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:
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2019 AND 2018
NOTE
1 – ORGANIZATION AND BASIS OF PRESENTATION
Organization
Nano
Magic Inc. (“we”, “us”, “our”, “Nano Magic” 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. On March 3, 2020, we changed our name from PEN Inc. to Nano Magic Inc.
Through
the Company’s wholly-owned subsidiary, Nano Magic LLC, formerly known as PEN Brands LLC, 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. On March 31, 2020,
PEN Brands LLC changed its name to Nano Magic LLC.
Through
the Company’s wholly-owned subsidiary, Applied Nanotech, Inc., we primarily perform contract research services for the Company
and for governmental and private customers.
Basis
of Presentation and Principles of Consolidation
The
Company’s consolidated financial statements include the financial statements of its wholly-owned subsidiaries, Applied Nanotech,
Inc. and Nano Magic LLC. All significant intercompany accounts and transactions have been eliminated in consolidation.
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,
the Company had losses from operations and net cash used by operations of $1,031,083 and $878,668, respectively,
for the year ended December 31, 2019. Furthermore, the Company had an accumulated deficit, a stockholders’ deficit and a
working capital deficit of $7,689,545, $446,856 and $673,040, respectively, at December 31, 2019 and $6,724,558, $837,585,
and $1,034,965 at December 31, 2018. These factors raise substantial doubt about the Company’s ability to continue
as a going concern within one year after the date that these consolidated financial statements are issued. Management cannot provide
assurance that the Company will ultimately achieve profitable operations, become cash flow positive or raise additional capital.
During 2018 management took measures to reduce operating expenses and continued to closely monitor costs in 2019. In addition,
the Company raised equity capital in 2018, 2019 and 2020. These 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
Use
of Estimates
The preparation of consolidated financial
statements in conformity with accounting principles generally accepted in the United States of America (“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 years
ended December 31, 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, 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 items 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,
Cash Equivalents and Restricted Cash
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.
Investments
Investments consist of long-term certificates
of deposit. The certificate of deposit held at December 31, 2019 and 2018 matures in May 2021 and carries interest at a rate of
2.29% per year.
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 based on prices paid for inventory
items. This valuation requires us to make judgments, based on currently available information, about the likely method of disposition,
such as sales to individual customers and expected recoverable values.
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 other income or expense
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 year ended December 31, 2019 and 2018.
Revenue
Recognition
We adopted ASC Topic 606, Revenue from
Contracts with Customers (“ASC Topic 606”), effective January 1, 2018 using the modified retrospective method.
ASC Topic 606 is a comprehensive revenue recognition model that requires revenue to be recognized when control of the promised
goods or services are transferred to our customers at an amount that reflects the consideration that we expect to receive. The
cumulative impact of this adoption for open contracts as of January 1, 2018 was $159,396; this affected December 31, 2017 retained
earnings. The application of ASC Topic 606 requires us to use significant judgment and estimates. Application of ASC Topic
606 requires a five-step model applicable to all revenue streams as follows:
Identification
of the contract, or contracts, with a customer
A
contract with a customer exists when (i) we enter into an enforceable contract with a customer that defines each party’s
rights regarding the goods or services to be transferred and identifies the payment terms related to these goods or services,
(ii) the contract has commercial substance and, (iii) we determine that collection of substantially all consideration for goods
or services that are transferred is probable based on the customer’s intent and ability to pay the promised consideration.
We apply judgment in determining the customer’s ability and intention to pay, which is based on a variety of factors including
the customer’s historical payment experience or, in the case of a new customer, published credit and financial information
pertaining to the customer.
Identification
of the performance obligations in the contract
Performance
obligations promised in a contract are identified based on the goods or services that will be transferred to the customer that
are both capable of being distinct, whereby the customer can benefit from the goods or service either on its own or together with
other resources that are readily available from third parties or from us, and are distinct in the context of the contract, whereby
the transfer of the goods or services is separately identifiable from other promises in the contract.
When
a contract includes multiple promised goods or services, we apply judgment to determine whether the promised goods or services
are capable of being distinct and are distinct within the context of the contract. If these criteria are not met, the promised
goods or services are accounted for as a combined performance obligation.
Determination
of the transaction price
The
transaction price is determined based on the consideration to which we will be entitled to receive in exchange for transferring
goods or services to our customer. We estimate any variable consideration included in the transaction price using the expected
value method that requires the use of significant estimates for discounts, cancellation periods, refunds and returns. Variable
consideration is described in detail below.
Allocation
of the transaction price to the performance obligations in the contract
If
the contract contains a single performance obligation, the entire transaction price is allocated to the single performance obligation.
Contracts that contain multiple performance obligations require an allocation of the transaction price to each performance obligation
based on a relative Stand-Alone Selling Price (“SSP,”) basis. We determine SSP based on the price at which the performance
obligation would be sold separately. If the SSP is not observable, we estimate the SSP based on available information, including
market conditions and any applicable internally approved pricing guidelines.
Recognition
of revenue when, or as, we satisfy a performance obligation
We recognize contract revenue over
time and product revenue at a point in time, when the related performance obligation is satisfied by transferring the promised
goods or services to our customer. Contract revenue is recognized based on a cost-to-cost input method.
Disaggregation of Revenue
For the years ended December 31, 2019
and 2018, total sales in the United States represent approximately 83% and 93% of total consolidated revenues, respectively. No
other geographical area accounted for more than 10% of total sales during the years ended December 31, 2019 and 2018.
Principal
versus Agent Considerations
When
another party is involved in providing goods or services to our customer, we apply the principal versus agent guidance in ASC
Topic 606 to determine if we are the principal or an agent to the transaction. When we control the specified goods or services
before they are transferred to our customer, we report revenue gross, as principal. If we do not control the goods or services
before they are transferred to our customer, revenue is reported net of the fees paid to the other party, as agent. Our evaluation
to determine if we control the goods or services within ASC Topic 606 includes the following indicators:
We
are primarily responsible for fulfilling the promise to provide the specified good or service.
When
we are primarily responsible for providing the goods and services, such as when the other party is acting on our behalf, we have
indication that we are the principal to the transaction. We consider if we may terminate our relationship with the other party
at any time without penalty or without permission from our customer.
We
have inventory risk before the specified good or service has been transferred to a customer or after transfer of control to the
customer.
We
may commit to obtaining the services of another party with or without an existing contract with our customer. In these situations,
we have risk of loss as principal for any amount due to the other party regardless of the amount(s) we earn as revenue from our
customer.
The
entity has discretion in establishing the price for the specified good or service.
We
have discretion in establishing the price our customer pays for the specified goods or services.
