Management's Discussion and Analysis of Financial Condition and Results of Operations.

Forward-Looking Information

This Quarterly 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 Quarterly 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 unaudited condensed consolidated financial statements and the notes thereto 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 the 2025 Annual Report.

Background Overview

Nocopi Technologies, Inc. develops and markets specialty reactive inks for multiple applications across various industries. Our specialty inks are used by our customers for a range of purposes from bringing entertainment products to life with a variety of color activations to providing document and brand authentication for security purposes aimed at reducing losses caused by fraudulent document reproduction or by product counterfeiting and/or diversion. Our primary markets are the large educational and toy products industry and the document and product authentication industry. 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 our licensees or to their licensed printers.

Unless the context otherwise requires, all references to the "Company," "we," "our" or "us" and other similar terms mean Nocopi Technologies, Inc., a Maryland corporation, and its consolidated subsidiary, Polymeric Nocopi.

Recent Developments

On May 18, 2026, the Company entered into an Asset Purchase Agreement (the "Asset Purchase Agreement") with Polymeric U.S., Inc. ("Polymeric" or the "Seller"), a Missouri corporation, and Savara Capital, a Mauritius limited company, and the sole shareholder of the Seller (the "Owner") whereby the Seller and Owner agreed to sell Polymeric's business to a wholly owned subsidiary of the Company, Polymeric Nocopi, LLC ("Polymeric Nocopi"). Pursuant to the Asset Purchase Agreement, the Company acquired (the "Polymeric Acquisition") substantially all the assets of Polymeric for an aggregate purchase consideration of $2,650,000, which consisted of (a) $1,900,000 in cash, subject to customary working capital adjustments and other reductions described below, (b) the assumption by the Company of certain specified liabilities of the Seller and (c) the issuance by the Company of 500,000 shares of Common Stock to the Seller. On the closing date, the Company delivered to the Seller $1,750,000, which represented the cash consideration portion of the purchase price, less the holdback amount of $150,000. Polymeric's business operations consist primarily of the manufacture and sale of screens and digital inks. Management believes the acquisition expands the Company's product offerings, manufacturing capabilities, customer relationships, and is expected to enhance future revenue opportunities and expand geographic footprint of the Company.

Results of Operations

The 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.

The 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 the 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 the 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 the Company agrees to revise such terms, revenues from the customer may be adversely affected.

For the Three and Nine months ended September 30, 2026, as compared to the Three and Nine months ended September 30, 2025.

Total revenues for the three months ended September 30, 2026 were approximately $3,329,000 as compared to $386,000 for the three months ended September 30, 2025, an increase of $2,943,000 or approximately 763%. Total revenues for the nine months ended September 30, 2026 were approximately $4,680,000 as compared to $1,225,000 for the nine months ended September 30, 2025, an increase of $3,455,000, or 282%. The increase in total revenues is primarily comprised of the following:

The Company's gross profit increased to approximately $2,203,000 or 66% of gross revenues, for the three months ended September 30, 2026 from approximately $178,000 or 46% of gross revenues for the three months ended September 30, 2025, an approximately 20% increase in gross profit percentage. The Company's gross profit increased to approximately $2,751,000 or 59% of gross revenues for the nine months ended September 30, 2026 from approximately $643,000 or 52% of gross revenues for the nine months ended September 30, 2025, an approximately 6% increase in gross profit percentage. The increase in gross profit percentage is due to the increase in revenues from licenses, royalties and fees which have historically carried a higher gross profit than product and other sales, which generally consist of either supplies or other manufactured products which incorporate the Company's technologies or equipment used to support the application of its technologies. These product supplies and items (except for inks which are manufactured by the 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.

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 these sources as well as the Company's overall gross profit. The gross profit from licenses, royalties and fees increased to approximately 97% for the three months ended September 30, 2026 from approximately 60% for the three months ended September 30, 2025. The gross profit from licenses, royalties and fees increased to approximately 92% for the nine months ended September 30, 2026 from approximately 71% for the nine months ended September 30, 2025.

The gross profit of product and other sales, expressed as a percentage of revenues, 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 33% for the three months ended September 30, 2026 from approximately 40% for the three months ended September 30, 2025. The gross profit from product and other sales decreased to approximately 36% for the nine months ended September 30, 2026 from approximately 42% for the nine months ended September 30, 2025.

Total operating expenses for the three months ended September 30, 2026, as compared to the three months ended September 30, 2025, were approximately $982,000 and $320,000, respectively, an increase of approximately $661,000 or 207%. Total operating expenses for the nine months ended September 30, 2026, as compared to the nine months ended September 30, 2025, were approximately $2,259,000 and $1,044,000, respectively, an increase of approximately $1,215,000 or 116%. The increase in total operating expenses was primarily comprised of the following:

We reported other income, net of approximately $201,000 and $116,000 for the three months ended September 30, 2026 and 2025, respectively, and approximately $396,000 and $341,000 for the nine months ended September 30, 2026 and 2025, respectively. The increase in other income is primarily attributable to the recognition of an unrealized gain on marketable securities related to acquired equity securities investments during the third quarter of 2026 offset by decrease in interest income as a direct result of having a lower cash balance for both periods in 2026 as compared to the prior period of 2025.

