NOCOPI TECHNOLOGIES INC/MD/ - Quarter Report: 2023 September (Form 10-Q)

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, 2023

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 ☒  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.

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: 10,501,178 shares of common stock, par value $0.01, as of November 1, 2023.

NOCOPI TECHNOLOGIES, INC.

INDEX

i

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

Nocopi Technologies, Inc.

Statements of Comprehensive Income (Loss)*

(unaudited)

*See accompanying notes to these financial statements.

Nocopi Technologies, Inc.

Balance Sheets*

 (unaudited)

*See accompanying notes to these financial statements.

Nocopi Technologies, Inc.

Statements of Cash Flows*

(unaudited)

*See accompanying notes to these financial statements.

Nocopi Technologies, Inc.

Statements of Stockholders’ Equity*

For the Periods December 31, 2022 through September 30, 2023 and December 31, 2021 through September 30, 2022

(unaudited)

* See accompanying notes to these financial statements.

NOCOPI TECHNOLOGIES, INC.

NOTES TO FINANCIAL STATEMENTS

(UNAUDITED)       

Note 1. Financial Statements

The accompanying unaudited condensed financial statements have been prepared by Nocopi Technologies, Inc. (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 Note 2 Significant Accounting Policies included in the Notes to Financial Statements included in our Company’s Annual Report on Form 10-K for the year ended December 31, 2022, as filed with the Securities and Exchange Commission on March 31, 2023, as amended on April 28, 2023 (the “2022 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 our Company believes that the accompanying disclosures are adequate to make the information presented not misleading. The Notes to Financial Statements included in the 2022 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, 2023 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 (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 our Company has no items of other comprehensive income (loss), comprehensive income (loss) is equal to net income (loss).

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 September 30, 2023, 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, 2023.

As part of an employment agreement, the Company granted an executive a one-time equity award of 1,000,000 restricted shares of the Company’s common stock valued at $3,580,000, fair value, which award shall 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 is being amortized 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 $420,600 for the three and nine months ended September 30, 2023. To the extent the Company has not established an employee equity compensation plan on or prior to August 18, 2024, the restricted shares may be converted, at the election of the executive, in full or in part, into cash compensation, at a rate of $3.10 per share of common stock, which was the fair market value of the common stock on August 18, 2023, which was the commencement date of the employment agreement. Since the issuance of the restricted stock can be settled in cash, the monthly amortization of the $3,580,000 fair value of the restricted stock grant is recorded as stock compensation payable. If the restricted stock grant is settled in shares of the Company’s common stock, then the stock compensation payable will be reclassified to additional paid in capital.

Note 3. Cash and Cash Equivalents

The amortized cost and fair value of securities held to maturity at September 30, 2023 are as follows:

Note 4. Long-term Receivables

As of September 30, 2023, the Company had long-term receivables of $1,993,700 from 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 Company determined that the above conditions were met upon execution of the agreements and, in the year ended December 31, 2022, recognized $2,810,600 of royalty revenue along with $206,600 of commission expense net of imputed interest of $131,300. 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, 2023, the accrued commission payable balance was approximately $183,000.

The current portion of the three new license agreements, in the amount of $624,100  is included in accounts receivable on the balance sheet as of September 30, 2023. The current portion of the license agreement entered into in prior years, in the amount of $507,500, is included in accounts receivable on the balance sheet as of December 31, 2022

The following table summarizes the future minimum payments due under the three new license agreements as of September 30, 2023:

The Company has evaluated the collectibility of the long-term receivables and believes them to be fully collectible as of September 30, 2023. 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, 2023, and 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, 2023 is $1,993,700.

Note 5. Stockholders’ Equity

On September 11, 2023 our Company entered into a stock purchase agreement (the “Purchase Agreement”) in connection with a private placement for total gross proceeds of $5.0 million. The Purchase Agreement provided for the issuance of an aggregate of 1,250,000 shares of our 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 date of grant of $65,790, which Advisory Shares shall be issued as follows: one-third (21,930 Advisory Shares) on September 11, 2024, one-third (21,930 Advisory Shares) on September 11, 2025 and one-third 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. On September 11, 2023, the sale pursuant to the Purchase Agreement closed. No placement fees or commissions were paid in connection with this transaction.