Contract
Assets
We
capitalize costs and estimated earnings in excess of billings as a contract asset in current assets. At December 31, 2019 and
2018, contract assets totaled $15,525 and $16,486, respectively.
Contract
Liabilities
Contract
liabilities consist of customer advance payments and billings in excess of revenue recognized. We may receive payments from our
customers in advance of completing our performance obligations. We record contract liabilities equal to the amount of payments
received in excess of revenue recognized, Contract liabilities are recorded under the caption “contract liabilities”
and are reported as current liabilities on our consolidated financial statements when the time to fulfill the performance
obligations under terms of our contracts is less than one year. At December 31, 2019 and 2018, contract liabilities totaled $162,123
and $95,610, respectively.
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 products are sold. Shipping and handling costs incurred for product shipped to customers are included in cost of sales.
For the years ended December 31, 2019 and 2018 shipping and handling costs amounted to $94,431 and $110,761, 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 years ended December 31, 2019
and 2018 were $68,539 and $60,846, respectively, and are included in operating expenses on the accompanying 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 years ended December 31, 2019 and 2018 were $4,969 and
$779, respectively, and are included in selling and marketing on the consolidated accompanying statements of operations. These
advertising expenses do not 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 December 31, 2019, 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, 2017. 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 December 31, 2019
or 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. The Company adopted ASU No. 2017-09 in 2018; its adoption did not have a material impact
on its consolidated financial statements.
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.
Earnings
(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 December 31, 2018, 37,778 contingently issuable common shares
that were issuable based on certain market conditions (see Note 11) were 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 income (loss) and consisted of the following:
|
|
December 31,
2019
|
|
|
December 31,
2018
|
|
Stock options
|
|
|
455,502
|
|
|
|
8,726
|
|
Stock warrants
|
|
|
2,817,463
|
|
|
|
551,559
|
|
Restricted stock
|
|
|
-
|
|
|
|
37,778
|
|
Warrant options
|
|
|
-
|
|
|
|
550,847
|
|
Total
|
|
|
3,272,952
|
|
|
|
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 16).
Net
income (loss) per share for each class of common stock is as follows:
Net income (loss) per common shares outstanding:
|
|
Year Ended
December 31, 2019
|
|
|
Year Ended
December 31, 2018
|
|
Class A common stock
|
|
$
|
(0.21
|
)
|
|
$
|
0.01
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding:
|
|
|
|
|
|
|
|
|
Class A common stock
|
|
|
5,607,392
|
|
|
|
3,741,481
|
|
Class B common stock
|
|
|
-
|
|
|
|
-
|
|
Class Z common stock
|
|
|
-
|
|
|
|
-
|
|
Total weighted average shares outstanding
|
|
|
5,607,392
|
|
|
|
3,741,481
|
|
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 President 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”).
Leases
The Company adopted ASC 842 on January 1,
2019 using the modified retrospective basis and did not adjust comparative periods as permitted under Accounting Standards Update
(“ASU”) 2018-11. ASC 842 supersedes nearly all existing lease accounting guidance under U.S. GAAP issued by
the Financial Accounting Standards Board (“FASB”) including ASC Topic 840, Leases. ASC 842 requires that lessees recognize
Right-of-Use (ROU) assets and lease liabilities calculated based on the present value of lease payments for all lease agreements
with terms that are greater than twelve months. ASC 842 distinguishes leases as either a finance lease or an operating lease that
affects how the leases are measured and presented in the statement of operations and statement of cash flows.
For operating leases, we calculated ROU
assets and lease liabilities based on the present value of the remaining lease payments as of the date of adoption using the
IBR as of that date. On the date of adoption, operating lease liabilities and right-of-use assets totaled $400,327. We
do not have finance leases as per the definition of ASC 842 as of December 31, 2019.
The
FASB issued practical expedients and accounting policy elections that the Company has applied as described below.
Practical
Expedients
ASC
842 provides a package of three practical expedients that must be adopted together and applied to all lease agreements. The
Company elected the package of practical expedients as follows for all leases:
Whether
expired or existing contracts contain leases under the new definition of a lease.
Because
the accounting for operating leases and service contracts was similar under ASC 840, there was no accounting reason to separate
lease agreements from service contracts in order to account for them correctly. The Company reviewed existing service contracts
to determine if the agreement contained an embedded lease to be accounted for on the balance sheet under ASC 842.
Lease
classification for expired or existing leases.
Leases
that were capital leases under ASC 840 are accounted for as financing leases under ASC 842 while leases that were operating leases
under ASC 840 are accounted for as operating leases under ASC 842.
Whether
previously capitalized initial direct costs would meet the definition of initial direct costs under the new standard guidance.
The
definition of initial direct costs is more restrictive under ASC 842 than under ASC 840. Entities that do not elect the practical
expedient are required to reassess capitalized initial direct costs under ASC 840 and record an equity adjustment for those that
are not capitalizable under ASC 842.
Accounting
Policy Elections
Lease
Term
The Company calculates the term for
each lease agreement to include the noncancelable period specified in the agreement together with (1) the periods covered by
options to extend the lease if the Company is reasonably certain to exercise that option, (2) periods covered by an option
to terminate if the Company is reasonably certain not to exercise that option and (3) period covered by an option to extend
(or not terminate) if controlled by the lessor.
The assessment of whether the Company is
reasonably certain to exercise an option to extend a lease requires significant judgement surrounding contract-based factors,
asset-based factors, entity-based factors and market-based factors.
Lease
Payments
Lease
payments consist of the following payments (as applicable) related to the use of the underlying asset during the lease term:
|
●
|
Fixed
payments, including in substance fixed payments, less any lease incentives paid or payable to the lessee
|
|
|
|
|
●
|
Variable
lease payments that depend on an index or a rate, such as the Consumer Price Index or a market interest rate, initially measured
using the index or rate at the commencement date of January 1, 2019.
|
|
|
|
|
●
|
The
exercise price of an option to purchase the underlying asset if the lessee is reasonably certain to exercise that option.
|
|
|
|
|
●
|
Payments
for penalties for terminating the lease if the lease term reflects the lessee exercising an option to terminate the lease.
|
|
|
|
|
●
|
Fees
paid by the lessee to the owners of a special-purpose entity for structuring the transaction
|
|
|
|
|
●
|
For
a lessee only, amounts probable of being owed by the lessee under residual value guarantees
|
Incremental
Borrowing Rate
The
ROU asset and related lease liabilities recorded under ASC 842 are calculated based on the present value of the lease payments
using (1) the rate implicit in the lease or (2) the lessee’s IBR, defined as the rate of interest that a lessee would have
to pay to borrow on a collateralized basis over a similar term an amount equal to the lease payments in a similar economic environment.
