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)
Maryland | 87-0406496 |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
480 Shoemaker Road, Suite 104, King of Prussia, PA 19406
(Address of principal executive offices) (Zip Code)
(610) 834-9600
(Registrants telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None.
Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
|
|
|
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No ¨
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes þ No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of large accelerated filer, accelerated filer, smaller reporting company, and emerging growth company in Rule 12b-2 of the Exchange Act.
Large accelerated filer ¨ | Accelerated filer ¨ |
Non-accelerated filer þ | Smaller reporting company þ |
| Emerging growth company ¨ |
If an emerging growth company, indicate by checkmark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Securities Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No þ
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
| PAGE |
Part I. FINANCIAL INFORMATION |
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Financial Statements | 1 |
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1 | |
2 | |
Statements of Cash Flows for Nine Months Ended September 30, 2020 and September 30, 2019 | 3 |
4 | |
5 | |
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Managements Discussion and Analysis of Financial Condition and Results of Operations | 9 |
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Controls and Procedures | 14 |
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Part II. OTHER INFORMATION |
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Risk Factors | 15 |
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Unregistered Sales of Equity Securities and Use of Proceeds | 15 |
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Other Information | 15 |
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Exhibits | 16 |
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17 | |
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18 |
PART I FINANCIAL INFORMATION
Statements of Operations*
(unaudited)
|
| Three Months ended |
|
| Nine Months ended |
| ||||||||||
|
| 2020 |
|
| 2019 |
|
| 2020 |
|
| 2019 |
| ||||
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|
|
|
|
|
|
|
|
|
|
|
| ||||
Revenues |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Licenses, royalties and fees |
| $ | 153,300 |
|
| $ | 189,400 |
|
| $ | 425,000 |
|
| $ | 571,900 |
|
Product and other sales |
|
| 601,500 |
|
|
| 448,100 |
|
|
| 1,477,400 |
|
|
| 991,100 |
|
|
|
| 754,800 |
|
|
| 637,500 |
|
|
| 1,902,400 |
|
|
| 1,563,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Licenses, royalties and fees |
|
| 61,900 |
|
|
| 41,400 |
|
|
| 170,200 |
|
|
| 98,200 |
|
Product and other sales |
|
| 267,400 |
|
|
| 166,600 |
|
|
| 716,200 |
|
|
| 380,300 |
|
|
|
| 329,300 |
|
|
| 208,000 |
|
|
| 886,400 |
|
|
| 478,500 |
|
Gross profit |
|
| 425,500 |
|
|
| 429,500 |
|
|
| 1,016,000 |
|
|
| 1,084,500 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development |
|
| 40,700 |
|
|
| 45,200 |
|
|
| 123,700 |
|
|
| 122,600 |
|
Sales and marketing |
|
| 90,900 |
|
|
| 81,000 |
|
|
| 260,900 |
|
|
| 224,200 |
|
General and administrative |
|
| 123,800 |
|
|
| 84,200 |
|
|
| 383,500 |
|
|
| 265,200 |
|
|
|
| 255,400 |
|
|
| 210,400 |
|
|
| 768,100 |
|
|
| 612,000 |
|
Net income from operations |
|
| 170,100 |
|
|
| 219,100 |
|
|
| 247,900 |
|
|
| 472,500 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expenses) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income |
|
| 4,200 |
|
|
| 4,600 |
|
|
| 12,300 |
|
|
| 7,200 |
|
Interest expense and bank charges |
|
| (1,300 | ) |
|
| (2,600 | ) |
|
| (5,900 | ) |
|
| (8,000 | ) |
|
|
| 2,900 |
|
|
| 2,000 |
|
|
| 6,400 |
|
|
| (800 | ) |
Net income before income taxes |
|
| 173,000 |
|
|
| 221,100 |
|
|
| 254,300 |
|
|
| 471,700 |
|
Income taxes |
|
| 9,900 |
|
|
| 14,300 |
|
|
| (32,200 | ) |
|
| 30,600 |
|
Net income |
| $ | 163,100 |
|
| $ | 206,800 |
|
| $ | 286,500 |
|
| $ | 441,100 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted net income per common share |
| $ | .00 |
|
| $ | .00 |
|
| $ | .00 |
|
| $ | .01 |
|
|
|
|
|
|
|
|
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|
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Weighted average common shares outstanding |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
| 66,768,023 |
|
|
| 59,614,698 |
|
|
| 62,952,473 |
|
|
| 58,949,377 |
|
Diluted |
|
| 66,893,250 |
|
|
| 59,990,371 |
|
|
| 63,069,652 |
|
|
| 59,322,141 |
|
*See accompanying notes to these financial statements.
