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 SeptemberJune 30, 20172018
or
¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934.
For the transition period from _________________ to ______________
Commission File Number: 000-20333
NOCOPI TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
Maryland | 87-0406496 |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
480 Shoemaker Road, Suite 104, King of Prussia, PA 19406
(Address of principal executive offices) (Zip Code)
(610) 834-9600
(Registrant’s telephone number, including area code)
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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files). Yes þ No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ¨ | Accelerated filer ¨ |
Non-accelerated filer ¨ | Smaller reporting company þ |
(Do not check if a smaller reporting company) | Emerging growth company ¨ |
If an emerging growth company, indicate by checkmark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange 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.date: 58,616,716 shares of common stock, par value $0.01, as of November 1, 2017August 10, 2018.
NOCOPI TECHNOLOGIES, INC.
INDEX
| PAGE |
Part I. FINANCIAL INFORMATION |
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Financial Statements | 1 |
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1 | |
Balance Sheets at | 2 |
3 | |
4 | |
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Management’s Discussion and Analysis of Financial Condition and Results of Operations | 8 |
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Controls and Procedures |
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Part II. OTHER INFORMATION |
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Exhibits |
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PART I – FINANCIAL INFORMATION
Statements of Operations*
(unaudited)
|
| Three Months ended September 30 |
| Nine Months ended September 30 |
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| Three Months ended June 30 |
| Six Months ended June 30 |
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| 2017 |
| 2016 |
| 2017 |
| 2016 |
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| 2018 |
| 2017 |
| 2018 |
| 2017 |
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Revenues |
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Licenses, royalties and fees |
| $ | 178,200 |
| $ | 170,300 |
| $ | 468,900 |
| $ | 381,800 |
|
| $ | 1,655,600 |
| $ | 131,900 |
| $ | 1,830,500 |
| $ | 290,700 |
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Product and other sales |
|
| 224,200 |
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| 373,400 |
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| 634,500 |
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| 648,100 |
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| 218,100 |
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| 227,700 |
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| 468,600 |
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| 410,300 |
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| 402,400 |
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| 543,700 |
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| 1,103,400 |
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| 1,029,900 |
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| 1,873,700 |
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| 359,600 |
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| 2,299,100 |
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| 701,000 |
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Cost of revenues |
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Licenses, royalties and fees |
| 23,300 |
| 36,500 |
| 71,100 |
| 73,000 |
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| 24,200 |
| 26,800 |
| 49,200 |
| 47,800 |
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Product and other sales |
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| 82,300 |
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| 156,900 |
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| 248,600 |
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| 275,200 |
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| 93,400 |
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| 94,100 |
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| 185,600 |
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| 166,300 |
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| 105,600 |
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| 193,400 |
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| 319,700 |
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| 348,200 |
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| 117,600 |
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| 120,900 |
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| 234,800 |
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| 214,100 |
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Gross profit |
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| 296,800 |
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| 350,300 |
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| 783,700 |
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| 681,700 |
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| 1,756,100 |
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| 238,700 |
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| 2,064,300 |
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| 486,900 |
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Operating expenses |
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Research and development |
| 36,300 |
| 33,700 |
| 109,200 |
| 103,700 |
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| 36,100 |
| 36,500 |
| 73,200 |
| 72,900 |
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Sales and marketing |
| 67,200 |
| 72,800 |
| 187,900 |
| 176,700 |
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| 168,500 |
| 59,800 |
| 238,600 |
| 120,700 |
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General and administrative |
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| 80,400 |
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| 69,900 |
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| 240,000 |
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| 224,200 |
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| 101,500 |
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| 68,900 |
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| 204,200 |
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| 159,600 |
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| 183,900 |
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| 176,400 |
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| 537,100 |
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| 504,600 |
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| 306,100 |
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| 165,200 |
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| 516,000 |
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| 353,200 |
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Net income from operations |
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| 112,900 |
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| 173,900 |
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| 246,600 |
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| 177,100 |
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| 1,450,000 |
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| 73,500 |
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| 1,548,300 |
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| 133,700 |
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Other income (expenses) |
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Interest income |
| 200 |
| – |
| 200 |
| – |
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| 300 |
| – |
| 700 |
| – |
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Interest expense, bank charges and accretion of interest |
|
| (3,300 | ) |
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| (3,300 | ) |
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| (22,600 | ) |
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| (10,100 | ) |
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| (2,800 | ) |
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| (3,100 | ) |
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| (5,700 | ) |
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| (19,300 | ) |
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| (3,100 | ) |
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| (3,300 | ) |
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| (22,400 | ) |
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| (10,100 | ) |
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| (2,500 | ) |
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| (3,100 | ) |
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| (5,000 | ) |
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| (19,300 | ) |
Net income |
| $ | 109,800 |
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| $ | 170,600 |
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| $ | 224,200 |
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| $ | 167,000 |
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| $ | 1,447,500 |
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| $ | 70,400 |
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| $ | 1,543,300 |
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| $ | 114,400 |
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Basic and diluted net income per common share |
| $ | .00 |
| $ | .00 |
| $ | .00 |
| $ | .00 |
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| $ | .02 |
| $ | .00 |
| $ | .03 |
| $ | .00 |
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Weighted average common shares outstanding |
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Basic |
| 58,599,016 |
| 58,599,016 |
| 58,599,016 |
| 58,599,016 |
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| 58,616,716 |
| 58,599,016 |
| 58,616,716 |
| 58,599,016 |
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Diluted |
| 58,896,464 |
| 58,599,655 |
| 58,891,635 |
| 58,600,384 |
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| 58,989,480 |
| 58,969,160 |
| 58,955,344 |
| 58,889,178 |
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*See accompanying notes to these financial statements.
