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 June 30, 20182019

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)

480 Shoemaker Road, Suite 104, King of Prussia, PA 19406

(Address of principal executive offices) (Zip Code)

(610) 834-9600

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:  None.

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, 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.

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 ExchangeSecurities 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: 58,616,716 shares of common stock, par value $0.01, as of August 10, 2018.

9, 2019.

NOCOPI TECHNOLOGIES, INC.

INDEX

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

Nocopi Technologies, Inc.

Statements of Operations*

(unaudited)

*See accompanying notes to these financial statements.

Nocopi Technologies, Inc.

Balance Sheets*

*See accompanying notes to these financial statements.

Nocopi Technologies, Inc.

Statements of Cash Flows*

(unaudited)

*See accompanying notes to these financial statements.

Nocopi Technologies, Inc.

Statements of Stockholders’ Equity*

For the Periods December 31, 2018 through June 30, 2019 and December 31, 2017 through June 30, 2018

(unaudited)

* See accompanying notes to these financial statements.

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. (the(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 theour Company's 20172018 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 theour Company believes that the accompanying disclosures are adequate to make the information presented not misleading. The Notes to Financial Statements included in the 20172018 Annual Report on Form 10-KForm10-K should be read in conjunction with the accompanying interim financial statements. The interim operating results for the three months and six months ended June 30, 20182019 may not be necessarily indicative of the operating results expected for the full year.

TheOur 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 theour Company has no items of other comprehensive income, comprehensive income (loss) is equal to net income (loss).income.

Note 2. Revenues

On January 1, 2018, theour Company adopted ASU 214-09,Revenue from Contracts with Customers (“Topic 606”), using the modified retrospective method. Results for periods beginning on or after January 1, 2018 are presented under Topic 606; however, prior period amounts are not adjusted and continue to be reported in accordance with Topic 605,Revenue Recognition, which was in effect for those periods.

TheOur Company recorded a decrease to the opening balance of the accumulated deficit of $96,100 and a corresponding charge to deferred revenue as of January 1, 2018 due to the cumulative impact of the adoption of Topic 606. The impact to the revenue for the quarter ended March 31, 2018 as a result of applying Topic 606 was not material. The disclosure of disaggregated revenue is disclosed in Note 9.10.

The adoption of the new guidance affected our recognition of revenue from licenses and royalties. Under our previous accounting practice, we recognized revenue from licenses and royalties on a straight-line basis over the term of the related license agreement. As a result of our adoption of the new guidance, we will recognize revenue from 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 of imputed interest of licenses, royalties and fees and $106,500 of selling expenses in the second quarter and first 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 balance sheet.

The change in accumulated deficit on our Balance Sheet at June 30, 2018, including the aggregate impact of the change in accounting principles which was effective on January 1, 2018, was as follows:

45

NOCOPI TECHNOLOGIES, INC.

NOTES TO FINANCIAL STATEMENTS

(UNAUDITED)

Note 3. Stock Based Compensation

TheOur 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 June 30, 2018, the2019, our Company did not have an active stock option plan. There was no unrecognized portion of expense related to stock option grants at June 30, 2018.2019.

Note 4. Line of Credit

In November 2018, our Company negotiated a $150,000 revolving line of credit with a bank to provide a source of working capital, if required. The line of credit is secured by all the assets of our Company and bears interest at the bank’s prime rate for a period of one year and its prime rate plus 1.5% thereafter. The line of credit is subject to an annual review and quiet period. There have been no borrowings under the line of credit since its inception.

Note 4.5. Convertible Debentures

At June 30, 2018, the2019, our Company had convertible debentures totaling $128,300 outstanding, which are due during the third quarter of 2018.2019. 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 theour Company at $0.025 per share. DuringAs of the first quarter of 2017, the Company’s Board of Directors approved and thecurrent date, holders of $33,300$92,900 of those 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 third quarter of 2018, the holders of $103,300 of convertible debentureshave agreed to extend the maturity dates of thosethe convertible debentures for one year with no change in the terms or conditions of the debentures.

TheOur Company also granted warrants to purchase 691,365 shares of theour Company’s common stock at $0.02 per share to the holders of the debentures. The warrants are currently exercisable two years after issuance and expire seven years after issuance.at various dates in the third quarter of 2020 and the third quarter of 2021. 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.

