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United States

Securities and Exchange Commission

Washington, D.C. 20549

 

Form 10-Q

(Mark One)

 

☒  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934.

 

For the quarterly period ended September 30, 2024

 

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)

 

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

 

Title of each class Trading Symbol(s) Name of each exchange on which registered
     

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒  No ☐

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒  No ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer   ☐ Accelerated filer   ☐
Non-accelerated filer     ☒ Smaller reporting company  ☒
  Emerging growth company  ☐

 

If an emerging growth company, indicate by checkmark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Securities Act. ☐

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐  No ☒

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 10,523,108 shares of common stock, par value $0.01, as of November 7, 2024.

 

 

 
 

 

 

NOCOPI TECHNOLOGIES, INC.

 

INDEX

 

  PAGE
Part I. FINANCIAL INFORMATION  
   
Item 1. Financial Statements 1
   
Statements of Comprehensive Loss for Three Months and Nine Months Ended September 30, 2024 and September 30, 2023 1
Balance Sheets at September 30, 2024 and December 31, 2023 2
Statements of Cash Flows for Nine Months Ended September 30, 2024 and September 30, 2023 3
Statements of Stockholders’ Equity for Three Months and Nine Months Ended September 30, 2024 and September 30, 2023 4
Notes to Financial Statements 5
   
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 11
   
Item 3. Quantitative and Qualitative Disclosures About Market Risk 16
   
Item 4. Controls and Procedures 16
   
Part II. OTHER INFORMATION  
   
Item 1. Legal Proceedings 17
   
Item 1A. Risk Factors 17
   
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds. 17
   
Item 3. Defaults Upon Senior Securities 17
   
Item 4. Mine Safety Disclosures 17
   
Item 5. Other Information 17
   
Item 6. Exhibits 17
   
SIGNATURES 18
   

 

 i

 
 

 

 

PART I – FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

Nocopi Technologies, Inc.

Statements of Comprehensive (Loss

(unaudited)

                 
   Three Months ended
September 30		   Nine Months ended
September 30		 
   2024   2023   2024   2023 
Revenues                
Licenses, royalties and fees  $151,500   $136,900   $327,000   $410,100 
Product and other sales   516,900    438,200    1,198,700    1,356,300 
Total revenues   668,400    575,100    1,525,700    1,766,400 
                     
Cost of revenues                    
Licenses, royalties and fees   59,300    62,700    162,000    171,200 
Product and other sales   228,800    247,300    587,500    648,300 
Total cost of revenues   288,100    310,000    749,500    819,500 
Gross profit   380,300    265,100    776,200    946,900 
                     
Operating expenses                    
Research and development   43,600    39,800    127,100    119,900 
Sales and marketing   91,600    71,200    236,500    218,600 
General and administrative   727,400    833,800    3,196,900    1,258,300 
Total operating expenses   862,600    944,800    3,560,500    1,596,800 
Net loss from operations   (482,300)   (679,700)   (2,784,300)   (649,900)
                     
Other income (expenses)                    
    Other income   84,000    —    84,000    — 
Interest income   153,000    69,800    432,900    192,300 
Interest expense and bank charges   (5,800)   (4,000)   (17,300)   (9,000)
Total other income (expenses)   231,200    65,800    499,600    183,300 
Net loss before income taxes   (251,100)   (613,900)   (2,284,700)   (466,600)
Income taxes benefit   —    (160,600)   —    (122,700)
Net loss  $(251,100)  $(453,300)  $(2,284,700)  $(343,900)
                     
Net loss per common share                    
Basic  $(.02)  $(.05)  $(.22)  $(.04)
Diluted  $(.02)  $(.05)  $(.22)  $(.04)
                     
Weighted average common shares outstanding                    
Basic and diluted   10,508,488    9,667,845    10,503,615    9,390,067 

 

See accompanying notes to these condensed financial statements.

 

 

1 
 

 

 

Nocopi Technologies, Inc.

Balance Sheets

 (unaudited)

         
   September 30   December 31 
   2024   2023 
Assets
Current assets          
Cash and cash equivalents  $10,940,900   $2,269,200 
Accounts receivable less $12,000 allowance for credit losses   1,253,500    1,120,700 
Inventory, net of allowance of $79,700 and $126,900, respectively    351,500    448,000 
Interest receivable   —    160,000 
Short-term investments   —    7,985,600 
Prepaid and other current assets   129,700    121,800 
Total current assets   12,675,600    12,105,300 
           
Fixed assets          
Leasehold improvements   81,500    81,500 
Furniture, fixtures and equipment   179,700    169,800 
Fixed assets, gross   261,200    251,300 
Less: accumulated depreciation and amortization   240,500    214,800 
Total fixed assets   20,700    36,500 
Other assets          
Long-term receivable   1,428,400    1,838,500 
Operating lease right of use – building   51,800    17,600 
Other assets   1,480,200    1,856,100 
Total assets  $14,176,500   $13,997,900 
           