Balance Sheets*
|
| September 30 |
| December 31 |
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| June 30 |
| December 31 |
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| 2017 |
| 2016 |
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| 2018 |
| 2017 |
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| (unaudited) |
| (audited) |
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| (unaudited) |
| (audited) |
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Assets | Assets |
| Assets |
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Current assets |
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Cash |
| $ | 362,800 |
| $ | 199,100 |
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| $ | 298,000 |
| $ | 360,400 |
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Accounts receivable less $5,000 allowance for doubtful accounts |
| 197,900 |
| 243,400 |
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| 286,000 |
| 292,100 |
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Inventory |
| 111,800 |
| 70,900 |
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| 122,600 |
| 110,600 |
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Prepaid and other |
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| 21,500 |
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| 29,600 |
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| 29,600 |
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| 35,300 |
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Total current assets |
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| 694,000 |
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| 543,000 |
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| 736,200 |
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| 798,400 |
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Fixed assets |
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Leasehold improvements |
| 19,700 |
| 19,700 |
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| 19,700 |
| 19,700 |
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Furniture, fixtures and equipment |
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| 183,200 |
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| 178,300 |
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| 185,400 |
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| 184,900 |
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| 202,900 |
| 198,000 |
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| 205,100 |
| 204,600 |
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Less: accumulated depreciation and amortization |
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| 188,400 |
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| 183,000 |
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| 194,000 |
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| 190,500 |
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| 14,500 |
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| 15,000 |
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| 11,100 |
| 14,100 |
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Other assets |
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Long-term receivable |
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| 1,521,700 |
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| – |
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Total assets |
| $ | 708,500 |
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| $ | 558,000 |
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| $ | 2,269,000 |
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| $ | 812,500 |
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Liabilities and Stockholders' Equity (Deficiency) |
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Liabilities and Stockholders' Equity | Liabilities and Stockholders' Equity |
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Current liabilities |
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Demand loans |
| $ | – |
| $ | 10,000 |
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Convertible debentures |
| 128,300 |
| 128,300 |
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| $ | 128,300 |
| $ | 128,300 |
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Accounts payable |
| 43,800 |
| 33,100 |
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| 20,100 |
| 4,900 |
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Accrued expenses |
| 396,500 |
| 459,900 |
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| 159,500 |
| 364,700 |
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Deferred revenue |
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| 82,100 |
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| 106,300 |
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| – |
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| 99,400 |
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Total current liabilities |
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| 650,700 |
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| 737,600 |
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| 307,900 |
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| 597,300 |
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Stockholders' equity (deficiency) |
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Other liabilities |
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Accrued expenses, non-current |
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| 106,500 |
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| – |
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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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Issued and outstanding – 58,599,016 shares |
| 586,000 |
| 586,000 |
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Issued and outstanding – 58,616,716 shares |
| 586,200 |
| 586,200 |
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Paid-in capital |
| 12,439,800 |
| 12,426,600 |
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| 12,440,000 |
| 12,440,000 |
| ||||||
Accumulated deficit |
|
| (12,968,000 | ) |
|
| (13,192,200 | ) |
|
| (11,171,600 | ) |
|
| (12,811,000 | ) |
Total stockholders' equity (deficiency) |
|
| 57,800 |
|
|
| (179,600 | ) | ||||||||
Total liabilities and stockholders' equity (deficiency) |
| $ | 708,500 |
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| $ | 558,000 |
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Total stockholders' equity |
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| 1,854,600 |
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|
| 215,200 |
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Total liabilities and stockholders' equity |
| $ | 2,269,000 |
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| $ | 812,500 |
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*See accompanying notes to these financial statements.
Statements of Cash Flows*
(unaudited)
|
| Nine Months ended September 30 |
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| Six Months ended June 30 |
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| 2017 |
| 2016 |
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| 2018 |
| 2017 |
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Operating Activities |
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Net income |
| $ | 224,200 |
| $ | 167,000 |
|
| $ | 1,543,300 |
| $ | 114,400 |
| ||
Adjustments to reconcile net income to net cash provided by operating activities |
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Adjustments to reconcile net income to net cash used in operating activities |
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Depreciation and amortization |
| 5,400 |
| 5,500 |
|
| 3,500 |
| 3,500 |
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Accretion of interest – convertible debentures |
|
| 13,200 |
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|
| 500 |
|
| – |
| 13,200 |
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Non-current assets and liabilities, net |
| (1,415,200 | ) |
| – |
| ||||||||||
Cumulative effect of accounting change |
|
| 96,100 |
|
|
| – |
| ||||||||
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|
| 242,800 |
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| 173,000 |
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| 227,700 |
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| 131,100 |
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(Increase) decrease in assets |
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Accounts receivable |
| 45,500 |
| (159,800 | ) |
| 6,100 |
| (50,600 | ) | ||||||
Inventory |
| (40,900 | ) |
| (36,700 | ) |
| (12,000 | ) |
| (15,500 | ) | ||||
Prepaid and other |
| 8,100 |
| 10,700 |
|
| 5,700 |
| (400 | ) | ||||||
Increase (decrease) in liabilities |
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Decrease in liabilities |
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Accounts payable and accrued expenses |
| (52,700 | ) |
| 75,600 |
|
| (190,000 | ) |
| (69,000 | ) | ||||
Deferred revenue |
|
| (24,200 | ) |
|
| (22,200 | ) |
|
| (99,400 | ) |
|
| (10,300 | ) |
|
|
| (64,200 | ) |
|
| (132,400 | ) |
|
| (289,600 | ) |
|
| (145,800 | ) |
Net cash provided by operating activities |
|
| 178,600 |
|
|
| 40,600 |
| ||||||||
Net cash used in operating activities |
|
| (61,900 | ) |
|
| (14,700 | ) | ||||||||
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Investment Activities |
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Additions to fixed assets |
|
| (4,900 | ) |
|
| (1,400 | ) |
|
| (500 | ) |
|
| (4,900 | ) |
Net cash used in investing activities |
|
| (4,900 | ) |
|
| (1,400 | ) |
|
| (500 | ) |
|
| (4,900 | ) |
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Financing Activities |
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Repayment of demand loans |
|
| (10,000 | ) |
|
| (13,500 | ) | ||||||||
Net cash used in financing activities |
|
| (10,000 | ) |
|
| (13,500 | ) | ||||||||
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| |||||||||||
Increase in cash |
| 163,700 |
| 25,700 |
| |||||||||||
Decrease in cash |
| (62,400 | ) |
| (19,600 | ) | ||||||||||
Cash at beginning of year |
|
| 199,100 |
|
|
| 11,400 |
|
|
| 360,400 |
|
|
| 199,100 |
|
Cash at end of period |
| $ | 362,800 |
|
| $ | 37,100 |
|
| $ | 298,000 |
|
| $ | 179,500 |
|
*See accompanying notes to these financial statements.
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
Note 1. Financial Statements
The accompanying unaudited condensed financial statements have been prepared by Nocopi Technologies, Inc. (the “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 the Company's 20162017 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 the Company believes that the accompanying disclosures are adequate to make the information presented not misleading. The Notes to Financial Statements included in the 20162017 Annual Report on Form 10-K should be read in conjunction with the accompanying interim financial statements. The interim operating results for the three months and ninesix months ended SeptemberJune 30, 20172018 may not be necessarily indicative of the operating results expected for the full year.
The 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 the Company has no items of other comprehensive income, comprehensive income (loss) is equal to net income.income (loss).
