SEC Info℠

Home

Search

My Interests

Help

Sign In

Please Sign In

Nocopi Technologies Inc/MD – ‘10-Q’ for 3/31/20

On:  Thursday, 5/14/20, at 1:20pm ET   ·   For:  3/31/20   ·   Accession #:  1553350-20-438   ·   File #:  0-20333

Previous ‘10-Q’:  ‘10-Q’ on 11/13/19 for 9/30/19   ·   Next:  ‘10-Q’ on 8/14/20 for 6/30/20   ·   Latest:  ‘10-Q’ on 11/14/23 for 9/30/23

in

this entire Filing. an “Entity” Search.

Show

Documents searched

and

each “hit”. the 1st “hit”.

↓↑Hints

 Text Wildcards:  ? (any letter/digit),  * (many).  Search Logic:  for Documents:  & (and),  | (or);  for Text:  | (anywhere),  "(&)" (near).  Details... 

  As Of               Filer                 Filing    For·On·As Docs:Size             Issuer                      Filing Agent

 5/14/20  Nocopi Technologies Inc/MD        10-Q        3/31/20   44:1.7M                                   Edgar Filing LLC/FA

Document/Exhibit                   Description                      Pages   Size 

 1: 10-Q        Quarterly Report                                    HTML    214K 
 2: EX-31.1     Certification of Chief Executive Officer            HTML     18K 
 3: EX-31.2     Certification of Chief Financial Officer            HTML     18K 
 4: EX-32.1     Certification Pursuant to 18 U.S.C. Section 1350,   HTML     16K 
                as Adopted Pursuant to Section 906 of the                        
                Sarbanes-Oxley Act of 2002                                       
23: R1          Document and Entity Information                     HTML     47K 
39: R2          Statements of Operations                            HTML     96K 
34: R3          Balance Sheets                                      HTML    120K 
12: R4          Balance Sheets (Parenthetical)                      HTML     27K 
22: R5          Statements of Cash Flows                            HTML     80K 
38: R6          Statements of Stockholders' Equity                  HTML     34K 
32: R7          Financial Statements                                HTML     21K 
11: R8          Stock Based Compensation                            HTML     18K 
24: R9          Line of Credit                                      HTML     16K 
37: R10         Convertible Debentures                              HTML     42K 
41: R11         Other Income (Expenses)                             HTML     17K 
27: R12         Income Taxes                                        HTML     27K 
15: R13         Earnings per Share                                  HTML     18K 
36: R14         Major Customer and Geographic Information           HTML     38K 
40: R15         Leases                                              HTML     28K 
26: R16         Convertible Debentures (Tables)                     HTML     40K 
14: R17         Income Taxes (Tables)                               HTML     23K 
35: R18         Major Customer and Geographic Information (Tables)  HTML     39K 
42: R19         Leases (Tables)                                     HTML     26K 
20: R20         Stock Based Compensation (Details)                  HTML     16K 
18: R21         Line of Credit (Details)                            HTML     19K 
29: R22         Convertible Debentures (Narrative) (Details)        HTML     33K 
44: R23         Convertible Debentures (Warrants Activity)          HTML     37K 
                (Details)                                                        
19: R24         Income Taxes (Details)                              HTML     29K 
17: R25         Income Taxes (Components for State Income Tax       HTML     26K 
                Expense) (Details)                                               
28: R26         Earnings per Share (Details)                        HTML     18K 
43: R27         Major Customer and Geographic Information           HTML     25K 
                (Schedule of Revenues from Non-affiliated                        
                Customers) (Details)                                             
21: R28         Major Customer and Geographic Information           HTML     21K 
                (Schedule of Non-affiliated Customers with                       
                Accounts Receivable) (Details)                                   
16: R29         Major Customer and Geographic Information           HTML     28K 
                (Schedule of Revenue by Geographic Region)                       
                (Details)                                                        
13: R30         Leases (Narrative) (Details)                        HTML     23K 
25: R31         Leases (Maturities of Lease Liabilities) (Details)  HTML     32K 
30: XML         IDEA XML File -- Filing Summary                      XML     74K 
31: EXCEL       IDEA Workbook of Financial Reports                  XLSX     32K 
 5: EX-101.INS  XBRL Instance -- nnup-20200331                       XML    352K 
 7: EX-101.CAL  XBRL Calculations -- nnup-20200331_cal               XML    118K 
 8: EX-101.DEF  XBRL Definitions -- nnup-20200331_def                XML    143K 
 9: EX-101.LAB  XBRL Labels -- nnup-20200331_lab                     XML    476K 
10: EX-101.PRE  XBRL Presentations -- nnup-20200331_pre              XML    330K 
 6: EX-101.SCH  XBRL Schema -- nnup-20200331                         XSD     73K 
33: ZIP         XBRL Zipped Folder -- 0001553350-20-000438-xbrl      Zip     48K 