Liabilities and Stockholders' Equity          
           
Current liabilities          
Accounts payable  $68,400   $27,500 
Accrued expenses   186,200    94,600 
Stock compensation payable   3,584,700    1,347,100 
Operating lease liability – current   51,800    17,600 
Total current liabilities   3,891,100    1,486,800 
           
Other liabilities          
Accrued expenses – non-current   99,900    128,600 
Total other liabilities   99,900    128,600 
Stockholders' equity          
Common stock, $0.01 par value
Authorized – 75,000,000 shares
Issued and outstanding – 10,523,108 shares		   105,200    105,000 
Paid-in capital   21,734,600    21,647,100 
Accumulated deficit   (11,654,300)   (9,369,600)
Total stockholders' equity   10,185,500    12,382,500 
Total liabilities and stockholders' equity  $14,176,500   $13,997,900 

 

 

See accompanying notes to these condensed financial statements.

 

 

2 
 

 

  

Nocopi Technologies, Inc.

Statements of Cash Flows

(unaudited)

         
   Nine Months ended
September 30		 
   2024   2023 
Operating Activities          
Net loss  $(2,284,700)  $(343,900)
Adjustments to reconcile net loss to net cash provided by operating activities          
Depreciation and amortization   25,700    32,500 
Stock-based compensation   2,325,300    420,600 
Amortization of operating lease right of use-building   48,800    37,700 
Inventory reserve   (47,200)   (16,100)
(Increase) decrease in assets          
Accounts receivable   (132,800)   (254,300)
Inventory   143,700    118,000 
Interest receivable   160,000    — 
Prepaid and other current assets   (7,900)   2,100 
Long-term receivables   410,100    469,400 
Increase (decrease) in liabilities          
Accounts payable   40,900    (500)
Accrued expenses   62,900    26,500 
Operating lease liability   (48,800)   (37,700)
Taxes on income   —    (287,100)
Net cash provided by operating activities   696,000    167,200 
           
Investing Activities          
Additions to fixed assets   (9,900)   (28,500)
Sale of short-term investment   7,985,600    — 
Net cash provided by (used in) investing activities   7,975,700    (28,500)
           
Financing Activities          
     Issuance of common stock   —    5,000,000 
Net cash provided by financing activities   —    5,000,000 
           
Increase in cash and cash equivalents   8,671,700    5,138,700 
           
Cash and Cash Equivalents          
  Beginning of period   2,269,200    5,337,800 
  End of period  $10,940,900   $10,476,500 
           
Supplemental non-cash schedule of activities:          
Right of use asset and liability  $83,000   $— 

 

 

See accompanying notes to these condensed financial statements.

  

 

3 
 

 

 

Nocopi Technologies, Inc.

Statements of Stockholders’ Equity

For Three Months and Nine Months ended September 30, 2024 and September 30, 2023

(unaudited)

 

                     
   Common stock   Paid-in   Accumulated     
   Shares   Amount   Capital   Deficit   Total 
Balance at December 31, 2023   10,501,178   $105,000   $21,647,100   $(9,369,600)  $12,382,500 
                          
Net loss   —    —    —    (1,028,200)   (1,028,200)
Balance at March 31, 2024   10,501,178    105,000    21,647,100    (10,397,800)   11,354,300 
                          
Net loss   —    —    —    (1,005,400)   (1,005,400)
Balance at June 30, 2024   10,501,178   $105,000   $21,647,100   $(11,403,200)  $10,348,900 
                          
Issuance of common stock for services   21,930    200    87,500    —    87,700 
                          
Net loss   —    —    —    (251,100)   (251,100)
Balance at September 30, 2024   10,523,108   $105,200   $21,734,600   $(11,654,300)  $10,185,500 

 

                 
                 
   Common stock   Paid-in   Accumulated     
   Shares   Amount   Capital   Deficit   Total 
Balance at December 31, 2022   9,251,178   $92,500   $16,659,600   $(7,933,700)  $8,818,400 
                          
Net income   —    —    —    30,300    30,300 
Balance at March 31, 2023   9,251,178    92,500    16,659,600    (7,903,400)   8,848,700 
                          
Net income   —    —    —    79,100    79,100 
Balance at June 30, 2023   9,251,178   $92,500   $16,659,600   $(7,824,300)  $8,927,800 
                          
Issuance of common stock   1,250,000    12,500    4,987,500    —    5,000,000 
                          
Net loss   —    —    —    (453,300)   (453,300)
Balance at September 30, 2023   10,501,178   $105,000   $21,647,100   $(8,277,600)  $13,474,500 

 

 

See accompanying notes to these condensed financial statements.

 

 

4 
 

 

  

NOCOPI TECHNOLOGIES, INC.

NOTES TO FINANCIAL STATEMENTS

(UNAUDITED)

 

Note 1. Financial Statements

 

The accompanying unaudited condensed financial statements have been prepared by Nocopi Technologies, Inc. (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 Note 2 Significant Accounting Policies included in the Notes to Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2023, as filed with the Securities and Exchange Commission on March 25, 2024 (the “2023 Annual Report”). Certain financial information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations, although the Company believes that the accompanying disclosures are adequate to make the information presented not misleading. The Notes to Financial Statements included in the 2023 Annual Report should be read in conjunction with the accompanying interim financial statements. The interim operating results for the three months and nine months ended September 30, 2024 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 (loss).  Comprehensive income (loss) 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 (loss).  Since the Company has no items of other comprehensive income (loss), comprehensive income (loss) is equal to net income (loss).

