UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

FORM 10-Q

 

[X] Quarterly report under Section 13 or 15(d) of the Securities Exchange Act of 1934

 

For the quarterly period ended June 30, 2019

 

[  ] Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

COMMISSION FILE NO. 1-11602

 

PEN INC.

(Exact name of registrant as specified in its charter)

 

Delaware		47-1598792
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification No.)

 

750 Denison Court
Bloomfield Hills, MI		48302
(Address of principal executive offices)		(Zip Code)

 

(844) 273-6462

(Registrant’s telephone number, including area code)

 

Title of each class		Trading Symbol		Name of Each Exchange on Which Registered
Class A Common Stock, $0.0001 par value		PENC		OTC Markets

 

Former name or former address, if changed since last report: 701 Brickell Ave, Suite 1550, Miami, FL 33131.

 

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 [X] No

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted 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 and post such files). [X] 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 “accelerated filer”, “large accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer [  ]		Accelerated filer [  ]
Non-accelerated filer [  ] (Do not check if a smaller reporting company)		Smaller reporting company [X]

 

Emerging growth company [  ]

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). [  ] Yes [X] No.

 

Securities registered pursuant to Section 12(b) of the Act: None

 

As of December 17, 2019, the registrant had 6,099,692 shares of Class A Common Stock issued and outstanding.

 

 

 

PEN INC.

 

INDEX

 

		Page
Part I. Financial Information
	Item 1. Financial Statements	F-1
	Consolidated Balance Sheets—June 30, 2019 (unaudited) and December 31, 2018	F-1
	Consolidated Statements of Operations—Three and Six Months Ended June 30, 2019 and 2018 (unaudited)	F-2
	Consolidated Statements of Changes in Stockholders’ Deficit for the Three Months Ended June 30, 2019 and 2018 (unaudited)	F-3
	Consolidated Statements of Changes in Stockholders’ Deficit for the Six Months Ended June 30, 2019 and 2018 (unaudited)	F-4
	Consolidated Statements of Cash Flows—Six Months Ended June 30, 2019 and 2018 (unaudited)	F-5
	Condensed Notes to Unaudited Consolidated Financial Statements	F-6
	Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	4
	Item 3. Quantitative and Qualitative Disclosures about Market Risk	8
	Item 4. Controls and Procedures	8
Part II. Other Information
	Item 1. Legal Proceedings	8
	Item 1A. Risk Factors	8
	Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	8
	Item 3. Defaults Upon Senior Securities	9
	Item 4. Mine Safety Disclosures	9
	Item 5. Other Information	9
	Item 6. Exhibits	9
Signatures		10

 

 

FORWARD-LOOKING STATEMENTS

 

This Form 10-Q contains certain forward-looking statements that we believe are within the meaning of the federal securities laws. For this purpose, any statements that are not statements of historical fact may be deemed to be forward-looking statements, including the statements under “Management’s Discussion and Analysis of Financial Condition and Results of Operations” regarding our strategy, future operations, future expectations or future estimates, financial position and objectives of management. Those statements in this Form 10-Q containing the words “believes,” “anticipates,” “plans,” “expects” and similar expressions constitute forward-looking statements, although not all forward-looking statements contain such identifying words. These forward-looking statements are based on our current expectations and are subject to a number of risks, uncertainties and assumptions relating to our operations, results of operations, competitive factors, shifts in market demand and other risks and uncertainties.

 

Although we believe that the assumptions underlying our forward-looking statements are reasonable, any of the assumptions could be inaccurate and actual results may differ from those indicated by the forward-looking statements included in this Form 10-Q. In light of the significant uncertainties inherent in the forward-looking statements included in this Form 10-Q, you should not consider the inclusion of such information as a representation by us or anyone else that we will achieve such results. Moreover, we assume no obligation to update these forward-looking statements to reflect actual results, changes in assumptions or changes in other factors affecting such forward-looking statements.

 

 

PART I. FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS

 

PEN INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

 

		June 30 2019				December 31 2018
			(unaudited)
ASSETS
CURRENT ASSETS:
Cash		$	270,736			$	221,502
Restricted cash			-				85,000
Accounts receivable, net			122,161				307,554
Inventory			725,009				827,527
Prepaid expenses and other current assets			42,694				81,864
Total Current Assets			1,160,600				1,523,447
Property, plant and equipment, net			304,094				328,028
Other assets			32,196				32,196
Total Assets		$	1,496,890			$	1,883,671
LIABILITIES AND STOCKHOLDERS’ DEFICIT
CURRENT LIABILITIES:
Accounts payable		$	1,243,226			$	1,375,042
Accounts payable - related parties			19,887				19,887
Accrued expenses and other current liabilities			274,305				478,155
Bank revolving line of credit			-				330,892
Current portion of notes payable			48,641				73,562
Advances from related parties			140,000				140,000
Deferred revenue			80,838				89,730
Total Current Liabilities			1,806,897				2,507,268
Notes payable, net of current portion			155,537				129,798
Total Liabilities			1,962,434				2,637,066
Commitments and Contingencies (See Note 11)
STOCKHOLDERS’ DEFICIT:
Preferred stock, $0.0001 par value, 20,000,000 shares authorized; no shares issued and outstanding			-				-
Class A common stock: $0.0001 par value, 7,200,000 shares authorized; 5,306,549 and 3,741,481 issued and outstanding at June 30, 2019 and December 31, 2018, respectively			530				374
Class B common stock: $0.0001 par value, 2,500,000 shares authorized; 0 shares issued and outstanding at June 30, 2019 and December 31, 2018, respectively			-				-
Class Z common stock: $0.0001 par value, 300,000 shares authorized; 0 shares issued and outstanding at June 30, 2019 and December 31, 2018, respectively			-				-
Additional paid-in capital			6,565,444				5,886,600
Accumulated deficit			(7,031,518	)			(6,640,370	)
Total Stockholders’ Deficit			(465,544	)			(753,396	)
Total Liabilities and Stockholders’ Deficit		$	1,496,890			$	1,883,671

 

See accompanying notes to consolidated financial statements.

 

 

PEN INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

 

		For the Three Months Ended								For the Six Months Ended
		June 30,								June 30,
		2019				2018				2019				2018
		(unaudited)				(unaudited)				(unaudited)				(unaudited)
REVENUES:
Products		$	383,827			$	919,557			$	825,315			$	2,062,132
Contract services			267,812				447,896				584,185				748,846
Total Revenues			651,639				1,367,453				1,409,500				2,810,978
COST OF REVENUES:
Products			374,065				650,816				557,021				1,455,503
Contract services			229,097				289,741				622,353				591,313
Total Cost of Revenues			603,162				940,557				1,179,374				2,046,816
GROSS PROFIT			48,477				426,896				230,126				764,162
OPERATING EXPENSES:
Selling and marketing expenses			17,298				(12,920	)			26,344				28,776
Salaries, wages and related benefits			128,489				191,047				159,780				355,071
Research and development			41,024				2,251				41,069				10,444
Professional fees			72,920				150,802				165,972				323,240
General and administrative expenses			140,855				143,368				284,632				290,677
Total Operating Expenses			400,586				474,548				677,797				1,008,208
INCOME (LOSS) FROM OPERATIONS			(352,109	)			(47,652	)			(447,671	)			(244,046	)
OTHER (EXPENSE) INCOME:
Interest expense			(5,159	)			(26,271	)			(7,753	)			(42,612	)
Loss on settlement reserve			4,654								4,654
Other income, net			9,705				53,121				59,622				245,338
Total Other (Expense) Income			9,200				26,850				56,523				202,726
NET INCOME (LOSS)		$	(342,909	)		$	(20,802	)		$	(391,148	)		$	(41,320	)
NET INCOME (LOSS) PER COMMON SHARE:
Basic		$	(0.08	)		$	(0.01	)		$	(0.09	)		$	(0.01	)
Diluted		$	(0.08	)		$	(0.01	)		$	(0.09	)		$	(0.01	)
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
Basic			4,472,389				3,092,220				4,312,554				3,087,694
Diluted			4,472,389				3,092,220				4,312,554				3,087,694

 

See accompanying notes to consolidated financial statements.

 

 

PEN INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ DEFICIT

FOR THE THREE MONTHS ENDED JUNE 30, 2019 AND JUNE 30, 2018

(unaudited)

 

		Class A Common Stock								Class B Common Stock								Class Z Common Stock								Additional Paid-in				Accumulated				Stockholders’
		Shares				Amount				Shares				Amount				Shares				Amount				Capital				Deficit				Deficit
Balance, March 31, 2019			4,299,620			$	429				-			$	-				-			$	-			$	6,126,545			$	(6,688,609	)		$	(561,635	)
Common stock issued for cash, net of issuance costs			965,115				97																				385,950								386,047
Common stock issued for services			41,814				4																				23,996								24,000
Warrants , options, and warrant options on private placement																											28,953								28,953
Net loss																															(342,909	)			(342,909	)
Balance, June 30, 2019			5,306,549				530				-				-				-				-				6,565,444				(7,031,518	)			(465,544	)
Balance, March 31, 2018			1,657,765			$	165				1,432,690			$	143				-			$	-			$	5,509,667			$	(6,607,755	)		$	(1,097,780	)
Common stock issued for services			5,043				1				3,362				1												9,996								9,998
Net loss																															(20,802	)			(20,802	)
Balance, June 30, 2018			1,662,808			$	166				1,436,052			$	144				-			$	-			$	5,519,664			$	(6,628,557	)		$	(1,108,583	)

 

See accompanying notes to consolidated financial statements.