Note 6. Income Taxes

There was no income tax benefit for the net losses for the three months ended September 30, 2023 and the nine months ended September 30, 2023 and 2022 because our Company determined that the realization of the net deferred tax asset was not assured. Our Company created a valuation allowance for the entire amount of such benefits. However, the income tax benefit reflected on the Statement of Comprehensive Income (Loss) for the three and nine months ended September 30, 2023 is the result of reversing the tax accruals. There is no provision for income taxes for the three months ended September 30, 2023 due to the availability of net operating loss carryforwards.

The components for federal and state income tax expense are:

There was no change in unrecognized tax benefits during the period ended September 30, 2023 and there was no accrual for uncertain tax positions as of September 30, 2023. Tax years from 2020 through 2022 remain subject to examination by U.S. federal and state jurisdictions. There is no Federal net operating loss carryforward and $1,657,892 of Pennsylvania State net operating loss carryforward as of September 30, 2023.

Note 7. Earnings (Loss) per Share

In accordance with FASB ASC 260, Earnings per Share, basic earnings (loss) per common share is computed using net earnings (loss) divided by the weighted average number of common shares outstanding for the periods presented. Diluted earnings (loss) per share are computed using weighted average number of common shares plus dilutive common share equivalents outstanding during the period. Since our Company did not have any common stock equivalents outstanding as of September 30, 2023 and September 30, 2022, basic and diluted earnings (loss) per share were the same. 

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 the 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 6.5%. 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.

Total lease expense under operating leases for the three and nine months ended September 30, 2023 was $13,300 and $40,000, respectively. Total lease expense under operating leases for the three and nine months ended September 30, 2022 was $13,300 and $40,000, respectively.

Maturities of lease liabilities are as follows:

Note 10. 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. The Company will record the credit as other income in the Statement of Comprehensive Income in the period the refund is received.

Note 11. Subsequent Events

In connection with Michael S. Liebowitz’s appointment as Chief Executive Officer of the Company, on October 19, 2023, Mr. Liebowitz and the Company entered into an employment agreement (the “Employment Agreement”), which sets forth the terms and conditions of his employment and is effective as of October 19, 2023.

Pursuant to the Employment Agreement, Mr. Liebowitz serves as our Chief Executive Officer for an initial term of five years, commencing on August 18, 2023, the date of his appointment (the “Term Commencement Date”), and for successive periods of one year after the expiration of the initial term, unless either party gives the other party written notice of termination at least 180 days prior to the termination date of the applicable term period, or unless the Employment Agreement is otherwise terminated in accordance with its term. In consideration for serving as Chief Executive Officer, Mr. Liebowitz is entitled to an annual base salary of $400,000, which is effective retroactively as of the Term Commencement Date. In addition, Mr. Liebowitz shall be entitled to a one-time equity award of 1,000,000 restricted shares (the “Equity Award”) of the Company’s common stock valued at $3,580,000, fair value, which award shall 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 is being amortized to expense over the vesting term. The Company recorded total expense of $420,600 for the three and nine months ended September 30, 2023. To the extent the Company has not established an employee equity compensation plan on or prior to August 18, 2024, the Equity Award may be converted, at the election of Mr. Liebowitz, in full or in part, into cash compensation, at a rate of $3.10 per share of common stock, the fair market value of the common stock as of the Term Commencement Date. Mr. Liebowitz is also entitled to participate in all insurance and other fringe benefit programs of the Company to the extent and on the same terms and conditions as are accorded to other management employees of the Company.

In the event (i) Mr. Liebowitz resigns “For Good Reason” or (ii) the Company terminates his employment for any reason other than “For Good Cause”, excluding instances of Mr. Liebowitz’s death or “Total Disability”, (each as defined in the Employment Agreement), he is entitled to receive the following payments and benefits, in addition to any accrued obligations and subject to his timely execution and non-revocation of a general release of claims in the Company’s favor and continued compliance with the restrictive covenants contained in the Employment Agreement: (i) an amount equal to twelve (12) months of his then base salary, which sum shall be payable on a bi-weekly basis from and after the date of any such termination and (ii) any unvested shares of common stock deriving from the Equity Award shall immediately vest and, upon August 18, 2024, shall be issued.