Note 2. Going ConcernRevenues
Since its inception,On January 1, 2018, the Company has incurred significant lossesadopted ASU 214-09,Revenue from Contracts with Customers (“Topic 606”), using the modified retrospective method. Results for periods beginning on or after January 1, 2018 are presented under Topic 606; however, prior period amounts are not adjusted and continue to be reported in accordance with Topic 605,Revenue Recognition, which was in effect for those periods.
The Company recorded a decrease to the opening balance of the accumulated deficit of $96,100 and a corresponding charge to deferred revenue as of September 30, 2017, had accumulated lossesJanuary 1, 2018 due to the cumulative impact of $12,968,000. For the nine months ended September 30, 2017,adoption of Topic 606. The disclosure of disaggregated revenue is disclosed in Note 9.
The adoption of the Company hadnew guidance affected our recognition of revenue from licenses and royalties. Under our previous accounting practice, we recognized revenue from licenses and royalties on a straight-line basis over the term of the related license agreement. As a result of our adoption of the new guidance, we will recognize revenue from licensees and royalties at a point in time when the term begins.
During the second quarter of 2018, we negotiated an amendment to a license agreement with a licensee that, in addition to expanding the technologies that the licensee is permitted to market, provides for a four year extension to the license agreement that contains guaranteed royalties payable in installments over the term of the amendment to the license agreement.Since the performance obligation is to grant the license for the use of certain patented ink technology as it exists at the time that it is granted, the promise to grant the license is a performance obligation satisfied at a point in time in accordance with Topic 606.In accordance with Topic 606, we recorded $1,521,700 net income from operations of $246,600. At September 30, 2017, the Company had positive working capitalimputed interest of $43,300licenses, royalties and stockholders’ equityfees and $106,500 of $57,800. For the year ended December 31, 2016, the Company’s net income from operations was $271,800. The Company, which is substantially dependent on its licensees to generate licensing revenues, may incur operating losses and experience negative cash flowselling expenses in the future. Sustaining profitabilitysecond quarter and positive cash flow dependsfirst six months of 2018 related to the amendment to the license agreement. The related receivable and payable are recorded as other assets and other liabilities on the Company’s ability to maintainbalance sheet.
The change in accumulated deficit on our Balance Sheet at June 30, 2018, including the increasesaggregate impact of the change in revenues and gross profits that it realized in 2016 and through the first nine months of 2017 from its traditional business. There can be no assurances that the Company will be able to generate sufficient revenues and gross profits to sustain profitability and positive cash flow in the future.accounting principles which was effective on January 1, 2018, was as follows:
Accumulated deficit – January 1, 2018 |
| $ | (12,811,000 | ) |
Net earnings |
|
| 1,543,300 |
|
Cumulative effect of accounting change at January 1, 2018 |
|
| 96,100 |
|
Accumulated deficit – June 30, 2018 |
| $ | (11,171,600 | ) |
Receipt of funds in earlier periods from investors and from demand loan holders have allowed the Company to remain in operation through the current date. Management of the Company believes that it may need additional capital if the Company is unable to at least maintain the revenue level and profits achieved during 2016 and the first nine months of 2017. There can be no assurances that the Company will be successful in obtaining sufficient additional capital, if needed, or if it does, that the additional capital will enable the Company to impact its revenues so as to have a material positive effect on the Company’s operations and cash flow. The Company believes that without additional capital, whether in the form of debt, equity or both, it may be forced to cease operations at an undetermined future date.
4
NOCOPI TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
Note 3. Stock Based Compensation
The 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 SeptemberJune 30, 2017,2018, the Company did not have an active stock option plan. There was no unrecognized portion of expense related to stock option grants at SeptemberJune 30, 2017.2018.
Note 4. Demand Loans
During the third quarter of 2017, the Company repaid the remaining $10,000 principal balance of an unsecured loan from an individual and at September 30, 2017 had no demand loans outstanding. During the nine months ended September 30, 2016, the Company repaid the remaining $13,500 principal balance of an unsecured loan from a second individual. The loans bore interest at an annual rate of 8%.
4
NOCOPI TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
Note 5.4. Convertible Debentures
At SeptemberJune 30, 2017,2018, the Company had convertible debentures totaling $128,300 outstanding, of which $95,000 were due during the third quarter of 2017 and $33,300 are due during the third quarter of 2018. The convertible debentures bear interest at 7%. At the option of the lender, the debentures and accrued interest are convertible in whole or part into common stock of the Company at $0.025 per share. During the first quarter of 2017, the Company’s Board of Directors approved and the holders of $33,300 of convertible debentures that had matured during the third quarter of 2016, one of which is held by a Director of the Company, accepted an offer of extension whereby the maturity dates of the convertible debentures are extended for two years and the conversion rate of the debentures and accrued interest into Common Stock of the Company is reduced from $0.05 to $0.025. In accordance with FASB ASC 470, this modification of the convertible debentures was recorded as a debt discount to the notes payable of approximately $13,200 with an offsetting credit to additional-paid in capital. In the three months ended March 31, 2017, the entire $13,200 was accreted through interest expense.
Early in the fourththird quarter of 2017,2018, the holders of $95,000$103,300 of convertible debentures agreed to extend the maturity dates of those convertible debentures for one year with no change in the terms or conditions of the debentures.
The Company also granted warrants to purchase 691,365 shares of the Company’s common stock at $0.02 per share to the holders of the debentures. The warrants are exercisable two years after issuance and expire seven years after issuance. The fair value of the warrants was determined using the Black-Scholes pricing model. The relative fair value of the warrants was recorded as a discount to the notes payable with an offsetting credit to additional paid-in capital since the 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. For
The fair value of the three months ended September 30, 2017 and September 30, 2016, $0warrants 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 the 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. Forexpense over the nine months ended September 30, 2017 and September 30, 2016, $0 and approximately $500, respectively, was accreted through interest expense.term of the notes payable.