 

 

PEN INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ DEFICIT

FOR THE SIX MONTHS ENDED JUNE 30, 2019 AND JUNE 30, 2018

(unaudited)

 

		Class A Common Stock								Class B Common Stock								Class Z Common Stock								Additional Paid-in				Accumulated				Total Stockholders’
		Shares				Amount				Shares				Amount				Shares				Amount				Capital				Deficit				Deficit
Balance, December 31, 2018			3,741,481			$	374				-			$	-				-			$	-			$	5,886,600			$	(6,640,370	)		$	(753,396	)
Common stock issued for cash, net of issuance costs			1,523,254				152																				609,150								609,302
Common stock issued for services			41,814				4																				23,996								24,000
Warrants , options, and warrant options on private placement																											45,698								45,698
Net loss																															(391,148	)			(391,148	)
Balance, June 30, 2019			5,306,549				530				-				-				-				-				6,565,444				(7,031,518	)			(465,544	)
Balance, December 31, 2017			1,653,322			$	165				1,423,252			$	142				-			$	-			$	5,490,925			$	(6,587,237	)		$	(1,096,005	)
Common stock issued for cash, net of issuance costs			4,443								9,438				1												18,743								18,744
Common stock issued for services			5,043				1				3,362				1												9,996								9,998
Net loss																															(41,320	)			(41,320	)
Balance, June 30, 2018			1,662,808			$	166				1,436,052			$	144				-			$	-			$	5,519,664			$	(6,628,557	)		$	(1,108,583	)

 

See accompanying notes to consolidated financial statements.

 

 

PEN INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

 

		For the Six Months Ended
		June 30,
		2019				2018
		(unaudited)				(unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss		$	(391,148	)		$	(41,320	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Change in inventory obsolescence reserve			17,527				28,641
Depreciation and amortization expense			26,416				32,261
Stock-based compensation			156				8,746
Change in operating assets and liabilities:
Accounts receivable			185,393				(188,249	)
Accounts receivable - related party			-				14,226
Inventory			84,991				(347,385	)
Prepaid expenses and other assets			39,170				(129,424	)
Accounts payable			(131,868	)			(102,282	)
Accounts payable - related parties			-				-
Customer deposits			-				(134,224	)
Accrued expenses			(203,850	)			495,272
Deferred revenue			(8,892	)			(12,396	)
NET CASH PROVIDED BY OPERATING ACTIVITIES			(382,053	)			(376,134	)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property, plant and equipment			(2,483	)			-
NET CASH PROVIDED BY INVESTING ACTIVITIES			(2,483	)			-
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from bank lines of credit			-				1,903,600
Repayment of bank lines of credit			(330,892	)			(1,509,374	)
Repayment of bank loans			818				(40,803	)
Proceeds from sale of common stock			678,844				-
Payment of issuance costs related to sale of common stock			-				-
Proceeds from advances from related parties			-				25,000
NET CASH USED IN FINANCING ACTIVITIES			348,770				378,423
NET DECREASE IN CASH			(35,766	)			2,289
CASH, beginning of year			306,502				233,299
CASH, end of period		$	270,736			$	235,588
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the period for interest
Interest		$	7,753			$	42,612
Income taxes		$	-			$	-
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
Reclassification of accrued salary to notes payable - long-term		$	-			$	-
Accrued director fees settled with common stock		$	-			$	19,997

 

The following table provides a reconciliation of cash and restricted cash reported within the consolidated balance sheet that sum to the total of the same such amounts shown in the consolidated statement of cash flows:

 

Cash		$	270,736				150,588
Restricted cash			-				85,000
Total cash and restricted cash		$	270,736			$	235,588

 

See accompanying notes to consolidated financial statements.

 

 

PEN INC. AND SUBSIDIARIES

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2019

(UNAUDITED)

 

NOTE 1 – ORGANIZATION AND BASIS OF PRESENTATION

 

Organization

 

PEN Inc. (“we”, “us”, “our”, “PEN” or the “Company”), a Delaware corporation, develops and sells a portfolio of nano-layer coatings, nano-based cleaners, and nano-composite products based on its proprietary technology, and performs nanotechnology product research and development generating revenues through performing contract services.

 

Through our wholly-owned subsidiary, PEN Brands LLC, formerly known as Nanofilm, Ltd., we develop, manufacture and sell consumer and institutional products using nanotechnology to deliver unique performance attributes at the surfaces of a wide variety of substrates. These products are marketed internationally primarily to customers in the optical industry.

 

Through our wholly-owned subsidiary, Applied Nanotech, Inc., we primarily perform design and development services for ourselves and for governmental and private customers.

 

Basis of Presentation

 

The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“US GAAP”) for interim financial information. Accordingly, they do not include all the information and disclosures required by US GAAP for annual financial statements. In the opinion of management, such statements include all adjustments (consisting only of normal recurring items) which are considered necessary for a fair presentation of the unaudited consolidated financial statements of the Company as of June 30, 2019 and for the three and six months ended June 30, 2019 and 2018. The results of operations for the three and six months ended June 30, 2019 are not necessarily indicative of the operating results for the full year ending December 31, 2019 or any other period. These unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and related disclosures of the Company as of December 31, 2018 and for the year then ended, which were filed with the Securities and Exchange Commission on Form 10-K on November 13, 2019.

 

Going Concern

 

These consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the settlement of liabilities and commitments in the normal course of business. As reflected in the consolidated financial statements filed with our Form 10-K on June 15, 2019, the Company had a net loss of $53,135 and $687,068 for the years ended December 31, 2018 and 2017. Additionally, the Company had a net loss of $342,909 and $391,148 for the three and six months ended June 30, 2019. Furthermore, the Company had an accumulated deficit, a stockholders’ deficit and a working capital deficit of $7,031,518, $465,544 and $646,297, respectively, at June 30, 2019. These factors raise substantial doubt about the Company’s ability to continue as a going concern within one year after the date that the financial statements are issued. Management cannot provide assurance that the Company will ultimately achieve profitable operations or become cash flow positive, or raise additional debt and/or equity capital. During 2018 and continuing in the first two quarters of 2019, management has taken measures to reduce operating expenses. Although the Company has historically raised capital from sales of equity, there is no assurance that it will be able to continue to do so. These unaudited consolidated financial statements do not include any adjustments related to the recoverability and classification of assets or the amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern.

 

 

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Principles of Consolidation

 

The Company’s consolidated financial statements include the financial statements of its wholly-owned subsidiaries, Applied Nanotech, Inc. and PEN Brands LLC. All significant intercompany accounts and transactions have been eliminated in consolidation.

 

Use of Estimates

 

The preparation of consolidated financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. Significant estimates for the three and six months ended June 30, 2019 and 2018 include estimates for allowance for doubtful accounts on accounts receivable, the estimates for obsolete inventory, the useful life of property and equipment, assumptions used in assessing impairment of long-term assets, the fair value of assets acquired and liabilities assumed in the merger, estimates of current and deferred income taxes and deferred tax valuation allowances, the fair value of non-cash equity transactions, and the fair value of equity incentives.

 

Fair Value of Financial Instruments and Fair Value Measurements

 

The Company adopted the guidance of Accounting Standards Codification (“ASC”) 820 for fair value measurements which clarifies the definition of fair value, prescribes methods for measuring fair value, and establishes a fair value hierarchy to classify the inputs used in measuring fair value as follows:

 

Level 1-Inputs are unadjusted quoted prices in active markets for identical assets or liabilities available at the measurement date.

 

Level 2-Inputs are quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets and liabilities in markets that are not active, inputs other than quoted prices that are observable, and inputs derived from or corroborated by observable market data.

 

Level 3-Inputs are unobservable inputs which reflect the reporting entity’s own assumptions on what assumptions the market participants would use in pricing the asset or liability based on the best available information.

 

The carrying amounts reported in the consolidated balance sheets for cash and cash equivalents, accounts receivable, loans and lines of credit, accounts payable, accrued expenses, and other payables approximate their fair market value based on the short-term maturity of these instruments.

 

The Company analyzes all financial and non-financial instruments with features of both liabilities and equity under the Financial Accounting Standards Board (“FASB”) accounting standard for such instruments. Under this standard, financial and non-financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. The Company accounts for no instruments at fair value using level 3 valuation.

 

ASC 825-10 “Financial Instruments”, allows entities to voluntarily choose to measure certain financial assets and liabilities at fair value (fair value option). The fair value option may be elected on an instrument-by-instrument basis and is irrevocable, unless a new election date occurs. If the fair value option is elected for an instrument, unrealized gains and losses for that instrument should be reported in earnings at each subsequent reporting date. The Company did not elect to apply the fair value option to any outstanding instruments.

 

Cash and Cash Equivalents

 

For purposes of the consolidated statements of cash flows, the Company considers all highly liquid instruments with a maturity of three months or less at the purchase date and money market accounts to be cash equivalents.

 

 

Accounts Receivable

 

The Company recognizes an allowance for losses on accounts receivable in an amount equal to the estimated probable losses net of recoveries. The allowance is based on an analysis of historical bad debt experience, current receivables aging, and expected future write-offs, as well as an assessment of specific identifiable customer accounts considered at risk or uncollectible. The expense associated with the allowance for doubtful accounts is recognized as general and administrative expense.

 

Inventory

 

Inventory is stated at the lower of cost or net realizable value. Cost is determined using the first-in, first-out (FIFO) method. At June 30, 2019 and December 31, 2018, inventory consisted of the following:

 

		June 30, 2019				December 31, 2018
Raw materials		$	692,849			$	823,283
Finished goods			435,160				389,716
			1,128,009				1,212,999
Less: reserve for obsolescence			(403,000	)			(385,472	)
Inventory, net		$	725,009			$	827,527

 

Property and Equipment

 

Property and equipment are stated at cost and are depreciated using the straight-line method over their estimated useful lives, which range from three to ten years. Leasehold improvements are depreciated over the shorter of the useful life or lease term including scheduled renewal terms. Maintenance and repairs are charged to expense as incurred. When assets are retired or disposed of, the cost and accumulated depreciation are removed from the accounts, and any resulting gains or losses are included in income in the year of disposition. The Company examines the possibility of decreases in the value of these assets when events or changes in circumstances reflect the fact that their recorded value may not be recoverable.