Recently
Issued Accounting Pronouncements
Financial Instruments — Credit
Losses (Topic 326)
In June 2016, the FASB issued ASU 2016-13, Financial
Instruments — Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”).
This standard prescribes an impairment model (known as the current expected credit loss (“CECL”) model) that is based
on expected losses rather than incurred losses. Under the new guidance, an entity recognizes as an allowance its estimate of expected
credit losses, which is intended to result in the timely recognition of losses. Under the CECL model, entities will estimate credit
losses over the entire contractual term of the instrument from the date of initial recognition of the financial instrument.
Measurement of expected credit losses is
to be based on relevant forecasts that affect collectability. The scope of financial assets within the CECL methodology is broad
and includes trade receivables from certain revenue transactions and certain off-balance sheet credit exposures. Different
components of the guidance require modified retrospective or prospective adoption. ASU 2016-13 is effective for the annual
reporting period beginning on or after December 15, 2020. The Company adopted this standard January 1, 2020 and there
was no material impact.
Except
for our accounting policies for leases as a result of adopting ASC 842, there have been no changes to our significant accounting
policies described in Note 2 to our Annual Report on Form 10-K for the year ended December 31, 2019, that have had a material
impact on our Consolidated Financial Statements and related notes.
Reclassifications
Certain
accounts and financial statement captions in the prior periods have been reclassified to conform to the current period financial
statements. None of the reclassifications, excluding the correction disclosed in Note 3 below, had any impact on the net
loss reported in 2018.
NOTE
3 – CORRECTION OF IMMATERIAL ERRORS
During
the fourth quarter of 2019, the Company identified errors in accounting for revenues and cost of revenues resulting in immaterial
correction of errors in previously issued consolidated financial statements. Each of these errors affected periods beginning prior
to 2018 through December 31, 2019. In accordance with Staff Accounting Bulletin (SAB) No. 99, Materiality, and SAB No.
108, Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements,
management evaluated the materiality of the errors from qualitative and quantitative perspectives, and concluded that while the
errors did not, individually, or in the aggregate, result in a material misstatement of the previously issued consolidated financial
statements, correcting these errors in the fourth quarter ended December 31, 2019 would have been material to that quarter.
The
adjustments cumulatively impacted the following balance sheet items as of December 31, 2018:
|
|
As Reported
|
|
|
Adjustment
|
|
|
|
As Corrected
|
|
Inventories
|
|
$
|
827,527
|
|
|
$
|
(267,725
|
)
|
(a)
|
|
$
|
559,802
|
|
Prepaid expenses and other
current assets
|
|
|
81,864
|
|
|
|
16,486
|
|
(b)
|
|
|
98,350
|
|
Property, plant and equipment, net
|
|
|
328,028
|
|
|
|
(33,045
|
)
|
(c)
|
|
|
294,983
|
|
Total Assets
|
|
|
1,883,671
|
|
|
|
(284,284
|
)
|
|
|
|
1,599,387
|
|
Accounts payable
|
|
|
1,375,042
|
|
|
|
(205,975
|
)
|
(d)
|
|
|
1,169,067
|
|
Contract liabilities
|
|
|
89,730
|
|
|
|
5,880
|
|
(e)
|
|
|
95,610
|
|
Total Liabilities
|
|
|
2,637,066
|
|
|
|
(200,095
|
)
|
|
|
|
2,436,971
|
|
Total Stockholders’ Deficit
|
|
$
|
(753,396
|
)
|
|
|
(84,189
|
)
|
(f)
|
|
$
|
(837,585
|
)
|
References
to above adjustments
|
a.
|
The
Company lost lens care customers in 2018 that had an impact on the realizable value of specific customer-inventory that was
held in inventory and not reserved for at year-end.
|
|
|
|
|
b.
|
This
adjustment accounts for the value of contract assets due to earnings on contracts that had not been billed for at year-end.
|
|
|
|
|
c.
|
There
was an error in the calculation of accumulated depreciation for specific property, plant and equipment.
|
|
|
|
|
d.
|
Accrued
accounts payable invoices for goods received not invoiced were reconciled after year-end and subsequently reversed. Additionally,
audit fees accrued in 2018 for the audit performed in 2019 was reversed, while legal fees that related to 2018 that were not
booked were recorded in the above adjustments.
|
|
|
|
|
e.
|
An
increase in contract liabilities was booked as a result of proper adoption
of ASC 606 for contracts in-progress at year-end.
|
|
|
|
|
f.
|
Total
Stockholders’ Deficit increased due to a revaluation of opening contracts with the adoption of ASC Topic 606 on January
1, 2018 totaling $159,396 offset by the understatement of net earnings for the year ended December 31, 2018 of $75,207
as detailed below.
|
The
errors discussed above resulted in an understatement of net earnings of $75,207 for the year ended December 31, 2018 as detailed
in the table below:
|
|
As
Reported
|
|
|
Adjustment
|
|
|
As
Corrected
|
|
Product revenues
|
|
$
|
3,048,164
|
|
|
$
|
122,046
|
(a)
|
|
$
|
3,170,210
|
|
Contract services revenues
|
|
|
1,282,588
|
|
|
|
47,957
|
(b)
|
|
|
1,330,545
|
|
Cost of product revenues
|
|
|
2,325,617
|
|
|
|
284,255
|
(c)
|
|
|
2,609,872
|
|
Cost of contract services revenues
|
|
|
1,126,352
|
|
|
|
(284,254
|
)(d)
|
|
|
842,098
|
|
Gross profit
|
|
|
878,783
|
|
|
|
170,002
|
|
|
|
1,048,785
|
|
Total operating expenses
|
|
|
1,197,281
|
|
|
|
(108,103
|
)(e)
|
|
|
1,089,178
|
|
(Loss) from operations
|
|
|
(318,498
|
)
|
|
|
278,105
|
|
|
|
(40,393
|
)
|
Other Income
|
|
|
265,363
|
|
|
|
(202,898
|
)(f)
|
|
|
62,465
|
|
Net Income (Loss)
|
|
$
|
(53,135
|
)
|
|
$
|
75,207
|
|
|
$
|
22,072
|
|
References
to above adjustments
|
a.
|
Represents
the reclassification of product revenues formerly included in contract services revenue segment on the Applied Nanotech, Inc.
books in 2018.
|
|
|
|
|
b.
|
With
the proper recognition of contract services revenues with the adoption of ASC Topic 606, in-progress contract revenue was determined
to be understated in 2018 by $170,003, offset by the reclassification noted in item (a) above of $122,046.
|
|
|
|
|
c.