The following table summarizes allthe Company’s warrant activity of the Company sinceposition at June 30, 2018 and December 31, 2016:2017:
|
|
|
|
|
| Weighted Average |
|
|
|
|
|
| Weighted Average |
| ||||||||||
|
| Number |
| Exercise |
| Exercise |
|
| Number |
| Exercise |
| Exercise |
| ||||||||||
|
| of Shares |
| Price |
| Price |
|
| of Shares |
| Price |
| Price |
| ||||||||||
Outstanding warrants - |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||
December 31, 2016 |
|
| 721,365 |
|
| $0.01 to $0.07 |
|
| $ | 0.021 |
| |||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Warrants expired |
|
| 12,300 |
| $0.06 and $0.07 |
| $ | 0.063 |
| |||||||||||||||
December 31, 2017 |
|
| 691,365 |
| $0.02 |
| $0.02 |
| ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Outstanding warrants - |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
September 30, 2017 |
|
| 709,065 |
|
| $0.01 to $0.03 |
|
| $ | 0.020 |
| |||||||||||||
June 30, 2018 |
|
| 691,365 |
| $0.02 |
| $0.02 |
| ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Weighted average remaining |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
contractual life (years) |
|
| 3.01 |
|
|
|
|
|
|
|
| 2.33 |
|
|
|
|
|
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Exercisable warrants - |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
September 30, 2017 |
|
| 709,065 |
|
| $0.01 to $0.03 |
|
| $ | 0.020 |
| |||||||||||||
June 30, 2018 |
|
| 691,365 |
| $0.02 |
| $0.02 |
| ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Weighted average remaining |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
contractual life (years) |
|
| 3.01 |
|
|
|
|
|
|
|
| 2.33 |
|
|
|
|
|
|
Note 6. Other Income (Expenses)
Other income (expenses) in the three months and nine months ended September 30, 2017 and September 30, 2016 includes interest on unsecured loans from two individuals and on convertible debentures held by nine investors. Also included in other income (expenses) is accretion of debt discounts in the nine months ended September 30, 2017 related to the extension of the maturity dates of $33,300 of convertible debentures.
5
NOCOPI TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
Note 7.5. Other Income (Expenses)
Other income (expenses) in the three months and six months ended June 30, 2018 and June 30, 2017 includes interest on convertible debentures held by nine investors. Also included in other income (expenses) in the three months and six months ended June 30, 2017 is interest on an unsecured loan from an individual and, in the six months ended June 30, 2017, accretion of debt discounts related to the extension of the maturity dates of $33,300 of convertible debentures.
Note 6. Income Taxes
There is no provision for income taxes for the three months and ninesix months ended SeptemberJune 30, 20172018 and SeptemberJune 30, 20162017 due to the availability of net operating loss carryforwards. The Company has createdestablished a valuation allowance for the entire amount of such benefits.benefits resulting from the Company’s net operating loss carryforwards because the Company has determined that the realization of the net deferred tax asset is not assured.
There was no change in unrecognized tax benefits during the period ended SeptemberJune 30, 20172018 and there was no accrual for uncertain tax positions as of SeptemberJune 30, 2017.2018.
Tax years from 20132014 through 20162017 remain subject to examination by U.S. federal and state jurisdictions.
Note 8.7. Related Party Transactions
During the ninesix months ended SeptemberJune 30, 2017 and September 30, 20162018, the Company paid $151,700 and $15,000, respectively,$235,400 to Michael A. Feinstein, M.D., the Company’s Chairman of the Board and Chief Executive Officer, representing a portionthe balance of previously deferred salary owed to him under an employment agreement with the Company. During each of the nine month periodssix months ended SeptemberJune 30, 2017, and September 30, 2016,the Company paid $116,200 to Dr. Feinstein representing a portion of previously deferred salary owed to him under the employment agreement. During the five month period ended May 31, 2018, Dr. Feinstein deferred $63,800$35,400 of salary. At SeptemberDuring the six month period ended June 30, 2017, Dr. Feinstein deferred $42,500 of salary. In June 2018, the periodic salary payments provided for in Dr. Feinstein’s employment agreement resumed. At June 30, 2018, there was no remaining deferred salary owed approximately $213,300 of salary deferred by him.to Dr. Feinstein. There iswas no interest payable on the deferred salary.
Note 9.8. Earnings (Loss) per Share
In accordance withFASB ASC 260,Earnings per Share, basic earnings (loss) per common share is computed using net earnings (loss) divided by the weighted average number of common shares outstanding for the periods presented. The computation of diluted earnings per common share involves the assumption that outstanding common shares are increased by shares issuable upon exercise of those stock options and warrants for which the market price exceeds the exercise price. The number of shares issuable upon the exercise of such stock options and warrants is decreased by shares that could have been purchased by the Company with related proceeds. For the three months and ninesix months ended SeptemberJune 30, 2018, the number of incremental common shares resulting from the assumed conversion of warrants was 372,764 and 338,628, respectively. For the three months and six months ended June 30, 2017, the number of incremental common shares resulting from the assumed conversion of warrants was 297,448370,144 and 292,619,290,162, respectively. For the three months and nine months ended September 30, 2016, the number of incremental common shares resulting from the assumed conversion of warrants was 639 and 1,368, respectively.
Note 10.9. Major Customer and Geographic Information
The Company’s revenues, expressed as a percentage of total revenues, from non-affiliated customers that equaled 10% or more of the Company’s total revenues were:
|
| Three Months ended September 30 |
|
| Nine Months ended September 30 |
|
| Three Months ended June 30 |
|
| Six Months ended June 30 |
| ||||||||||||||||||||
|
| 2017 |
|
| 2016 |
|
| 2017 |
|
| 2016 |
|
| 2018 |
|
| 2017 |
|
| 2018 |
|
| 2017 |
| ||||||||
Customer A |
|
| 48 | % |
|
| 60 | % |
|
| 43 | % |
| 37 | % |
|
| 8 | % |
|
| 47 | % |
|
| 13 | % |
| 40 | % | ||
Customer B |
| 27 | % |
| 21 | % |
| 25 | % |
| 22 | % |
| 85 | % |
| 20 | % |
| 74 | % |
| 24 | % | ||||||||
Customer C |
| 4 | % |
| 3 | % |
| 9 | % |
| 19 | % |
| 2 | % |
| 12 | % |
| 5 | % |
| 12 | % |
6
NOCOPI TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
The Company’s non-affiliate customers whose individual balances amounted to more than 10% of the Company’s net accounts receivable, expressed as a percentage of net accounts receivable, were:
|
| September 30 |
|
| December 31 |
|
| June 30 |
|
| December 31 |
| ||||
|
| 2017 |
|
| 2016 |
|
| 2018 |
|
| 2017 |
| ||||
Customer A |
| 20 | % |
| 26 | % |
| 6 | % |
| 14 | % | ||||
Customer B |
| 45 | % |
| 47 | % |
| 88 | % |
| 47 | % | ||||
Customer C |
| 8 | % |
| 5 | % |
| 2 | % |
| 15 | % |
The Company performs ongoing credit evaluations of its customers and generally does not require collateral. The Company also maintains allowances for potential credit losses. The loss of a major customer could have a material adverse effect on the Company’s business operations and financial condition.
