In late 2019 I published a short primer on Nocopi Technologies (NNUP). This post served as an introduction to the company for a few people and touched on NNUP’s financial performance over the last few years, concluding with why I think the company is a good candidate for investment.
As a follow up, I’d like to discuss NNUP’s Q4 2019 results and the overall 2019 results.
By way of reminder, let’s remember what the company actually does. Here’s what I wrote in my last piece on NNUP:
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.
When we’re talking about specialty reactive inks for the educational and entertainment markets, we’re talking about products marketed under names such as ImagineInk, Color Blast, Magicolor, INKredibles, etc. If you have kids, you probably know these names. Mess-free markers are big in my home.
NNUP reported 19Q4 revenues of $974,400. Compared to 18Q4 revenues of $481,200, this represents growth of 102%. I don’t have to tell you that’s pretty incredible. For the full year 2019, NNUP had revenues of $2,537, 400 which was down approximately 24% from 2018 revenues of $3.34MM. On the face of it, this looks bad, but there is one fact to remember which mitigates this: in 2018 NNUP had to recognize approximately $1.5MM of the present value of a four-year licensing agreement as revenue. This agreement pays NNUP $100,000/quarter, which does not show up on the income statement since the revenue has already been recognized. But it does keep cash coming in the door, and as you know: cash is king. So even though you might not see it on the income statement, there’s a nice piece of cash coming through the door each quarter. All of that to say, if we back out $1.2MM (leaving $300,000 in revenue which would be the quarterly licensing revenue since the agreement was signed in 18Q2) from 2018 revenues, we are left with 2018 revenue of $2.14MM. Similarly, we’ll add $400,000 to the 2019 revenue numbers to include the cash received as part of the licensing agreement giving us 2019 revenues of $2,937,400. So on this adjusted basis, revenues for 2019 were actually up by 37% over 2018 – pretty good.
Of course, this is not how financial statements and accounting work, but I do find that it is sometimes helpful to think about things on equal footing. If the company had to recognize a one-time revenue event that contributes cash over a period of time, I like to smooth out the revenue to get a feeling for how quarters/years actually compare with each other. Make sense? I hope so.
Applying this same thought exercise to gross profit and net income numbers is a little tricky, but for our purposes rough numbers are just fine. Licensing revenues cost roughly 15%-20% by my best guess. Applying a cost of 17% to applicable licensing portion of revenues for 2018/2019 gives us an adjusted gross profits of $1.73MM and approximately $2.05MM, respectively. Using similar logic to adjust for taxes at a reasonable rate, we end up with net income of approximately $232K for 2018 and $1.08MM for 2019.
Maybe you disagree with that analysis, and that’s ok, but for me by shifting the revenue and expense recognition from 2018 and spreading it over the life of the license to better match the cash flow I feel like I get a better picture. Now, this approach is far from perfect and I get that. And while I am not normally a fan of adjusted reporting or metrics, for a case like this I find it helpful to understand what’s going on outside of a one-time revenue event, if that revenue were occurring over the life of the license.
Using this adjusted measure, 2019 basic EPS increases from $.0127/share to $.0182/share and diluted EPS increases from $.0126/share to $.0180/share. What does that mean? To me it means that the recurring cash coming into the business on a quarterly basis is meaningful and will allow the company to do some interesting things, even though that cash won’t be recognized on the income statement as revenue. The balance sheet will keep growing and that’s always good.
I have had some brief email exchanges with IR reps for NNUP and am generally pleased with the direction the company is heading and how management is considering shareholders in the decision making process. I mentioned possibilities for further strengthening the revenue model and they agreed. In particular I am intrigued by the corporate market and what can be done to improve document security and fraud prevention. This could be applicable to nearly every business segment and industry. Unfortunately, large corporate contracts take forever to get done and while they can be very lucrative, it just takes a lot of time and effort.
Last time I wrote about NNUP I think I threw out a very broad price target of $.12 – $.20/share. I might raise that a bit. The company is trading a right around a 6 P/E as I write this, using the actual diluted EPS numbers reported. Using my adjusted diluted EPS the company is trading a little above a 4 P/E. In normal times I would expect the company to trade in the 8-12 range which based on my numbers would put us around $.14 – $.21/share, something like that. I think the floor on this stock is raising and I can not say what the ceiling is. I have no idea. Maybe we’re close but my gut says it’s a lot higher. Long term I wouldn’t be surprised to see it get to $.50-$1, but a lot has to happen between now and then.
Of course the major elephant in the room is everything that’s happening with COVID-19 and the economic impact of the current shutdown. What that means is really anybody’s guess at this point. NNUP could be severely affected if people aren’t purchasing like they normally would. That said, there is very strong brand recognition with NNUP’s partners and if I’ve learned anything during this quarantine/isolation period, it’s that I will spend almost any amount of money to keep my children entertained while I try to work.
Disclaimer: Of course I’m long NNUP. Don’t take anything in here as advice. It’s just analysis and commentary, and maybe bad analysis and commentary at that.
