | Developments and changes in laws and regulations, including increased regulation of our industry through legislative action and revised rules and standards. | |
| · | Security breaches, cybersecurity attacks and other significant disruptions in our information technology systems. | |
| · | Such other factors as discussed throughout Part I, Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations in this Quarterly Report on Form 10-Q, and throughout Part II, Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations and in Item 1A. Risk Factors of our Annual Report on Form 10-K for the year ended December 31, 2022. |
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.
| 10 |
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, 2022, filed with the Securities and Exchange Commission on March 31, 2023, as amended on April 28, 2023.
Background Overview
Nocopi Technologies, Inc. develops and markets specialty reactive inks for applications in the large educational and toy products market. We also develop and market technologies for document and product authentication, which we believe can reduce losses caused by fraudulent document reproduction or by product counterfeiting and/or diversion. We derive our revenues primarily from licensing our technologies on an exclusive or non-exclusive basis to licensees who incorporate our technologies into their product offering and from selling products incorporating our technologies to the licensees or to their licensed printers.
Unless the context otherwise requires, all references to the “Company,” “we,” “our” or “us” and other similar terms means Nocopi Technologies, Inc., a Maryland corporation.
| 11 |
Results of Operations
Our Company’s revenues are derived from (a) royalties paid by licensees of our technologies, (b) fees for the provision of technical services to licensees and (c) from the direct sale of (i) products incorporating our technologies, such as inks, security paper and pressure sensitive labels, and (ii) equipment used to support the application of our technologies, such as ink-jet printing systems. Royalties consist of guaranteed minimum royalties payable by our licensees in certain cases and additional royalties which typically vary with the licensee’s sales or production of products incorporating the licensed technology. Service fees and sales revenues vary directly with the number of units of service or product provided.
Our Company recognizes revenue on its lines of business as follows:
| a. | License fees for the use of our technology and royalties with guaranteed minimum amounts are recognized at a point in time when the term begins; | |
| b. | Product sales are recognized at the time of the transfer of goods to customers at an amount that our Company expects to be entitled to in exchange for these goods, which is at the time of shipment; and | |
| c. | Fees for technical services are recognized at the time of the transfer of services to customers at an amount that our Company expects to be entitled to in exchange for the services, which is when the service has been rendered. |
We believe that, as fixed cost reductions beyond those we have achieved in recent years may not be achievable, our operating results are substantially dependent on revenue levels. Because revenues derived from licenses and royalties carry a much higher gross profit margin than other revenues, operating results are also substantially affected by changes in revenue mix.
Both the absolute amount of our Company’s revenues and the mix among the various sources of revenue are subject to substantial fluctuation. We have a relatively small number of substantial customers rather than a large number of small customers. Accordingly, changes in the revenue received from a significant customer can have a substantial effect on our Company’s total revenue, revenue mix and overall financial performance. Such changes may result from a substantial customer’s product development delays, engineering changes, changes in product marketing strategies, production requirements and the like. In addition, certain customers have, from time to time, sought to renegotiate certain provisions of their license agreements and, when our Company agrees to revise such terms, revenues from the customer may be adversely affected.
Revenues for the first quarter of 2023 were $592,100 compared to $339,400 in the first quarter of 2022, an increase of $252,700, or approximately 74%. Licenses, royalties and fees decreased by $14,300, or approximately 10%, in the first quarter of 2023 to $123,000 from $137,300 in the first quarter of 2022. The decrease in licenses, royalties and fees in the first quarter of 2023 compared to the first quarter of 2022 is due primarily to lower royalties from our Company’s licensees in the entertainment and toy products market. We cannot assure you that the marketing and product development activities of our Company’s licensees or other businesses in the entertainment and toy products market will produce a significant increase in revenues for our Company, nor can the timing of any potential revenue increases be predicted, particularly given the uncertain economic conditions presently being experienced.
Product and other sales increased by $267,000, or approximately 132%, to $469,100 in the first quarter of 2023 from $202,100 in the first quarter of 2022. Sales of ink increased in the first quarter of 2023 compared to the first quarter of 2022 due primarily to higher ink shipments to the third party authorized printer used by two of our Company’s major licensees in the entertainment and toy products market. In the first quarter of 2023, our Company derived revenues of approximately $541,500 from our Company’s licensees and their authorized printers in the entertainment and toy products market compared to revenues of approximately $306,500 in the first quarter of 2022.