In the event of Mr. Liebowitz’s termination due to his death or Total Disability, 50% of any unvested shares of common stock under the Equity Award shall immediately vest and, upon August 18, 2024, shall be issued to Mr. Liebowitz’s designated beneficiary or, if none, to his estate, in addition to any accrued obligations.

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 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, 2022, filed with the Securities and Exchange Commission on March 31, 2023, as amended on April 28, 2023.

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 adversely affected.

Revenues for the third quarter of 2023 were $575,100 compared to $685,900 in the third quarter of 2022, a decrease of $110,800, or approximately 16%. Licenses, royalties and fees decreased by $310,600, or approximately 69%, to $136,900 in the third quarter of 2023 from $448,600 in the third quarter of 2022. The decrease in licenses, royalties and fees in the third quarter of 2023 compared to the third quarter of 2022 is due primarily to lower royalties from our Company’s licensees in entertainment and toy products markets. We cannot assure you 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 presently being experienced.

Product and other sales increased by $200,900, or approximately 85%, to $438,200 in the third quarter of 2023 from $237,300 in the third quarter of 2022. Sales of ink increased in the third quarter of 2023 compared to the third quarter of 2022 due primarily to higher ink shipments to the third party authorized printer used by two of our Company’s major licensees in the entertainment and toy products market. In the third quarter of 2023, our Company derived revenues of approximately $566,100 from our licensees and their authorized printers in the entertainment and toy products market compared to revenues of approximately $648,300 in the third quarter of 2022.

 For the first nine months of 2023, revenues were $1,766,400, representing an increase of $226,800, or approximately 15%, from revenues of $1,539,600 in the first nine months of 2022. Licenses, royalties and fees decreased by $345,600, or approximately 46%, to $410,100 in the first nine months of 2023 from $755,700 in the first nine months of 2022. The decrease in licenses, royalties and fees is due primarily to higher royalties from the renewal of one of our Company’s licensees in September 2022 in the entertainment and toy products market. We cannot assure you 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 presently being experienced.

Product and other sales increased by $572,400, or approximately 73%, to $1,356,300 in the first nine months of 2023 from $783,900 in the first nine months of 2022. Sales of ink increased in the first nine months of 2023 compared to the first nine of 2022 due primarily to higher ink shipments to the third party authorized printer used by two of our Company’s major licensees in the entertainment and toy products market. Our Company derived revenues of approximately $1,687,700 from licensees and their authorized printers in the entertainment and toy products market in the first nine months of 2023 compared to revenues of approximately $1,426,100 in the first nine months of 2022.

Our Company’s gross profit decreased to $265,100 in the third quarter of 2023, or approximately 46% of revenues, from $493,500 in the third quarter of 2022, or approximately 72% 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 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.

For the first nine months of 2023, gross profit was $946,900, or approximately 54% of revenues, compared to $979,800, or approximately 64% of revenues, in the first nine months of 2022. The lower gross profit in the first nine months of 2023 compared to the first nine months of 2022 was primarily due to a decrease in gross profit from 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 decreased to approximately 54% in the third quarter of 2023 compared to approximately 90% in the third quarter of 2022 and to approximately 58% of revenues from licenses, royalties and fees in the first nine months of 2023 from approximately 83% in the first nine months of 2022.

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 44% of revenues in the third quarter of 2023 compared to approximately 38% of revenues in the third quarter of 2022. For the first nine months of 2023, the gross profit, expressed as a percentage of revenues, increased to approximately 52% of revenues from product and other sales compared to approximately 45% of revenues from product and other sales in the first nine months of 2022.

Research and development expenses increased in the third quarter of 2023 to $39,800 from $23,900 in the third quarter of 2022 and to $119,900 in the first nine months of 2023 from $95,900 in the first nine months of 2022 due primarily to higher employee and lab expenses in the third quarter and first nine months of 2023 compared to the third quarter and first nine months of 2022.

Sales and marketing expenses decreased to $71,200 in the third quarter of 2023 from $88,900 in the third quarter of 2022 and decreased to $218,600 in the first nine months of 2023 from $230,400 in the first nine months of 2022. The decrease in the third quarter of 2023 compared to the third quarter of 2022 is due primarily to lower commission and employee related expenses in the third quarter of 2023 compared to the third quarter of 2022. The decrease in the first nine months of 2023 compared to the first nine months of 2022 is due primarily to lower commission and employee related expenses in the first nine months of 2023 compared to the first nine months of 2022. 