 

Reclassifications

 

Certain reclassifications have been made to the 2023 Statement of Cash Flows in order to conform to the 2024 Statement of Cash Flows presentation.

     

Recently Issued Accounting Pronouncements Not Yet Adopted

As of September 30, 2024, there are no recently issued accounting standards not yet adopted which would have a material effect on the Company's financial statements.

Recently Adopted Accounting Pronouncements

As of September 30, 2024 and for the period then ended, there are no recently adopted accounting standards that have a material effect on the Company's financial statements.

Note 2. 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. On June 17, 2024, the Company’s shareholders approved the Nocopi Technologies, Inc. 2024 Incentive Compensation Plan (the “2024 Plan”), which allows the Company to issue equity awards to directors, officers, other employees and consultants of the Company. As of September 30, 2024, 1,649,769 restricted stock units (“RSUs”) have been granted under the 2024 Plan. As of September 30, 2024, the unamortized value related to grants under the 2024 Plan was $1,410,000.   

 
5 

NOCOPI TECHNOLOGIES, INC.

NOTES TO FINANCIAL STATEMENTS

(UNAUDITED)

 

 

As part of an employment agreement, the Company granted (the “Prior Grant”) to an executive a one-time equity award of 1,000,000 restricted stock units (“RSUs”) of the Company’s common stock valued at $3,580,000, fair value, which award was originally set to vest in its entirety on August 18, 2024. The fair market value of the restricted stock award was determined based on the closing price of the Company’s common stock on the grant date and was expensed on a straight-line basis to general and administrative expense as stock-based compensation over the one-year vesting term. The Company recorded stock-based compensation expense of $479,300 and $2,259,500   for the three and nine months ended September 30, 2024, respectively. Under the original terms of the award, to the extent the Company had not established an employee equity compensation plan on or prior to August 18, 2024, the restricted shares may have been converted, at the election of the executive, in full or in part, into cash compensation, at a rate of $3.58 per share of common stock, which was the fair market value of the common stock on October 10, 2023, which was the date the Board of Directors approved the grant. Since the issuance of the restricted stock can be settled in cash, the monthly expense was credited to a liability account, stock compensation liability, instead of equity.

On August 16, 2024, the executive agreed to cancel and forfeit the Prior Grant and, in lieu of the Prior Grant, the Company granted the executive 1,649,769 RSUs (“Replacement Grant”), pursuant to and subject to the 2024 Plan and an award agreement, as approved by the Board of Directors. The fair market value of the replacement grant was $3,580,000, which was determined based on the closing price of the Company’s common stock on the grant date. The shares of common stock underlying the Replacement Grant shall vest ratably and quarterly over a two-year period beginning on the Replacement Grant date, August 16, 2024. The cancellation and issuance of the Replacement Grant is treated as a modification of an award under FASB ASC 718. This modification resulted in an incremental fair value of $1,410,000, calculated as the difference between the fair value of the Replacement Grant and the fair value of the Prior Grant on the modification date. The incremental fair value will be recognized as additional compensation expense on a straight-line basis over the new two-year vesting period. The Company will relieve the stock compensation liability on a proportional basis as the Replacement Grant vests.

Note 3. Cash and Cash Equivalents

        
  

September 30

2024

  

December 31

2023

 
Cash and cash equivalents          
  Cash and money market funds  $10,940,900   $2,269,200 
 Cash and cash equivalents  $10,940,900   $2,269,200 

 

Note 4. Inventories

        
  

September 30

2024

  

December 31

2023

 
Inventories consist of the following:          
  Raw materials  $411,500   $534,500 
  Work in process   —    11,900 
  Finished goods   19,700    28,500 
 Inventory gross   431,200    574,900 
  Less: Allowance   (79,700)   (126,900)
 Inventory  $351,500   $448,000 

 

Note 5. Short-term Investments 

        
   September 30   December 31 
   2024   2023 
Short-term investments          
   U.S. Treasury Bills  $—   $7,985,600 
   Short-term investments  $—   $7,985,600 

 

All U.S. Treasury Bills have matured as of September 30, 2024.

  

Total interest income recognized for U.S. Treasury Bills was $49,700 and $42,500 for the three months ended September 30, 2024 and 2023, respectively and $229,400 and $129,800 for the nine months ended September 30, 2024 and 2023, respectively. Interest receivable was $0 and $160,000 for the nine months ended September 30, 2024 and for the year ended December 31, 2023, respectively. 

 

6 

NOCOPI TECHNOLOGIES, INC.