|
Cost
of product revenues increased by $284,255 for the net effect of the $267,725 increase
to the inventory reserve, the error found in the depreciation calculation of $33,045,
a general reclassification of operating expenses to cost of revenues of $96,779, an increase
associated with costs related to the product revenues reclass to the product segment
identified in item (a) above of $78,466, offset by the reversal of the balance in goods
received not invoiced of $191,760.
|
|
|
|
|
d.
|
Cost
of contract services revenues decreased by $284,254 resulting from a reclass of $205,788 of sublease income from Other Income
plus $78,466 in cost of revenues associated with the product revenues reclass to the product segment identified in item (a) above.
|
|
|
|
|
e.
|
Operating
expenses decreased by $108,103 resulting primarily from a general reclassification of expenses to cost of revenues of $96,778
plus the net effect of corrections in accruals explained in the balance sheet section above.
|
|
|
|
|
f.
|
Other
Income decreased primarily from the reclassification of sublease income totaling $205,788 to net out rent expenses in cost
of revenues, offset by a small reclassification of interest expense to operating expense.
|
NOTE
4 – ACCOUNTS RECEIVABLE
At
December 31, 2019 and 2018, accounts receivable consisted of the following:
|
|
December 31, 2019
|
|
|
December 31, 2018
|
|
Accounts receivable
|
|
$
|
164,960
|
|
|
$
|
321,224
|
|
Less: allowance for doubtful accounts
|
|
|
(13,960
|
)
|
|
|
(13,670
|
)
|
Accounts receivable, net
|
|
$
|
151,290
|
|
|
$
|
307,554
|
|
Bad
debt expense, net of recoveries, was $0 and $34,977 for the years ended December 31, 2019 and 2018, respectively.
NOTE
5 – INVENTORY
At
December 31, 2019 and 2018, inventory consisted of the following:
|
|
December 31, 2019
|
|
|
December 31, 2018
|
|
Raw materials
|
|
$
|
663,932
|
|
|
$
|
823,283
|
|
Finished goods
|
|
|
335,762
|
|
|
|
389,716
|
|
|
|
|
999,694
|
|
|
|
1,212,999
|
|
Less: reserve for obsolescence
|
|
|
(577,072
|
)
|
|
|
(653,197
|
)
|
Inventory, net
|
|
$
|
422,622
|
|
|
$
|
559,802
|
|
Excess write-downs related to inventory obsolescence
during the years ended December 31, 2019 and 2018 were $160,439 and $267,724, respectively, and included within
cost of sales on consolidated statement of operations.
NOTE
6 - PROPERTY AND EQUIPMENT
At
December 31, 2019 and 2018, property and equipment consisted of the following:
|
|
Useful Life
|
|
December 31, 2019
|
|
|
December 31, 2018
|
|
Machinery and equipment
|
|
5 - 10 Years
|
|
$
|
2,729,308
|
|
|
$
|
2,729,308
|
|
Furniture and office equipment
|
|
3 - 7 Years
|
|
|
589,860
|
|
|
|
578,731
|
|
Leasehold improvements
|
|
2 - 15 Years
|
|
|
10,843
|
|
|
|
10,843
|
|
|
|
|
|
|
3,330,011
|
|
|
|
3,318,882
|
|
Less: accumulated depreciation
|
|
|
|
|
(3,108,446
|
)
|
|
|
(3,023,899
|
)
|
Property and equipment, net
|
|
|
|
$
|
221,565
|
|
|
$
|
294,983
|
|
For the years ended December 31, 2019
and 2018, depreciation and amortization expense amounted to $84,547 and $97,710, respectively.
During
the years ended December 31, 2019 and 2018 there were no sales of equipment.
NOTE
7 – OPERATING LEASE RIGHT-OF-USE ASSETS
Leasing
Transactions
The
Company’s leased assets include offices, production and research and development facilities. Our current lease portfolio
has remaining terms from less than one-year up to four years. Many of these leases contain options under which we can extend the
term for several years. Renewal options are excluded from our calculation of lease liabilities unless we are reasonably assured
to exercise the renewal option. Our lease agreements do not contain residual value guarantees or material restrictive covenants.
On
September 20, 2017, the Company entered into a three-year lease agreement for 22,172 square feet of office space in Brooklyn Heights,
Ohio beginning September 20, 2017 and ending September 20, 2020. Monthly lease payments amount to $8,688.
On
December 10, 2018, we entered into a five-year lease agreement for 3,742 square feet of space for the design facility in Austin,
beginning January 2019 and ending February 29, 2024. Monthly lease payments start at $3,472 per month, increasing 3% each year.
On
June 21, 2019, we leased approximately 1,200 square feet of office space in Bingham Farms, Michigan for nine months for
a sales office. Monthly payments are $1,529 per month. The lease has been extended through December 31, 2020.
Operating
leases are reflected on our balance sheet within operating lease ROU assets and the related current and non-current operating
lease liabilities. Leases with terms of less than twelve months have been classified as current ROU assets, whereas the lease
with a remaining term of more than twelve months has been classified as a non-current ROU asset. ROU assets represent the right
to use an underlying asset for the lease term, and lease liabilities represent the obligation to make lease payments arising from
lease agreement. Operating lease ROU assets and liabilities are recognized at the commencement date, or the date on which the
lessor makes the underlying asset available for use, based upon the present value of the lease payments over the respective lease
term. Lease expense is recognized on a straight-line basis over the lease term, subject to any changes in the lease or expectation
regarding the terms. Variable lease costs such as common area maintenance, property taxes and insurance are expensed as incurred.
Balance
Sheet
Supplemental
balance sheet information related to leases was as follows:
|
|
December 31, 2019
|
|
Operating Leases
|
|
|
|
|
Total operating lease ROU assets
|
|
$
|
257,523
|
|
|
|
|
|
|
Operating lease liabilities (current)
|
|
|
131,835
|
|
Operating lease liabilities (noncurrent)
|
|
|
136,624
|
|
Total operating lease liabilities
|
|
$
|
268,459
|
|
The
average remaining lease term in months is 24.3 with an average discount rate of 8.50%.