 

Impairment of Long-Lived Assets

 

In accordance with ASC Topic 360, the Company reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be fully recoverable, or at least annually. The Company recognizes an impairment loss when the sum of expected undiscounted future cash flows is less than the carrying amount of the asset. The amount of impairment is measured as the difference between the asset’s estimated fair value and its book value. The Company did not record any impairment charge for the three and six months ended June 30, 2019 and 2018.

 

Revenue Recognition

 

Pursuant to the guidance of ASC Topic 606 the Company recognizes sales when persuasive evidence of an arrangement exists, delivery has occurred or services have been provided, the purchase price is fixed or determinable and collectability is reasonably assured.

 

Types of revenue:

 

●	Net product sales by our subsidiary PEN Brands LLC.
●	Reimbursements under agreements to perform contract services related to new products and product development for government agencies and others by our subsidiary, Applied Nanotech. We do not perform contracts that are contingent upon successful results. Larger projects are sometimes broken down in phases to allow the customer to determine at the end of each phase if they wish to move to the next phase. The agreements with federal government agencies generally provide that, upon completion of a technology development program, the funding agency is granted a royalty-free license to use any technology developed during the course of the program for its own purposes, but not any preexisting technology that we use in connection with the program. We retain all other rights to use, develop, and commercialize the technology. Agreements with nongovernmental entities generally allow the entity the first opportunity to license the technology from us upon completion of the project.

 

 

●	Product sales and other miscellaneous revenues from our subsidiary, Applied Nanotech such as the sale of conductive inks, graphene foils and thermal management materials.

 

Revenue recognition criteria:

 

●	Net product sales by our subsidiary PEN Brands LLC, are recognized when the product is shipped to the customer and title is transferred.
●	Revenue from contract services performed is generally recognized based on what we have a right to invoice.
●	Revenue from other product sales is recognized at the time the product shipped. The Company’s subsidiary Applied Nanotech’s primary business is contract services, not the sale of products. Product sales are generally insignificant in number and are generally limited to the sale of conductive inks, graphene foils, thermal management materials, samples, proofs of concepts, prototypes, or other items resulting from its contract services.
●	Other miscellaneous revenue is recognized as deemed appropriate given the facts of the situation and is generally not material.

 

Sales Incentives and Consideration Paid to Customers

 

The Company accounts for certain promotional costs such as sales incentives and cooperative advertising as a reduction of sales. For the three and six months ended June 30, 2019, the Company recorded $0 and $0, respectively, as a reduction of sales related to sales incentives which was the same as the prior three and six month periods.

 

Cost of Sales

 

Cost of sales includes inventory costs, materials and supplies costs, internal labor and related benefits, subcontractor costs, depreciation, overhead and shipping and handling costs incurred.

 

Shipping and Handling Costs

 

Shipping and handling costs incurred relating to the purchase of inventory are included in inventory which is charged to cost of sales as product are sold. Shipping and handling costs incurred for product shipped to customers are included in cost of sales. For the three months ended June 30, 2019 and 2018 shipping and handling costs amounted to $30,003 and $33,115, respectively, $43,524 and $66,440 for the six months ended June 30, 2019 and 2018, respectively.

 

Research and Development

 

Research and development costs incurred in the development of the Company’s products and under other Company sponsored research and development projects are expensed as incurred. Costs such as direct labor, direct costs, and other allocated costs incurred to perform research and development service pursuant to government and private research projects are in included in cost of sales. Research and development costs incurred in the development of the Company’s products for the three months ended June 30, 2019 and 2018 were $41,024 and $41,069, respectively, and were $41,069 and $146,431for the six months ended June 30, 2019 and 2018, respectively, and are included in operating expenses on the accompanying unaudited consolidated statements of operations.

 

Advertising Costs

 

The Company participates in various advertising programs. All costs related to advertising of the Company’s products are expensed in the period incurred. Advertising costs charged to operations for the three months ended June 30, 2019 and 2018 were $3,416 and $95, respectively, and were $1,980 and $500 for the six months ended June 30, 2019 and 2018, respectively, and are included in sales and marketing on the unaudited consolidated accompanying statements of operations. These costs are included in sales and marketing on the consolidated accompanying statements of operations. These advertising expenses do not in include cooperative advertising and sales incentives which have been deducted from sales.

 

 

Federal and State Income Taxes

 

The Company accounts for income tax using the liability method prescribed by ASC 740, “Income Taxes”. Under this method, deferred tax assets and liabilities are determined based on the difference between the financial reporting and tax bases of assets and liabilities using enacted tax rates that will be in effect in the year in which the differences are expected to reverse. The Company records a valuation allowance to offset deferred tax assets if based on the weight of available evidence, it is more-likely-than-not that some portion, or all, of the deferred tax assets will not be realized. The effect on deferred taxes of a change in tax rates is recognized as income or loss in the period that includes the enactment date.

 

The Company follows the accounting guidance for uncertainty in income taxes using the provisions of ASC 740 “Income Taxes”. Using that guidance, tax positions initially need to be recognized in the financial statements when it is more likely than not the position will be sustained upon examination by the tax authorities. As of June 30, 2019, and December 31, 2018, the Company had no uncertain tax positions that qualify for either recognition or disclosure in the financial statements. Tax years that remain subject to examination are the years ending on and after December 31, 2013. The Company does not expect any significant changes in its unrecognized tax benefits within twelve months of the reporting date. The Company recognizes interest and penalties related to uncertain income tax positions in other expense. However, no such interest and penalties were recorded as of June 30, 2019 or December 31, 2018.

 

Stock-Based Compensation

 

Stock-based compensation is accounted for based on the requirements of the Share-Based Payment Topic of ASC 718 which requires recognition in the financial statements of the cost of employee and director services received in exchange for an award of equity instruments over the period the employee or director is required to perform the services in exchange for the award (presumptively, the vesting period). The ASC also requires measurement of the cost of employee and director services received in exchange for an award based on the grant-date fair value of the award.

 

Pursuant to ASC Topic 505-50, for share-based payments to consultants and other third-parties, compensation expense is determined at the “measurement date.” The expense is recognized over the service period of the award. Until the measurement date is reached, the total amount of compensation expense remains uncertain. The Company initially records compensation expense based on the fair value of the award at the reporting date.

 

Loss Per Share of Common Stock

 

ASC 260 “Earnings Per Share”, requires dual presentation of basic and diluted earnings per share (“EPS”) with a reconciliation of the numerator and denominator of the basic EPS computation to the numerator and denominator of the diluted EPS computation. Basic EPS excludes dilution. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the entity. Basic net loss per common share is computed by dividing net loss available to common shareholders by the weighted average number of shares of common shares outstanding during the period. Diluted net loss per common share is computed by dividing net loss by the weighted average number of shares of common stock, common stock equivalents and potentially dilutive securities outstanding during each period. As of June 30, 2019, and December 31, 2018, 37,778 contingently issuable common shares that are issuable based on certain market conditions (see Note 9) are not included in the potential dilutive shares in calculating the diluted EPS. Additionally, potentially dilutive common shares consist of common stock options and warrants (using the treasury stock method). These common stock equivalents may be dilutive in the future. Potentially dilutive common shares were excluded from the computation of diluted shares outstanding as they would have an anti-dilutive impact on the Company’s net losses and consisted of the following:

 

		June 30, 2019				December 31, 2018
Stock options			8,726				8,726
Stock warrants			2,074,813				551,559
Restricted stock			37,778				37,778
Warrant Options			-				550,847
Total			2,121,317				1.148,910

 

 

Additionally, there are an unknown quantity of common stock equivalents that result from a potential conversion of stock appreciation rights (See Note 9).

 

Net loss per share for each class of common stock is as follows:

 

Net (loss) income per common shares outstanding:		Three Months ended June 30, 2019				Three Months ended June 30, 2018				Six Months ended June 30, 2019				Six Months ended June 30, 2018
Class A common stock		$	(0.08	)		$	(0.01	)		$	(0.09	)		$	(0.01	)
Class B common stock		$	-			$	(0.01	)		$	-			$	(0.01	)
Weighted average shares outstanding:
Class A common stock			4,472,389				1,658,824				4,312,554				1,657,375
Class B common stock							1,433,396								1,430,319
Total weighted average shares outstanding			4,472,389				3,092,220				4, 312,554				3,087,694

 

Segment Reporting

 

The Company uses “the management approach” in determining reportable operating segments. The management approach considers the internal organization and reporting used by the Company’s chief operating decision maker for making operating decisions and assessing performance as the source for determining the Company’s reportable segments. The Company’s chief operating decision maker is the Chairman and chief executive officer (“CEO”) of the Company, who reviews operating results to make decisions about allocating resources and assessing performance for the entire Company. The Company classified the reportable operating segments into (i) the development, manufacture and sale of consumer and institutional products using nanotechnology to deliver unique performance attributes at the surfaces of a wide variety of substrates (the “Product segment”) and (ii) nanotechnology design and development services for our future products and for government and private entities and sales of products developed for third parties (the “Contract services segment”).