Our Company’s gross profit increased to $311,600, or approximately 53% of gross revenues, in the first quarter of 2023 from $173,200, or approximately 51% of gross revenues, in the first quarter of 2022. Licenses, royalties and fees have historically carried a higher gross profit than product and other sales, which generally consist of either supplies or other manufactured products which incorporate our Company’s technologies or equipment used to support the application of its technologies. These items (except for inks which are manufactured by our Company) are generally purchased from third-party vendors and resold to the end-user or licensee and carry a lower gross profit than licenses, royalties and fees.
| 12 |
As the variable component of cost of revenues related to licenses, royalties and fees is a low percentage of these revenues and the fixed component is not substantial, period to period changes in revenues from licenses, royalties and fees can significantly affect both the gross profit from these sources as well as our Company’s overall gross profit. The gross profit from licenses, royalties and fees decreased to approximately 52% in the first quarter of 2023 from approximately 71% in the first quarter of 2022.
The gross profit of product and other sales, expressed as a percentage of revenues, is dependent on both the overall sales volumes of product and other sales and on the mix of the specific goods produced and/or sold. Primarily due to higher sales of ink and other products in the first quarter of 2023 compared to the first quarter of 2022, there was a higher gross profit from product and other sales of approximately 53% of revenues in the first quarter of 2023 compared to a gross profit of approximately 37% of revenues in the first quarter of 2022.
Research and development expenses increased in the first quarter of 2023 to $44,800 compared to $39,500 in the first quarter of 2022 due primarily to higher employee and lab expenses in the first quarter of 2023 compared to the first quarter of 2022.
Sales and marketing expenses increased to $86,300 in the first quarter of 2023 from $64,800 in the first quarter of 2022 due primarily to higher commission expense on the higher level of revenues in the first quarter of 2023 compared to the first quarter of 2022.
General and administrative expenses decreased in the first quarter of 2023 to $201,200 compared to $277,700 in the first quarter of 2022 due primarily to lower professional fees offset in part by higher employee related expenses and higher insurance expense in the first quarter of 2023 compared to the first quarter of 2022.
Income taxes in the first quarter of 2023 include federal and state income taxes. The state income taxes result from limitations placed on income tax net operating loss deductions by the Commonwealth of Pennsylvania.
The net income of $30,300 in the first quarter of 2023 compared to the net loss of $203,400 in the first quarter of 2022 resulted primarily from a higher gross profit on a higher level of product sales, lower operating expenses and interest income in the first quarter of 2023 compared to the first quarter of 2022.
Plan of Operation, Liquidity and Capital Resources
During the first quarter of 2023, our Company’s cash increased to $5,394,300 at March 31, 2023 from $5,337,800 at December 31, 2022. During the first quarter of 2023, our Company generated $57,600 from its operating activities and used $1,100 for capital expenditures.
During the first quarter of 2023, our Company’s revenues increased approximately 74% primarily as a result of higher sales of ink to an authorized printer of our Company’s licensees in the entertainment and toy products market offset in part by lower royalty revenues from our Company’s licensees in the entertainment and toy products market. Our total overhead expenses decreased in the first quarter of 2023 to $332,300 compared to $382,000 in the first quarter of 2022, our Company’s interest income and our Company’s income tax expense increased in the first quarter of 2023 compared to the first quarter of 2022. As a result of these factors, our Company generated net income of $30,300 in the first quarter of 2023 compared to a net loss of $203,400 in the first quarter of 2022. Our Company had positive operating cash flow of $57,600 during the first quarter of 2023. At March 31, 2023, our Company had working capital of $6,604,500 and stockholders’ equity of $8,848,700. For the full year of 2022, our Company had net income of $1,813,100 and had negative operating cash flow of $8,100. At December 31, 2022, our Company had working capital of $6,421,800 and stockholders’ equity of $8,818,400.
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.