Income Statement
Supplemental income statement information
related to leases was as follows:
|
|
December 31,
2019
|
|
Operating Lease Costs
|
|
|
|
|
Cost of product revenue
|
|
$
|
124,617
|
|
Cost of contract services
|
|
|
46,339
|
|
Sublease (income)
|
|
|
(23,200
|
)
|
Net operating lease cost
|
|
$
|
147,756
|
|
Maturities
Future
minimum lease payments under leases that had initial or remaining non-cancelable lease terms in excess of one year as of December
31, 2019, are as follows:
|
|
Operating Leases
|
|
2020
|
|
$
|
140,161
|
|
2021
|
|
|
46,085
|
|
2022
|
|
|
48,841
|
|
2023
|
|
|
50,315
|
|
2024
|
|
|
8,427
|
|
Undiscounted Cash Flows
|
|
$
|
293,829
|
|
Less: imputed interest
|
|
|
(25,370
|
)
|
Total
|
|
$
|
268,459
|
|
NOTE
8 – BANK LOANS AND LINES OF REVOLVING CREDIT FACILITY
In
April 2014, our subsidiary, Nano Magic 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 was payable on demand and was secured by all of Nano Magic
LLC’s assets. The Revolving Note was amended five times in 2015, 2017 and 2018. As amended, the interest rate was, 3.0%
above the Prime Rate (as reported in the Wall Street Journal). Under a subsequent amendment, the maturity date was extended to
July 3, 2019 with an automatic one-year renewal unless terminated by either party 60 days in advance.
On January 31, 2019, the Company paid $172,101
to the Lender. This payment, and the application of $85,000 in cash collateral held by the Lender, constituted the outstanding
principal balance of $234,841 and accrued interest and fees of $22,260 due to the Lender and thus paid in full all of our remaining
obligations under the Revolving Note. The parties also terminated a revolving credit line agreement originally executed in April
2014 that was renewed in August 2018.
At December 31, 2019 and 2018 the Company
had a line of credit balance outstanding of $0 and $330,892, respectively, which includes accrued interest of $0 and
$2,475, respectively. Subject to the limitations of the borrowing base, the amount available on the line of credit was
$1,176,440 at December 31, 2018. The weighted average interest rate during the years ended December 31, 2019 and 2018 was
approximately 8.5% and 7.9%, respectively.
NOTE
9 – NOTES PAYABLE
On February 10, 2015, our subsidiary
Nano Magic LLC entered into a promissory note (the “Equipment Note”) with KeyBank, N.A. (the “Bank”)
to borrow up to $373,000. The borrower may obtain one or more advances not to exceed $373,000. The unpaid principal balance
of the Equipment Note is payable in 60 equal monthly installments 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. On June 18, 2019, Nano Magic LLC entered into an Amendment to the Equipment
Note with the Bank (the “Amendment”). 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 to $4,053 per month including
interest. At December 31, 2019 and 2018, the principal amount due under the Equipment Note, as amended by the Amendment,
amounted to $115,926, and $134,944, respectively. As of December 31, 2019, $48,641 and $67,285, respectively, represent the
current and non-current portion due under the Equipment Note, as amended by the Amendment. At December 31, 2018, the
current and non-current portions were $73,562 and $60,563, respectively.
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, 2019). All principal and interest payable
under three of these notes aggregating $37,469 are due in 2025 and all principal and interest payable under two
of these notes amounting to $18,350 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
payments of notes payable are as follows:
Year
|
|
|
As
of December 31, 2019
|
|
2020
|
|
|
$
|
52,641
|
|
2021
|
|
|
$
|
48,641
|
|
2022
|
|
|
$
|
18,644
|
|
2023
|
|
|
|
-
|
|
2024
|
|
|
$
|
54,885
|
|
Total
|
|
|
$
|
174,811
|
|
NOTE
10 – RELATED PARTY TRANSACTIONS
Accounts Payable – related parties
and advances from related parties of $159,887 used as working capital in 2018 from Mr. Rickert and Ms. Rickert and
accrued payroll of $16,000 due to them have been included within the consolidated balance sheets as of December
31, 2019 and December 31, 2018. We paid legal and consulting fees to director Mr. Ron Berman of $94,100 in 2019
and of $18,750 in 2018. We paid legal and consulting fees of $90,600 in 2019, $36,425 in 2018 to the law firm of Mr, Tom
Berman, who is our President, Chief Executive Officer and a director.
Mr. Ron Berman and Mr. Tom Berman are the managers of the limited
liability company that is the manager of both of PEN Comeback, LLC and PEN Comeback 2, LLC. These two limited liability companies
purchased shares of Class A common stock and derivative securities from us in 2018 and 2019. See the subsection on Sales of Stock
under Issuances of Common Stock in Note 11.
NOTE
11 - STOCKHOLDERS’ DEFICIT
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 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 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 Nano Magic 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 Carl Zeiss Inc. (“Zeiss”) or an entity wholly owned by the
ultimate parent of Zeiss. Zeiss was one of the parties to the business combination in August, 2014 and the rights of holders
of Class Z common stock reflect rights it had as an equity owner of what is now our wholly-owned subsidiary, Nano Magic LLC.
Voting
Rights. Holders of 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 our Board, have anti-dilution rights described below and have consent rights with respect to
certain amendments to our 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 us (on the same terms as made available to third parties)
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
Common
Stock Issued for Services
On
February 28, 2018, the Company issued an aggregate of 4,443 shares of Class A common stock and 2,962 shares of Class B common
stock to the Company’s directors as compensation to them for service on its board. These shares were valued on that date
at $1.35 per share based on the quoted price of the stock for a total value of $10,000. On that same day, the Company issued 6,746
shares of Class B common stock in satisfaction of the outstanding equity credits.
On
May 23, 2018, the Company issued an aggregate of 5,043 shares of Class A common stock and 3,362 shares of Class B common stock
to the Company’s directors as compensation to them for service on its board. These shares were valued on that date at $1.19
per share based on the quoted price of the stock for a total value of $10,000.
On
October 15, 2018, we issued an aggregate of 20,000 shares of Class A common stock to the Company’s directors as compensation
to them for service on our board. These shares were valued on that date at $0.50 per share based on the price paid in the private
placement for a total value of $10,000. On that date 1,774 shares of Class A common stock were issued to fully retire the last
outstanding equity credits.
On
December 5, 2018, we issued an aggregate of 30,000 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 $0.40 per share based on the quoted price of the stock for a total
value of $12,000.
On
April 3, 2019, we issued an aggregate of 18,180 shares of Class A common stock to five of our directors as compensation to them
for service on our Board. These shares were valued on that date at $0.55 per share based on the quoted price of the stock for
a total value of $10,000.
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.
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 24, 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.
On
December 31, 2019, we issued an aggregate of 35,000 shares of Class A common stock under the 2015 Equity Incentive Plan to three
employees in settlement of accrued salary due to them. These shares were valued on that date at $0.65 per share based on the quoted
price of the stock for a total value of $22,750.