1
Balance Sheets*
|
| September 30, |
|
| December 31, |
| ||
|
| 2020 |
|
| 2019 |
| ||
|
| (unaudited) |
|
| (audited) |
| ||
Assets |
| |||||||
Current assets |
|
|
|
|
|
| ||
Cash |
| $ | 1,428,900 |
|
| $ | 688,000 |
|
Accounts receivable less $5,000 allowance for doubtful accounts |
|
| 1,023,000 |
|
|
| 1,352,300 |
|
Inventory |
|
| 286,600 |
|
|
| 127,900 |
|
Prepaid and other |
|
| 21,200 |
|
|
| 135,000 |
|
Total current assets |
|
| 2,759,700 |
|
|
| 2,303,200 |
|
|
|
|
|
|
|
|
|
|
Fixed assets |
|
|
|
|
|
|
|
|
Leasehold improvements |
|
| 27,800 |
|
|
| 24,200 |
|
Furniture, fixtures and equipment |
|
| 163,700 |
|
|
| 252,500 |
|
|
|
| 191,500 |
|
|
| 276,700 |
|
Less: accumulated depreciation and amortization |
|
| 98,100 |
|
|
| 206,600 |
|
|
|
| 93,400 |
|
|
| 70,100 |
|
Other assets |
|
|
|
|
|
|
|
|
Long-term receivables |
|
| 671,100 |
|
|
| 957,000 |
|
Operating lease right of use - building |
|
| 171,000 |
|
|
| 202,000 |
|
|
|
| 842,100 |
|
|
| 1,159,000 |
|
Total assets |
| $ | 3,695,200 |
|
| $ | 3,532,300 |
|
|
| |||||||
Liabilities and Stockholders' Equity |
| |||||||
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Current liabilities |
|
|
|
|
|
|
|
|
Convertible debentures |
| $ | |
|
| $ | 97,900 |
|
Accounts payable |
|
| 58,300 |
|
|
| 44,300 |
|
Accrued expenses |
|
| 165,500 |
|
|
| 231,600 |
|
Income taxes |
|
| 22,200 |
|
|
| 52,400 |
|
Operating lease liability, current |
|
| 43,800 |
|
|
| 41,700 |
|
Total current liabilities |
|
| 289,800 |
|
|
| 467,900 |
|
|
|
|
|
|
|
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Other liabilities |
|
|
|
|
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|
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|
Accrued expenses, non-current |
|
| 47,000 |
|
|
| 67,000 |
|
Deferred income taxes |
|
| |
|
|
| 47,400 |
|
Operating lease liability, non-current |
|
| 127,200 |
|
|
| 160,300 |
|
|
|
| 174,200 |
|
|
| 274,700 |
|
|
|
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Stockholders' equity |
|
|
|
|
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Common stock, $0.01 par value |
|
|
|
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Authorized 75,000,000 shares |
|
|
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|
|
|
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Issued and outstanding |
|
|
|
|
|
|
|
|
2020 67,353,690 shares; 2019 61,044,698 shares |
|
| 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 |
|
*See accompanying notes to these financial statements.
2
Statements of Cash Flows*
(unaudited)
|
| Nine Months ended |
| |||||
|
| 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 |
|
|
|
|
|
|
|
|
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
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 banks 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 Companys 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 Companys common stock.
The following table summarizes our Companys 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 Companys 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 Companys 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 Companys revenues, expressed as a percentage of total revenues, from non-affiliated customers that equaled 10% or more of our Companys 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 Companys non-affiliate customers whose individual balances amounted to more than 10% of our Companys 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 Companys business operations and financial condition.
