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.

Here’s a quick recap of my 2019:

• Family
  • What can I say – it’s been a great year.
  • M is 4 and halfway through her first year of Pre-K. She’s enrolled in Kindergarten (!) for next year. We’ll be finding out in February exactly which school she’ll be going to. She’s also in the middle of her second year of ballet. We’ll see if she keeps this up or moves on to another interest. She’s all girl, loves pink and purple, and I can’t believe she’s almost in school!
  • H is 2 and a complete wrecking ball. He had some surgery this year to remove his adenoids and put tubes in his ears. His hearing seems to have improved and he’s been working hard in speech therapy; he is speaking much more and more clearly. What a joy it is to watch him learn to use his voice and communicate with words. He is fearless (except for dogs) and has a really good mechanical mind – always taking things apart and figuring them out.
  • We added a third this year! M2 is almost 10 months old. He’s the happiest baby, just all smiles all the time. He’s crawling like a champ, pulling himself up onto things, and standing. He talks non-stop and I can’t wait to hear all the things he’s saying. His siblings love him (sometimes a little too much) and he seems to like them too. It will be fun to watch them grow up together and see the bonds that form.
  • X continues to be our rock, our glue, our sanity. I’ll never know how she manages to balance the work of three young kids, a big old house, a job as a nurse, and a husband that’s usually out running somewhere. But she does it with grace and we’re all lucky to have her. She’s always cooking up something new and tasty in the kitchen and figuring out ways to keep our three energetic kiddos busy and engaged. I’d be lost without her.
• Running:
  • Ran 1779.88 miles, according to Garmin – by far my biggest year for mileage. This included:
    • Pittsburgh Marathon – I think this was my third time completing this race. It’s fun and local and even though this year was slow I had a great time
    • Hell Hath No Hurry 50k (my first ultramarathon) – it was so hot and muddy on this day. This is a great event put on by good people with terrific support.
    • Baker Trail Ultrachallenge 50-miler – this was my first 50-miler and I was definitely nervous about this race. Turns out I didn’t need to be. Yes it was the furthest distance I’d ever attempted, but the event is so well-organized and supported that I had nothing to worry about. What a fun day and great way to get my first 50-miler.
    • New York City Marathon – if I’m honest I wasn’t totally jazzed about this race, and my results show it. In fact, I saw my wife and baby at mile 18, stopped and said “I’m done. Let’s walk back to the hotel.” Well, she convinced me to finish and I’m glad I listened. Even though it was my worst marathon performance, it was still a special day. I have a lot of love in my heart for New York, so getting to run this race was great.
    • First Annual Matt’s Birthday Fat Ass Run (where I run my age in miles around a loop in Frick Park. 38 miles this year!) What a blast this was. I ended up doing 38.01 miles around a roughly one mile loop. I had something like 15 different people run with me during the day. My family did a loop with me, my brother did several, one guy even did 30!
  • Hired a running coach to help me be motivated when it comes to doing my workout and also get me doing the things I hate to do: speed workouts, core work, etc. So far it’s been great. If you’re looking for a coach, I highly recommend Sarah Keyes.
  • This was the a bit of a recovery year for me. I’ve been out of the groove of regular running for a couple of years, so 2019 was a year of just getting back to it.
• Work
  • After a great couple of years, I switched employers.
  • My new employment situation is terrific – I’m a W2 employee but 100% work at home. This setup truly suits my personality and I think it will prove to be a long and productive work situation.
• Reading
  • I didn’t read as much as I wanted to this year. According to Goodreads, I finished 11 books:
    • Relentless Forward Progress: A Guide to Running Ultramarathons by Bryon Powell
    • What is the Bible? by Rob Bell
    • Build a Rental Property Empire by Mark Ferguson
    • Sweep: The Story of a Girl and Her Monster by Jonathan Auxier
    • All the Light We Cannot See by Anthony Doerr
    • Good Talk by Mira Jacob
    • Building Wealth One House at a Time by John W. Schaub
    • Bartleby, the Scrivener: A Story of Wall Street by Herman Melville
    • Again to Carthage by John L. Parker Jr.
    • Bad Paper by Jake Halpern
    • Bad Blood by John Carreyrou
  • I’m currently reading maybe a half-dozen books that I hope to finish in the next month or two
• Random:
  • I liquidated and then restarted my collection of T206 baseball cards. I’ll probably spend the rest of my life working on this set.
  • We bought a new (to us) vehicle this year. We traded in our trusty 2012 Subaru Forester for a 2018 Honda Odyssey. The extra space comes in handy with three car seats.
  • I spent a few days in Nashville with some good friends. We have a long-running and very active text chain and try to get together once per year if we can. I saw several of these friends at different points during the year, but it’s rare that all six of us can be in the same place at the same time as we are scattered across the U.S.
  • I’ve continued to play chess (badly). I really enjoy chess and want to be good at it, I just don’t seem to have the time (or don’t make the time, rather) to properly study the game and learn. Maybe someday.

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.

Beautiful 16 miles today. My left Achilles’ tendon has been a bit tender so I’ve been working on that, stretching and icing and slowing down a bit.

I haven’t posted anything recently but I’ve been busy with family, work, and running.

We added to the family recently – welcome Max.

Work has been good but busy.

Running is going well. Pittsburgh marathon is coming up in about 3 weeks and then it’s time for ultramarathon training. And then it’s time for NYC marathon training. It’ll be a lot of miles on my legs but I’m feeling good.

More to come.