NOCOPI TECHNOLOGIES INC/MD/ - Quarter Report: 2019 September (Form 10-Q)

United States

Securities and Exchange Commission

Washington, D.C. 20549

Form 10-Q

(Mark One)

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

For the quarterly period ended September 30, 2019

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: 60,324,698 shares of common stock, par value $0.01, as of November 8, 2019.

NOCOPI TECHNOLOGIES, INC.

INDEX

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

Nocopi Technologies, Inc.

Statements of Operations*

(unaudited)

*See accompanying notes to these financial statements.

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, 2018 through September 30, 2019 and December 31, 2017 through September 30, 2018

(unaudited)

* See accompanying notes to these financial statements.

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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 the summary of Accounting Policies included in our Company's 2018 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 2018 Annual Report on Form 10-K should be read in conjunction with the accompanying interim financial statements. The interim operating results for the three and nine months ended September 30, 2019 may not be necessarily indicative of the operating results expected for the full year.

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. Revenues

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

Our Company recorded a decrease to the opening balance of the accumulated deficit of $96,100 and a corresponding charge to deferred revenue as of January 1, 2018 due to the cumulative impact of the adoption of Topic 606. The disclosure of disaggregated revenue is disclosed in Note 10.

The adoption of the new guidance affected our recognition of revenue from licenses and royalties. Under our previous accounting practice, we recognized revenue from licenses and royalties on a straight-line basis over the term of the related license agreement. As a result of our adoption of the new guidance, we will recognize revenue from licensees and royalties at a point in time when the term begins.

During the second quarter of 2018, we negotiated an amendment to a license agreement with a licensee that, in addition to expanding the technologies that the licensee is permitted to market, provides for a four year extension to the license agreement that contains guaranteed royalties payable in installments over the term of the amendment to the license agreement. Since the performance obligation is to grant the license for the use of certain patented ink technology as it exists at the time that it is granted, the promise to grant the license is a performance obligation satisfied at a point in time in accordance with Topic 606. In accordance with Topic 606, we recorded $1,521,700 net of imputed interest of licenses, royalties and fees and $106,500 of selling expenses in the first nine months of 2018 related to the amendment to the license agreement. The related receivable and payable are recorded as other assets and other liabilities on the balance sheet.

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

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NOCOPI TECHNOLOGIES, INC.

NOTES TO FINANCIAL STATEMENTS

(UNAUDITED)

Note 3. Stock Based Compensation

Our Company follows FASB ASC 718, Compensation – Stock Compensation, and uses the Black-Scholes option pricing model to calculate the grant-date fair value of an award. At September 30, 2019, our Company did not have an active stock option plan. There was no unrecognized portion of expense related to stock option grants at September 30, 2019.

Note 4. Line of Credit

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

Note 5. Convertible Debentures

At September 30, 2019, 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%. During the third quarter of 2019, our Company’s Board of Directors approved and the holders of $97,900 of the $128,300 of convertible debentures previously 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. 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, the holders of approximately $30,400 of previously outstanding convertible debentures elected to convert those debentures plus approximately $12,300 of accrued interest into 1,707,982 shares of restricted stock of our Company.

Our Company also granted warrants in earlier periods to purchase 691,365 shares of our 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 September 30, 2019 and December 31, 2018:

The aggregate intrinsic value of warrants outstanding and exercisable as of September 30, 2019 was approximately $12,100. The aggregate intrinsic value is calculated as the difference between the exercise price of the underlying warrants and the closing stock price of $0.0375 for our Company’s common stock on September 30, 2019.

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NOCOPI TECHNOLOGIES, INC.

NOTES TO FINANCIAL STATEMENTS

(UNAUDITED)

Note 6. Other Income (Expenses)

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

Note 7. Income Taxes

There is no provision for federal income taxes for the three and nine months ended September 30, 2019 and September 30, 2018 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:

There was no change in unrecognized tax benefits during the period ended September 30, 2019 and there was no accrual for uncertain tax positions as of September 30, 2019.

Tax years from 2016 through 2018 remain subject to examination by U.S. federal and state jurisdictions.

Note 8. Related Party Transactions

During the nine months ended September 30, 2018, our Company paid $235,400 to Michael A. Feinstein, M.D., our Company’s Chairman of the Board and Chief Executive Officer, representing the balance of previously deferred salary owed to him under an employment agreement with our Company. During the five month period ended May 31, 2018, Dr. Feinstein deferred $35,400 of salary. The deferred salary was fully repaid to Dr. Feinstein during 2018 and, at September 30, 2018, there was no remaining deferred salary owed to him. There was no interest payable on the deferred salary.