 

Recently Issued Accounting Pronouncements

 

On February 25, 2016, the FASB issued ASU No. 2016-02 (“ASU 2016-02”) to amend the accounting guidance for leases. The accounting applied by a lessor is largely unchanged under ASU 2016-02. However, the standard requires lessees to recognize lease assets and lease liabilities for leases classified as operating leases on the balance sheet. Lessees will recognize in the statement of financial position a liability to make lease payments and a right-of-use asset representing its right to use the underlying asset for the lease term. For leases with a term of 12 months or less, a lessee is permitted to make an accounting policy election by class of underlying asset not to recognize lease assets and lease liabilities. If a lessee makes this election, it will recognize lease expense for such leases generally on a straight-line basis over the lease term. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018 and early adoption is permitted. The Company is currently assessing the impact of the guidance on its consolidated financial statements and notes to its consolidated financial statements.

 

 

In July 2017, the FASB issued ASU No. 2017-11, “Earnings Per Share (Topic 260) and Derivatives and Hedging (Topic 815) - Accounting for Certain Financial Instruments with Down Round Features,” (“ASU 2017-11”). Equity-linked instruments, such as warrants and convertible instruments may contain down round features that result in the strike price being reduced on the basis of the pricing of future equity offerings. Under ASU 2017-11, a down round feature will no longer require a freestanding equity-linked instrument (or embedded conversion option) to be classified as a liability that is remeasured at fair value through the income statement (i.e. marked-to-market). However, other features of the equity-linked instrument (or embedded conversion option) must still be evaluated to determine whether liability or equity classification is appropriate. Equity classified instruments are not marked-to-market. For earnings per share (“EPS”) reporting, the ASU requires companies to recognize the effect of the down round feature only when it is triggered by treating it as a dividend and as a reduction of income available to common shareholders in basic EPS. The amendments in this ASU are effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. Early adoption is permitted, including adoption in any interim period. The Company is currently evaluating the effect that adopting this new accounting guidance will have on its consolidated financial statements.

 

There are no other recently issued accounting standards that apply to us or that are expected to have a material impact on our results of operations, financial condition, or cash flows.

 

Reclassifications

 

Certain accounts and financial statement captions in the prior periods have been reclassified to conform to the current period financial statements.

 

NOTE 3 – BANK LOANS AND LINES OF REVOLVING CREDIT FACILITY

 

In April 2014, our subsidiary, PEN Brands LLC entered into a $1,500,000 revolving credit line agreement (the “Revolving Note”) with Mackinac Commercial Credit, LLC (the “Lender”) with draws limited to a borrowing base as defined in the Revolving Note. The unpaid principal balance of this Revolving Note is payable on demand, is secured by all of PEN Brands LLC’s assets, and bears interest computed at a rate of interest (the “Effective Rate”) which is equal to 7.0% above the LIBOR Rate, as defined, payable monthly. PEN Brands LLC will pay to Lender a late charge of 5.0% of any monthly payment not received by Lender within 10 calendar days after its due date. The Company may, at any time or from time to time upon three business days’ written notice to Lender, prepay the Note in whole provided that if (i) Borrower prepays the Revolving Note in full and terminates the Revolving Note, or (ii) Lender terminates the Revolving Note after default, then Borrower will pay a termination premium equal to 2.0% of the maximum loan amount. On May 1, 2015, PEN Brands LLC and the Lender entered into an amendment to the Loan and Security Agreement extending the outside maturity date to April 4, 2016 and permitting advances against an expanded borrowing base. The borrowing base was increased by $450,000 through October 31, 2015, with this amount reducing by $7,500 monthly thereafter. In addition, PEN Inc., the parent company, guaranteed PEN Brands LLC’s obligations to the Lender. On April 4, 2016, the maturity date under the Loan & Security Agreement between PEN Brands LLC and the Lender was automatically extended for a one-year renewal term.

 

Without the Lender’s consent, so long as the obligation remains outstanding, in addition to other covenants as defined in the Revolving Note, PEN Brands LLC shall not a) merge or consolidate with any other company, except for the combination that closed in August 2014 and shall not suffer a change of control; b) make any capital expenditures, as defined, materially affecting the business; c) declare or pay cash dividends upon any of its stock, or distribute any of its property, make any loans, make investments, redeem, retire or acquire any of its stock, d) become liable for the indebtedness of anyone else, as defined, and e) incur indebtedness, other than trade payables.

 

On April 3, 2017, PEN Brands LLC and the Lender executed a second amendment to the Revolving Note that extended the maturity date to April 4, 2018, with a one-year renewal option. The second amendment also changed the interest rate to 3.0% above the Prime Rate, as reported in the Wall Street Journal. Under a subsequent amendment, the maturity date was changed to July 3, 2018.

 

On October 17, 2017, pursuant to the terms of the Revolving Note, the gross proceeds of $85,000 in connection with the Asset Purchase agreement were applied to decrease the borrowing base of the Revolving Note. In connection with the sale of fixed assets, the Company amended the Revolving Note to establish a cash collateral account to be no less than $85,000. Pursuant to this amendment, the Company entered into a loan agreement with two Company directors in the aggregate principal amount of $85,000 in order to fund the cash collateral provision pursuant to the amended loan agreement. The loan bears no interest and is due when cash flow permits, or if earlier, upon the payment or refinancing of the loan from the Lender to PEN Brands.

 

 

On March 30, 2018, PEN Brands and the lender entered into the fourth amendment that permits the borrower to request up to three advances of not more than $200,000 each supported by certain qualifying purchase orders. Each purchase order advance to be repaid in not less than 30 days. No subsequent request can be made until any prior purchase order advance has been repaid. Two of the Company’s officers and directors have personally guaranteed repayment of purchase order advances. The fourth amendment also changes the maturity date for the loan to July 3, 2018. That date becomes the date for an automatic one-year renewal unless either the lender or the borrower gives notice of non-renewal. Other terms and conditions of the agreement remain the same.

 

On August 8, 2018, PEN Brands and the lender entered into the fifth amendment with an effective date of July 3, 2018. The fifth amendment renewed the agreement through July 3, 2019 and provides for an automatic one-year renewal at that time unless it is terminated by either party 60 days in advance. The fifth amendment also limits the amounts that PEN Brands can advance to its parent, and provides that advances based on eligible inventory will reduce monthly by $7,500 per month starting November 1, 2018.

 

On January 31, 2019, PEN Brands paid $172,101 to the lender. This payment, and the application of $85,000 in cash collateral held by the lender paid in full the outstanding principal balance, accrued interest and fees due to the lender. The parties also terminated the revolving credit line agreement and note originally executed in April 2014 that was renewed in August 2018.

 

NOTE 4 – NOTES PAYABLE

 

On February 10, 2015, Nanofilm entered into a promissory note (the “Equipment Note”) with KeyBank, N.A. (the “Bank”) to borrow up to $373,000. Nanofilm may obtain one or more advances not to exceed $373,000. The unpaid principal balance of this Equipment Note is payable in 60 equal monthly installments payments of principal and interest through June 10, 2020. The Equipment Note is secured by certain equipment, as defined in the Equipment Note, and bears interest computed at a rate of interest of 4.35% per annum based on a year of 360 days. At December 31, 2018, the principal amount due under the Equipment Note amounted to $179,399, respectively. As of June 30, 2019, $68,182 and $79,898, represent the current and non-current portion due under this note.

 

In June and November 2015, in connection with a severance package offered to four employees, the Company entered into four promissory note agreements with the four employees which obligate the Company to pay these employees accrued and unpaid deferred salary in an aggregate amount of $51,808. The principal amounts due under these notes shall bear interest at the minimum rate of interest applicable under the internal revenue code (approximately 3.0% at December 31, 2018). All principal and interest payable under three of these notes aggregating $40,565 are due in 2025 and all principal and interest payable under one of these notes amounting to $15,695 are due in 2020. Accordingly, $51,808 is included in non-current notes payable.

 

January 2017, the Company issued a promissory note in the principal amount of $17,425 to a departing employee representing the amount of his accrued and unpaid salary. The note does not bear interest and is due in January 2027, and is included in non-current notes payable.

 

Future principal payments of notes payable are as follows:

 

Year		As of June 30, 2019				As of December 31, 2018
2019			48,641				73,562
2020			100,654				74,913
2021							-
2022							-
Thereafter			54,882				54,882
Total		$	204,177			$	203,357

 

 

NOTE 5 – RELATED PARTY TRANSACTIONS

 

Advances from related parties of $159,887 from certain Company directors and executives and accrued payroll of $16,000 due to certain executives have been included within the consolidated balance sheet as of December 31, 2018. The advances are non-interest bearing and are due on demand.

 

NOTE 6 - STOCKHOLDERS’ EQUITY

 

Description of Preferred and Common Stock

 

On December 11, 2015, the Board of Directors of the Company approved a reverse stock split of the issued and outstanding shares of the Company’s common stock at the ratio of 1-for-180 (the “Reverse Stock Split”) and authorized an amendment of the Company’s Amended and Restated Certificate of Incorporation, as amended, to effect the Reverse Stock Split, to reduce the number of authorized shares of common stock, and to set a par value of $0.0001 per share after the Reverse Stock Split. On January 26, 2016, each one hundred eighty (180) shares of the Company’s (i) Class A Common Stock (“Class A common stock”), (iii) Class B Common Stock and (iii) Class Z Common Stock, then issued and outstanding were automatically combined into one (1) validly issued, fully paid and non-assessable share of Class A Common Stock, Class B Common Stock and Class Z Common Stock, respectively, without any further action by the Company or the holder. Additionally, the authorized number of shares of common stock were reduced to 10,000,000 comprised of 7,200,000 shares of Class A Common Stock, 2,500,000 shares of Class B Common Stock (“Class B common stock”), and 300,000 shares of Class Z Common Stock (“Class Z common stock”). The par value of each class of common stock remained the same at $0.0001 per common share. All share and per share data in the accompanying unaudited consolidated financial statements have been retroactively restated to reflect the effect of the Reverse Stock Split and authorized shares. The Company is also authorized to issue 20,000,000 shares of Preferred Stock, par value $0.0001 per share (“preferred stock”).