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 March 31, 2020

or

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

For the transition period from _________________ to ______________

Commission File Number: 000-20333

NOCOPI TECHNOLOGIES, INC.

(Exact name of registrant as specified in its charter)

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 every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes þ  No ¨

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

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

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 61,044,698 shares of common stock, par value $0.01, as of May 12, 2020.

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.

1

Nocopi Technologies, Inc.

Balance Sheets*

*See accompanying notes to these financial statements.

2

Nocopi Technologies, Inc.

Statements of Cash Flows*

(unaudited)

*See accompanying notes to these financial statements.

3

Nocopi Technologies, Inc.

Statements of Stockholders’ Equity*

For the Periods December 31, 2019 through March 31, 2020 and December 31, 2018 through March 31, 2019

(unaudited)

* See accompanying notes to these financial statements.

4

NOCOPI TECHNOLOGIES, INC.

NOTES TO FINANCIAL STATEMENTS

(UNAUDITED)

Note 1. Financial Statements

The accompanying unaudited condensed financial statements have been prepared by Nocopi Technologies, Inc. (our “Company”). These statements include all adjustments (consisting only of normal recurring adjustments) which management believes necessary for a fair presentation of the statements and have been prepared on a consistent basis using the accounting policies described in the summary of Accounting Policies included in our Company's 2019 Annual Report on Form 10-K. Certain financial information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations, although our Company believes that the accompanying disclosures are adequate to make the information presented not misleading. The Notes to Financial Statements included in the 2019 Annual Report on Form10-K should be read in conjunction with the accompanying interim financial statements. The interim operating results for the three months ended March 31, 2020 may not be necessarily indicative of the operating results expected for the full year.

In March 2020, the World Health Organization declared the outbreak of a novel coronavirus (COVID-19) as a pandemic which continues to spread throughout the United States. On March 19, 2020 the Governor of Pennsylvania declared a health emergency and issued an order to close all nonessential businesses until further notice. The mandated closure of these nonessential businesses in Pennsylvania remains in effect as of the current date is expected to continue for the foreseeable future in the portion of the state in which we conduct our business operations. Our operations are deemed to be essential and thus we remain open. However, disruptions to our business operations with a resultant impact on our results of operations could continue to occur as a result of quarantines of employees and suppliers in areas affected by the outbreak, availability of raw materials required to manufacture our products, disruption of supply chains that provide our raw materials, price increases of raw materials and supplies used in our production processes, facility closures of domestic and international customers who purchase and use our products, and travel and logistics restrictions affecting our inbound and outbound shipments in connection with the outbreak. While we expect this global pandemic to continue to negatively impact our results of operations, cash flow and financial position, the related financial impact cannot be reasonably estimated at this time.

Our Company follows Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 220 in reporting comprehensive income.  Comprehensive income is a more inclusive financial reporting methodology that includes disclosure of certain financial information that historically has not been recognized in the calculation of net income.  Since our Company has no items of other comprehensive income, comprehensive income is equal to net income.

Note 2. Stock Based Compensation

Our Company follows FASB ASC 718, Compensation – Stock Compensation, and uses the Black-Scholes option pricing model to calculate the grant-date fair value of an award. At March 31, 2020, our Company did not have an active stock option plan. There was no unrecognized portion of expense related to stock option grants at March 31, 2020.

Note 3. Line of Credit

In November 2018, our Company negotiated a $150,000 revolving line of credit with a bank to provide a source of working capital, if required. The line of credit is secured by all the assets of our Company and bears interest at the 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. Convertible Debentures

At March 31, 2020, our Company had convertible debentures totaling $97,900 outstanding, which are due during the third quarter of 2020. 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 our Company at $0.025 per share. During the third quarter of 2019, our Company’s Board of Directors approved and the holders of $97,900 of $128,300 of convertible debentures then outstanding agreed to extend the maturity dates of those convertible debentures for one year to the third quarter of 2020 with no change in the terms or conditions of the debentures.