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 theour 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.

The following table summarizes theour Company’s warrant position at June 30, 20182019 and December 31, 2017:2018:

The aggregate intrinsic value of warrants outstanding and exercisable as of June 30, 2019 was approximately $18,500. The aggregate intrinsic value is calculated as the difference between the exercise price of the underlying warrants and the closing stock price of $0.0468 for the Company’s common stock on June 30, 2019.

Note 6. Other Income (Expenses)

Other income (expenses) for the three months and six months ended June 30, 2019 and 2018 includes interest on convertible debentures held by nine investors.

56

NOCOPI TECHNOLOGIES, INC.

NOTES TO FINANCIAL STATEMENTS

(UNAUDITED)

Note 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 6.7. Income Taxes

There is no provision for federal income taxes for the three months and six months ended June 30, 20182019 and June 30, 20172018 due to the availability of net operating loss carryforwards. TheOur Company has established a valuation allowance for the entire amount of benefits resulting from theour Company’s net operating loss carryforwards because theour 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:

There was no change in unrecognized tax benefits during the period ended June 30, 20182019 and there was no accrual for uncertain tax positions as of June 30, 2018.2019.

Tax years from 20142015 through 20172018 remain subject to examination by U.S. federal and state jurisdictions.

Note 7.8. Related Party Transactions

During the six months ended June 30, 2018, theour Company paid $235,400 to Michael A. Feinstein, M.D., theour Company’s Chairman of the Board and Chief Executive Officer, representing the balance of previously deferred salary owed to him under an employment agreement with theour Company. During the six months ended June 30, 2017, 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 $35,400 of salary. During the six month period endedThe deferred salary was fully repaid to Dr. Feinstein during 2018 and, at 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, 2018,2019, there was no remaining deferred salary owed to Dr. Feinstein.him. There was no interest payable on the deferred salary.

Note 8.9. 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 theour Company with related proceeds. For the three and six months ended June 30, 2019, the number of incremental common shares resulting from the assumed conversion of warrants was 356,564 and 371,289, respectively. For the three and six months ended June 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 370,144 and 290,162, respectively.

Note 9.10. Major Customer and Geographic Information

TheOur 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:

67

NOCOPI TECHNOLOGIES, INC.

NOTES TO FINANCIAL STATEMENTS

(UNAUDITED)

TheOur Company’s non-affiliate customers whose individual balances amounted to more than 10% of theour Company’s net accounts receivable, expressed as a percentage of net accounts receivable, were:

TheOur Company performs ongoing credit evaluations of its customers and generally does not require collateral. TheOur Company also maintains allowances for potential credit losses. The loss of a major customer could have a material adverse effect on theour Company’s business operations and financial condition.

TheOur Company’s revenues by geographic region are as follows:

Note 11. 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%. 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.

Future minimum lease payments under non-cancelable operating leases with initial or remaining terms of one year or more at June 30, 2019 are: $25,200 – 2019; $51,600 – 2020; $53,100 – 2021; $54,600 – 2022; $56,200 – 2023 and $18,900 – 2024.

Total lease expense under operating leases for the three and six months ended June 30, 2019 was $13,400 and $26,700, respectively. Total lease expense under operating leases for the three and six months ended June 30, 2018 was $11,300 and $22,500, respectively.

8

NOCOPI TECHNOLOGIES, INC.

NOTES TO FINANCIAL STATEMENTS

(UNAUDITED)

Maturities of lease liabilities are as follows:

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Forward-Looking Information

This report on Form 10-Q contains, and our officers and representatives may from time to time make, "forward-looking statements" within the meaning of the safe harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. Forward-looking statements can be identified by words such as: "anticipate," "intend," "plan," "goal," "seek," "believe," "project," "estimate," "expect," "strategy," "future," "likely," "may," "should," "will" and similar references to future periods. Examples of forward-looking statements include, among others, statements we make regarding:regarding

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:

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, 2017,2018, filed with the Securities and Exchange Commission on March 29, 2018.2019.