NOTES TO FINANCIAL STATEMENTS

(UNAUDITED)

 

 

Note 6. Long-term Receivables

 

As of September 30, 2024, the Company had long-term receivables of $1,428,400 from two of the three licensees representing the present value of fixed guaranteed royalty payments that will be payable over varying periods of two through five years that commenced in the second half of 2022 and terminate in the second quarter of 2028. The fixed guaranteed royalty payments result from amendments to license agreements with two existing licensees and a license agreement with a new licensee. The receivable represents the present value of the fixed minimum annual payments due under the license agreements, discounted at the Company's incremental borrowing rate of 4%. 

 

The three agreements grant licenses for the use of certain patented ink technology as it exists at the time that it is granted which is considered functional intellectual property. Under Topic 606, a performance obligation to transfer a license for functional intellectual property is satisfied at a point in time and the fixed consideration could be recognized upfront when the Company transfers control of the licensee if certain criteria are met. Specifically, the minimum royalty guarantee could be recognized upfront if the following conditions are met:

 

  · The royalty payment is fixed or determinable

 

  · Collection of the royalty payment is considered probable

 

  · The licensee has the ability to benefit from the licensed technology

 

The Company determined that the above conditions were met upon execution of the 2022 license agreements and recognized $2,810,600 of royalty revenue net of imputed interest of $131,300 for the year ended December 31, 2022. The commissions are payable over the term of the license agreements and are due when payments are received by the Company. As of September 30, 2024, the accrued commission payable balance was approximately $139,400, which is included in accrued expenses. 

 

The current portion of the three license agreements in the amount of $565,300 and $624,600, is included in accounts receivable on the balance sheets as of September 30, 2024 and December 31, 2023, respectively.

 

The following table summarizes the future minimum payments due under the three license agreements as of September 30, 2024:

       
Year Ending December 31:        
  2024     $ 160,500  
  2025       570,000  
  2026       570,000  
  2027       557,500  
  2028       260,000  
     Total     $ 2,118,000  

 

The Company has evaluated the collectability of the long-term receivables and believes them to be fully collectible as of September 30, 2024. However, there can be no assurance that the receivables will not be impaired in the future due to changes in the licensees’ financial condition or other factors. 

 

The long-term receivables are recorded at its present value as of September 30, 2024, and the receivable and imputed interest will be amortized over the term of the license agreements using the effective interest method. The unamortized balance of the long-term receivables as of September 30, 2024 and December 31, 2023 was $1,428,400 and $1,838,500. The unamortized imputed interest balance as of September 30, 2024 was $124,300, which will be recognized as interest income through June 30, 2028. Interest income was $4,300 and $2,000 for the three months ended September 30, 2024 and 2023, respectively and $11,200 and $16,000  for the nine months ended September 30, 2024 and 2023, respectively.

 

 

7 

NOCOPI TECHNOLOGIES, INC.

NOTES TO FINANCIAL STATEMENTS

(UNAUDITED)

 

 

Note 7. Stockholders’ Equity

On September 11, 2023, the Company entered into a stock purchase agreement in connection with a private placement for total gross proceeds of $5.0 million. The stock purchase agreement provided for the issuance of an aggregate of 1,250,000 shares of the Company’s common stock to an investor at a purchase price of $4.00 per share. In addition, as consideration for general advisory services until the third anniversary, the Company agreed to issue an aggregate total of 65,790 shares of common stock with a total fair market value on the date of grant of $263,160, which shares shall be issued as follows: one-third (21,930 shares) on September 11, 2024, which was issued on such date, one-third (21,930 shares) on September 11, 2025 and one-third (21,930 shares) on September 11, 2026. The Company expenses the value of the stock grant, which is determined to be the fair market value of the shares at the date of grant, straight-line over the term of the advisory agreement. For the three and nine months ended September 30, 2024, the Company recognized $22,100 and $65,800, respectively of consulting expense associated with this issuance. On September 11, 2023, the sale pursuant to the Purchase Agreement closed. No placement fees or commissions were paid in connection with this transaction.

During the three months ended September 30, 2024 the Company issued 21,930 shares of its common stock for advisory services with a fair value of $87,700, which was fully expensed upon issuance.

The Company recognized share-based compensation of $501,400 and $420,600 for the three months ended September 30, 2024 and 2023 and $2,325,300 and $420,600 for the nine months ended September 30, 2024 and 2023. 

At September 30, 2024, the Company had no warrants outstanding.

Note 8. Income Taxes

 

There was no income tax benefit for the net losses for the three and nine months ended September 30, 2024 and September 30, 2023 due to the recording of a full valuation allowance as management has determined that it is more likely than not that that the realization of the net deferred tax assets would not be realized. However, the income tax benefit of $160,600 and $122,700 for the three and nine months ended September 30, 2023 is a result of a reversal of tax accruals.

 

The components for federal and state income tax expense are:

        
  

Nine Months ended

September 30

 
   2024   2023 
Current federal taxes  $—   $(122,700)
Current state taxes   —    — 
Income tax expense (benefit)  $—   $(122,700)

 

There was no change in unrecognized tax benefits during the period ended September 30, 2024 and there was no accrual for uncertain tax positions as of September 30, 2024. Tax years from 2021 through 2023 remain subject to examination by U.S. federal and state jurisdictions. The Federal net operating loss carryforward of $144,563   will not expire but is subject to 80% utilization of current year taxable income. The Pennsylvania State net operating loss carryforward is currently $2,039,134 as of September 30, 2024 and will begin to expire in 2024 and is subject to 40% utilization of current year taxable income but will be phased in to reach 80% utilization beginning in 2025.