Note 9. Earnings per Share

In accordance with FASB ASC 260, Earnings per Share, basic earnings per common share is computed using net earnings divided by the weighted average number of common shares outstanding for the periods presented. The computation of diluted earnings per common share involves the assumption that outstanding common shares are increased by shares issuable upon exercise of those warrants for which the market price exceeds the exercise price. The number of shares issuable upon the exercise of such warrants is decreased by shares that could have been purchased by our Company with related proceeds. For the three and nine months ended September 30, 2019, the number of incremental common shares resulting from the assumed conversion of warrants was 375,673 and 372,764, respectively. For the three and nine months ended September 30, 2018, the number of incremental common shares resulting from the assumed conversion of warrants was 395,910 and 360,568, respectively.

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NOCOPI TECHNOLOGIES, INC.

NOTES TO FINANCIAL STATEMENTS

(UNAUDITED)

Note 10. 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 11. Leases

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

Due to the adoption of the new lease standard under the optional transition method which allows the entity to apply the new lease standard at the adoption date, our Company has capitalized the present value of the minimum lease payments commencing January 1, 2019, using an estimated incremental borrowing rate of 6%. The minimum lease payments do not include common area annual expenses which are considered to be non-lease components.

As of January 1, 2019 the operating lease right-of-use asset and operating lease liability amounted to $241,100 with no cumulative-effect adjustment to the opening balance of accumulated deficit.

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

Future minimum lease payments under non-cancelable operating leases with initial or remaining terms of one year or more at September 30, 2019 are: $12,600 – 2019; $51,600  – 2020; $53,100 – 2021; $54,600 – 2022; $56,200 – 2023 and $18,900 – 2024.

8

NOCOPI TECHNOLOGIES, INC.

NOTES TO FINANCIAL STATEMENTS

(UNAUDITED)

Total lease expense under operating leases for the three and nine months ended September 30, 2019 was $13,300 and $40,000, respectively. Total lease expense under operating leases for the three and nine months ended September 30, 2018 was $11,300 and $33,800, respectively.

Maturities of lease liabilities are as follows:

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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.

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, 2018, filed with the Securities and Exchange Commission on March 29, 2019.

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Background Overview

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

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

Results of Operations

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

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

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

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

Revenues for the third quarter of 2019 were $637,500 compared to $561,400 in the third quarter of 2018, an increase of $76,100, or approximately 14%. Licenses, royalties and fees increased by $14,200, or approximately 8%, to $189,400 in the third quarter of 2019 from $175,200 in the third quarter of 2018. The increase in licenses, royalties and fees in the third quarter of 2019 compared to the third quarter of 2018 is due primarily to higher royalties from five licensees offset in part by lower guaranteed licensing revenue of approximately $100,000 in the third quarter of 2019 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 (see below) in the second quarter of 2018. We cannot assure you that we will continue to obtain higher royalties on an ongoing basis from licensees in the entertainment and toy products market, especially upon the occurrence of an economic downturn or other unfavorable conditions.

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Product and other sales increased by $61,900, or approximately 16%, to $448,100 in the third quarter of 2019 from $386,200 in the third quarter of 2018. Sales of ink increased in the third quarter of 2019 compared to the third quarter of 2018 due primarily to higher ink shipments to a third party authorized printer used by one 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 third quarter of 2019, our Company derived revenues of approximately $555,900 from our licensees and their authorized printers in the entertainment and toy products market compared to revenues of approximately $485,700 in the third quarter of 2018.

For the first nine months of 2019, revenues were $1,563,000, representing a decrease of $1,297,500, or approximately 45%, from revenues of $2,860,500 in the first nine months of 2018. Revenues in the first nine months of 2018 included, in accordance with ASU 214-09, Revenue from Contracts with Customers (“Topic 606”), revenue of $1,521,700 representing the present value of guaranteed royalty payments that are payable over a four-year period beginning in the third quarter of 2019 as a result of an amendment to a license agreement with a licensee that, in addition to expanding the technologies that our licensee is permitted to market, provides for a four year extension to the license agreement beginning in July 2019. Since the performance obligation is to grant the license for the use of certain patented ink technology as it exists at the time that it is granted, the promise to grant the license is a performance obligation satisfied at a point in time in accordance with Topic 606. Previously, we recognized revenue from licenses and royalties on a straight-line basis over the term of the related license agreement. Licenses, royalties and fees decreased by $1,433,800, or approximately 71%, to $571,900 in the first nine months of 2019 from $2,005,700 in the first nine months of 2018. The decrease in licenses, royalties and fees in the first nine months of 2019 compared to the first nine months of 2018 is due primarily to the adoption of Topic 606 described above. See “Plan of Operation, Liquidity and Capital Resources” and “Note 2 to our Condensed Financial Statements” for comparative information on the impact of the adoption of Topic 606 to our Company’s condensed financial statements.