Our Companys 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. Managements 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:
| · | 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. |
| · | The extent to which we are successful in gaining new long-term relationships with customers or retaining significant existing customers and the level of service failures that could lead customers to use competitors' services. |
| · | Our ability to improve our current credit rating with our vendors and the impact on our raw materials and other costs and competitive position of doing so. |
| · | The impact of losing our intellectual property protections or the loss in value of our intellectual property. |
| · | Changes in customer demand. |
| · | The adequacy of our cash flow and earnings and other conditions which may affect our ability to timely service our debt obligations. |
| · | 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. |
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 Companys 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 Companys products caused by shortages of these ingredients as a result of the COVID-19 pandemic along with a mix of our Companys 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 Companys 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 licensees 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 Companys 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 Companys total revenue, revenue mix and overall financial performance. Such changes may result from a substantial customers 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 Companys licensees in both the entertainment and security markets. We cannot assure you that the marketing and product development activities of our Companys 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 Companys major licensees in the entertainment and toy products market offset in part by lower ink shipments to our Companys 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 Companys 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 Companys major licensees in the entertainment and toy products market offset in part by lower ink shipments to our Companys 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 Companys 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 Companys 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 Companys 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 Companys 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 Companys revenues increased approximately 22% primarily as a result of higher sales of ink to the authorized printers of our Companys 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 Companys total overhead expenses increased in the first nine months of 2020 compared to the first nine months of 2019 and our Companys 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 banks 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 Companys 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 Companys 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 Companys 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 Companys management, with the participation of our Companys Principal Executive Officer and Principal Financial Officer, evaluated the effectiveness of our Companys 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 Companys Principal Executive Officer and Principal Financial Officer concluded that, as of September 30, 2020, our Companys 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 Commissions rules and forms, and is accumulated and communicated to our Companys management, including our Companys 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
The following risk factors supplement the Risk Factors described in the Companys 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 Companys 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 Companys products caused by shortages of these ingredients as a result of the COVID-19 pandemic along with a mix of our Companys 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
Date |
| Security/Value |
July 2020 |
| 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. |
July 2020 |
| Common Stock 550,000 shares of common stock at $0.02 per share pursuant to warrant exercises for total proceeds of $11,000. |
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.
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 Companys 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 Companys common stock at an exercise price of $0.02 per share. Our Company received $11,000 upon the exercise of these warrants.
The following exhibits are included herein:
Exhibit No. |
| Description of Exhibit |
| Location |
10.1 |
| Form of Convertible Debenture Purchase Agreement and Exhibits |
| Incorporated by reference to the Companys Annual Report on Form 10-K filed on September 11, 2015 |
10.2 |
| Form of Letter Agreement re: Convertible Debenture Purchase Agreement Election |
| Incorporated by reference to the Companys Quarterly Report on Form 10-Q filed on November 13, 2019 |
31.1 |
|
| Filed herewith | |
31.2 |
|
| Filed herewith | |
32.1 |
|
| Filed herewith | |
101.INS |
| XBRL Instance Document |
| Filed herewith |
101.SCH |
| XBRL Taxonomy Extension Schema |
| Filed herewith |
101.CAL |
| XBRL Taxonomy Extension Calculation Linkbase |
| Filed herewith |
101.DEF |
| XBRL Taxonomy Extension Definition Linkbase |
| Filed herewith |
101.LAB |
| XBRL Taxonomy Extension Label Linkbase |
| Filed herewith |
101.PRE |
| XBRL Taxonomy Extension Presentation Linkbase |
| Filed herewith |
16
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.
|
| NOCOPI TECHNOLOGIES, INC. |
|
|
|
DATE: November 13, 2020 |
| /s/ Michael A. Feinstein, M.D. |
|
| Michael A. Feinstein, M.D. |
|
| Chairman of the Board, President & Chief Executive Officer |
|
|
|
DATE: November 13, 2020 |
| /s/ Rudolph A. Lutterschmidt |
|
| Rudolph A. Lutterschmidt |
|
| Vice President & Chief Financial Officer |
17
Exhibit No. |
| Description of Exhibit |
| Location |
10.1 |
| Form of Convertible Debenture Purchase Agreement and Exhibits |
| Incorporated by reference to the Companys Annual Report on Form 10-K filed on September 11, 2015 |
10.2 |
| Form of Letter Agreement re: Convertible Debenture Purchase Agreement Election |
| Incorporated by reference to the Companys Quarterly Report on Form 10-Q filed on November 13, 2019 |
31.1 |
|
| Filed herewith | |
31.2 |
|
| Filed herewith | |
32.1 |
|
| Filed herewith | |
101.INS |
| XBRL Instance Document |
| Filed herewith |
101.SCH |
| XBRL Taxonomy Extension Schema |
| Filed herewith |
101.CAL |
| XBRL Taxonomy Extension Calculation Linkbase |
| Filed herewith |
101.DEF |
| XBRL Taxonomy Extension Definition Linkbase |
| Filed herewith |
101.LAB |
| XBRL Taxonomy Extension Label Linkbase |
| Filed herewith |
101.PRE |
| XBRL Taxonomy Extension Presentation Linkbase |
| Filed herewith |
18
EXHIBIT 31.1
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
I, Michael A. Feinstein, M.D., Chief Executive Officer of Nocopi Technologies, Inc., certify that:
1.