  

Note 9. Loss per Share

 

In accordance with FASB ASC 260, Earnings per Share, basic loss per common share is computed using net loss divided by the weighted average number of common shares outstanding for the periods presented. Diluted loss per share are computed using weighted average number of common shares plus dilutive common share equivalents outstanding during the period. Since the Company did not have any common stock equivalents outstanding as of September 30, 2024 and September 30, 2023 and had net losses for the three and nine months then ended, basic and diluted earnings (loss) per share were the same.

 
8 

NOCOPI TECHNOLOGIES, INC.

NOTES TO FINANCIAL STATEMENTS

(UNAUDITED)

 

 

 

 

Note 10. 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

 
   2024   2023   2024   2023 
Customer A   75%   69%   71%   69%
Customer B   17%   18%   16%   17%

 

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 
   2024   2023 
Customer A   19%   — 
Customer B   73%   82%

 

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.

 

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

                 
  

Three Months ended

September 30

  

Nine Months ended

September 30

 
   2024   2023   2024   2023 
North America  $143,600   $140,700   $296,100   $414,300 
South America   —    600    600    600 
Asia   503,400    409,900    1,162,700    1,286,600 
Australia   21,400    23,900    66,300    64,900 
   $668,400   $575,100   $1,525,700   $1,766,400 

 

 

 
9 

NOCOPI TECHNOLOGIES, INC.

NOTES TO FINANCIAL STATEMENTS

(UNAUDITED)

 

 

 

 

Note 11. Leases

 

The Company conducts its operations in leased facilities under a non-cancelable operating lease, which was originally set to expire in April 2024. The lease has been extended for 13 months for a new term that began on May 1, 2024 and will expire on May 31, 2025.

 

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, the Company has capitalized the present value of the minimum lease payments commencing May 1, 2024, using an estimated incremental borrowing rate of 6.5%. The minimum lease payments do not include common area annual expenses which are considered to be non-lease components.

 

As of May 1, 2024 the operating lease right-of-use asset and operating lease liability amounted to $83,046 with no cumulative-effect adjustment to the opening balance of accumulated deficit.

 

There are no other material operating leases. The Company has elected not to recognize right-of-use assets and lease liabilities arising from short-term leases.

 

Total lease expense under operating leases for the three and nine months ended September 30, 2024 was $19,800 and $50,800, respectively. Total lease expense under operating leases for the three and nine months ended September 30, 2023 was $13,300 and $40,000, respectively.

 

Undiscounted future minimum lease payments as of September 30, 2024, by year and in aggregate are as follows:

         
      Operating Leases  
             
  2024     $  21,400  
  2025       35,700  
          57,100  
  Less interest       (5,300 )
  Total     $ 51,800  

 

Note 12. Employee Retention Tax Credit

 

The CARES Act, signed into law on March 27, 2020 with subsequent amendments, provides for refundable employee retention credit to employers whose operations were suspended due to COVID-19 or whose revenue significantly decreased. On June 15, 2023, the Company filed a Form 941-X to claim a refundable employee retention credit for the first quarter and third quarter 2021 payroll in the total amount of $84,000. In the quarter ended September 30, 2024, the Company received such credit and recorded the credit as other income in the accompanying Statement of Comprehensive Loss.

 

 

10 
 

 

  

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

 

Forward-Looking Information

 

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

 

  · Expected operating results, such as revenue, expenses and capital expenditures
  · Current or future volatility in market conditions
  · Our belief that we have sufficient liquidity to fund our business operations during the next twelve months
  · Strategy for customer retention, growth, product development, market position, and risk management

 

Forward-looking statements are neither historical facts nor assurances of future performance. Instead, they are based only on our current beliefs, expectations and assumptions regarding the future of our business, future plans and strategies, projections, anticipated events and trends, the economy and other future conditions. Because forward-looking statements relate to the future, they are subject to inherent uncertainties, risks and changes in circumstances that are difficult to predict and many of which are outside of our control. Our actual results and financial condition may differ materially from those indicated in the forward-looking statements. Therefore, you should not rely on any of these forward-looking statements. Important factors that could cause our actual results and financial condition to differ materially from those indicated in the forward-looking statements include, among others, the following:

 

  · The extent to which we are successful in gaining new long-term relationships with customers or retaining significant existing customers and the level of service failures that could lead customers to use competitors' services.
  · Strategic actions, including business acquisitions and our success in integrating acquired businesses.
  · Our ability to improve our current credit rating with our vendors and the impact on our raw materials and other costs and competitive position of doing so.
  · The impact of losing our intellectual property protections or the loss in value of our intellectual property.
  · Changes in customer demand.
  · The occurrence of hostilities, political instability or catastrophic events.
  · Developments and changes in laws and regulations, including increased regulation of our industry through legislative action and revised rules and standards.
  · Security breaches, cybersecurity attacks and other significant disruptions in our information technology systems.
  · Such other factors as discussed throughout Part I, Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations in this Quarterly Report on Form 10-Q, and throughout Part II, Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations and in Part I, Item 1A. Risk Factors of our Annual Report on Form 10-K for the year ended December 31, 2023.