5

NOCOPI TECHNOLOGIES, INC.

NOTES TO FINANCIAL STATEMENTS

(UNAUDITED)

Our Company also granted warrants in the third quarter of 2013 and 2014 to purchase a total of 691,365 shares of our Company’s common stock at $0.02 per share to the holders of the debentures. The warrants are exercisable two years after issuance and expire seven years after issuance. The fair value of the warrants was determined using the Black-Scholes pricing model. The relative fair value of the warrants was recorded as a discount to the notes payable with an offsetting credit to additional paid-in capital since our Company determined that the warrants were an equity instrument in accordance with FASB ASC 815. The debt discount related to the warrant issuances has been accreted through interest expense over the term of the notes payable.

The following table summarizes our Company’s warrant position at March 31, 2020 and December 31, 2019:

The aggregate intrinsic value of warrants outstanding and exercisable as of March 31, 2020 was approximately $36,300. The aggregate intrinsic value is calculated as the difference between the exercise price of the underlying warrants and the closing stock price of $0.0725 for our Company’s common stock on March 31, 2020.

Note 5. Other Income (Expenses)

Other income (expenses) for the three months ended March 31, 2020 and March 31, 2019 includes interest on debentures held by seven investors.

Note 6. Income Taxes

There is no provision for federal income taxes for the three months ended March 31, 2020 and March 31, 2019 due to the availability of net operating loss carryforwards. Our Company has established a valuation allowance for the entire amount of benefits resulting from our Company’s net operating loss carryforwards because our Company has determined that the realization of the net deferred tax asset is not assured.

The components for state income tax expense resulting from the limitation on the use of net operating losses are:

During the first quarter of 2020, our Company reversed $47,400 of accrued Pennsylvania income taxes that are not payable.

There was no change in unrecognized tax benefits during the period ended March 31, 2020 and there was no accrual for uncertain tax positions as of March 31, 2020.

Tax years from 2016 through 2019 remain subject to examination by U.S. federal and state jurisdictions.

6

NOCOPI TECHNOLOGIES, INC.

NOTES TO FINANCIAL STATEMENTS

(UNAUDITED)

Note 7. Earnings per Share

In accordance with FASB ASC 260, Earnings per Share, basic earnings per common share is computed using net earnings divided by the weighted average number of common shares outstanding for the periods presented. The computation of diluted earnings per common share involves the assumption that outstanding common shares are increased by shares issuable upon exercise of those warrants for which the market price exceeds the exercise price. The number of shares issuable upon the exercise of such warrants is decreased by shares that could have been purchased by our Company with related proceeds. For the three months ended March 31, 2020 and March 31, 2019, the number of incremental common shares resulting from the assumed conversion of warrants was 486,212 and 384,773, respectively.

Note 8. Major Customer and Geographic Information

Our Company’s revenues, expressed as a percentage of total revenues, from non-affiliated customers that equaled 10% or more of our Company’s total revenues were:

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

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

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

Note 9. Leases

Our Company conducts its operations in leased facilities under a non-cancelable operating lease expiring in 2024.

Due to the adoption of the new lease standard under the optional transition method which allows the entity to apply the new lease standard at the adoption date, our Company has capitalized the present value of the minimum lease payments commencing January 1, 2019, using an estimated incremental borrowing rate of 6%. 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.

7

NOCOPI TECHNOLOGIES, INC.

NOTES TO FINANCIAL STATEMENTS

(UNAUDITED)

Total lease expense under operating leases for each of the three month periods ended March 31, 2020 and March 31, 2019 was $13,300.

Maturities of lease liabilities were as follows:

8

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:

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.

9

The following discussion and analysis should be read in conjunction with our Condensed financial statements, included herewith. This discussion should not be construed to imply that the results discussed herein will necessarily continue into the future, or that any conclusion reached herein will necessarily be indicative of actual operating results in the future. Such discussion represents only the best present assessment of our management. This information should also be read in conjunction with our audited historical financial statements which are included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2019, filed with the Securities and Exchange Commission on March 30, 2020, as amended on April 29, 2020.