General and administrative expenses increased to $833,800 in the third quarter of 2023 from $180,200 in the third quarter of 2022 and increased to $1,258,300 in the first nine months of 2023 from $964,600 in the first nine months of 2022. The increase in the third quarter and the first nine months of 2023 compared to the third quarter and first nine,months of 2022 is due primarily to higher professional fees, higher employee related expenses and higher insurance expenses offset by a decrease in professional fees and public company related expenses.

Income taxes in the third quarter and first nine months of 2023 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 $453,300 in the third quarter of 2023 compared to net income $206,500 in the third quarter of 2022 resulted primarily from a lower gross profit on a higher level of product sales, higher operating expenses and interest income in the third quarter of 2023 compared to the third quarter of 2022. The net loss of $343,900 in the first nine months of 2023 compared to net loss of $293,900 in the first nine months of 2022 resulted primarily from a higher level of product sales and interest income in the first nine months of 2023 compared to the first nine months of 2022, higher operating expenses in the first nine months of 2023 compared to the first nine months of 2022.

Plan of Operation, Liquidity and Capital Resources

During the first nine months of 2023, our Company’s cash increased to $10,476,500 at September 30, 2023 from $5,337,800 at December 31, 2022. During the first nine months of 2023, our Company generated $167,200 from its operating activities, used $25,800 for capital expenditures and generated $5,000,000 from the issuance of common stock.

During the first nine months of 2023, our Company’s revenues increased approximately 15% primarily as a result of higher sales of ink to an authorized printer of our Company’s licensees in the entertainment and toy products market offset in part by lower royalty revenues from our Company’s licensees in the entertainment and toy products market. Our total overhead expenses increased in the first nine months of 2023 to $1,596,800 compared to $1,290,900 in the first nine months of 2022, our Company’s interest income increased and our Company’s income tax expense decreased in the first nine months of 2023 compared to the first nine months of 2022. As a result of these factors, our Company generated a net loss of $343,900 in the first nine months of 2023 compared to a net loss of $293,900 in the first nine months of 2022. Our Company had positive operating cash flow of $167,200 during the first nine months of 2023. At September 30, 2023, our Company had positive working capital of $11,538,600 and stockholders’ equity of $13,474,500. For the full year of 2022, our Company had net income of $1,813,100 and had negative operating cash flow of $8,100. At December 31, 2022, our Company had working capital of $6,421,800 and stockholders’ equity of $8,818,400. 

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. We cannot assure you that these efforts will enable our 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 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.

Our 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. Beyond the Line of Credit, 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 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 in 2023 and beyond due to any future effects of the COVID-19 pandemic and its effect on the global economy, geopolitical instability including the Russia-Ukraine war 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, 2023, 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 31, 2023, as amended on April 28, 2023, other than those appearing elsewhere in this Quarterly Report on Form 10-Q.

Recently Adopted Accounting Pronouncements

As of September 30, 2023, there were no recently adopted accounting standards that had a material effect on our Company’s financial statements.

Recently Issued Accounting Pronouncements Not Yet Adopted

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments – Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments. The amendments in this Update affect loans, debt securities, trade receivables, and any other financial assets that have the contractual right to receive cash. The ASU requires an entity to recognize expected credit losses rather than incurred losses for financial assets. For public entities, the amendments are effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. ASU No. 2019-10 extends the effective dates for two years for smaller reporting companies and nonpublic companies.

Off-Balance Sheet Arrangements

Our 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. 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, 2023. Based on this evaluation, our Company’s Principal Executive Officer and Principal Financial Officer concluded that, as of September 30, 2023, 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, 2023 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II - OTHER INFORMATION

Item 1. Legal Proceedings.

None

Item 1A. Risk Factors.

Not applicable

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

During the quarter ended September 30, 2023, none of our officers or directors adopted or terminated any contract, instruction or written plan for the purchase or sale of securities that was intended to satisfy the affirmative defense conditions of Rule 10b5-1(c) under the Exchange Act or any “non-Rule 10b5-1 trading arrangement,” as defined in Item 408 of Regulation S-K.

Item 6.  Exhibits

(a) Exhibits

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.