Product and other sales increased by $136,300, or approximately 16%, to $991,100 in the first nine months of 2019 from $854,800 in the first nine months of 2018. Sales of ink increased in the nine months of 2019 compared to the first nine of 2018 due primarily to higher ink shipments to the third party authorized printer used by one of our Company’s major licensees in the entertainment and toy products market and higher ink shipments to our Company’s licensees in the retail receipt and document fraud market. Our Company derived revenues of approximately $1,327,900 from licensees and their authorized printers in the entertainment and toy products market in the first nine months of 2019 compared to revenues of approximately $2,661,700 in the first nine months of 2018. The decrease in revenues from our licensees and their authorized printers in the entertainment and toy products market in the first nine months of 2019 compared to the first nine months of 2018 is due primarily to the adoption of Topic 606.

Our Company’s gross profit increased to $429,500 in the third quarter of 2019, or approximately 67% of revenues, from $388,400 in the third quarter of 2018 or approximately 69% of revenues. Licenses, royalties and fees have historically carried a higher gross profit than product and other sales. Such other sales generally consist of supplies or other manufactured products which incorporate our Company’s technologies or equipment used to support the application of its technologies. These items (except for inks which are manufactured by our Company) are generally purchased from third-party vendors and resold to the end-user or licensee and carry a lower gross profit than licenses, royalties and fees. The higher gross profit in the third quarter of 2019 compared to the third quarter of 2018 results primarily from higher gross revenues from licenses, royalties and fees and product and other sales in the third quarter of 2019 compared to the third quarter of 2018.

For the first nine months of 2019, gross profit was $1,084,500, or approximately 69% of revenues, compared to $2,452,700, or approximately 86% of revenues in 2018. The lower gross profit in the first nine months of 2019 compared to the first nine months of 2018 results primarily from lower licenses, royalties and fees due to the adoption of Topic 606 in 2018 offset in part by higher gross revenues from product and other sales in the first nine months of 2019 compared to the first nine months of 2018.

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As the variable component of cost of revenues related to licenses, royalties and fees is a low percentage of these revenues and the fixed component is not substantial, period to period changes in revenues from licenses, royalties and fees can significantly affect both the gross profit from licenses, royalties and fees as well as overall gross profit. The gross profit from licenses, royalties and fees decreased to approximately 78% in the third quarter of 2019 compared to approximately 80% in the third quarter of 2018 and to approximately 83% of revenues from licenses, royalties and fees in the first nine months of 2019 from approximately 96% in the first nine months of 2018.

The gross profit, expressed as a percentage of revenues, of product and other sales is dependent on both the overall sales volumes of product and other sales and on the mix of the specific goods produced and/or sold. The gross profit from product and other sales decreased to approximately 63% of revenues in the third quarter of 2019 compared to approximately 64% of revenues in the third quarter of 2018. For the first nine months of 2019 and 2018, the gross profit, expressed as a percentage of revenues, was approximately 62% of revenues from product and other sales.

Research and development expenses of $45,200 and $122,600 in the third quarter and first nine months of 2019, respectively, were comparable to $38,100 and $111,300 in the third quarter and first nine months of 2018, respectively.

Sales and marketing expenses increased in the third quarter of 2019 to $81,000 from $74,600 in the third quarter of 2018. Sales and marketing expenses decreased in the first nine months of 2019 to $224,200 from $313,200 in the first nine months of 2018. The increase in the third quarter of 2019 compared to the third quarter of 2018 is due primarily to higher commission expense on the higher level of revenues in the third quarter of 2019 compared to the third quarter of 2018. The decrease in the first nine months of 2019 compared to the first nine months of 2018 is due primarily to lower commission expense on the lower level of sales in the first nine months of 2019 compared to the first nine months of 2018 related to the additional revenue generated in 2018 as a result of the adoption of Topic 606 in the second quarter of 2018.

General and administrative expenses increased in the third quarter of 2019 to $84,200 from $73,400 in the third quarter of 2018. General and administrative expenses decreased in the first nine months of 2019 to $265,200 from $277,600 in the first nine months of 2018. The increase in third quarter of 2019 compared to the third quarter of 2018 is due primarily to higher employment and public company expenses in the third quarter of 2019 compared to the third quarter of 2018. The decrease in the first nine months of 2019 compared to the first nine months of 2018 is due primarily to lower patent related expenses and lower legal expenses in the first nine months of 2019 compared to the first nine months of 2018.

Other income (expenses) in the third quarter and first nine months of 2019 and 2018 included interest on convertible debentures held by nine investors and interest earned on invested funds.