6
NOCOPI TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
The Company’s revenues by geographic region are as follows:
|
| Three Months ended September 30 |
|
| Nine Months ended September 30 |
| ||||||||||
|
| 2017 |
|
| 2016 |
|
| 2017 |
|
| 2016 |
| ||||
North America |
| $ | 181,800 |
|
| $ | 184,900 |
|
| $ | 493,600 |
|
| $ | 411,300 |
|
South America |
|
| 1,500 |
|
|
| – |
|
|
| 1,500 |
|
|
| – |
|
Europe |
|
| 100 |
|
|
| – |
|
|
| 300 |
|
|
| – |
|
Asia |
|
| 211,600 |
|
|
| 351,400 |
|
|
| 585,800 |
|
|
| 596,400 |
|
Australia |
|
| 7,400 |
|
|
| 7,400 |
|
|
| 22,200 |
|
|
| 22,200 |
|
|
| $ | 402,400 |
|
| $ | 543,700 |
|
| $ | 1,103,400 |
|
| $ | 1,029,900 |
|
Note 11. Subsequent Event
In October 2017, a warrant holder exercised warrants to purchase 17,700 shares of common stock of the Company at exercise prices ranging from $0.01 to $0.03.
|
| Three Months ended June 30 |
|
| Six Months ended June 30 |
| ||||||||||
|
| 2018 |
|
| 2017 |
|
| 2018 |
|
| 2017 |
| ||||
North America |
| $ | 1,674,400 |
|
| $ | 136,700 |
|
| $ | 1,859,300 |
|
| $ | 311,800 |
|
South America |
|
| – |
|
|
| – |
|
|
| 1,500 |
|
|
| – |
|
Europe |
|
| 100 |
|
|
| 200 |
|
|
| 100 |
|
|
| 200 |
|
Asia |
|
| 199,200 |
|
|
| 215,300 |
|
|
| 438,200 |
|
|
| 374,200 |
|
Australia |
|
| – |
|
|
| 7,400 |
|
|
| – |
|
|
| 14,800 |
|
|
| $ | 1,873,700 |
|
| $ | 359,600 |
|
| $ | 2,299,100 |
|
| $ | 701,000 |
|
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Forward-Looking Information
This report on Form 10-Q contains, and our officers and representatives may from time to time make, "forward-looking statements" within the meaning of the safe harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. Forward-looking statements can be identified by words such as: "anticipate," "intend," "plan," "goal," "seek," "believe," "project," "estimate," "expect," "strategy," "future," "likely," "may," "should," "will" and similar references to future periods. Examples of forward-looking statements include, among others, statements we makeregarding regarding:
·
Expected operating results, such as revenue growth and earnings
·
Anticipated levels of capital expenditures for fiscal year 2017 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
· | Expected operating results, such as revenue growth and earnings | |
· | Anticipated levels of capital expenditures for fiscal year 2018 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 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.
·
The occurrence of hostilities, political instability or catastrophic events.
·
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 Part I, Item 1A. Risk Factors of our Annual Report on Form 10-K for the year ended December 31, 2016.
· | 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. | |
· | The occurrence of hostilities, political instability or catastrophic events. | |
· | 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 Part I, Item 1A. Risk Factors of our Annual Report on Form 10-K for the year ended December 31, 2017. |
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.
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, 2016,2017, filed with the Securities and Exchange Commission on March 30, 2017.29, 2018.
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.
Results of Operations
TheOur Company’s revenues are derived from (i)(a) royalties paid by licensees of the Company’s technologies; (ii)our technologies, (b) fees for the provision of technical services to licensees;licensees and (iii)(c) from the direct sale of (a)(i) products incorporating the Company’sour technologies, such as inks, security paper and pressure sensitive labels, and (b)(ii) equipment used to support the application of the Company’sour technologies, such as ink-jet printing systems. Royalties consist of guaranteed minimum royalties payable by the Company’sour licensees and/orin certain cases and additional royalties which typically vary with the licensee’s sales or production of products incorporating the licensed technology. Technical services, in the form of on-site or telephone consultations by members of the Company’s technical staff, may be offered to licensees of the Company’s technologies. The consulting fees are billed at agreed upon per diem or hourly rates at the time the services are rendered. Service fees and sales revenues vary directly with the number of units of service or product provided.
TheOur Company recognizes revenue on its lines of business as follows:
a)
License fees and royalties are recognized when the license term begins. Upon inception of the license term, revenue is recognized in a manner consistent with the nature of the transaction and the earnings process, which generally is ratably over the license term;
b)
Product sales are recognized (i) upon shipment of products; (ii) when the price is fixed or determinable; and (iii) when collectability is reasonably assured; and
c)
Fees for technical services are recognized when (i) the service has been rendered; (ii) an arrangement exists; (iii) the price is fixed or determinable based upon a per diem or hourly rate; and (iv) collectability is reasonably assured.
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. |
The Company believesWe believe that, as fixed cost reductions beyond those it haswe have achieved in recent years may not be achievable, itsour 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 amountsamount of theour Company’s revenues and the mix among the various sources of revenue are subject to substantial fluctuation. The Company hasWe 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 theour Company’s total revenue, and on its revenue mix and overall financial performance. Such changes may result from a substantial customer’s product development delays, engineering changes, changes in product marketing strategies, production requirements and the like. In addition, certain customers have, from time to time, sought to renegotiate certain provisions of their license agreements and, when theour Company agrees to revise such terms, revenues from the customer may be affected. The addition of a substantial new customer or the loss of a substantial existing customer may also have a substantial effect on the Company’s total revenue, revenue mix and operating results.
Revenues for the thirdsecond quarter of 2018 were $1,873,700 compared to $359,600 in the second quarter of 2017, were $402,400 compared to $543,700an increase of $1,514,100, or approximately 421%. Revenues in the second quarter of 2018 included, in accordance with ASU 214-09,Revenue from Contracts with Customers (“Topic 606”), revenue of $1,521,700 representing the present value of guaranteed royalty payments that will be payable over a four-year period beginning in the third quarter of 2016,2019 as a decreaseresult of $141,300, or approximately 26%.an amendment to a license agreement with a licensee that, in addition to expanding the technologies that our licensee is permitted to market, provides for a four year extension to the license agreement beginning in July 2019.Since the performance obligation is to grant the license for the use of certain patented ink technology as it exists at the time that it is granted, the promise to grant the license is a performance obligation satisfied at a point in time in accordance with Topic 606.Previously, we recognized revenue from licenses and royalties on a straight-line basis over the term of the related license agreement. Licenses, royalties and fees increased by $7,900,$1,523,700, or approximately 5%1,155%, to $178,200$1,655,600 in the thirdsecond quarter of 20172018 from $170,300$131,900 in the thirdsecond quarter of 2016.2017. The increase in licenses, royalties and fees is due primarily to higher licensing revenue received from four licensees including one licensee added in the second halfadoption of 2016.Topic 606 described above. There can be no assurances that the marketing and product development activities of theour Company’s licensees or other businesses in the entertainment and toy products market will produce sustained increasesa significant increase in revenues for theour Company, nor can the timing of any potential revenue increases be predicted, particularly given the uncertain economic conditions being experienced worldwide. See “Plan of Operation, Liquidity and Capital Resources” and “Note 2 to our Condensed Financial Statements” for comparative information on the impact of the adoption of Topic 606 to our Company’s condensed financial statements.