For the three and nine months ended September 30, 2026, we recorded a provision for income taxes of approximately $25,000. We did not record a provision for income taxes for the three and nine months ended September 30, 2025.

Net income increased to approximately $1,397,000 for the three months ended September 30, 2026 as compared to a net loss of $(27,000) for the three months ended September 30, 2025. Net income increased to approximately $863,000 for the nine months ended September 30, 2026 as compared to a net loss of $(60,000) for the nine months ended September 30, 2025. The change relates to the factors discussed above.

Plan of Operation, Liquidity and Capital Resources

The Company's cash decreased to approximately $7,292,000 at September 30, 2026 from $11,553,600 at December 31, 2025. The change is discussed below under cash flow from activities.

The following table summarizes total current assets, liabilities and working capital at September 30, 2026, compared to December 31, 2025, and the changes between those periods:

Sources and Uses of Cash

Net Cash Flow from Operating Activities

For the nine months ended September 30, 2026, net cash used in operating activities was approximately $366,000 due to our net income of approximately $863,000 offset primarily by non-cash charges of stock-based compensation of approximately $106,000, depreciation of $31,000, amortization of $11,000 and amortization of right of use assets of $127,000, partially offset by an unrealized gain on marketable securities of approximately $109,000. Net changes in operating assets and liabilities totaled approximately $(1,409,000), which is primarily attributable to an increase in long-term receivables of approximately $1,013,000, increase in accounts receivable of $445,000, increase in inventories of $132,000, increase in accounts payable and accrued expenses of $372,000 and decrease in operating lease liability of $123,000.

For the nine months ended September 30, 2025, net cash provided by operating activities was approximately $658,000 due to our net loss of approximately $60,000 offset primarily by non-cash charges of stock- based compensation of approximately $72,000, depreciation of $5,000, and amortization of right of use assets of $57,000. Net changes in operating assets and liabilities totaled approximately $569,000, which is primarily attributable to a decrease in long-term receivables of approximately $369,000, decrease in accounts receivable of $247,000, decrease in prepaid and other current assets of $57,000, increase in accounts payable of $44,000 and decrease in operating lease liability of $52,000.

Net Cash Flow used in Investing Activities

Net cash used in investing activities was approximately $4,696,000 for the nine months ended September 30, 2026, related to purchase of equipment of approximately $19,000, purchase of equity investments of approximately $276,000, purchase of held-to-maturity debt securities investments of approximately $2,600,000 and the acquisition of Polymeric business for $1,800,000 as compared to $0 in the same period of 2025.

Net Cash Flow from Financing Activities

Net cash provided by financing activities was approximately $800,000 for the nine months ended September 30, 2026, related to proceeds received from the sale of our common stock for $800,000 as compared to $0 in the same period of 2025.

Our plan of operations for the next twelve months following the date of this Quarterly Report on Form 10-Q consists of concentrating available human and financial resources to continue to capitalize on the specific business relationships the Company has developed in the entertainment and toy products market. Based on our current operating plan, we believe that our existing cash resources will be able to fund our planned operations for the next twelve months. This includes two licensees that have been marketing products incorporating the 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 the 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.

The 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 the Company to generate additional revenues and positive cash flow.

The Company intends to continue pursuing strategic acquisitions of businesses with complementary or competing products, services, technologies, or capabilities that enhance its operations, expand its product and service offerings, and support long-term growth and the generation of free cash flow. Although the Company completed a recent acquisition in May 2026, management continues to actively evaluate additional acquisition opportunities and engage in discussions with prospective acquisition targets. Future acquisitions may be funded through the issuance of debt or equity securities, cash payments, the exchange of services, or any combination thereof. As of the date of this Quarterly Report on Form 10-Q, the Company has not entered into any definitive agreements with respect to any additional acquisitions.

The 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. 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 the 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 2026 and beyond and its effect on the global economy, geopolitical instability including the Russia-Ukraine war and conflicts in the Middle East and the related supply chain disruptions 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 negatively impacted in future periods.

Contractual Obligations

As of September 30, 2026, there were no material changes in our contractual obligations from those disclosed in the 2025 Annual Report, other than those appearing in the notes to the financial statements appearing elsewhere in this Quarterly Report on Form 10-Q.

Recently Adopted Accounting Pronouncements

As of September 30, 2026 and for the period then ended, there are no recently adopted accounting standards that have a material effect on the Company's financial statements.

Recently Issued Accounting Pronouncements Not Yet Adopted

See Note 2 to the condensed consolidated financial statements for a discussion of recently issued accounting pronouncements not yet adopted, which the Company is currently evaluating.

Off-Balance Sheet Arrangements

The Company does not have any off-balance sheet arrangements.