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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 the Company’s technologies since 2012. These two licensees maintain a significant presence in the entertainment and toy products market and are well known and highly regarded participants in this market. We anticipate that these two licensees will expand their current offerings that incorporate our technologies and will introduce and market new products that will incorporate our technologies available to them under their license agreements with our Company. We will continue to develop various applications for these licensees. We also plan to expand our licensee base in the entertainment and toy market. We currently have additional licensees marketing or developing products incorporating our technologies in certain geographic and niche markets of the overall entertainment and toy products market.
Our Company maintains its presence in the retail loss prevention market and believes that revenue growth in this market can be achieved through increased security ink sales to its licensees in this market. We will continue to adjust our production and technical staff as necessary and, subject to available financial resources, invest in capital equipment needed to support potential growth in ink production requirements beyond our current capacity. Additionally, we will pursue opportunities to market our current technologies in specific security and non-security markets. There can be no assurances that these efforts will enable our Company to generate additional revenues and positive cash flow.
Our future growth strategy includes expanding our business through acquisitions of other companies with competing or complementary services, technologies or businesses in order to expand our product and service offerings to grow our free cash flow. We are currently actively engaged in the process to identify acquisition candidates and negotiate transactions. As of the date of this report on Form 10-Q, we have no agreements to make any acquisition. We expect to fund our business expansion through the issuance of debt or equity securities, the payment of cash, the exchange of services, or any combination thereof.
Our Company has received, and may in the future seek, additional capital in the form of debt, equity or both, to support our working capital requirements and to provide funding for other business opportunities. Beyond the Line of Credit, we cannot assure you that if we require additional capital, that we will be successful in obtaining such additional capital, or that such additional capital, if obtained, will enable our Company to generate additional revenues and positive cash flow.
As previously stated, we generate a significant portion of our total revenues from licensees in the entertainment and toy products market. These licensees generally sell their products through retail outlets. In the future, such sales may be adversely affected by changes in consumer spending that may occur as a result of an uncertain economic environment in 2023 and beyond due to any future effects of the COVID-19 pandemic and its effect on the global economy, geopolitical instability including the ongoing conflict between Russia and Ukraine and the supply chain disruptions related to both as well as the record inflation, lower demand and significantly higher interest rates currently being experienced in the United States along with the probability of an economic recession both in the United States and globally. The eventual magnitude of these circumstances and their effect on the worldwide economy are extremely uncertain at this time. As a result, our revenues, results of operations and liquidity may be negatively impacted in future periods.
Contractual Obligations
As of March 31, 2023, there were no material changes in our contractual obligations from those disclosed in our Annual Report on Form 10-K filed with the SEC on March 31, 2023, as amended on April 28, 2023, other than those appearing in the notes to the financial statements appearing elsewhere in this Quarterly Report on Form 10-Q.
Recently Adopted Accounting Pronouncements
As of March 31, 2023, 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
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments – Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments. The amendments in this Update affect loans, debt securities, trade receivables, and any other financial assets that have the contractual right to receive cash. The ASU requires an entity to recognize expected credit losses rather than incurred losses for financial assets. For public entities, the amendments are effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. ASU No. 2019-10 extends the effective dates for two years for smaller reporting companies and nonpublic companies.
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In August 2020, the FASB issued ASU No. 2020-06, Debt – Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging – Contracts in Entity’s Own Equity (Subtopic 815-40), Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity. The amendments in this Update affect entities that issue convertible instruments and/or contracts in an entity’s own equity. For convertible instruments, the instruments primarily affected are those issued with beneficial conversion features or cash conversion features because the accounting models for those specific features are removed. However, all entities that issue convertible instruments are affected by the amendments to the disclosure requirements in this Update. For contracts in an entity’s own equity, the contracts primarily affected are freestanding instruments and embedded features that are accounted for as derivatives under the current guidance because of failure to meet the settlement conditions of the derivatives scope exception related to certain requirements of the settlement assessment. The Board simplified the settlement assessment by removing the requirements (1) to consider whether the contract would be settled in registered shares, (2) to consider whether collateral is required to be posted, and (3) to assess shareholder rights. Those amendments also affect the assessment of whether an embedded conversion feature in a convertible instrument qualifies for the derivatives scope exception. Additionally, the amendments in this Update affect the diluted EPS calculation for instruments that may be settled in cash or shares and for convertible instruments. The amendments in this Update are effective for public business entities that meet the definition of a Securities and Exchange Commission (SEC) filer, excluding entities eligible to be smaller reporting companies as defined by the SEC, for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years. For all other entities, the amendments are effective for fiscal years beginning after December 15, 2023, including interim periods within those fiscal years. Early adoption is permitted, but no earlier than fiscal years beginning after December 15, 2020, including interim periods within those fiscal years. The Board specified that an entity should adopt the guidance as of the beginning of its annual fiscal year. The Board decided to allow entities to adopt the guidance through either a modified retrospective method of transition or a fully retrospective method of transition.