Product and other sales decreased by $149,200,$9,600, or approximately 40%4%, to $224,200$218,100 in the thirdsecond quarter of 20172018 from $373,400$227,700 in the thirdsecond quarter of 2016.2017. Sales of ink decreased nominally in the thirdsecond quarter of 2018 compared to the second quarter of 2017 compared to the third quarter of 2016 due primarily to a decrease in the volume oflower ink shipped in the third quarter of 2017shipments to a third party authorized printer used by one of theour Company’s major licensees in the entertainment and toy products market compared to the third quarter of 2016, along with lower ink shipments to the Company’s licensees in the retail receipt and document fraud market. This new printer was appointed late inIn the second quarter of 2016 and, at that time, placed a significant amount of ink orders that were shipped in the third quarter of 2016. In 2017, this printer’s orders and shipments were more equally balanced between the second and third quarters. In the third quarter of 2017, the2018, our Company derived revenues of approximately$344,9001,806,700 from itsour licensees and their authorized printers in the entertainment and toy products market compared to revenues of approximately $490,100$305,200 in the thirdsecond quarter of 2016.2017. The increase in revenues from our licensees and their authorized printers in the entertainment and toy products market in the second quarter of 2018 compared to the second quarter of 2017 is due primarily to the adoption of Topic 606 described above.
For the first ninesix months of 2017,2018, revenues were $1,103,400,$2,299,100, representing an increase of $73,500,$1,598,100, or approximately 7% higher than228%, from revenues of $1,029,900$701,000 in the first ninesix months of 2016.2017. Licenses, royalties and fees of $468,900increased by $1,539,800, or approximately 530%, to $1,830,500 in the first ninesix months of 2017 were $87,100, or approximately 23%, higher than licenses, royalties and fees of $381,8002018 from $290,700 in the first ninesix months of 2016. The2017. As in the second quarter of 2018, the increase in licenses, royalties and fees in the first six months of 2018 compared to the first six months of 2017 is due primarily to higher licensing revenue received from four licensees including one licensee added in the second halfadoption of 2016.Topic 606.
Product and other sales decreasedincreased by $13,600,$58,300, or approximately 2%14%, to $634,500$468,600 in the first ninesix months of 20172018 from $648,100$410,300 in the first ninesix months of 2016.2017. Sales of ink decreasedincreased in the first ninesix months of 20172018 compared to the first nine monthssix of 20162017 due primarily to higher ink shipments to the third party authorized printers used by two of our Company’s major licensees in the entertainment and toy products market offset in part by lower ink shipments to theour Company’s licensees in the retail receipt and document fraud market. TheOur Company derived revenues of approximately $932,600$2,176,000 from licensees and their authorized printers in the entertainment and toy products market in the first ninesix months of 20172018 compared to revenues of approximately $883,800$587,700 in the first ninesix months of 2016.2017. The increase in revenues from our licensees and their authorized printers in the entertainment and toy products market in the first six months of 2018 compared to the first six months of 2017 is due primarily to the adoption of Topic 606.
TheOur Company’s gross profit decreasedincreased to $296,800$1,756,100 in the thirdsecond quarter of 2018, or approximately 94% of revenues, from $238,700 in the second quarter of 2017 or approximately 74% of revenues, from $350,300 in the third quarter of 2016, or approximately 64%66% 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 theour Company’s technologies or equipment used to support the application of its technologies. These items (except for inks which are manufactured by theour 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 lowerhigher gross profit in the thirdsecond quarter of 2018 compared to the second quarter of 2017 comparedresults primarily from higher licenses, royalties and fees due to the third quarteradoption of 2016 results primarily fromTopic 606 offset in part by lower gross revenues from product and other sales offset in part by higher gross revenues from licenses, royalties and fees in the thirdsecond quarter of 20172018 compared to the thirdsecond quarter of 2016.2017.
For the first ninesix months of 2017,2018, gross profit was $783,700,$2,064,300, or approximately 71%90% of revenues, compared to $681,700,$486,900, or approximately 66%69% of revenues, in the first ninesix months of 2016.2017. The higher gross profit in the first ninesix months of 20172018 compared to the first ninesix months of 20162017 results primarily from both higher gross revenues from licenses, royalties and fees along with adue to the adoption of Topic 606 and higher gross profitrevenues from product and other sales in the first ninesix months of 20172018 compared to the first ninesix months of 2016 resulting from a favorable mix of products sold in the first nine months of 2017 compared to the first nine months of 2016.2017.
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. Primarily due to higher revenues from licenses, royalties and fees in the third quarter of 2017 compared to the third quarter of 2016, theThe gross profit from licenses, royalties and fees increased to approximately 87% of revenues99% in the thirdsecond quarter of 2018 compared to approximately 80% in the second quarter of 2017 fromand to approximately 79%97% of revenues in the third quarter of 2016. The gross profit from licenses, royalties and fees was approximately 85% in the first ninesix months of 2017 compared to2018 from approximately 81%84% in the first ninesix months of 2017 resulting from the same factors as the third quarter of 2017 compared to the third quarter of 2016.2017.
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 increaseddecreased to approximately 63%57% of revenues in the thirdsecond quarter of 20172018 compared to approximately 58%59% of revenues in the thirdsecond quarter of 2016.2017. This increase in the gross profit, expressed as a percentagedecrease was due to lower sales volume of revenues wasproduct and other sales and lower margins on certain products due primarily to a change in mixhigher prices of products sold during the third quarter of 2017 compared to the third quarter of 2016.certain raw materials. For the first ninesix months of 2017,2018, the gross profit, expressed as a percentage of revenues, increased to approximately 61%60% of revenues from product and other sales compared to approximately 58%59% of revenues from product and other sales in the first ninesix months of 2016 resulting from the same factors as the third quarter of 2017 compared to the third quarter of 2016.2017.
Research and development expenses of $36,300$36,100 and $73,200 in the thirdsecond quarter and first six months of 20172018, respectively, were comparable to $36,500 and $109,200$72,900 in the second quarter and first ninesix months of 2017, were comparable to $33,700 in the third quarter of 2016 and $103,700 in the first nine months of 2016.respectively.