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

Our Company’s revenues are derived from (a) royalties paid by licensees of our technologies, (b) fees for the provision of technical services to licensees and (c) from the direct sale of (i) products incorporating our technologies, such as inks, security paper and pressure sensitive labels, and (ii) equipment used to support the application of our technologies, such as ink-jet printing systems. Royalties consist of guaranteed minimum royalties payable by our licensees in certain cases and additional royalties which typically vary with the licensee’s sales or production of products incorporating the licensed technology. Service fees and sales revenues vary directly with the number of units of service or product provided.

Our Company recognizes revenue on its lines of business as follows:

We believe that, as fixed cost reductions beyond those we have achieved in recent years may not be achievable, our operating results are substantially dependent on revenue levels. Because revenues derived from licenses and royalties carry a much higher gross profit margin than other revenues, operating results are also substantially affected by changes in revenue mix.

Both the absolute amount of our Company’s revenues and the mix among the various sources of revenue are subject to substantial fluctuation. We have a relatively small number of substantial customers rather than a large number of small customers. Accordingly, changes in the revenue received from a significant customer can have a substantial effect on our Company’s total revenue, revenue mix and overall financial performance. Such changes may result from a substantial customer’s product development delays, engineering changes, changes in product marketing strategies, production requirements and the like. In addition, certain customers have, from time to time, sought to renegotiate certain provisions of their license agreements and, when our Company agrees to revise such terms, revenues from the customer may be affected.

Revenues for the second quarter of 20182019 were $1,873,700$516,100 compared to $359,600$1,873,700 in the second quarter of 2017, an increase2018, a decrease of $1,514,100,$1,357,600, or approximately 421%72%. 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 2019 as a result of 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 increaseddecreased by $1,523,700,$1,463,600, or approximately 1,155%88%, to $192,000 in the second quarter of 2019 from $1,655,600 in the second quarter of 2018 from $131,900 in the second quarter of 2017.2018. The increasedecrease in licenses, royalties and fees is due primarily to the adoption of Topic 606 in the second quarter of 2018 described above. There can be no assurances that the marketing and product development activities of our Company’s licensees or other businesses in the entertainment and toy products market will produce a significant increase in revenues for our Company, nor can the timing of any potential revenue increases be predicted, particularly given the uncertain economic conditions being experienced worldwide. 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.

On a comparative basis, excluding revenues related to the adoption of Topic 606 in the second quarter of 2018, revenues of $516,100 in the second quarter of 2019 were $164,100, or 47% higher than revenues of $352,000 in the second quarter of 2018. On a comparative basis, excluding revenues related to the adoption of Topic 606 in the second quarter of 2018, revenues from licenses, royalties and fees of $192,000 in the second quarter of 2019 were $58,100, or 43% higher than revenues of $133,900 from licenses, royalties and fees in the second quarter of 2018.

Product and other sales decreasedincreased by $9,600,$106,000, or approximately 4%49%, to $324,100 in the second quarter of 2019 from $218,100 in the second quarter of 2018 from $227,7002018. Sales of ink increased in the second quarter of 2017. Sales of ink decreased nominally in the second quarter of 20182019 compared to the second quarter of 20172018 due primarily to lowerhigher ink shipments to athe third party authorized printerprinters used by onetwo of our Company’s major licensees in the entertainment and toy products market. In the second quarter of 2018,2019, our Company derived revenues of approximately$1,806,700 $436,100 from our licensees and their authorized printers in the entertainment and toy products market compared to revenues of approximately $305,200$1,806,700 in the second quarter of 2017. The increase in2018.

For the first six months of 2019, revenues were $925,500, representing a decrease of $1,373,600, or approximately 60%, from our licensees and their authorized printersrevenues of $2,299,100 in the entertainmentfirst six months of 2018. Licenses, royalties and toy products marketfees decreased by $1,448,000, or approximately 79%, to $382,500 in the first six months of 2019 from $1,830,500 in the first six months of 2018. As in the second quarter of 2018 compared to2019, the second quarter of 2017decrease in licenses, royalties and fees is due primarily to the adoption of Topic 606 described above.