I have reviewed this quarterly report on Form 10-Q of Nocopi Technologies, Inc.;
2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.
The registrants other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b)
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c)
Evaluated the effectiveness of the registrants disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d)
Disclosed in this report any change in the registrants internal control over financial reporting that occurred during the registrants most recent fiscal quarter (registrants fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrants internal control over financial reporting; and
5.
The registrants other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrants auditors and the audit committee of registrants board of directors (or persons performing the equivalent functions):
(a)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrants ability to record, process, summarize and report financial information; and
(b)
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal control over financial reporting.
Date: November 13, 2020
/s/ Michael A. Feinstein, M.D.
Michael A. Feinstein, M.D.
Chief Executive Officer
EXHIBIT 31.2
CERTIFICATION OF CHIEF FINANCIAL OFFICER
I, Rudolph A. Lutterschmidt, Vice President and Chief Financial Officer of Nocopi Technologies, Inc., certify that:
1.
I have reviewed this quarterly report on Form 10-Q of Nocopi Technologies, Inc.;
2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.
The registrants other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b)
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c)
Evaluated the effectiveness of the registrants disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d)
Disclosed in this report any change in the registrants internal control over financial reporting that occurred during the registrants most recent fiscal quarter (registrants fourth fiscal quarter in the case of annual report) that has materially affected, or is reasonably likely to materially affect, the registrants internal control over financial reporting; and
5.
The registrants other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrants auditors and the audit committee of registrants board of directors (or persons performing the equivalent functions):
(a)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrants ability to record, process, summarize and report financial information; and
(b)
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal control over financial reporting.
Date: November 13, 2020
/s/ Rudolph A. Lutterschmidt
Rudolph A. Lutterschmidt
Vice President and Chief Financial Officer
EXHIBIT 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Nocopi Technologies, Inc. (the "Company") on Form 10-Q for the Quarter ended September 30, 2020 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), the undersigned, Michael A. Feinstein, M.D., Chief Executive Officer, and Rudolph A. Lutterschmidt, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that;
(1) The Report fully complies with the requirements of Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.
November 13, 2020
/s/ Michael A. Feinstein, M.D.
Michael A. Feinstein, M.D.
Principal Executive Officer
/s/ Rudolph A. Lutterschmidt
Rudolph A. Lutterschmidt
Principal Financial Officer
Document and Entity Information - shares |
9 Months Ended | |
---|---|---|
Sep. 30, 2020 |
Nov. 09, 2020 |
|
Document And Entity Information | ||
Entity Registrant Name | NOCOPI TECHNOLOGIES INC/MD/ | |
Entity Central Index Key | 0000888981 | |
Document Type | 10-Q | |
Document Period End Date | Sep. 30, 2020 | |
Amendment Flag | false | |
Current Fiscal Year End Date | --12-31 | |
Entity Filer Category | Non-accelerated Filer | |
Entity Small Business | true | |
Entity Emerging Growth Company | false | |
Entity Shell Company | false | |
Entity Common Stock, Shares Outstanding | 67,353,690 | |
Document Fiscal Period Focus | Q3 | |
Document Fiscal Year Focus | 2020 | |
Entity Current Reporting Status | Yes | |
Entity Interactive Data Current | Yes | |