 

Preferred Stock

 

The preferred stock may be issued in one or more series. The Company’s board of directors are authorized to issue the shares of preferred stock in such series and to fix from time to time before issuance thereof the number of shares to be included in any such series and the designation, powers, preferences and relative, participating, optional or other rights, and the qualifications, limitations or restrictions thereof, of such series.

 

Common Stock – General

 

The rights of each share of Class A common stock, each share of Class B common stock and each share of Class Z common stock are the same with respect to dividends, distributions and rights upon liquidation.

 

Class A Common Stock

 

Holders of the Class A common stock are entitled to one vote per share in the election of directors and other matters submitted to a vote of the stockholders.

 

Class B Common Stock

 

Conversion Rights. Shares of Class B common stock can be converted, one-for-one, into shares of Class A common stock at any time at the option of the holder. Shares of Class B common stock will automatically be converted into shares of Class A common stock if the shares of Class B common stock are not owned by the Company’s chief executive officer, his spouse, or their descendants and their spouses, or by entities or trusts wholly-owned by them.

 

Voting Rights Holders of PEN Class B common stock are entitled to 100 votes per share in the election of directors and other matters submitted to a vote of the stockholders.

 

Class Z Common Stock

 

Conversion Rights. Shares of Class Z common stock can be converted, one-for-one, into shares of Class A common stock at any time at the option of the holder. Shares of Class Z common stock will automatically be converted into shares of Class A common stock if the shares of Class Z common stock are not owned by Zeiss or an entity wholly owned by the ultimate parent of Zeiss.

 

 

Voting Rights. Holders of PEN Class Z common stock do not vote in the election of directors or otherwise, but they do have the right to designate a director to the PEN Board, have anti-dilution rights described below and have consent rights with respect to certain amendments to PEN’s certificate of incorporation.

 

Other Rights. The Class Z common stock has anti-dilutive rights that, subject to limited exceptions, permit holders of Class Z common stock to purchase additional shares or equity rights issued by PEN (on the same terms as made available to third parties by PEN) to maintain their economic ownership percentage. The holders of Class Z common stock are also entitled to receive a copy of any notice sent to the holders of Class A common stock or Class B common stock, as and when the notice is sent to such holders.

 

Issuances of Common Stock

 

Sales of Common Stock and Derivative Equity Securities

 

On January 31, 2019, we sold an additional 325,581 shares of Class A common stock in a private placement to PEN Comeback at a per share price of $0.40 for aggregate proceeds of $130,232. At the same time the investor bought warrants to purchase up to 325,581 additional shares at a warrant exercise price of $1.50. The right to purchase warrant shares expires on the earlier of (1) 45 days after the day that PEN shares have been trading at or above 120% of the exercise price for a period of 90 days, or (2) four years from date of issue. Aggregate proceeds from the sales of the warrants were $9,767.

 

On March 22, 2019, we sold 232,558 shares of Class A common stock in a private placement to PEN Comeback at a per share price of $0.40 for aggregate proceeds of $93,023. At the same time the investor bought warrants to purchase up to 232,558 additional shares at a warrant exercise price of $1.50. The right to purchase warrant shares expires on the earlier of (1) 45 days after the day that PEN shares have been trading at or above 120% of the exercise price for a period of 90 days, or (2) four years from date of issue. Aggregate proceeds from the sales of the warrants were $6,977.

 

On May 10, 2019, we sold 523,255 shares of Class A common stock in a private placement to PEN Comeback at a per share price of $0.40 for aggregate proceeds of $209,302. At the same time the investor bought warrants to purchase up to 523,255 additional shares at a warrant exercise price of $1.50. The right to purchase warrant shares expires on the earlier of (1) 45 days after the day that PEN shares have been trading at or above 120% of the exercise price for a period of 90 days, or (2) four years from date of issue. Aggregate proceeds from the sales of the warrants were $15,698.

 

On June 27,2019, we sold 441,860 shares of Class A common stock in a private placement to PEN Comeback at a per share price of $0.40 for aggregate proceeds of $176,744. At the same time the investor bought warrants to purchase up to 441,860 additional shares at a warrant exercise price of $1.50. The right to purchase warrant shares expires on the earlier of (1) 45 days after the day that PEN shares have been trading at or above 120% of the exercise price for a period of 90 days, or (2) four years from date of issue. Aggregate proceeds from the sales of the warrants were $13,256.

 

Common Stock Issued for Services

 

On April 3, 2019, we issued an aggregate of 18,180 shares of our Class A common stock to five of our directors as compensation to them for service on our Board. The shares were valued at $0.55 per share based on the quoted price of the stock for a total value of $10,000. On that date the Board also granted to our President an option to purchase up to 550,000 shares of our Class A common stock at a price of $0.55 per share. Under that option, the right to purchase 50,000 shares vested on the date of grant, the right to purchase up to 75,000 shares will vest on December 31, 2019, the right to purchase 100,000 shares will vest on June 30, 2020, and the right to purchase up to 125,000 shares will vest on December 31, 2020 and two tranches entitling him to purchase 100,000 shares will vest if he reaches the cap for cash payments under the bonus program in 2019 or 2020. All rights to purchase have a term of 5 years from date of vesting.

 

 

On April 24, 2019, we issued an aggregate of 19,998 shares of Class A common stock to our directors as compensation to them for service on our Board. These shares were valued on that date at $0.60 per share based on the quoted price of the stock for a total value of $12,000.

 

Stock Options

 

Stock options outstanding are to purchase Class A common stock. Stock option activities for the six months ended June 30, 2019 are summarized as follows:

 

		Number of Options				Weighted Average Exercise Price				Weighted Average Remaining Contractual Term (Years)				Aggregate Intrinsic Value
Balance Outstanding December 31, 2018			559,573			$								$	-
Exercised			-								-				-
Expired			(550,847	)		$	4.34				-				-
Balance Outstanding June 30, 2019			8,726			$	59.21				1.44			$	-
Exercisable, June 30, 2019			8,726			$	59.21				1.44			$	-

 

Warrants

 

As of June 30, 2019, there were outstanding and exercisable warrants to purchase (1) 712 shares of common stock with a weighted average exercise price of $2.81 per share and a weighted average remaining contractual term of 31 months, and (2) 2,074,813 shares of Class A common stock at a weighted average exercise price of 1.50 per share with a weighted average remaining contractual term of 33.7 months. As of June 30, 2019, there were outstanding 550,847 warrant options expired unexercised. As of June 30, 2019, there was no intrinsic value for the warrants.

 

Contingently Issuable Class A Common Shares

 

On August 27, 2014, the Company entered into a Restricted Stock Agreement with Dr. Zvi Yaniv, the former Chief Operating Officer and President, of Applied Nanotech, and a current employee of the Company granting Dr. Yaniv 37,778 shares of Class A common stock, subject to forfeiture. All these shares become vested and not subject to forfeiture on the earlier of a change of control of us, Dr. Yaniv’s death, or if more than 180 days after closing, the average trading price of the shares during a measurement period of ten consecutive trading days reaches certain price thresholds. At an $18.00 price, 5,554 shares vest, with additional tranches of 5,556 shares vesting if the price reaches $27.00, $36.00, $45.00 and $54.00. The last 10,000 shares vest at a $63.00 price threshold.

 

Any shares that have not vested five years after the effective date will be forfeited. We also entered into a Piggyback Registration Rights Agreement that will allow Dr. Yaniv, subject to other customary terms and conditions, to register shares that are no longer subject to forfeiture if we are registering our shares. Pursuant to ASC 718-10 and related subsections, these shares were valued on the date of grant of August 27, 2014 at $13.12 per share for a total value of $495,720. The Company estimates the fair value of the awards with market conditions using a Binomial simulation, which utilizes several assumptions including the risk-free interest rate, the volatility of the Company’s stock and the exercise behavior of award recipients. The grant-date fair value of $495,720 of the awards was recognized over the requisite service period of 3 years, which represents the derived service period for the stock grant as determined by the Binomial simulation method. For the three and six months ended June 30, 2019 and 2018, in connection with the amortization of the fair value of this stock grant, the Company recorded stock-based compensation of $0 and $0, respectively. At June 30, 2019, there is no unamortized stock-based compensation expense to be recognized in future periods. See Note 11 – Subsequent Events for information about the forfeiture of these shares

 

 

Conversion of Class Z Common Stock

 

On May 23, 2017, Zeiss converted 262,631 shares of Class Z common stock into 262,631 shares of Class A common stock. Immediately thereafter, Zeiss sold 262,631 shares of Class A common stock to certain buyers which included the Company’s Chief Executive Officer for an aggregate of $100,000. In addition, pursuant to the certificate of incorporation, Zeiss’ Board representation automatically terminated and, as a result, Zeiss ceased to be a related party as of May 23, 2017.

 

Conversion of Class B Common Stock

 

On or about October 15, 2018 as part of the terms for the stock sale to PEN Comeback, Scott and Jeanne Rickert and their family partnership exercised the right to convert Class B shares into Class A shares on a 1:1 basis resulting in the issuance of 1,436,052 shares of Class A common stock.