ForOn a comparative basis, excluding revenues related to the adoption of Topic 606 in the first six months of 2018, revenues were $2,299,100, representing an increase of $1,598,100, or approximately 228%, from revenues of $701,000$925,500 in the first six months of 2017. Licenses, royalties and fees increased by $1,539,800,2019 were $148,100, or approximately 530%,19% higher than revenues of $777,400 in the first six months of 2018. On a comparative basis, excluding revenues related to $1,830,500the adoption of Topic 606 in the first six months of 2018, revenues from $290,700licenses, royalties and fees of $382,500 in the first six months of 2017. As in the second quarter2019 were $73,700, or 24% higher than revenues of 2018, the increase in$308,800 from licenses, royalties and fees in the first six months of 2018 compared to the first six months of 2017 is due primarily to the adoption of Topic 606.2018.

Product and other sales increased by $58,300,$74,400, or approximately 14%16%, to $543,000 in the first six months of 2019 from $468,600 in the first six months of 2018 from $410,3002018. Sales of ink increased in the first six months of 2017. Sales of ink increased in the six months of 20182019 compared to the first six of 20172018 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 lowerand higher ink shipments to our Company’s licensees in the retail receipt and document fraud market. Our Company derived revenues of approximately $2,176,000$772,000 from licensees and their authorized printers in the entertainment and toy products market in the first six months of 20182019 compared to revenues of approximately $587,700$2,176,000 in the first six months of 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 606.2018.

Our Company’s gross profit increaseddecreased to $361,100 in the second quarter of 2019, or approximately 70% of revenues, from $1,756,100 in the second quarter of 2018 or approximately 94% of revenues, from $238,700 in the second quarter of 2017 or approximately 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 our Company’s technologies or equipment used to support the application of its technologies. These items (except for inks which are manufactured by our Company) are generally purchased from third-party vendors and resold to the end-user or licensee and carry a lower gross profit than licenses, royalties and fees. The higherlower gross profit in the second quarter of 20182019 compared to the second quarter of 20172018 results primarily from higherlower licenses, royalties and fees due to the adoption of Topic 606 in the second quarter of 2018 offset in part by lowerhigher gross revenues from product and other sales in the second quarter of 20182019 compared to the second quarter of 2017.2018.

For the first six months of 2018,2019, gross profit was $2,064,300,$655,000, or approximately 90%71% of revenues, compared to $486,900,$2,064,300, or approximately 69%90% of revenues, in the first six months of 2017.2018. The higherlower gross profit in the first six months of 20182019 compared to the first six months of 20172018 results primarily from both higherlower licenses, royalties and fees due to the adoption of Topic 606 andin the second quarter of 2018 offset in part by higher gross revenues from product and other sales in the first six months of 20182019 compared to the first six months of 2017.2018.

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 increaseddecreased to approximately 84% in the second quarter of 2019 compared to approximately 99% in the second quarter of 2018 compared to approximately 80% in the second quarter of 2017 and to approximately 97%85% of revenues from licenses, royalties and fees in the first six months of 20182019 from approximately 84%97% in the first six months of 2017.2018.

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 decreasedincreased to approximately 62% of revenues in the second quarter of 2019 compared to approximately 57% of revenues in the second quarter of 2018 compared to approximately 59% of revenues in the second quarter of 2017.2018. This decreaseincrease was due to lowerhigher sales volume of product and other sales and lower margins on certaina favorable mix of products due primarily to higher prices of certain raw materials.sold. For the first six months of 2018,2019, the gross profit, expressed as a percentage of revenues, increased to approximately 60%61% of revenues from product and other sales compared to approximately 59%60% of revenues from product and other sales in the first six months of 2017.2018.

Research and development expenses of $39,400 and $77,400 in the second quarter and first six months of 2019, respectively, were comparable to $36,100 and $73,200 in the second quarter and first six months of 2018, respectively, were comparable to $36,500 and $72,900 in the second quarter and first six months of 2017, respectively.

Sales and marketing expenses increaseddecreased to $74,300 in the second quarter of 2019 from $168,500 in the second quarter of 2018 from $59,800 in the second quarter of 2017 and to $238,800$143,200 in the first six months of 20182019 from $120,700$238,600 in the first six months of 2017.2018. This increasedecrease is due primarily to higherlower commission expense on the higherlower level of sales in the second quarter and first six months of 20182019 compared to the second quarter and first six months of 20172018 related to the additional revenue generated in 2018 as a result of the adoption of Topic 606.606 in the second quarter of 2018.