Background Overview

Nocopi Technologies, Inc. develops and markets specialty reactive inks for applications in the large educational and toy products market. We also develop and market technologies for document and product authentication, which we believe can reduce losses caused by fraudulent document reproduction or by product counterfeiting and/or diversion. We derive our revenues primarily from licensing our technologies on an exclusive or non-exclusive basis to licensees who incorporate our technologies into their product offering and from selling products incorporating our technologies to the licensees or to their licensed printers.

Unless the context otherwise requires, all references to the “Company,” “we,” “our” or “us” and other similar terms means Nocopi Technologies, Inc., a Maryland corporation.

Effects of COVID-19

To serve our customers while also providing for the safety of our employees and service providers, we have adapted various steps to protect our employees. Any employee who is uncomfortable coming into our facilities may choose not to come in. We have a large enough facility to enable all of our employees to social distance and we follow Centers for Disease Control and Prevention (CDC) guidelines. Our production employees work with chemicals and they have always used masks, respirators, etc., even before COVID-19. As a result, we continue to maintain the same level of productivity and effectiveness as prior to the COVID-19 pandemic.

The impact of COVID-19 on the Company had little impact on the financial results during the first quarter of 2020 as the majority of the operational adjustments were made late in the period. We expect the subsequent quarter to see further impact from COVID-19 and the various operational adjustments we made. The full extent of the impact to the Company due to the impact of the COVID-19 pandemic for our second quarter and beyond cannot be currently determined. The extent to which the COVID-19 pandemic may impact our future financial and operational performance will be dependent on many factors that we may not be able to predict because they continue to change and evolve depending on both national and local circumstances among them government restrictions affecting our employees, customers and suppliers, changes in our revenues due to lower customer demand as a result of the pandemic and a potential inability to obtain raw materials due to lower availability. We continue to monitor the impact of COVID-19 on our business but we cannot accurately predict the extent to which it will adversely affect our future results of operations, financial condition or cash flows.

To date, we have not suffered a drop off in customer orders and total earned royalties in the entertainment and toy products market as a result of COVID-19, but we have recently experienced a negative impact on revenues in our smaller anti-counterfeiting and anti-diversion products market due to closures of certain printing facilities that utilize these technologies and anticipate that these closures may continue for a period of time. We continue to retain revenues at historical levels in the entertainment and toy products market through the current date despite the downturns in the overall economy. While the products of our licensees in the larger entertainment and toy products market are sold by both large and smaller retailers, some of whom remain open, and are also available for purchase online, we believe that revenues may not continue to be achieved at levels experienced to the current date due to the negative economic conditions that are expected to continue over the balance of the year as a result of COVID-19. A slowdown in overall consumer spending may affect the sales of products marketed by our licensees. Our major licensees in the entertainment and toy products market are large, well-known businesses in this market with whom we believe our long-term relationship will not be adversely affected by the current COVID-19 pandemic.

10

Results of Operations

Our 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 first quarter of 2020 were $520,300 compared to $409,400 in the first quarter of 2019, an increase of $110,900, or approximately 27%. Licenses, royalties and fees decreased by $25,900, or approximately 14%, in the first quarter of 2020 to $164,600 from $190,500 in the first quarter of 2019. The decrease in licenses, royalties and fees is due primarily to lower guaranteed licensing revenue of approximately $100,000 in the first quarter of 2020 from one licensee in the entertainment and toy products market as a result of the adoption of ASU 214-09, Revenue from Contracts with Customers in the second quarter of 2018. 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 as a result of the COVID-19 pandemic that is continuing to negatively impact all worldwide economies.

Product and other sales increased by $136,800, or approximately 62%, to $218,900 in the first quarter of 2020 from $218,900 in the first quarter of 2019. Sales of ink increased in the first quarter of 2020 compared to the first quarter of 2019 due primarily to lower ink shipments to the third party authorized printers used by two of our Company’s major licensees in the entertainment and toy products market offset in part by lower ink shipments to our Company’s licensees in the retail receipt and document fraud market. In the first quarter of 2020, our Company derived revenues of approximately $453,500 from our Company’s licensees and their authorized printers in the entertainment and toy products market compared to revenues of approximately $335,900 in the first quarter of 2019.