 

 

11 
 

 

 

Any forward-looking statement made by us in this Report on Form 10-Q 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, 2023, filed with the Securities and Exchange Commission on March 25, 2024.

 

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

 

The 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.

 

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

 

  a. License fees for the use of our technology and royalties with guaranteed minimum amounts are recognized at a point in time when the term begins;
  b. Product sales are recognized at the time of the transfer of goods to customers at an amount that the 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 the Company expects to be entitled to in exchange for the services, which is when the service has been rendered.

 

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

 

Both the absolute amount of the 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 the 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 the Company agrees to revise such terms, revenues from the customer may be adversely affected.

 

12 
 

 

 

Revenues for the third quarter of 2024 were $668,400 compared to $575,100 in the third quarter of 2023, an increase of $93,300, or approximately 16%. Licenses, royalties and fees increased by $14,600, or approximately 11%, to $151,500 in the third quarter of 2024 from $136,900 in the third quarter of 2023. The increase in licenses, royalties and fees in the third quarter of 2024 compared to the third quarter of 2023 is due primarily to higher royalties from the Company’s licensees in entertainment and toy products markets. We cannot assure you that the marketing and product development activities of the Company’s licensees or other businesses in the entertainment and toy products market will produce a significant increase in revenues for the Company, nor can the timing of any potential revenue increases be predicted, particularly given the uncertain economic conditions presently being experienced.

 

Product and other sales increased by $78,700, or approximately 18%, to $516,900 in the third quarter of 2024 from $438,200 in the third quarter of 2023. Sales of ink increased in the third quarter of 2024 compared to the third quarter of 2023 due primarily to more ink shipments to the third party authorized printer used by two of the Company’s major licensees in the entertainment and toy products market. In the third quarter of 2024, the Company derived revenues of approximately $648,600 from our licensees and their authorized printers in the entertainment and toy products market compared to revenues of approximately $566,100 in the third quarter of 2023.

 

 For the first nine months of 2024, revenues were $1,525,700, representing a decrease of $240,700, or approximately 14%, from revenues of $1,766,400 in the first nine months of 2023. Licenses, royalties and fees decreased by $83,100, or approximately 20%, to $327,000 in the first nine months of 2024 from $410,100 in the first nine months of 2023. The decrease in licenses, royalties and fees is due primarily to lower royalties from the Company’s licensees in the entertainment and toy products market. We cannot assure you that the marketing and product development activities of the Company’s licensees or other businesses in the entertainment and toy products market will produce a significant increase in revenues for the Company, nor can the timing of any potential revenue increases be predicted, particularly given the uncertain economic conditions presently being experienced.

 

Product and other sales decreased by $157,600, or approximately 13%, to $1,198,700 in the first nine months of 2024 from $1,356,300 in the first nine months of 2023. Sales of ink decreased in the first nine months of 2024 compared to the first nine of 2023 due primarily to lower ink shipments to the third party authorized printer used by two of the Company’s major licensees in the entertainment and toy products market. The Company derived revenues of approximately $1,469,300 from licensees and their authorized printers in the entertainment and toy products market in the first nine months of 2024 compared to revenues of approximately $1,687,700 in the first nine months of 2023.  

 

The Company’s gross profit increased to $380,300 in the third quarter of 2024, or approximately 57% of revenues, from $265,100 in the third quarter of 2023, or approximately 46% of revenues. Licenses, royalties and fees have historically carried a higher gross profit than product and other sales, which generally consist of supplies or other manufactured products which incorporate the Company’s technologies or equipment used to support the application of its technologies. These items (except for inks which are manufactured by the 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.

 

For the first nine months of 2024, gross profit was $776,200, or approximately 51% of revenues, compared to $946,900, or approximately 54% of revenues, in the first nine months of 2023. The lower gross profit in the first nine months of 2024 compared to the first nine months of 2023 was primarily due to a decrease in gross profit from both licenses, royalties and fees and product and other sales.

 

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 increased to approximately 61% in the third quarter of 2024 compared to approximately 54% in the third quarter of 2023 and decreased to approximately 50% of revenues from licenses, royalties and fees in the first nine months of 2024 from approximately 58% in the first nine months of 2023.

 

 

13 
 

 

 

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 increased to approximately 56% of revenues in the third quarter of 2024 compared to approximately 44% of revenues in the third quarter of 2023. For the first nine months of 2024, the gross profit, expressed as a percentage of revenues, decreased to approximately 51% of revenues from product and other sales compared to approximately 52% of revenues from product and other sales in the first nine months of 2023

 

Research and development expenses increased in the third quarter of 2024 to $43,600 from $39,800 in the third quarter of 2023 and to $127,100 in the first nine months of 2024 from $119,900 in the first nine months of 2023 due primarily to higher employee related and lab expenses in the third quarter and first nine months of 2024 compared to the third quarter and first nine months of 2023.