 

2015 Equity Incentive Plan

 

On November 30, 2015, the Board of Directors authorized the 2015 Equity Incentive Plan (the “Plan”), which reserved 111,111 shares of common stock. If any share of common stock that has been granted pursuant to a stock option ceases to be subject to a stock option, or if any forfeiture or termination affects shares of common stock that are the subject to any other stock-based award, the shares are again available for future grants and awards under the Plan. The Plan’s purpose is to enable the Company to offer its employees, officers, directors and consultants an opportunity to acquire a proprietary interest in the Company for their contributions. As of December 31, 2018, 17,284 Class A common shares had been were issued under the Plan. As of June 30, 2019, 93,827 shares are available for future issuance.

 

NOTE 7 – CONCENTRATIONS

 

Concentrations of Credit Risk

 

Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of trade accounts receivable and cash deposits and investments in cash equivalent instruments.

 

Customer Concentrations

 

Customer concentrations for the six months ended June 30, 2019 and 2018 are as follows:

 

		Revenues
		For the six months ended June 30,
		2019				2018
Customer A			*	%			32	%
Customer B			*	%			10	%
Customer C			13	%			*	%
Customer D			11	%			*	%
Total			24	%			42	%

 

*Less than 10%

 

		Accounts Receivable
		As of				As of
		June 30, 2019				June 30, 2018
Customer A			23	%			*	%
Customer B			14	%			*	%
Customer A			*	%			42
Customer B			*	%			12
Total			37	%			54	%

 

 

A reduction in sales from or loss of such customers would have a material adverse effect on our consolidated results of operations and financial condition.

 

Geographic Concentrations of Sales

 

For the six months ended June 30, 2019 and 2018, total sales in the United States represent approximately 83% and 96% of total consolidated revenues, respectively. No other geographical area accounting for more than 10% of total sales during the six months ended June 30, 2019 and 2018.

 

Vendor Concentrations

 

Vendor concentrations for inventory purchases for the six months ended June 30, 2019 and 2018 are:

 

		For the six months ended June 30,
		2019				2018
Vendor A			49	%			25	%
Vendor B			*	%			14	%
Vendor C			*	%			11	%
Vendor D			*	%			10	%
Vendor E			10				*
Total			59	%			60	%

 

NOTE 8 – STOCK APPRECIATION PLAN

 

From June 1, 1988, until December 31, 1997, when the plan was terminated, PEN Brands LLC had in place a Stock Appreciation Rights Plan A (the “Plan”), intended to provide employees, directors, members of a technical advisory board and certain independent contractors selected by the Board with equity-like participation in the growth of PEN Brands LLC. The maximum number of stock appreciation rights that could be granted by the Board was 1,000,000.

 

There were 235,782 fully vested stock appreciation rights (“SARS”) outstanding under the terms of the Plan at June 30, 2019 and December 31, 2018. The SARS unit value is based on the book value of the Company as of the last fiscal year end multiplied by a SARS multiplier stipulated in the SARS plan. However, in the event of an initial public offering (“IPO”) of PEN Brands, the SARS are redeemable based on a value equal to offering price of the stock in an IPO times the total outstanding shares of the Company just subsequent to the completion of the IPO, multiplied by the SARS multiplier. The SARS multiplier is to be adjusted, as the Board determines, to reflect changes in the capitalization of PEN Brands LLC. Generally, the SARS are redeemable in cash, at their then fair value as computed pursuant to the Plan, in the event of termination of employment or business relationship, death, permanent and total disability, or sale of PEN Brands (as defined). Upon an IPO, SARS are to be redeemed by applying 70% of the redemption value to purchase common shares, with the remaining 30% being distributed in cash to the participant.

 

The business combination completed in August 2014 did not qualify as an IPO under the Plan; however, a future underwritten registered offering may qualify.

 

The accrued redemption value associated with the stock appreciation rights amounted to $54,290, at June 30, 2019 and December 31, 2018. If the Company completes an IPO, the value of SARS calculated based on the IPO formula may cause a material increase in the value of the liability.

 

 

NOTE 9 – SEGMENT REPORTING

 

The Company’s principal operating segments coincide with the types of products to be sold. The products from which revenues are derived are consistent with the reporting structure of the Company’s internal organization. The Company’s two reportable segments for the three and six months ended June 30, 2019 and 2018 were the Product segment and ii) the Contract services segment (formerly the research and development segment). The Company’s chief operating decision-maker has been identified as the Chairman and CEO, who reviews operating results to make decisions about allocating resources and assessing performance for the entire Company. Segment information is presented based upon the Company’s management organization structure as of June 30, 2019 and the distinctive nature of each segment. Future changes to this internal financial structure may result in changes to the reportable segments disclosed. There are no inter-segment revenue transactions and, therefore, revenues are only to external customers. As the Company primarily generates its revenues from customers in the United States, no geographical segments are presented.

 

Segment operating profit is determined based upon internal performance measures used by the chief operating decision-maker. The Company derives the segment results from its internal management reporting system. The accounting policies the Company uses to derive reportable segment results are the same as those used for external reporting purposes. Management measures the performance of each reportable segment based upon several metrics, including net revenues, gross profit and operating loss. Management uses these results to evaluate the performance of, and to assign resources to, each of the reportable segments. The Company manages certain operating expenses separately at the corporate level and does not allocate such expenses to the segments. Segment income from operations excludes interest income/expense and other income or expenses and income taxes according to how a particular reportable segment’s management is measured. Management does not consider impairment charges, and unallocated costs in measuring the performance of the reportable segments.

 

Segment information available with respect to these reportable business segments for the three and six months ended June 30, 2019 and 2018 was as follows:

 

		Three Months Ended June 30,								Six Months Ended June 30,
		2019				2018				2019				2018
Revenues:
Product segment		$	383,827			$	919,557			$	825,315			$	2,062,132
Contract services segment		$	267,812				447,896			$	584,185				748,846
Total segment and consolidated revenues		$	651,639			$	1,367,453			$	1,409,500			$	2,810,978
Cost of revenues:
Products		$	374,065			$	650,816			$	557,021			$	1,455,503
Contract services segment		$	229,097				289,741			$	622,353				591,313
Total segment and consolidated cost of revenues		$	603,162			$	940,557			$	1,179,374			$	2,046,816
Gross profit (loss):
Product segment		$	9,762			$	268,741			$	268,294			$	606,629
Contract services segment			38,715				158,155				(38,168	)			157,533
Total segment and consolidated gross profit		$	48,477			$	426,896			$	230,126			$	764,162
Gross margin:
Product segment			2.5	%			29.2	%			32.5	%			29.4	%
Contract services segment			14.5	%			35.3	%			-6.5	%			21.0	%
Total gross margin			7.4	%			31.2	%			16.3	%			27.2	%
Segment operating expenses:
Product segment			262,758				272,153				417,948				593,307
Contract services segment			49,607				62,639				114,637				102,038
Total segment operating expenses			312,365				334,793				532,586				695,345
Income (loss) from operations:
Product segment		$	(252,997	)		$	(3,412	)		$	(149,654	)		$	13,322
Contract services segment			(10,892	)			95,516				(152,805	)			55,495
Total segment income (loss)			(263,888	)			91,102				(302,460	)			68,817
Unallocated costs			(88,220	)			(139,756	)			(145,211	)			(312,864	)
Total consolidated loss from operations		$	(352,109	)		$	(47,653	)		$	(447,671	)		$	(244,047	)
Depreciation and amortization:
Product segment		$	13,972			$	15,989			$	26,416			$	32,261
Contract services segment			-				-				-				-
Total segment depreciation and amortization			13,972				15,989				26,416				32,261
Unallocated depreciation			-				-				-				-
Total consolidated depreciation and amortization		$	13,972			$	15,989			$	26,416			$	32,261
Capital additions:
Product segment		$	-			$	-			$	-			$	-
Contract services segment			-				-				-				-
Total segment capital additions			-				-				-				-
Unallocated capital additions			-				-				-				-
Total consolidated capital additions		$	-			$	-			$	-			$	-

 

											June 30, 2019				December 31, 2018
Segment total assets:
Product segment										$	1,151,463			$	1,704,314
Contract services segment											147,341				153,747
Corporate											198,086				25,610
Total consolidated total assets										$	1,496,890			$	1,883,671

 

 

NOTE 10 - COMMITMENTS AND CONTINGENCIES

 

Stock Appreciation Rights

 

If the Company completes an IPO, the value of stock appreciation rights calculated based on the IPO formula may cause a material increase in the value of the liability (See Note 8).

 

Litigation

 

The Company may be, from time to time, subject to various administrative, regulatory, and other legal proceedings arising in the ordinary course of business. We are not currently a defendant in any proceedings. Our policy is to accrue costs for contingent liabilities, including legal proceedings or unasserted claims that may result in legal proceedings, when a liability is probable and the amount can be reasonably estimated.

 

NOTE 11 - SUBSEQUENT EVENTS

 

Sales of Common Stock and Derivate Equity Securities

 

On September 6, 2019, we sold 216,912 shares of Class A common stock in a private placement to PEN Comeback 2, LLC at a per share price of $0.65 for aggregate proceeds of $140,993. At the same time the investor bought 216,906 warrants to purchase up to 216,906 additional shares at a warrant exercise price of $1.50. The right to purchase warrant shares expires four years from date of issue. Aggregate proceeds from the sales of the warrants were $6,507.

 

On October 9, 2019, we sold an additional 88,235 shares of Class A common stock in a private placement to PEN Comeback 2, LLC at a per share price of $0.65 for aggregate proceeds of $57,353. At the same time the investor bought 88,235 warrants to purchase up to 88,235 additional shares at a warrant exercise price of $1.50. The right to purchase warrant shares expires four years from date of issue. Aggregate proceeds from the sales of the warrants were $2,647.