Our Company’s gross profit decreased to $269,000, or approximately 52% of gross revenues, in the first quarter of 2020 from $293,900, or approximately 72% of gross revenues, in the first quarter of 2019. Licenses, royalties and fees have historically carried a higher gross profit than product and other sales, which generally consist of either supplies or other manufactured products which incorporate our Company’s technologies or equipment used to support the application of its technologies. These items (except for inks which are manufactured by our Company) are generally purchased from third-party vendors and resold to the end-user or licensee and carry a lower gross profit than licenses, royalties and fees.

11

As the variable component of cost of revenues related to licenses, royalties and fees is a low percentage of these revenues and the fixed component is not substantial, period to period changes in revenues from licenses, royalties and fees can significantly affect both the gross profit from these sources as well as our Company’s overall gross profit. The gross profit from licenses, royalties and fees decreased to approximately 70% in the first quarter of 2020 from approximately 87% in the first quarter of 2019.

The gross profit of product and other sales, expressed as a percentage of revenues, is dependent on both the overall sales volumes of product and other sales and on the mix of the specific goods produced and/or sold. Primarily due to higher raw material expenses along with expenses related to a staffing addition and additional depreciation expense in the first quarter of 2020 compared to the first quarter of 2019, there was a lower gross profit from product and other sales of approximately 43% of revenues in the first quarter of 2020 compared to a gross profit of approximately 59% of revenues from product and other sales in the first quarter of 2019.

Research and development expenses of $41,100 in the first quarter of 2020 were comparable to $38,000 in the first quarter of 2019.

Sales and marketing expenses increased to $84,000 in the first quarter of 2020 from $68,900 in the first quarter of 2019 due primarily to higher commission expense on the higher level of revenues in the first quarter of 2020 compared to the first quarter of 2019.

General and administrative expenses increased in the first quarter of 2020 to $139,700 compared to $94,100 in the first quarter of 2019 due primarily to higher public relations and salary expense in the first quarter of 2020 compared to the first quarter of 2019.

Other income (expenses) in the first quarter of 2020 and 2019 included interest on convertible debentures held by seven investors.

Income taxes in the first quarter of 2020 and 2019 result from limitations placed on income tax net operating loss deductions by the Commonwealth of Pennsylvania. In the first quarter of 2020, our Company reversed $47,400 of accrued Pennsylvania income taxes that are not payable

The lower net income of $52,600 in the first quarter of 2020 compared to $85,400 in the first quarter of 2019 resulted primarily from a lower gross profit on a lower level of licenses, royalties and fees, higher cost of revenues and higher operating expenses in the first quarter of 2020 compared to the first quarter of 2019 offset in part by the reversal of income taxes.

Plan of Operation, Liquidity and Capital Resources

During the first quarter of 2020, our Company’s cash increased to $1,205,400 at March 31, 2020 from $688,000 at December 31, 2019. During the first quarter of 2020, our Company generated $524,900 from its operating activities and used $7,500 for capital expenditures.

During the first quarter of 2020, our Company’s revenues increased approximately 27% primarily as a result of higher sales of ink to the authorized printers of our Company’s licensees in the entertainment and toy products market offset in part by lower royalty revenues from a licensee in the entertainment and toy products market.

Our total overhead expenses increased in the first quarter of 2020 to $264,800 compared to $201,000 in the first quarter of 2019 and our Company’s income tax expense decreased in the first quarter of 2020 compared to the first quarter of 2019. As a result of these factors, our Company generated net income of $52,600 in the first quarter of 2020 compared to $85,400 in first quarter of 2019. Our Company had positive operating cash flow of $524,900 during the first quarter of 2020. At March 31, 2020, our Company had positive working capital of $1,925,700 and stockholders’ equity of $2,842,300. For the full year of 2019, our Company had net income of $754,900 and had positive operating cash flow of $360,600. At December 31, 2019, our Company had positive working capital of $1,853,300 and stockholders’ equity of $2,789,700.

Our Company has $97,900 of convertible debentures outstanding that are due during the third quarter of 2020. These borrowings allowed our Company to remain in operation through late 2016 when our Company’s cash flow increased significantly.

12

Our Company has a $150,000 revolving line of credit with a bank that provides a source of working capital, if required. At March 31, 2020, there were no outstanding borrowings under the line of credit.

