Nocopi Technologies, Inc. is a nanocap company specializing in document security and product authentication. The company was founded by in 1983 and is based in King of Prussia, PA – just outside of Philadelphia.
The company was initially engaged in the authentication space, developing copy-resistant papers which would inhibit the reproduction of sensitive documents on a standard office copier. From there, the company moved into creating specialty ink technologies which would hamper reproduction or counterfeiting efforts. More recently, the company has developed specialty reactive inks for use in the educational and entertainment markets.
Of note to parents (myself included) is the “mess-free” ink which is commonly found in coloring books and activity books. This ink allows the child to draw freely with a marker/pen and the color or design only shows up on parts of the paper which have been printed with Nocopi’s ink. This toy/entertainment market opportunity is huge and is driving new revenue for the company. Other applications include “Magic Ink”, which is used in coloring/activity books marketed by leading child-focused publishers, and “Rub-it & Color”, which allows the user to scratch a paper’s surface and display a variety of colors.
Additionally, around 25% of revenues are derived from pharmaceutical and beauty companies that use Nocopi’s technology to apply secret or hidden product markings to manage and monitor product authenticity. Beyond these uses, the company is still providing authentication technologies to Fortune 500 companies.
Nocopi is led by Dr. Michael Feinstein (CEO) and Terry Stovold (COO). Additionally, the company uses a consulting CFO for the time being. Dr. Feinstein is in the process of winding down his medical practice in order to devote more time to Nocopi and lead its recent investor relations and marketing effort.
The company’s primary sources of revenue include: licensing the use of its technology, royalties, product sales, and fees for technical services. Over the last several years, management has been focused on establishing a strong financial base and building brand awareness in the marketplace – this effort seems to be paying off, which should be obvious by looking at the balance sheet. From 4Q2014 to 4Q2018, the company’s cash position grew over 1300%, from $30K to $400K, while liabilities decreased almost 34%, from $830K to $550K. Accumulated Deficit for shareholder has been decreased over 17%, from $13.43MM to $11.06MM.
Turning to the income statement, we see more encouraging signs. Revenues during this period have grown from $920k to $3.34MM*, an increase of over 360%. Gross profits grew by over 460%, from $600k (65% gross margins) to $2.78MM (83% gross margins), indicating that the company has become more efficient in how it generates revenue. This is supported by operating expenses, which grew by only 65% from $890K to $1.47MM. Bottom line net income grew from $10K to $1.66MM, an astounding 16,600% increase. One other item to keep in mind is that as of 12/31/2018 the company has approximately $2.5MM net operating loss carryforwards.
*Note that due to the nature of its licensing agreements, Nocopi had to recognize the present value of a four-year licensing agreement which was signed in 2018, meaning that 2018 revenues include $1.5MM from this agreement. This licensing agreement will pay out a minimum of $100K/quarter for four years, beginning in 3Q2019 – so cash will be coming in the door but it will be “hidden” when looking at the income statement.
Taking a look at 2019, the first three quarters of the year show continued strength: if we back out the $1.5MM in licensing revenue discussed above, 2018 revenues were $1.84MM. Through 3Q2019, revenues are $1.57MM, with a realistic year-end estimate being $2.0MM – $2.5MM. Net income through three quarters is $440K, likely to end the year around $600K – $750K. This would lead to EPS of somewhere around $.01 – $.013, a meaningful increase from adjusted 2018 EPS.
The balance sheet through the first three quarters of 2019 has also shown signs of strength. The company ended 2018 with $400K in cash, and as of 9/30/2019 has approximately $800K in cash. Liabilities have grown somewhat from $550K to $710K, due largely to an increase in accrued expenses and other liabilities. Still, the company has current assets of $1.87MM and total liabilities of only $710K. Perhaps a better way to look at this company’s balance sheet is to say that Nocopi has liquid assets of $1.63MM and current liabilities of only $420K, giving it a quick ratio of 3.88. The company had a tangible book value per share of $.041 as of 9/30/2019. The company is building a strong balance sheet and is management has shown a commitment to turning this company into one that will last.
During this period of growth, management made a concerted effort to reduce fixed costs to a reasonable and sustainable level. While this has contributed to the margin growth, the truth is that this business does not have huge operating expenses so there is only so much expense cutting that can be done. This means that with costs under control, it is incumbent upon management to grow top-line revenue, i.e. find more meaningful licensing opportunities. To this end, management has been able to grow the product base to include popular franchises from names such as Disney, Marvel, Nickelodeon, DreamWorks, etc. While this does pose a risk to the company (inability to generate new licensing opportunities means no new revenue coming in), I believe the opportunity and potential for Nocopi far outweigh the risks. Licensing and royalty revenue is cheap, it does not carry significant costs and therefore the margins on this type of revenue are huge. Focusing on licensing and royalty revenue while also maintain a presence in the retail/security/authentication market is the way forward for Nocopi and I’m glad to see management moving in this direction.
Currently, the company is trading for $.065/share, giving it a market capitalization of $3.9MM. The company has seen its share price increase since releasing Q3 numbers in November 2019. At a project 2019 EPS of $.011/share, it is currently trading at a P/E of 6. As the company grows revenue and further solidifies its balance sheet, I think a price target in the $.12 – $.20 range is reasonable. Will it get there? I’m not sure. But I believe management is making the right moves regarding generating revenue and solidifying the balance sheet. I’d like to see them increase the number of licensing agreements and maybe even types of products that are offered. Spending a little more on R&D wouldn’t bother me, but overall I think they are headed in the right direction. I’m happy to be a shareholder and will be watching this company with a keen eye for the next few years.
Disclosure: It should be obvious but I am long Nocopi Technologies, Inc.