Income taxes in the third quarter and first nine months of 2019 and 2018 resulted from limitations placed on income tax net operating loss deductions by the Commonwealth of Pennsylvania.

The net income of $206,800 in the third quarter of 2018 compared to net income of $1,100 in the third quarter of 2018 resulted primarily from higher gross profit on a higher level of revenues and lower Pennsylvania income taxes in the third quarter of 2019 compared to the third quarter of 2018 offset in part by higher overhead expenses in the third quarter of 2019 compared to the third quarter of 2018. The net income of $441,100 in the first nine months of 2019 compared to net income of $1,544,400 in the first nine months of 2018 resulted primarily from a lower gross profit on a lower level of revenues in the first nine months of 2019 compared to the first nine months of 2018 related to the adoption of Topic 606 in the second quarter of 2018 offset in part by lower overhead expenses and lower Pennsylvania income taxes in the first nine months of 2019 compared to the first nine months of 2018.

Plan of Operation, Liquidity and Capital Resources

During the first nine months of 2019, our Company’s cash increased to $798,000 at September 30, 2019 from $400,800 at December 31, 2018. During the first nine months of 2018, our Company generated $399,400 from its operating activities and used $2,200 for capital equipment purchases.

In the first nine months of 2019, our Company’s revenues decreased approximately 45% to $1,563,000 from $2,860,500 in the first nine months of 2018 of which an increase of 17%, or $224,200, is attributable to an increase in revenues from historical operations in the first nine months of 2019 compared to the first nine months of 2018 offset by a decrease of $1,521,700, or 62%, that is attributable the reduction of our Company’s revenues in the first nine months of 2019 compared to the first nine months of 2018 as a result of the adoption of Topic 606 in the second quarter of 2018.

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Our Company’s total overhead expenses, interest expense and income tax expense decreased in the first nine months of 2019 compared to the first nine months of 2018. As a result of these factors, our Company generated net income of $441,100 in the first nine months of 2019 compared to $1,544,400 in the first nine months of 2018. Our Company had positive operating cash flow of $399,400 during the first nine months of 2019 and at September 30, 2019, had positive working capital of $1,454,600 and stockholders’ equity of $2,450,500. For the full year of 2018, our Company had net income of $1,655,400 and had positive operating cash flow of $40,900. At December 31, 2018, our Company had positive working capital of $810,500 and stockholders’ equity of $1,966,700.

Our Company has $97,900 of convertible debentures outstanding that are due during the third quarter of 2020. During the third quarter of 2019, holders of $97,900 of $128,300 of the convertible debentures previously outstanding agreed to extend the maturity dates of the convertible debentures for one year to the third quarter of 2020 with no change in the terms or conditions of the debentures.

In November 2018, our Company negotiated a $150,000 revolving line of credit (“Line of Credit”) with a bank to provide a source of working capital, if required. The Line of Credit is secured by all the assets of our Company and bears interest at the 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. We may need to obtain additional capital in the future to further support the working capital requirements associated with our existing revenue base and to develop new revenue sources. We cannot assure you that we will be successful in obtaining such additional capital, if needed. We continue to maintain a cost containment program including curtailment, where possible, of discretionary research and development and sales and marketing expenses.

Our plan of operation for the twelve months beginning with the date of this quarterly report consists of concentrating available human and financial resources to continue to capitalize on the specific business relationships our Company has developed in the entertainment and toy products market. This includes two licensees that have been marketing products incorporating our 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 may 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. If such changes occur, our revenues, results of operations and liquidity may be similarly impacted.

Recently Adopted Accounting Pronouncements

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) and subsequent related updates. The core principle of Topic 842 is that a lessee should recognize the assets and liabilities that arise from operating leases. Our Company adopted the standard effective January 1, 2019 under the optional transition method which allows the entity to apply the new lease standard at the adoption date and recognize a cumulative-effect adjustment, if any, to the opening balance of retained earnings in the period of adoption. The standard had a material impact on the balance sheet (see Note 11).

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Recently Issued Accounting Pronouncements Not Yet Adopted

As of September 30, 2019, 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 September 30, 2019. Based on this evaluation, our Company’s Principal Executive Officer and Principal Financial Officer concluded that, as of September 30, 2019, 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 September 30, 2019 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 2. Unregistered Sales of Equity Securities and Use of Proceeds

No underwriters were utilized, and no commissions or fees were paid with respect to any of the above transactions. We relied on Section 4(a)(2) and/or Regulation D of the Securities Act of 1933, as amended, since the transactions did not involve any public offering.

Item 6.  Exhibits

The following exhibits are included herein:

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SIGNATURES

Pursuant to the requirement of the Securities Exchange Act of 1934, our Company has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

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EXHIBIT INDEX

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