Sales and marketing expenses decreasedincreased to $67,200$168,500 in the thirdsecond quarter of 2018 from $59,800 in the second quarter of 2017 from $72,800 in the third quarter of 2016 due primarilyand to lower commission expense on the lower level of sales in the third quarter of 2017 compared to the third quarter of 2016. Sales and marketing expenses increased to $187,900$238,800 in the first ninesix months of 2017 compared to $176,7002018 from $120,700 in the first ninesix months of 20162017. This increase is due primarily to higher commission expense on the higher level of sales in the second quarter and first ninesix months of 2018 compared to the second quarter and first six months of 2017 comparedrelated to the first nine monthsadditional revenue generated as a result of 2016.the adoption of Topic 606.
General and administrative expenses increased in the thirdsecond quarter of 2018 to $101,500 from $68,900 in the second quarter of 2017. In the first six months of 2018, general and administrative expenses increased to $204,200 from $159,600 in the first six months of 2017. The increase in both the second quarter and first ninesix months of 2018 compared to the second quarter and first six months of 2017 to $80,400 and $240,000, respectively, from $69,900 and $224,200 in the third quarter and first nine months of 2016, respectively,is due primarily to higher employment costs, insurancepatent related expenses, higher legal expenses and fees offset in part by lower legalhigher employment expenses in the thirdsecond quarter and first ninesix months of 20172018 compared to the thirdsecond quarter and first ninesix months of 2016.2017.
Other income (expenses) in the thirdsecond quarter and first ninesix months of 20172018 and 20162017 included interest on unsecured loans from two individuals and on convertible debentures held by nine investors.investors and, in the second quarter and first six months of 2017, interest on an unsecured loan from an individual. Also included in other income (expenses) is accretion of debt discounts in the first nine monthsquarter of 2017 related to the extension of the maturity dates of $33,300 of convertible debentures. Other income (expenses) decreased to $3,100 in the third quarter of 2017 from $3,300 in the third quarter of 2016. Other income (expenses) increased to $22,400 in the first nine months of 2017 from $10,100 in the first nine months 2016. This increase is due primarily to accretion of debt discounts in the first nine months of 2017 related to the extension of the maturity dates of $33,300 of convertible debentures in the first quarter of 2017.
The net income of $109,800$1,447,500 in the thirdsecond quarter of 20172018 compared to the net income of $170,600$70,400 in the thirdsecond quarter of 20162017 resulted primarily from a lowerhigher gross profit on a lowerhigher level of revenues in the thirdsecond quarter of 2018 compared to the second quarter of 2017 related to the adoption of Topic 606 offset in part by higher overhead expenses in the second quarter of 2018 compared to the thirdsecond quarter of 2016 along with higher operating expenses in the third quarter of 2017 compared to the third quarter of 2016.2017. The net income of $224,200$1,543,300 in the first ninesix months of 20172018 compared to the net income of $167,000$114,400 in the first ninesix months of 20162017 resulted primarily from a higher gross profit on a higher level of revenues in the first ninesix months of 20172018 compared to the first ninesix months of 2016 offset in part by higher operating expenses2017 related to the adoption of Topic 606 and no accretion of debt discounts in the first ninesix months of 2018 as there was in the first six months of 2017 offset in part by higher overhead expenses in the first six months of 2018 compared to the first ninesix months of 2016.2017.
Plan of Operation, Liquidity and Capital Resources
During the first ninesix months of 2017, the2018, our Company’s cash increaseddecreased to $362,800$298,000 at SeptemberJune 30, 20172018 from $199,100$360,400 at December 31, 2016.2017. During the first ninesix months of 2017, the2018, our Company generated $178,600 fromused $61,900 to fund its operating activities used $4,900and $500 for capital equipment and repaid $10,000 to an individual lender.purchases.
During the first ninesix months of 2017, the2018, our Company’s revenues increased approximately 7% primarily as a result of higher licensing and royalty revenues from new and existing licensees. The Company’s228% to $2,299,100 in the first ninesix months of 2018 from $701,000 in the first six months of 2017 of which 11%, or $76,500 is attributable to historical operations and 217%, or $1,521,600, to the adoption of Topic 606.
Our total overhead expenses increased compared to the 2016 first nine months total overhead expenses and the Company’s interest expense increased related to accretion of interest in the first ninesix months of 20172018 compared to the first ninesix months of 2016.2017 and our Company’s interest expense decreased in the first six months of 2018 compared to the first six months of 2017. As a result of these factors, theour Company recorded a highergenerated net profitincome of $1,543,300 in the first ninesix months of 20172018 compared to the$114,400 in first ninesix months of 2016. The2017. Our Company had positivenegative operating cash flow of $178,600$61,900 during the first ninesix months of 2017.2018. At SeptemberJune 30, 2017, the2018, our Company had positive working capital of $43,300$428,300 and stockholders’ equity of $57,800.$1,854,600. For the full year of 2016, the2017, our Company had net income of $258,500$381,200 and had positive operating cash flow of $202,600.$177,500. At December 31, 2016, the2017, our Company had negativepositive working capital of $194,600$201,100 and a $179,600 stockholders’ deficiency.equity of $215,200.
Through September 30, 2017, theOur Company repaid all $63,000 of short-term loans that had been outstanding at January 1, 2015. In 2015, the Company repaid $10,000has $128,300 of convertible debentures and, in 2017, extended the maturity dates of $33,300 of convertible debentures from 2016 to 2018 and extended the maturity dates of $95,000 of convertible debentures from the third quarter of 2017 tooutstanding that are due during the third quarter of 2018. Borrowings and salesAs of common stockthe current date, holders of $103,300 of the convertible debentures have agreed to extend the maturity dates of the convertible debentures for one year with no change in years prior to January 1, 2015 havethe terms or conditions of the debentures. These borrowings allowed theour Company to remain in operation through 2016. There can be no assurances that the Company will be ablelate 2016 when our Company’s cash flow increased significantly.
We may need to secure sufficientobtain additional funding through investments or borrowings that will allow the Company to fund losses that it presently believes may be experiencedcapital in the future to support the working capital requirements associated with our existing revenue base and to fund potential operating losses that could occur if the Company isour licensees are unable to at least maintain current levels of sales of products utilizing our Company’s technologies. We cannot assure you that we will be successful in obtaining sufficient additional capital, or if we do so, that the additional capital will enable our Company to continue to operate profitably in the future and develop new revenue levelssources to have a material positive effect on our Company’s operations and profits consistent with 2016 and the first nine months of 2017. The Company believes that withoutcash flow. Without additional investment, itwe may then be forced to cease operations at an undetermined datetime in the future.future if we are unable to sustain revenues at levels approximating revenues achieved in recent years.