Entity Incorporation State Country Name | MD | |
Entity File Number | 000-20333 |
Statements of Operations - USD ($) |
3 Months Ended | 9 Months Ended | ||
---|---|---|---|---|
Sep. 30, 2020 |
Sep. 30, 2019 |
Sep. 30, 2020 |
Sep. 30, 2019 |
|
Revenues | ||||
Licenses, royalties and fees | $ 153,300 | $ 189,400 | $ 425,000 | $ 571,900 |
Product and other sales | 601,500 | 448,100 | 1,477,400 | 991,100 |
Total revenues | 754,800 | 637,500 | 1,902,400 | 1,563,000 |
Cost of revenues | ||||
Licenses, royalties and fees | 61,900 | 41,400 | 170,200 | 98,200 |
Product and other sales | 267,400 | 166,600 | 716,200 | 380,300 |
Total cost of revenues | 329,300 | 208,000 | 886,400 | 478,500 |
Gross profit | 425,500 | 429,500 | 1,016,000 | 1,084,500 |
Operating expenses | ||||
Research and development | 40,700 | 45,200 | 123,700 | 122,600 |
Sales and marketing | 90,900 | 81,000 | 260,900 | 224,200 |
General and administrative | 123,800 | 84,200 | 383,500 | 265,200 |
Total operating expenses | 255,400 | 210,400 | 768,100 | 612,000 |
Net income from operations | 170,100 | 219,100 | 247,900 | 472,500 |
Other income (expenses) | ||||
Interest income | 4,200 | 4,600 | 12,300 | 7,200 |
Interest expense and bank charges | (1,300) | (2,600) | (5,900) | (8,000) |
Total other income (expenses) | 2,900 | 2,000 | 6,400 | (800) |
Net income before income taxes | 173,000 | 221,100 | 254,300 | 471,700 |
Income taxes | 9,900 | 14,300 | (32,200) | 30,600 |
Net income | $ 163,100 | $ 206,800 | $ 286,500 | $ 441,100 |
Basic and diluted net income per common share | $ 0.00 | $ 0.00 | $ 0.00 | $ 0.01 |
Weighted average common shares outstanding | ||||
Basic | 66,768,023 | 59,614,698 | 62,952,473 | 58,949,377 |
Diluted | 66,893,250 | 59,990,371 | 63,069,652 | 59,322,141 |
Balance Sheets (Parenthetical) - USD ($) |
Sep. 30, 2020 |
Dec. 31, 2019 |
---|---|---|
Statement of Financial Position [Abstract] | ||
Allowance for doubtful accounts | $ 5,000 | $ 5,000 |
Common stock, par value | $ 0.01 | $ 0.01 |
Common stock, shares authorized | 75,000,000 | 75,000,000 |
Common stock, shares issued | 67,353,690 | 61,044,698 |
Common stock, shares outstanding | 67,353,690 | 61,044,698 |
Statements of Stockholders' Equity - USD ($) |
Common Stock [Member] |
Paid-In Capital [Member] |
Accumulated Deficit [Member] |
Total |
---|---|---|---|---|
Balance at Dec. 31, 2018 | $ 586,200 | $ 12,440,000 | $ (11,059,500) | $ 1,966,700 |
Balance shares at Dec. 31, 2018 | 58,616,716 | 58,616,716 | ||
Net income | 85,400 | $ 85,400 | ||
Balance at Mar. 31, 2019 | $ 586,200 | 12,440,000 | (10,974,100) | 2,052,100 |
Balance shares at Mar. 31, 2019 | 58,616,716 | |||
Balance at Dec. 31, 2018 | $ 586,200 | 12,440,000 | (11,059,500) | $ 1,966,700 |
Balance shares at Dec. 31, 2018 | 58,616,716 | 58,616,716 | ||
Net income | $ 441,100 | |||
Balance at Sep. 30, 2019 | $ 603,300 | 12,465,600 | (10,618,400) | 2,450,500 |
Balance shares at Sep. 30, 2019 | 60,324,698 | |||
Balance at Mar. 31, 2019 | $ 586,200 | 12,440,000 | (10,974,100) | 2,052,100 |
Balance shares at Mar. 31, 2019 | 58,616,716 | |||
Net income | 148,900 | 148,900 | ||
Balance at Jun. 30, 2019 | $ 586,200 | 12,440,000 | (10,825,200) | 2,201,000 |
Balance shares at Jun. 30, 2019 | 58,616,716 | |||
Conversion of debentures and interest | $ 17,100 | 25,600 | 42,700 | |
Conversion of debentures and interest Shares | 1,707,982 | |||
Net income | 206,800 | 206,800 | ||
Balance at Sep. 30, 2019 | $ 603,300 | 12,465,600 | (10,618,400) | 2,450,500 |
Balance shares at Sep. 30, 2019 | 60,324,698 | |||
Balance at Dec. 31, 2019 | $ 610,400 | 12,483,900 | (10,304,600) | $ 2,789,700 |
Balance shares at Dec. 31, 2019 | 61,044,698 | 61,044,698 | ||
Net income | 52,600 | $ 52,600 | ||
Balance at Mar. 31, 2020 | $ 610,400 | 12,483,900 | (10,252,000) | 2,842,300 |
Balance shares at Mar. 31, 2020 | 61,044,698 | |||
Balance at Dec. 31, 2019 | $ 610,400 | 12,483,900 | (10,304,600) | $ 2,789,700 |
Balance shares at Dec. 31, 2019 | 61,044,698 | 61,044,698 | ||
Net income | $ 286,500 | |||
Balance at Sep. 30, 2020 | $ 673,500 | 12,575,800 | (10,018,100) | $ 3,231,200 |