Sales
of Common Stock
On
October 15, 2018, we sold 590,847 shares of Class A common stock for a purchase price of $0.50 per share in a private placement
for aggregate proceeds of $295,423. Purchasers were PEN Comeback, LLC (“PEN Comeback”) and the Rickert
family, Limited Partnership. Ronald Berman, one of our directors, and his son, Tom Berman have reported that they each have 50%
control of PEN Comeback. Immediately prior to this sale, Tom Berman was elected as our President and as President of PEN Brands
that operates as our Products segment. Tom Berman was also elected to our board.
On January 31, 2019, we sold 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 Nano Magic 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. Proceeds were used, along with other corporate funds, to pay in full the principal
balance, accrued interest and fees due to our lender Mackinac Commercial Credit, LLC.
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 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 Nano Magic 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 523,266 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 523,266 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 Nano Magic 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 Nano Magic 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.
On
September 6, 2019, we sold 216,912 shares of Class A common stock in a private placement to PEN Comeback 2, LLC (“PEN
Comeback 2”) 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 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 and 15,384
shares of Class A common stock to the Rickert Family, Limited 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
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
Options
In
October 2018, options granted to two consultants to purchase an aggregate of 10,000 shares of the Company’s
common stock were forfeited when the consulting relationship terminated before the options vested.
On
October 15, 2018, in connection with the sale of shares of our Class A common stock to PEN Comeback the Company also
sold at a price of $0.03 per option, options that would allow PEN Comeback to acquire up to an additional 550,847 shares at an
option exercise price of $1.00 per share. Those options were not exercised and expired, by their terms, on June 30, 2019.
On
April 3, 2019, we issued to our CEO and President, Tom Berman, an option to purchase up to 550,000 shares of Class A common Stock
at a price of $0.55 per share. The option vests over time, each tranche exercisable for 4 years after vesting.
The
right to purchase:
|
|
Consisting
of:
|
|
Is
vested or will vest on:
|
Tranche
1
|
|
50,000
Option Shares
|
|
The
date of grant
|
Tranche
2
|
|
75,000
Option Shares
|
|
December
31, 2019
|
Tranche
3
|
|
100,000
Option Shares
|
|
June
30, 2020
|
Tranche
4
|
|
125,000
Option Shares
|
|
December
31, 2020
|
Tranche
5
|
|
100,000
Option Shares
|
|
If
the Bonus Cap is reached for 2019
|
Tranche
6
|
|
100,000
Option Shares
|
|
If
the Bonus Cap is reached for 2020
|
The
bonus cap under Mr. Berman’s employment agreement was not reached in 2019 and that tranche will never vest.
The
fair value of the option award to Mr. Tom Berman was calculated using the Black-Scholes method. The assumptions used in the calculation
are shown below. The expected term represents the period of time that the option is expected to be outstanding. 125,000
shares were vested at December 31, 2019 and compensation expense related to the option award for the year-ending 2019 was
$59,091. There are 325,000 shares unvested that will, if they vest, result in $153,635 of future compensation expense to be recorded.
Exercise price per option
|
|
$
|
0.55
|
|
Weighted average fair value per option at grant date
|
|
$
|
0.47
|
|
Expected term
|
|
|
5
years
|
|
Expected volatility
|
|
|
141
|
%
|
Expected dividend yield
|
|
|
0
|
%
|
Risk-free interest rate
|
|
|
1.66
|
%
|
Stock
options outstanding are to purchase Class A common stock. Stock option activities for the years ended December 31, 2019 and 2018
are summarized as follows:
|
|
Number of Options
|
|
|
Weighted Average Exercise Price
|
|
|
Weighted Average Remaining Contractual Term
(Years)
|
|
|
Aggregate Intrinsic Value
|
|
Balance Outstanding, December 31, 2017
|
|
|
19,120
|
|
|
$
|
29.38
|
|
|
|
2.82
|
|
|
$
|
-
|
|
Exercised
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited or expired
|
|
|
(10,394
|
)
|
|
|
44.34
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
550,847
|
|
|
|
1.00
|
|
|
|
|
|
|
|
|
|
Balance Outstanding, December 31, 2018
|
|
|
559,573
|
|
|
$
|
1.91
|
|
|
|
1.94
|
|
|
$
|
-
|
|
Exercised
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited or expired
|
|
|
(654,071
|
)
|
|
|
1.23
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
550,000
|
|
|
|
0.55
|
|
|
|
|
|
|
|
|
|
Balance Outstanding, December 31, 2019
|
|
|
455,502
|
|
|
$
|
1.24
|
|
|
|
4.22
|
|
|
$
|
18,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable, December 31, 2019
|
|
|
130,502
|
|
|
$
|
2.95
|
|
|
|
4.14
|
|
|
$
|
5,000
|
|
Warrants
As of December 31, 2019, there were outstanding
and exercisable warrants to purchase 2,817,463 shares of common stock with a weighted average exercise price of $1.50 per share
and a weighted average remaining contractual term of 40.2 months.
As
of December 31, 2018, 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) 550,847 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 6 months. As of December 31, 2018, there was no intrinsic value for the warrants.
Warrant
Options
As
of December 31, 2018, there were outstanding 550,847 warrant options that entitled the holder, for a price of $0.03 per option,
to purchase up to 550,847 options. Warrant options were only exercisable if and to the extent that options with an exercise price
of $1.00 per share were in fact exercised. None of the $1.00 options were exercised. The $1.00 options and the warrant options
expired by their terms on June 30, 2019.
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, Inc., 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 the Company, 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 would reach certain price thresholds. Any shares did
not vest in the five years after the effective date were to be forfeited.
The
fifth anniversary occurred August 27, 2019 and none of the shares had yet vested. Accordingly, all were forfeited.
Pursuant to ASC 718-10 and related subsections, the Company estimated the fair value of the awards with market conditions
using a Binomial simulation. Under that method, the awards were amortized under a three-year service period and there was no
amortization in the years ended December 31, 2018 or 2019.
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, options to purchase up to 10,000 Class A common shares were issued under the Plan. As of December 31, 2019, the options
had been forfeited. On December 31, 2019, we issued an aggregate of 102,500 shares to employees in settlement of accrued salaries
totaling $66,615.
NOTE
12 – INCOME TAXES
The
Company maintains deferred tax assets and liabilities that reflect the net tax effects of temporary differences between the carrying
amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The net deferred
tax asset has been fully offset by a valuation allowance because of the uncertainty of the attainment of future taxable income.