The Company’sWe 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 theour Company has developed in the entertainment and toy products market includingmarket. This includes two licensees withthat have been marketing products incorporating our Company’s technologies since 2012. These two licensees maintain a significant presence in the entertainment and toy products market that have been marketing products incorporating the Company’s technologies since 2012 along with a licensee added in 2015 who has been marketing products incorporating the Company’s available technologies in certain international markets since 2016. These licensees in the entertainment and toy products market are well known and highly regarded participants in this market. The Company believesWe anticipate that thethese two licensees that the Company has developed in the entertainment and toy products market will expand their current offerings incorporating the Company’sthat incorporate our technologies currently being marketed and will introduce and market new products incorporatingthat will incorporate our technologies available technologies covered by theto them under their license agreements that are not currently being marketed by them. The Company planswith our Company. We will continue to continue developingdevelop various applications for these licensees while expanding itslicensees. We also plan to expand our licensee base in the entertainment and toy market. The Company hasWe currently have additional licensees marketing or developing products incorporating the Company’sour technologies in certain geographic and niche markets of the overall entertainment and toy products market. The
Our Company maintains its presence in the retail loss prevention anti-counterfeiting and anti-diversion marketsmarket and believes that revenue growth in these marketsthis market can be achieved through increased security ink sales to its licensees in this market. The CompanyWe will continue to adjust itsour production and technical staff as necessary. The Company will also,necessary and, subject to available financial resources, invest in capital equipment needed to support potential growth in ink production requirements beyond itsour current capacity. Additionally, the Companywe will pursue opportunities to market itsour current technologies in specific security and non-security markets. There can be no assurances that these efforts will enable theour Company to generate additional revenues and positive cash flow.
TheOur Company has received and continues to seek additional capital, in the form of debt, equity or both, to support itsour working capital requirements. There can be no assurancesrequirementsand to provide funding for other business opportunities. We cannot assure you that the Companywe will be successful in raising additional capital, or that such additional capital, if obtained, will enable theour Company to generate additional revenues and positive cash flow.
The Company generatesAs previously stated, we generate a significant portion of itsour total revenues from licensees in the entertainment and toy products market. These licensees generally sell their products through retail outlets. DuringIn the year,future, such sales may be adversely affected by changes in consumer spending that may occur as a result of an uncertain economic environment. As a result, the Company’sour revenues, results of operations and liquidity may be negatively impacted as they were in previousearlier years.
Recently Adopted Accounting Pronouncements
AsIn June 2018, the FASB issued ASU No. 2018-07, Compensation – Stock Compensation (Topic 718), Improvements to Nonemployee Share-Based Payment Accounting. The amendments in this Update expand the scope of SeptemberTopic 718 to include share-based payment transactions for acquiring goods and services from nonemployees. Prior to this Update, Topic 718 applied only to share-based transactions to employees. Consistent with the accounting requirement for employee share-based payment awards, nonemployee share-based payment awards within the scope of Topic 718 are measured at grant-date fair value of the equity instruments that an entity is obligated to issue when the good has been delivered or the service has been rendered and any other conditions necessary to earn the right to benefit from the instruments have been satisfied. The amendments in this Update are effective for public business entities for fiscal years beginning after December 15, 2018, including interim periods within that fiscal year. Early adoption is permitted, but no earlier than an entity’s adoption date of Topic 606. The adoption of this pronouncement on June 30, 2017 and for the period then ended, there were2018 had no recently adopted accounting pronouncements that had a material effectimpact on theour Company’s financial statements.
Recently Issued Accounting Pronouncements Not Yet Adopted
In May 2014, the FASBAs of June 30, 2018, there are no recently issued ASU No. 2014-09,Revenue from Contracts with Customers (Topic 606). The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration toaccounting standards not yet adopted which the entity expects to be entitled in exchange for those goods or services. This guidance will supersede current revenue recognition guidance which is effective for the Companywould have a material effect on January 1, 2018. Under the new standard, the Company may be required to recognize revenue from license fees at the point in time when the license is granted as opposed to the recognition as earned over the license term which has been our historical practice. The Company has not determined the method to be used in applying the amendments in this standard.Company’s financial statements.
Off-Balance Sheet Arrangements
TheOur Company does not have any off-balance sheet arrangements.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures.TheOur Company’s management, with the participation of theour Company’s Principal Executive Officer and Principal Financial Officer, evaluated the effectiveness of theour Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) as of SeptemberJune 30, 2017.2018. Based on this evaluation, theour Company’s Principal Executive Officer and Principal Financial Officer concluded that, as of SeptemberJune 30, 2017 the2018, our Company’s disclosure controls and procedures were effective, in that they provide reasonable assurance that information required to be disclosed by theour Company in the reports that it files or submits under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and is accumulated and communicated to theour Company’s management, including theour Company’s Principal Executive Officer and Principal Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
Changes in Internal Control Over Financial Reporting. There were no changes in our internal control over financial reporting during the quarter ended SeptemberJune 30, 20172018 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II - OTHER INFORMATION
(a) Exhibits
| Certification of Chief Executive Officer required by Rule 13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
| Certification of Chief Financial Officer required by Rule 13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
| Certifications of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |
| 101.INS | XBRL Instance Document |
| 101.SCH | XBRL Taxonomy Extension Schema |
| 101.CAL | XBRL Taxonomy Extension Calculation Linkbase |
| 101.DEF | XBRL Taxonomy Extension Definition Linkbase |
| 101.LAB | XBRL Taxonomy Extension Label Linkbase |
| 101.PRE | XBRL Taxonomy Extension Presentation Linkbase |
Pursuant to the requirement of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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| NOCOPI TECHNOLOGIES, INC. |
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DATE: |
| /s/ Michael A. Feinstein, M.D. |
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| Michael A. Feinstein, M.D. |
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| Chairman of the Board, President & Chief Executive Officer |
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DATE: |
| /s/ Rudolph A. Lutterschmidt |
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| Rudolph A. Lutterschmidt |
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| Vice President & Chief Financial Officer |
Certification of Chief Executive Officer required by Rule 13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
Certification of Chief Financial Officer required by Rule 13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
Certifications of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |
101.INS | XBRL Instance Document |
101.SCH | XBRL Taxonomy Extension Schema |
101.CAL | XBRL Taxonomy Extension Calculation Linkbase |
101.DEF | XBRL Taxonomy Extension Definition Linkbase |
101.LAB | XBRL Taxonomy Extension Label Linkbase |
101.PRE | XBRL Taxonomy Extension Presentation Linkbase |
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