Balance shares at Sep. 30, 2020 | 67,353,690 | 67,353,690 | ||
Balance at Mar. 31, 2020 | $ 610,400 | 12,483,900 | (10,252,000) | $ 2,842,300 |
Balance shares at Mar. 31, 2020 | 61,044,698 | |||
Net income | 70,800 | 70,800 | ||
Balance at Jun. 30, 2020 | $ 610,400 | 12,483,900 | (10,181,200) | 2,913,100 |
Balance shares at Jun. 30, 2020 | 61,044,698 | |||
Conversion of debentures and interest | $ 57,600 | 86,400 | 144,000 | |
Conversion of debentures and interest Shares | 5,758,992 | |||
Exercise of warrants | $ 5,500 | 5,500 | 11,000 | |
Exercise of warrants Shares | 550,000 | |||
Net income | 163,100 | 163,100 | ||
Balance at Sep. 30, 2020 | $ 673,500 | $ 12,575,800 | $ (10,018,100) | $ 3,231,200 |
Balance shares at Sep. 30, 2020 | 67,353,690 | 67,353,690 |
Financial Statements |
9 Months Ended |
---|---|
Sep. 30, 2020 | |
Organization, Consolidation and Presentation of Financial Statements [Abstract] | |
Financial Statements | 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. |
Stock Based Compensation |
9 Months Ended |
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Sep. 30, 2020 | |
Share-based Payment Arrangement [Abstract] | |
Stock Based Compensation | 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. |
Line of Credit |
9 Months Ended |
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Sep. 30, 2020 | |
Line of Credit Facility [Abstract] | |
Line of Credit |
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 banks 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. |
Convertible Debentures |
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Convertible Debt [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Convertible Debentures |
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. Our Company also granted warrants in earlier periods to purchase 691,365 shares of our Companys 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 Companys common stock. The following table summarizes our Companys warrant position at September 30, 2020 and December 31, 2019:
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 Companys common stock on September 30, 2020. |
Other Income (Expenses) |
9 Months Ended |
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Sep. 30, 2020 | |
Other Income and Expenses [Abstract] | |
Other Income (Expenses) | 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. |
Income Taxes |
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Income Tax Disclosure [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Income Taxes | Note 6. Income Taxes There is no provision for federal income taxes for the three and nine months ended September 30, 2020 and September 30, 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 Companys 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:
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. |
Earnings per Share |
9 Months Ended |
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Sep. 30, 2020 | |
Weighted average common shares outstanding | |
Earnings per Share | 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. |
Major Customer and Geographic Information |
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Major Customer and Geographic Information [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Major Customer and Geographic Information | Note 8. Major Customer and Geographic Information Our Companys revenues, expressed as a percentage of total revenues, from non-affiliated customers that equaled 10% or more of our Companys total revenues were:
Our Companys non-affiliate customers whose individual balances amounted to more than 10% of our Companys net accounts receivable, expressed as a percentage of net accounts receivable, were:
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 Companys business operations and financial condition. Our Companys revenues by geographic region are as follows:
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Leases |
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Lessee Disclosure [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Leases | 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:
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Convertible Debentures (Tables) |
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Convertible Debt [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Warrants Position |
The following table summarizes our Companys warrant position at September 30, 2020 and December 31, 2019:
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Income Taxes (Tables) |
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Income Tax Disclosure [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Components for State Income Tax Expense | The components for state income tax expense resulting from the limitation on the use of net operating losses are:
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Major Customer and Geographic Information (Tables) |
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Segment Reporting [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Company's Revenues As Percentage Of Revenue |
Our Companys revenues, expressed as a percentage of total revenues, from non-affiliated customers that equaled 10% or more of our Companys total revenues were:
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Schedule of Non-affiliated Customers with Accounts Receivable More Than 10% | Our Companys non-affiliate customers whose individual balances amounted to more than 10% of our Companys net accounts receivable, expressed as a percentage of net accounts receivable, were:
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Company's Revenue by Geographic Region | Our Companys revenues by geographic region are as follows:
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Leases (Tables) |
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Sep. 30, 2020 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Lessee Disclosure [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Maturities of Lease Liabilities |
Maturities of lease liabilities are as follows:
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Stock Based Compensation (Details) |
Sep. 30, 2020
USD ($)
|
---|---|
Share-based Payment Arrangement [Abstract] | |
Unrecognized portion of expense related to stock option grants | $ 0 |
Line of Credit (Details) |
9 Months Ended |
---|---|
Sep. 30, 2020
USD ($)
| |
Line of Credit Facility [Abstract] | |
Line of credit | $ 150,000 |
Interest rate | 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. |
Convertible Debentures (Narrative) (Details) - USD ($) |
3 Months Ended | 9 Months Ended | |
---|---|---|---|
Sep. 30, 2020 |
Sep. 30, 2019 |
Sep. 30, 2020 |
|
Debt Instrument [Line Items] | |||
Amount converted | $ 97,900 | $ 30,400 | |
Shares issued | 5,758,992 | 1,707,982 | |
Accrued interest converted | $ 46,100 | $ 12,300 | |
Common stock that can be purchased 2013 and 2014 warrants | 691,365 | 691,365 | |
Price per share of warrants | $ 0.02 | $ 0.02 | |
Warrants exercisable term | 2 years | ||
Warrants expiration | 7 years | ||
Warrants exercised | 550,000 | ||
Common stock issued warrants exercised | 550,000 | ||
Convertible Debt [Member] | |||
Debt Instrument [Line Items] | |||
Convertible debt which are due during the third quarter of 2020 | $ 97,900 | $ 97,900 | |
Interest rate | 7.00% | 7.00% |
Convertible Debentures (Warrants Activity) (Details) - USD ($) |
9 Months Ended | |
---|---|---|
Sep. 30, 2020 |
Dec. 31, 2019 |
|
Warrants | ||
Exercise price | $ 0.02 | |
Warrant [Member] | ||
Warrants | ||
Outstanding warrants - | 141,365 | 691,365 |
Exercise price | $ 0.02 | $ 0.02 |
Weighted average exercise price | $ 0.02 | $ 0.02 |
Weighted average remaining contractual life (years) | 9 months 7 days | |
Exercisable | 141,365 | |
Exercisable weighted average exercise price | $ 0.02 | |
Intrinsic value | $ 22,300 | |
Intrinsic value exercisable | $ 22,300 | |
Stock price | $ 0.1775 |
Income Taxes (Details) |
9 Months Ended |
---|---|
Sep. 30, 2020
USD ($)
| |
Income Tax Contingency [Line Items] | |
Reversal accrued income taxes | $ 47,400 |
Unrecognized tax benefits | |