The
items accounting for the difference between income taxes at the effective statutory rate and the provision for income taxes for
the years ended December 31, 2019 and 2018 were as follows:
|
|
Years Ended December 31,
|
|
|
|
2019
|
|
|
2018
|
|
Income tax provision (benefit) at U.S. statutory rate of 21%
|
|
$
|
(203,000
|
)
|
|
$
|
5,000
|
|
Non-deductible expenses
|
|
|
-
|
|
|
|
-
|
|
Other
|
|
|
12,000
|
|
|
|
(8,000
|
)
|
Change in valuation allowance
|
|
|
191,000
|
|
|
|
3,000
|
|
Revaluation of deferred tax assets under U.S. tax act
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Total provision for income tax
|
|
$
|
-
|
|
|
$
|
-
|
|
The
Company’s approximate net deferred tax assets as of December 31, 2019 and 2018 were as follows:
|
|
December
31, 2019
|
|
|
December
31, 2018
|
|
Deferred
Tax Assets:
|
|
|
|
|
|
|
|
|
Net
operating loss carryforward
|
|
$
|
2,247,000
|
|
|
$
|
2,046,000
|
|
Stock-based
compensation
|
|
|
1,000
|
|
|
|
1,000
|
|
Allowance
for inventory obsolescence
|
|
|
125,000
|
|
|
|
141,000
|
|
Accrued
compensation
|
|
|
34,000
|
|
|
|
28,000
|
|
Other
|
|
|
32,000
|
|
|
|
32,000
|
|
Total
deferred tax assets
|
|
|
2,439,000
|
|
|
|
2,248,000
|
|
Valuation
allowance
|
|
|
(2,439,000
|
|
)
|
|
(2,248,000
|
)
|
Net
deferred tax assets
|
|
$
|
|
|
|
|
-
|
|
The
estimated net operating loss carryforward was approximately $10,699,000 at December 31, 2019, which is an estimate of the
Company’s net operating loss carryforward acquired in the Combination after giving effect to the limitation on the usage
of such net operating loss carryforwards due to a change in ownership in accordance with Section 382 of the Internal Revenue Code
plus net operating loss carryforwards since the Combination. The Company provided a valuation allowance equal to the net deferred
income tax asset for the year ended December 31, 2019 because it was not known whether future taxable income will be sufficient
to utilize the loss carryforward. The potential tax benefit arising from tax loss carryforwards prior to 2017 will expire
between 2020 and 2037, while the potential tax benefits arising after 2017 currently have no expiration date.
In
accordance with Section 382 of the Internal Revenue Code, the usage of the Company’s net operating loss carry forwards are
subject to annual limitations due to greater than 50% ownership changes. Additionally, the future utilization of the net operating
loss carryforwards to offset future taxable income may be subject to special tax rules which may limit their usage under the Separate
Return Limitation Year (“SRLY”) rules. If necessary, the deferred tax assets will be reduced by any carryforward that
expires prior to utilization as a result of such limitations, with a corresponding reduction of the valuation allowance.
The Company’s 2017, 2018
and 2019 Corporate Income Tax Returns are subject to Internal Revenue Service examination.
NOTE
13 - COMMITMENTS AND CONTINGENCIES
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.
In 2018 the Company reversed of a portion of an accrual made in 2017 because the matter accrued for was settled in December
2018 and the settlement was fully paid that year. As of December 31, 2019, the Company has not accrued any amount for litigation
contingencies.
NOTE
14 – 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 years ended December 31, 2019 and 2018 are as follows:
|
|
Product
Revenues
|
|
|
|
For
the Years Ended
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
Customer
A
|
|
|
*
|
%
|
|
|
40
|
%
|
Customer B
|
|
|
*
|
%
|
|
|
11
|
%
|
Total
|
|
|
*
|
%
|
|
|
51
|
%
|
|
|
Contract
Services Revenues
|
|
|
|
For
the Years Ended
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
Customer
C
|
|
|
46
|
%
|
|
|
9
|
%
|
Customer D
|
|
|
36
|
%
|
|
|
41
|
%
|
Customer
E
|
|
|
17
|
%
|
|
|
17
|
%
|
Total
|
|
|
99
|
%
|
|
|
67
|
%
|
*Less
than 10%
Related to the Company’s product
sales, two customers accounted for 51% of the Company’s total product revenue in 2018. No customer represented greater than
10% of the Company’s total product revenue in 2019. These customers did not have material accounts receivable balances at
December 31, 2019 and 2018. Related to the Company’s contract services revenues, three customers accounted for 99% and 67%
of total contract services revenues for 2019 and 2018, respectively. These customers did not have material accounts receivable
balances at December 31, 2019 and 2018. A reduction in sales from or loss of such customers would have a material adverse effect
on our results of operations and financial condition.
Geographic
Concentrations of Sales
For
the years ended December 31, 2019 and 2018, total sales in the United States represent approximately 83% and 93% of total consolidated
revenues, respectively. No other geographical area accounted for more than 10% of total sales during the years ended December
31, 2019 and 2018.
Vendor
Concentrations
Vendor
concentrations for inventory purchases for the years ended December 31, 2019 and 2018 are:
|
|
For the Years Ended
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
Vendor A
|
|
|
*
|
%
|
|
|
22
|
%
|
Vendor B
|
|
|
*
|
%
|
|
|
21
|
%
|
Vendor C
|
|
|
*
|
%
|
|
|
10
|
%
|
Total
|
|
|
*
|
%
|
|
|
53
|
%
|
*Less
than 10%
NOTE
15 – EQUITY CREDITS
In
1997, Nano Magic LLC established The Equity Credit Incentive Program. This program enabled select employees the opportunity to
purchase equity credits that increase in value based upon an increase in Nano Magic LLC’s revenue over a base year of 1996.
Eligible credits could be redeemed after two years at the equity credit value for that year. Under certain circumstances, the
equity credits were convertible into Nano Magic LLC equity. In 2018 shares were issued to convert the remaining equity credits
into our stock. As of December 31, 2018 and 2019, no equity credits were issued and outstanding.
NOTE
16 – STOCK APPRECIATION RIGHTS PLAN
From June 1, 1988, until December 31, 1997,
when the plan was terminated, Nano Magic LLC had in place a Stock Appreciation Rights Plan A (the “SAR 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 Nano Magic 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 outstanding under the terms
of the SAR Plan at December 31, 2019 and 2018.
At
December 31, 2019 and 2018, the Company accrued $42,823 and $54,290, respectively, related to the cash redemption value associated
with the stock appreciation rights held by terminated employees.