 

Sales and marketing expenses increased to $91,600 in the third quarter of 2024 from $71,200 in the third quarter of 2023 and increased to $236,500 in the first nine months of 2024 from $218,600 in the first nine months of 2023. The increase in the third quarter and first nine months of 2024 compared to the third quarter and first nine months of 2023 is due primarily to higher commission and employee related expenses in the third quarter of 2024 compared to the third quarter of 2023.

 

General and administrative expenses decreased in the third quarter of 2024 to $727,400 from $833,800 in the third quarter of 2023 and increased to $3,196,900 in the first nine months of 2024 from $1,258,300 in the first nine months of 2023. The decrease in the third quarter is due primarily to lower employee related expenses and professional fees in the third quarter of 2024 compared to the third quarter of 2023. The increase in the first nine months is due primarily to higher stock-based compensation, higher professional fees, and higher employee related expenses in the first nine months of 2024 compared to the first nine months of 2023.

 

For the third quarter of 2024, there was no income tax benefit for the net losses for the third quarter of 2024 due to the recording of a full valuation allowance since it is more likely than not that that the realization of the net deferred tax assets would not be realized. Income taxes in the third quarter of 2024 include federal and state income taxes. The state income taxes result from limitations placed on income tax net operating loss deductions by the Commonwealth of Pennsylvania.

 

The net loss of $251,100 in the third quarter of 2024 compared to a net loss of $453,300 in the third quarter of 2023 resulted primarily from a higher gross profit on a higher level of licenses, royalties and fees and product sales, lower operating expenses and higher interest income, other income and no income tax benefit in the third quarter of 2024 compared to the third quarter of 2023. The net loss of $2,284,700 in the first nine months of 2024 compared to a net loss of $343,900 in the first nine months of 2023 resulted primarily from a lower gross profit on a lower level of license, royalties, and fees and product sales in the first nine months of 2024 compared to the first nine months of 2023, higher operating expense, interest income, other income and no income tax benefit in the first nine months of 2024 compared to the first nine months of 2023.

 

Plan of Operation, Liquidity and Capital Resources

 

During the first nine months of 2024, the Company’s cash increased to $10,940,900 at September 30, 2024 from $2,269,200 at December 31, 2023. During the first nine months of 2024, the Company generated $696,000 from its operating activities and provided $7,975,700 from investing activities.

 

During the first nine months of 2024, the Company’s revenues decreased approximately 16% primarily as a result of lower sales of ink to an authorized printer of the Company’s licensees in the entertainment and toy products market and lower royalty revenues from the Company’s licensees in the entertainment and toy products market. Our total overhead expenses increased in the first nine months of 2024 to $3,560,500 compared to $1,596,800 in the first nine months of 2023, the Company’s interest and other income increased and the Company’s income tax expense decreased in the first nine months of 2024 compared to the first nine months of 2023. As a result of these factors, the Company generated a net loss of $2,284,700 in the first nine months of 2024 compared to a net loss of $343,900 in the first nine months of 2023. The Company had positive operating cash flow of $696,000 and $7,985,600 from the sale of short-term investments during the first nine months of 2024. At September 30, 2024, the Company had positive working capital of $8,784,500 and stockholders’ equity of $10,185,500. For the full year of 2023, the Company had a net loss of $1,435,900 and had negative operating cash flow of $19,300. At December 31, 2023, the Company had working capital of $10,618,500 and stockholders’ equity of $12,382,500.

 

 

14 
 

 

 

Our plan of operation for the twelve months beginning with the date of this Quarterly Report on Form 10-Q consists of concentrating available human and financial resources to continue to capitalize on the specific business relationships the Company has developed in the entertainment and toy products market. This includes two licensees that have been marketing products incorporating the Company’s technologies since 2012. These two licensees maintain a significant presence in the entertainment and toy products market and are well known and highly regarded participants in this market. We anticipate that these two licensees will expand their current offerings that incorporate our technologies and will introduce and market new products that will incorporate our technologies available to them under their license agreements with the Company. We will continue to develop various applications for these licensees. We also plan to expand our licensee base in the entertainment and toy market. We currently have additional licensees marketing or developing products incorporating our technologies in certain geographic and niche markets of the overall entertainment and toy products market.

 

The Company maintains its presence in the retail loss prevention market and believes that revenue growth in this market can be achieved through increased security ink sales to its licensees in this market. We will continue to adjust our production and technical staff as necessary and, subject to available financial resources, invest in capital equipment needed to support potential growth in ink production requirements beyond our current capacity. Additionally, we will pursue opportunities to market our current technologies in specific security and non-security markets. There can be no assurances that these efforts will enable the Company to generate additional revenues and positive cash flow.