Uncertain tax positions | |
Minimum [Member] | |
Income Tax Contingency [Line Items] | |
Tax years open for examination | 2017 |
Maximum [Member] | |
Income Tax Contingency [Line Items] | |
Tax years open for examination | 2019 |
Income Taxes (Components for State Income Tax Expense) (Details) - USD ($) |
3 Months Ended | 9 Months Ended | ||
---|---|---|---|---|
Sep. 30, 2020 |
Sep. 30, 2019 |
Sep. 30, 2020 |
Sep. 30, 2019 |
|
Income Tax Disclosure [Abstract] | ||||
Current state taxes | $ 9,900 | $ 21,100 | $ 15,200 | $ 91,800 |
Deferred state taxes | (6,800) | (47,400) | (61,200) | |
Income tax expense (benefit) | $ 9,900 | $ 14,300 | $ (32,200) | $ 30,600 |
Earnings per Share (Details) - shares |
3 Months Ended | 9 Months Ended | ||
---|---|---|---|---|
Sep. 30, 2020 |
Sep. 30, 2019 |
Sep. 30, 2020 |
Sep. 30, 2019 |
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Weighted average common shares outstanding | ||||
Number of incremental common shares resulting from the assumed conversion of warrants | 125,227 | 375,673 | 117,179 | 372,764 |
Major Customer and Geographic Information (Schedule of Revenues from Non-affiliated Customers) (Details) - Revenue [Member] |
3 Months Ended | 9 Months Ended | ||
---|---|---|---|---|
Sep. 30, 2020 |
Sep. 30, 2019 |
Sep. 30, 2020 |
Sep. 30, 2019 |
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Customer A [Member] | ||||
Revenue, Major Customer [Line Items] | ||||
Risk percentage | 74.00% | 65.00% | 65.00% | 47.00% |
Customer B [Member] | ||||
Revenue, Major Customer [Line Items] | ||||
Risk percentage | 3.00% | 10.00% | 6.00% | |
Customer C [Member] | ||||
Revenue, Major Customer [Line Items] | ||||
Risk percentage | 10.00% | 14.00% | 12.00% | 21.00% |
Major Customer and Geographic Information (Schedule of Non-affiliated Customers with Accounts Receivable) (Details) - Accounts Receivable [Member] |
9 Months Ended | 12 Months Ended |
---|---|---|
Sep. 30, 2020 |
Dec. 31, 2019 |
|
Customer A [Member] | ||
Concentration Risk [Line Items] | ||
Risk percentage | 28.00% | 26.00% |
Customer C [Member] | ||
Concentration Risk [Line Items] | ||
Risk percentage | 66.00% | 67.00% |
Major Customer and Geographic Information (Schedule of Revenue by Geographic Region) (Details) - USD ($) |
3 Months Ended | 9 Months Ended | ||
---|---|---|---|---|
Sep. 30, 2020 |
Sep. 30, 2019 |
Sep. 30, 2020 |
Sep. 30, 2019 |
|
Revenues from External Customers and Long-Lived Assets [Line Items] | ||||
Revenues | $ 754,800 | $ 637,500 | $ 1,902,400 | $ 1,563,000 |
North America [Member] | ||||
Revenues from External Customers and Long-Lived Assets [Line Items] | ||||
Revenues | 155,700 | 190,600 | 446,100 | 633,000 |
South America [Member] | ||||
Revenues from External Customers and Long-Lived Assets [Line Items] | ||||
Revenues | 700 | 2,100 | ||
Europe [Member] | ||||
Revenues from External Customers and Long-Lived Assets [Line Items] | ||||
Revenues | 100 | |||
Asia [Member] | ||||
Revenues from External Customers and Long-Lived Assets [Line Items] | ||||
Revenues | 583,400 | 418,300 | 1,424,000 | 901,300 |
Australia [Member] | ||||
Revenues from External Customers and Long-Lived Assets [Line Items] | ||||
Revenues | $ 15,000 | $ 28,600 | $ 30,200 | $ 28,600 |
Leases (Narrative) (Details) - USD ($) |
3 Months Ended | 9 Months Ended | ||||
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Sep. 30, 2020 |
Sep. 30, 2019 |
Sep. 30, 2020 |
Sep. 30, 2019 |
Dec. 31, 2019 |
Jan. 01, 2019 |
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Lessee Disclosure [Abstract] | ||||||
Lease expense | $ 13,300 | $ 13,300 | $ 40,000 | $ 40,000 | ||
Incremental borrowing rate | 6.50% | 6.50% | ||||
Operating lease right-of-use asset | $ 171,000 | $ 171,000 | $ 202,000 | $ 241,100 | ||
Operating lease liability | $ 171,000 | $ 171,000 | $ 241,100 |
Leases (Maturities of Lease Liabilities) (Details) - USD ($) |
Sep. 30, 2020 |
Jan. 01, 2019 |
---|---|---|
Lessee Disclosure [Abstract] | ||
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 | $ 241,100 |
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