Off-Balance Sheet Arrangements
Our Company does not have any off-balance sheet arrangements.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Not Applicable
Item 4. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures. Our Company’s management, with the participation of our Company’s Principal Executive Officer and Principal Financial Officer, evaluated the effectiveness of our Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) as of March 31, 2023. Based on this evaluation, our Company’s Principal Executive Officer and Principal Financial Officer concluded that, as of March 31, 2023, our Company’s disclosure controls and procedures were effective, in that they provide reasonable assurance that information required to be disclosed by our Company in the reports that it files or submits under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and is accumulated and communicated to our Company’s management, including our Company’s Principal Executive Officer and Principal Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
Changes in Internal Control Over Financial Reporting. There were no changes in our internal control over financial reporting during the quarter ended March 31, 2023 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
None
Item 1A. Risk Factors.
Not applicable
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
None
Item 3. Defaults Upon Senior Securities.
None
Item 4. Mine Safety Disclosures.
Not applicable
Item 5. Other Information.
None
Item 6. Exhibits.
(a) Exhibits
The following exhibits are included herein:
| Exhibit Number | Description | Location | ||
| 31.1 | Certification of Chief Executive Officer required by Rule 13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | Filed herewith | ||
| 31.2 | Certification of Chief Financial Officer required by Rule 13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | Filed herewith | ||
| 32.1 | Certifications of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | Furnished herewith | ||
| 101.INS | Inline XBRL Instance Document–the instance document does not appear in the Interactive Data File as its XBRL tags are embedded within the Inline XBRL document | Filed herewith | ||
| 101.SCH | Inline XBRL Taxonomy Extension Schema | Filed herewith | ||
| 101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase | Filed herewith | ||
| 101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase | Filed herewith | ||
| 101.LAB | Inline XBRL Taxonomy Extension Label Linkbase | Filed herewith | ||
| 101.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase | Filed herewith | ||
| 104 | Cover page formatted as Inline XBRL and contained in Exhibit 101 | Filed herewith |
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SIGNATURES
Pursuant to the requirements 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.
| NOCOPI TECHNOLOGIES, INC. | ||
| DATE: May 15, 2023 | /s/ Michael A. Feinstein, M.D. | |
| Michael A. Feinstein, M.D. | ||
| Chairman of the Board, President & Chief Executive Officer | ||
| DATE: May 15, 2023 | /s/ Rudolph A. Lutterschmidt | |
| Rudolph A. Lutterschmidt | ||
| Vice President & Chief Financial Officer |
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EXHIBIT INDEX
| Exhibit Number | Description | Location | ||
| 31.1 | Certification of Chief Executive Officer required by Rule 13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | Filed herewith | ||
| 31.2 | Certification of Chief Financial Officer required by Rule 13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | Filed herewith | ||
| 32.1 | Certifications of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | Furnished herewith | ||
| 101.INS | Inline XBRL Instance Document–the instance document does not appear in the Interactive Data File as its XBRL tags are embedded within the Inline XBRL document | Filed herewith | ||
| 101.SCH | Inline XBRL Taxonomy Extension Schema | Filed herewith | ||
| 101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase | Filed herewith | ||
| 101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase | Filed herewith | ||
| 101.LAB | Inline XBRL Taxonomy Extension Label Linkbase | Filed herewith | ||
| 101.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase | Filed herewith | ||
| 104 | Cover page formatted as Inline XBRL and contained in Exhibit 101 | Filed herewith |
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