 

Our future growth strategy includes expanding our business through acquisitions of other companies with competing or complementary services, technologies or businesses in order to expand our product and service offerings to grow our free cash flow. We are currently actively engaged in the process to identify acquisition candidates and negotiate transactions. As of the date of this Quarterly Report on Form 10-Q, we have no agreements to make any acquisition. We expect to fund our business expansion through the issuance of debt or equity securities, the payment of cash, the exchange of services, or any combination thereof.

The Company has received, and may in the future seek, additional capital in the form of debt, equity or both, to support our working capital requirements and to provide funding for other business opportunities. We cannot assure you that if we require additional capital, that we will be successful in obtaining such additional capital, or that such additional capital, if obtained, will enable the Company to generate additional revenues and positive cash flow.

 

As previously stated, we generate a significant portion of our total revenues from licensees in the entertainment and toy products market. These licensees generally sell their products through retail outlets. In the future, such sales may be adversely affected by changes in consumer spending that may occur as a result of an uncertain economic environment in 2024 and beyond and its effect on the global economy, geopolitical instability including the Russia-Ukraine war and conflicts in the Middle East and the supply chain disruptions related to both as well as the record inflation and significantly higher interest rates currently being experienced in the United States along with the probability of an economic recession both in the United States and globally. As a result, our revenues, results of operations and liquidity may be further negatively impacted in future periods.

 

Contractual Obligations

 

As of September 30, 2024, there were no material changes in our contractual obligations from those disclosed in our Annual Report on Form 10-K filed with the SEC on March 25, 2024, other than those appearing elsewhere in this Quarterly Report on Form 10-Q.

 

Recently Adopted Accounting Pronouncements

 

As of September 30, 2024 and for the period then ended, there are no recently adopted accounting standards that have a material effect on the Company’s financial statements.

 

 

15 
 

 

 

Recently Issued Accounting Pronouncements Not Yet Adopted

As of September 30, 2024, there were no recently issued accounting standards not yet adopted that would have a material effect on the Company’s financial statements

 

Off-Balance Sheet Arrangements

 

The Company does not have any off-balance sheet arrangements.

  

Item 3. Quantitative and Qualitative Disclosures About Market Risk

 

Not Applicable

 

Item 4. Controls and Procedures

 

Evaluation of Disclosure Controls and Procedures. The Company’s management, with the participation of the Company’s Principal Executive Officer and Principal Financial Officer, evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) as of September 30, 2024. Based on this evaluation, the Company’s Principal Executive Officer and Principal Financial Officer concluded that, as of September 30, 2024, the Company’s disclosure controls and procedures were effective, in that they provide reasonable assurance that information required to be disclosed by the 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 the Company’s management, including the 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 (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the quarter ended September 30, 2024 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. 

 

 

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PART II - OTHER INFORMATION

  

Item 1. Legal Proceedings.

 

None

 

Item 1A. Risk Factors.

 

Information about risk factors for the quarter ended September 30, 2024 does not differ materially from that set forth in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2023.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

 

None.

 

Item 3. Defaults Upon Senior Securities.

 

None

 

Item 4. Mine Safety Disclosures.

 

Not applicable

 

Item 5.  Other Information

 

From time to time, certain of our executive officers and directors have, and we expect they will in the future, enter into, amend or terminate written trading arrangements pursuant to Rule 10b5-1 of the Securities and Exchange Act or otherwise.

 

For the quarter ended September 30, 2024, none of our officers or directors adopted or terminated any contract, instruction or written plan for the purchase or sale of our securities that was intended to satisfy the affirmative defense conditions of Rule 10b5-1(c) under the Exchange Act and/or any “non-Rule 10b5-1 trading arrangement,” as defined in Item 408 of Regulation S-K.

 

Item 6.  Exhibits

 

(a) Exhibits

  

Exhibit Number   Description   Location
31.1   Certification of Chief Executive Officer required by Rule 13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.   Filed herewith
31.2   Certification of Chief Financial Officer required by Rule 13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.   Filed herewith
32.1   Certifications of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.   Furnished herewith
101.INS   Inline XBRL Instance Document–the instance document does not appear in the Interactive Data File as its XBRL tags are embedded within the Inline XBRL document    
101.SCH   Inline XBRL Taxonomy Extension Schema    
101.CAL   Inline XBRL Taxonomy Extension Calculation Linkbase    
101.DEF   Inline XBRL Taxonomy Extension Definition Linkbase    
101.LAB   Inline XBRL Taxonomy Extension Label Linkbase    
101.PRE   Inline XBRL Taxonomy Extension Presentation Linkbase    
104   Cover page formatted as Inline XBRL and contained in Exhibit 101    

 

 

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SIGNATURES

 

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.

 

    NOCOPI TECHNOLOGIES, INC.
     
DATE: November 13, 2024   /s/ Michael S. Liebowitz
    Michael S. Liebowitz
    Chairman of the Board, President & Chief Executive Officer (Principal Executive Officer)
     
DATE: November 13, 2024   /s/ Debra E. Glickman
    Debra E. Glickman
    Chief Financial Officer (Principal Financial and Accounting Officer)

 

 

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