We may need to obtain additional capital in the future to support the working capital requirements associated with our existing revenue base and to fund the potential negative impact on our profitability that could occur if our licensees experience significant declines in sales of products utilizing our Company’s technologies. We cannot assure you that we will be successful in obtaining sufficient additional capital, or if we do so, that the additional capital will enable our Company to continue to operate profitably in the future and develop new revenue sources to have a material positive effect on our Company’s operations and cash flow.

We continue to maintain a cost containment program including curtailment, where possible, of discretionary research and development and sales and marketing expenses.

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

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

Our Company has received and continues to 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 we will be successful in raising additional capital, or that such additional capital, if obtained, will enable our Company to generate additional revenues and positive cash flow.

As previously stated, we generate a significant portion of our total revenues from licensees in the entertainment and toy products market. These licensees generally sell their products through retail outlets. In the future, such sales may be adversely affected by changes in consumer spending that may occur as a result of an uncertain economic environment throughout the balance of 2020 and beyond due to the COVID-19 virus and its effect on the global economy. As a result, our revenues, results of operations and liquidity may be negatively impacted.

Contractual Obligations

As of March 31, 2020, there were no material changes in our contractual obligations from those disclosed in our Annual Report on Form 10-K filed with the SEC on March 30, 2020, as amended on April 29, 2020, other than those appearing in the notes to the financial statements appearing elsewhere in this Quarterly Report on Form 10-Q.

Recently Adopted Accounting Pronouncements

As of March 31, 2020, there were no recently adopted accounting standards that had a material effect on our Company’s financial statements.

13

Recently Issued Accounting Pronouncements Not Yet Adopted

As of March 31, 2020, there are no recently issued accounting standards not yet adopted which would have a material effect on our Company’s financial statements.

Off-Balance Sheet Arrangements

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

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures. Our Company’s management, with the participation of our Company’s Principal Executive Officer and Principal Financial Officer, evaluated the effectiveness of our Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) as of March 31, 2020. Based on this evaluation, our Company’s Principal Executive Officer and Principal Financial Officer concluded that, as of March 31, 2020, our Company’s disclosure controls and procedures were effective, in that they provide reasonable assurance that information required to be disclosed by our Company in the reports that it files or submits under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and is accumulated and communicated to our Company’s management, including our Company’s Principal Executive Officer and Principal Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

Changes in Internal Control Over Financial Reporting. There were no changes in our internal control over financial reporting during the quarter ended March 31, 2020 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

14

PART II - OTHER INFORMATION

Item 1A.  Risk Factors

The following risk factor supplements the Risk Factors described in the Company’s annual report on Form 10-K for the year ended December 31, 2019, as amended, and should be read in conjunction therewith.

The extent to which the COVID-19 pandemic will adversely impact our business, financial condition and results of operations is highly uncertain and cannot be predicted.

The COVID-19 pandemic has created significant worldwide uncertainty, volatility and economic disruption. The extent to which COVID-19 will adversely impact our business, financial condition and results of operations is dependent upon numerous factors, many of which are highly uncertain, rapidly changing and uncontrollable. These factors include, but are not limited to: (i) the duration and scope of the pandemic; (ii) governmental, business and individual actions that have been and continue to be taken in response to the pandemic, including travel restrictions, quarantines, social distancing, work-from-home and shelter-in-place orders and shut-downs; (iii) the impact on U.S. and global economies and the timing and rate of economic recovery; (iv) potential adverse effects on the financial markets and access to capital; (v) potential goodwill or other impairment charges; and (vi) the ability of our licensees and other customers to sell products that utilize or incorporate our technology.

Item 6.  Exhibits

The following exhibits are included herein:

15

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.

16

EXHIBIT INDEX

17

---

Dates Referenced Herein   and   Documents Incorporated by Reference

This ‘10-Q’ Filing		Date		Other Filings
Filed on:		5/14/20
		5/12/20
		4/29/20		10-K/A
For Period end:		3/31/20
		3/30/20		10-K
		3/19/20
		12/31/19		10-K,  10-K/A
		3/31/19		10-Q
		1/1/19
		12/31/18		10-K
				List all Filings

↑Top

---

Filing Submission 0001553350-20-000438   –   Alternative Formats (Word / Rich Text, HTML, Plain Text, et al.)

---

---

Copyright © 2024 Fran Finnegan & Company LLC – All Rights Reserved.
About — Privacy — Redactions — Help — Thu., Apr. 25, 6:27:59.1pm ET