 

On October 31, 2019, we sold an additional 165,441 shares of Class A common stock in a private placement to PEN Comeback 2, LLC and 15,384 shares of Class A common stock to Rickert Family Partnership, all at a per share price of $0.65 for aggregate proceeds of $117,537. At the same time PEN Comeback 2 bought 165,441 warrants to purchase up to 165,441 additional shares and the partnership bought 13 warrants to purchase up to 13 additional shares, all at a warrant exercise price of $1.50. The right to purchase warrant shares expires four years from date of issue. Aggregate proceeds from the sales of the warrants were $4,963.

 

On December 10, 2019, we sold an additional 272,059 shares of Class A common stock in a private placement to PEN Comeback 2, LLC at a per share price of $0.65 for aggregate proceeds of $176,838. At the same time the investor bought 272,055 warrants to purchase up to 272,055 additional shares at a warrant exercise price of $1.50. The right to purchase warrant shares expires four years from date of issue. Aggregate proceeds from the sales of the warrants were $0.03 per warrant for an aggregate of $8,162.

 

Stock for Services

 

On July 24, 2019, we issued an aggregate of 18,750 shares of Class A common stock to our directors as compensation to them for service on our Board. These shares were valued on that date at $0.64 per share based on the quoted price of the stock for a total value of $12,000.

 

On October 23, 2019, we issued an aggregate of 23,331 shares of Class A common stock to our directors as compensation to them for service on our Board and its committees. These shares were valued on that date at $0.60 per share based on the quoted price of the stock for a total value of $14,000.

 

On December 18, 2019, we issued an aggregate of 20,688 shares of Class A common stock to our directors as compensation to them for service on our Board. These shares were valued on that date at $0.58 per share based on the quoted price of the stock for a total value of $12,000.

 

Forfeiture of Restricted Stock

 

August 27, 2019 was the fifth anniversary of the date of issue for the restricted stock issued to Dr. Yaniv. Because none of the vesting conditions were met, the 37,778 shares of Class A common stock contingently issued were forfeited and are no longer outstanding.

 

 

ITEM 2: MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

The following is management’s discussion and analysis of certain significant factors that have affected our financial position and operating results during the periods included in the accompanying unaudited consolidated financial statements.

 

OVERVIEW

 

PEN develops, commercializes and markets consumer and industrial products enabled by nanotechnology that solve everyday problems for customers in the optical, transportation, military, sports and safety industries. Our primary business is the formulation, marketing and sale of products enabled by nanotechnology including the ULTRA CLARITY brand eyeglass cleaner, CLARITY DEFOGIT brand defogging products and CLARITY ULTRASEAL nanocoating products for glass and ceramics. We also sell an environmentally friendly surface protector, fortifier, and cleaner. Our design center conducts development services for us and for government and private customers and develops and sells printable inks and pastes, thermal management materials, and graphene foils and windows.

 

Our principal operating segments coincide with our different business activities and types of products sold. This is consistent with our internal reporting structure. Our two reportable segments for the three and six months ended June 30, 2019 were (i) the Product Segment and (ii) the Contract services Segment. For the three and six months ended June 30, 2018, the Company operated the same two segments.

 

RESULTS OF OPERATIONS

 

The following comparative analysis on results of operations was based primarily on the comparative consolidated financial statements, footnotes and related information for the periods identified below and should be read in conjunction with the unaudited consolidated financial statements and the notes to those statements that are included elsewhere in this report. The results discussed below are for the three and six months ended June 30, 2019 and 2018.

 

Comparison of Results of Operations for the Three and Six Months ended June 30, 2019 and 2018

 

Revenues:

 

For the three and six months ended June 30, 2019 and 2018, revenues consisted of the following:

 

		Three Months ended June 30,								Six Months ended June 30,
		2019				2018				2019				2018
Sales:
Product segment		$	383,827			$	919,557			$	825,315			$	2,062,132
Contract services segment		$	267,812				447,896				584,185				748,846
Total segment and consolidated sales		$	651,639			$	1,367,453			$	1,409,500			$	2,810,978

 

For the three months ended June 30, 2019, sales from the Product segment decreased by $535,730 or 58% as compared to the three months ended June 30, 2018 which was primarily attributable customers lost in May 2018 for which we were still filling orders that year. For the six months ended June 30, 2019 revenue from the Product segment decreased by $1,236,817 or 60%, as compared to the six months ended June 30, 2018, also attributable to the lost customers.

 

For the three months ended June 30, 2019, sales from the Contract services segment decreased by $180,084 or 40% as compared to the three months ended June 30, 2018 which was primarily attributable to contracts that concluded in 2018. For the six months ended June 30, 2019 revenue from the Contract services segment decreased by $164,661 or 22%, as compared to the six months ended June 30, 2018 for the same reason.

 

 

Cost of revenues

 

Cost of revenues includes inventory costs, materials and supplies costs, internal labor and related benefits, subcontractor costs, depreciation, overhead and shipping and handling costs incurred and costs related to government and private research contracts in our Contract services segment.

 

For the three months ended June 30, 2019, cost of revenues decreased by $370,592 or 39% as compared to the three months ended June 30, 2106. For the six months ended June 30, 2019, cost of revenues decreased by $900,639 or 44%. These changes consisted of the following:

 

		Three Months ended June 30,								Six Months ended June 30,
		2019				2018				2019				2018
Cost of revenues:
Product segment		$	374,065			$	650,816			$	557,021			$	1,455,503
Contract services segment			229,097				289,741				622,353				591,313
Total segment and consolidated cost of revenues		$	603,162			$	940,557			$	1,179,374			$	2,046,816

 

Gross profit and gross margin

 

For the three months ended June 30, 2019, gross profit amounted to $81,674 as compared to $426,896 for the three months ended June 30, 2018, a decrease of $345,222 or 81%. For the three months ended June 30, 2019 and 2018, gross margins were 12.5% and 31.2%, respectively. For the six months ended June 30, 2019, gross profit amounted to $263,323 as compared to $764,162 for the six months ended June 30, 2018, a decrease of $500,839 or 66%. For the six months ended June 30, 2019 and 2018, gross margins were 18.7% and 27.2%, respectively.

 

Gross profit and gross margin by segment is as follows:

 

		Three Months Ended June 30,																Six Months Ended June 30,
		2019				%				2018				%				2019				%				2018				%
Gross profit:
Product segment *		$	9,762				2.5	%			268,741				29.2	%		$	268,294				32.5	%			606,629				29.4	%
Contract services segment *		$	38,715				14.5	%			158,155				35.3	%		$	(38,168	)			(6.5	)%			157,533				21.0	%
Total gross profit		$	48,477				7.4	%			426,896				31.2	%			230,126				16.3	%			764,162				27.2	%

 

* Gross margin % based on respective segments revenues.

 

For the three months ended June 30, 2019, Product segment margin was down, but for the six months the Product segment margin was improved over 2018.

 

The gross margins from the research development segment for the three months ended June 30, 2019 was substantially improved as new contracts were awarded in 2019 but not sufficient to bring up the margin for the six month period.

 

Operating expenses

 

For the three months ended June 30, 2019, operating expenses were essentially flat, increasing by $7,717 or 1% compared to the three months ended June 30, 2018. The same was true for the six months period as operating expenses decreased by $7,615 for the period ended June 30, 2019, as compared to the six months ended June 30, 2018. For the three and six months ended June 30, 2019 and 2018, operating expenses consisted of the following:

 

		Three Months Ended June 30,								Six Months Ended June 30,
		2019				2018				2019				2018
Selling and marketing expenses		$	17,298			$	(12,920	)		$	26,334			$	28,776
Salaries, wages and related benefits			128,489				191,047				159,780				345,237
Research and development			41,024				2,251				41,069				10,444
Professional fees			72,290				150,802				165,972				324,324
General and administrative expenses			140,855				143,368				284,632				292,071
Total		$	400,586			$	474,548			$	677,797			$	1,000,852

 

 

●	For the three months ended June 30, 2019, selling and marketing expenses increased by $30,218 or 234% as compared to the three months ended June 30, 2018 due to an increase in direct sales efforts launched in the second quarter. For the six months ended June 30, 2019, sales and marketing expenses decreased by $2,432 or 8% as compared to the six months ended June 30, 2018 due to lower sales efforts in the first quarter that were not entirely offset by the additional efforts in the second quarter.
●	For the three months ended June 30, 2019, salaries, wages and related benefits decreased by $65,558, or 33%, as compared to the three months ended June 30, 2018. For the six months ended June 30, 2019, salaries, wages and contract services decreased by $195,291, or 55%, as compared to the six months ended June 30, 2018. For the three and six months ended June 30, 2019, these decreases were due to personnel reductions related to our ongoing efforts to reduce costs.
●	For the three months ended June 30, 2019, research and development costs increased by $38,773 or 1722%, as compared to the three months ended June 30, 2018. For the six months ended June 30, 2019, research and development costs increased by $30,625 or 293%, as compared to the six months ended June 30, 2018. For the three and six months ended June 30, 2019, the increases were due to new packaging to increase the sales channels for our products.
●	For the three and six months ended June 30, 2019, professional and other fees decreased by $77,882 or 52%, and $157,268 or 49%, as compared to the three and six months ended June 30, 2018, respectively. These decreases are attributable to a reduction in the use of outside consultants.
●	For the three months ended June 30, 2019, general and administrative expenses decreased by $2,531 or 2% as compared to the three months ended June 30, 2018. For the six months ended June 30, 2019, general and administrative expenses decreased by approximately $6,045 or 2% as compared to the six months ended June 30, 2018. These reductions were due to ongoing cost control efforts.

 

Loss from operations

 

As a result of the factors described above, for the three months ended June 30, 2019, loss from operations amounted to $352,109 as compared to loss from operations of $47,652 for the three months ended June 30, 2018, an increase of $304,457 or 639%. For the six months ended June 30, 2019, loss from operations amounted to $447,671 as compared to a loss from operations of $244,046 for the six months ended June 30, 2018, a difference of $203,625 or 83%.

 

Other (expense) income

 

For the three months ended June 30, 2019, other income was $ 9,200 as compared to $26,850 for the three months ended June 30, 2018, a decrease of $17,650 or 66%. There was a decrease in interest expense because we paid off the revolving line at the end of January and a reduction in sublease income because our Austin design center moved to smaller space in early 2019. For the six months ended June 30, 2019 other income was $56,523, as compared to a $202,726, for the six months ended 2018, a decrease of $146,203, or 72% due to the same factors.

 

Net loss

 

As a result of the foregoing, for the three and six months ended June 30, 2019, net loss amounted to $342,909 and $391,148 as compared to net loss of $20,802 and $41,320 for the three and six months ended June 30, 2018. The increase in net loss for the 3-month period was $322,107 or 1548%. For the six-month period there was an increase of $349,828 or 847%.

 

For the three months ended June 30, 2019 and 2018, net loss amounted to $0.08 per common share (basic and diluted), and $0.01 per common share (basic and diluted), respectively. For the six months ended June 30, 2019 and 2018, net loss amounted to $0.09 per common share (basic and diluted), and $0.01 per common share (basic and diluted), respectively.

 

 

LIQUIDITY AND CAPITAL RESOURCES

 

Liquidity is the ability of an enterprise to generate adequate amounts of cash to meet its needs for cash requirements. We had working capital deficit of $646,297 and $270,684 of unrestricted cash as of June 30, 2019 and working capital deficit of $983,822 and $221,502 of cash as of December 31, 2018.

 

The following table sets forth a summary of changes in our working capital from December 31, 2018 to June 30, 2019:

 

										December 31, 2018 to June 30, 2019
		June 30, 2019				December 31, 2018				Change in working capital				Percentage Change
Working capital:
Total current assets		$	1,160,600			$	1,523,447			$	(362,847	)			(23.82	)%
Total current liabilities			1,806,897				2,507,268				(700,371	)			(27.93	)%
Working capital deficit:		$	(646,297	)		$	(983,822	)		$	337,525				(34.31	)%

 

The decrease in current assets was attributable to the application of the restricted cash to the pay-off of the revolving credit arrangement and to a reduction in accounts receivable. The reduction in current liabilities reflects the pay-off of the revolving credit arrangement and a decrease in accrued expenses.

 

Net cash used in operating activities was $382,053 for the six months ended June 30, 2019 as compared to $376,134 for the six months ended June 30, 2018, a change of $5,919 or 2%. Net cash used in operating activities for the six months ended June 30, 2019 primarily reflected a net loss of ($391,148) adjusted for add-backs of $44,099 and changes in operating assets of $(35,004).

 

Net cash flow used in investing activities was $2,483 for the six months ended June 30, 2019 and $0 for the six months ended June 30, 2018.

 

Net cash used in financing activities of $348,770 for the six months ended June 30, 2019 as compared to $378,423 in the same period in 2018. During the six months ended June 30, 2019, we paid down the revolving credit arrangement and sold common stock.

 

Future Liquidity and Capital Needs.

 

Our principal future uses of cash are for working capital requirements, including reduction of accrued liabilities. Application of funds will depend on numerous factors including our sales and other revenues and our ability to control costs.

 

Equipment Financing

 

On February 10, 2015, PEN Brands entered a $373,000 promissory note (the “Equipment Note”) with KeyBank, N.A. (the “Bank”). The unpaid principal balance of this Equipment Note is payable in 60 equal monthly installments payments of principal and interest through September 10, 2020. The Equipment Note is secured by certain equipment, as defined in the Equipment Note, and bears interest computed at a rate of interest of 4.35% per annum based on a year of 360 days. At March 31, 2019, the principal amount due under the Equipment Note amounted to $74,380.

 

On June 18, 2019, PEN Brands entered into an Amendment to the Equipment Note with the Bank. By the amendment, the maturity date of the note was extended until April 10, 2022, the interest rate was raised to 6.29% per year, and the monthly payments were reduced.

amounted to $152,550.

 

 

Off-balance Sheet Arrangements

 

We have not entered into any other financial guarantees or other commitments to guarantee the payment obligations of any third parties. We have not entered into any derivative contracts that are indexed to our shares and classified as shareholder’s equity or that are not reflected in our consolidated unaudited financial statements. Furthermore, we do not have any retained or contingent interest in assets transferred to an unconsolidated entity that serves as credit, liquidity or market risk support to such entity. We do not have any variable interest in any unconsolidated entity that provides financing, liquidity, market risk or credit support to us or engages in leasing, hedging or research and development services with us.

 

ITEM 3. Quantitative and Qualitative disclosures about market risk

 

Not applicable to smaller reporting companies.

 

ITEM 4. Controls and Procedures

 

Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as of the end of the period covered by this report (the “Evaluation Date”). Based upon this evaluation, our principal executive officer and principal financial officer concluded as of the Evaluation Date that our disclosure controls and procedures were effective such that the material information required to be included in our Securities and Exchange Commission (“SEC”) reports was recorded, but we lacked the staff or cash to purchase outside resources to process, summarize, and report within the time periods specified in SEC rules and forms.

 

Our management, including our principal executive officer and principal financial officer, does not expect that our disclosure controls and procedures or our internal controls will prevent all error and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints and the benefits of controls must be considered relative to their costs. Due to the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within our company have been detected.

 

Changes in Internal Control

 

There were no changes identified in connection with our internal control over financial reporting during the three months ended June 30, 2019 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 required of smaller reporting companies

 

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

Sales of Common Stock and Derivate Equity Securities

 

On September 6, 2019, we sold 216,912 shares of Class A common stock in a private placement to PEN Comeback 2, LLC at a per share price of $0.65 for aggregate proceeds of $140,993. At the same time the investor bought 216,906 warrants to purchase up to 216,906 additional shares at a warrant exercise price of $1.50. The right to purchase warrant shares expires four years from date of issue. Aggregate proceeds from the sales of the warrants were $6,507.

 

 

On October 9, 2019, we sold an additional 88,235 shares of Class A common stock in a private placement to PEN Comeback 2, LLC at a per share price of $0.65 for aggregate proceeds of $57,353. At the same time the investor bought 88,235 warrants to purchase up to 88,235 additional shares at a warrant exercise price of $1.50. The right to purchase warrant shares expires four years from date of issue. Aggregate proceeds from the sales of the warrants were $2,647.

 

On October 31, 2019, we sold an additional 165,441 shares of Class A common stock in a private placement to PEN Comeback 2, LLC and 15,384 shares of Class A common stock to Rickert Family Partnership, all at a per share price of $0.65 for aggregate proceeds of $117,537. At the same time PEN Comeback 2 bought 165,441 warrants to purchase up to 165,441 additional shares and the partnership bought 13 warrants to purchase up to 13 additional shares, all at a warrant exercise price of $1.50. The right to purchase warrant shares expires four years from date of issue. Aggregate proceeds from the sales of the warrants were $4,963.

 

On December 10, 2019, we sold an additional 272,059 shares of Class A common stock in a private placement to PEN Comeback 2, LLC at a per share price of $0.65 for aggregate proceeds of $176,838. At the same time the investor bought 272,055 warrants to purchase up to 272,055 additional shares at a warrant exercise price of $1.50. The right to purchase warrant shares expires four years from date of issue. Aggregate proceeds from the sales of the warrants were $0.03 per warrant for an aggregate of $8,162.

 

Stock for Services

 

On July 24, 2019, we issued an aggregate of 18,750 shares of Class A common stock to our directors as compensation to them for service on our Board. These shares were valued on that date at $0.64 per share based on the quoted price of the stock for a total value of $12,000.

 

On October 23, 2019, we issued an aggregate of 23,331 shares of Class A common stock to our directors as compensation to them for service on our Board and its committees. These shares were valued on that date at $0.60 per share based on the quoted price of the stock for a total value of $14,000.

 

On December 18, 2019, we issued an aggregate of 20,688 shares of Class A common stock to our directors as compensation to them for service on our Board. These shares were valued on that date at $0.58 per share based on the quoted price of the stock for a total value of $12,000.

 

The sales and the issuances of stock and derivative securities were exempt from registration under Section 4(2).

 

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

 

None

 

ITEM 4. MINE SAFETY DISCLOSURES

 

Not applicable.

 

ITEM 5. OTHER INFORMATION

 

None

 

ITEM 6. EXHIBITS

 

Exhibit No.		Description
31.1*		Rule 13a-14(a)/15d-14(a) Certificate of Principal Executive Officer
31.2*		Rule 13a-14(a)/15d-14(a) Certificate of Chief Financial Officer
32.1*		Section 1350 Certificate of Principal Executive Officer and Chief Financial Officer
101.INS		XBRL Instance Document
101.SCH		XBRL Taxonomy Extension Schema
101.CAL		XBRL Taxonomy Extension Calculation
101.DEF		XBRL Taxonomy Extension Definition
101.LAB		XBRL Taxonomy Extension Labels
101.PRE		XBRL Taxonomy Extension Presentation Linkbase
*		Filed herewith.

 

 

SIGNATURES

 

Pursuant to the requirements of the Securities and Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned thereunto duly authorized.

 

	PEN Inc. (Registrant)
Date: January 8, 2020	/s/ Tom J. Berman
	Tom J. Berman
	President
Date: January 8, 2020	/s/ Jacqueline M. Soptick
	Jacqueline M. Soptick
	Chief Accounting Officer