NOTE
17 – 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 years ended December 31, 2019 and 2018 were the Product segment and the Contract services segment
(formerly the research and development segment). The Company’s chief operating decision-maker has been identified as the
President, 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 December 31,
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 years ended December 31, 2019 and 2018 was as
follows:
|
|
For the Years
Ended December 31,
|
|
|
|
2019
|
|
|
2018
|
|
Revenues:
|
|
|
|
|
|
|
|
|
Product segment
|
|
$
|
1,539,191
|
|
|
$
|
3,170,210
|
|
Contract services segment
|
|
$
|
896,819
|
|
|
|
1,330,545
|
|
Total segment and consolidated revenues
|
|
$
|
2,436,010
|
|
|
$
|
4,500,755
|
|
Cost of revenues:
|
|
|
|
|
|
|
|
|
Products
|
|
$
|
1,200,168
|
|
|
$
|
2,609,872
|
|
Contract services segment
|
|
$
|
911,941
|
|
|
$
|
842,098
|
|
Total segment and consolidated cost of revenues
|
|
$
|
2,112,109
|
|
|
$
|
3,451,970
|
|
|
|
|
|
|
|
|
|
|
Gross profit (loss):
|
|
|
|
|
|
|
|
|
Product segment
|
|
$
|
339,023
|
|
|
$
|
560,338
|
|
Contract services segment
|
|
|
(15,122
|
)
|
|
|
488,447
|
|
Total segment and consolidated gross profit
|
|
$
|
323,901
|
|
|
$
|
1,048,785
|
|
Gross margin:
|
|
|
|
|
|
|
|
|
Product segment
|
|
|
22.0
|
%
|
|
|
17.7
|
%
|
Contract services segment
|
|
|
-1.7
|
%
|
|
|
36.7
|
%
|
Total gross margin
|
|
|
13.3
|
%
|
|
|
23.3
|
%
|
Segment operating expenses:
|
|
|
|
|
|
|
|
|
Product segment
|
|
|
770,667
|
|
|
|
928,720
|
|
Contract services segment
|
|
|
215,026
|
|
|
|
200,621
|
|
Total segment operating expenses
|
|
|
985,694
|
|
|
|
1,129,341
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations:
|
|
|
|
|
|
|
|
|
Product segment
|
|
$
|
(431,644
|
)
|
|
$
|
(368,382
|
)
|
Contract services segment
|
|
|
(230,148
|
)
|
|
|
287,826
|
|
Total segment income (loss)
|
|
|
(661,792
|
)
|
|
|
(80,556
|
)
|
Unallocated costs
|
|
|
(369,291
|
)
|
|
|
40,163
|
|
Total consolidated income (loss) from operations
|
|
$
|
(1,031,083
|
)
|
|
$
|
(40,393
|
)
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization:
|
|
|
|
|
|
|
|
|
Product segment
|
|
$
|
83,281
|
|
|
$
|
97,286
|
|
Contract services segment
|
|
|
1,266
|
|
|
|
424
|
|
Total segment depreciation and amortization
|
|
|
84,547
|
|
|
|
97,710
|
|
Unallocated depreciation
|
|
|
-
|
|
|
|
-
|
|
Total consolidated depreciation and amortization
|
|
$
|
84,547
|
|
|
$
|
97,710
|
|
|
|
|
|
|
|
|
|
|
Capital additions:
|
|
|
|
|
|
|
|
|
Product segment
|
|
$
|
9,400
|
|
|
$
|
-
|
|
Contract services segment
|
|
|
1,729
|
|
|
|
3,917
|
|
Total segment capital additions
|
|
|
11,129
|
|
|
|
3,917
|
|
Unallocated capital additions
|
|
|
-
|
|
|
|
-
|
|
Total consolidated capital additions
|
|
|
11,129
|
|
|
$
|
3,917
|
|
|
|
December 31, 2019
|
|
|
December 31, 2018
|
|
Segment total assets:
|
|
|
|
|
|
|
|
|
Product segment
|
|
$
|
1,132,858
|
|
|
$
|
1,436,588
|
|
Contract services segment
|
|
|
176,568
|
|
|
|
137,189
|
|
Corporate
|
|
|
10,661
|
|
|
|
25,610
|
|
Total consolidated total assets
|
|
$
|
1,320,087
|
|
|
$
|
1,599,387
|
|
NOTE
18 - SUBSEQUENT EVENTS
Sales
of Common Stock and Derivate Equity Securities
On
January 22, 2020, we sold 198,530 shares of Class A common stock in a private placement to PEN Comeback 2 at a per share
price of $0.65 for aggregate proceeds of $129,044. At the same time the investor bought 198,516 warrants to purchase up to 198,516
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 $5,955.
On
February 24, 2020, we sold 205,883 shares of Class A common stock in a private placement to PEN Comeback 2 at a per share
price of $0.65 for aggregate proceeds of $133,824. At the same time the investor bought 205,868 warrants to purchase up to 198,516
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 $6,176.
On
March 24, 2020, in a private placement to PEN Comeback 2, we sold 551,600 shares of Class A common stock and committed to
issue an additional 242,518 shares when we have additional authorized shares. If the additional shares have not been issued by
March 24, 2021, we must refund the purchase price (without interest). Proceeds, at a per share price of $0.65, were $516,177.
At the same time the investor bought 794,110 warrants to purchase up to 794,110 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 sale of the
warrants were $23,823.
On
March 26, 2020, in a private placement to the same investor we committed to issue 36,765 shares when we have additional authorized
shares and accepted $.65 per share for proceeds of $23,897. If the shares have not been issued by March 26, 2021, we must refund
the purchase price (without interest). At the same time the investor bought 36,758 warrants to purchase up to 36,780 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 sale of the warrants were $1,103.
Stock
for Services
On
February 12, 2020, we issued an aggregate of 21,048 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 $0.57 per share based on the quoted price of the stock for a total
value of $12,000.
Paycheck Protection Program Loan
On May 8, 2020, we obtained a loan from
Fifth Third Bank for $130,000 under the Small Business Administration Paycheck Protection Program. Depending on the severity and
term of the disruptions from the COVID-19 pandemic, our business may still suffer from a lack of working capital.
COVID-19 Pandemic
In December 2019, a novel strain of
coronavirus disease (“COVID-19”) was first reported in Wuhan, China. Less than four months later, on March 11, 2020,
the World Health Organization declared COVID-19 a pandemic. Restrictions imposed by Federal, state and local governments have
affected operations of our business and those of our vendors and customers as well as logistics for shipping and receiving supplies
and shipping our products.
Apart from the disruption affecting
all manufacturing businesses, some of the raw materials and bottles used to produce our liquid products, including the new surface
product, are used to produce hand sanitizer and other cleaning product that are in high demand and some of our raw materials and
packaging have become harder to find due to the COVID-19 pandemic. If shortages continue, we may not be able to obtain adequate
supply. Moreover, when the material is available, the price can be substantially higher which will probably adversely impact our
profit margin even if we can implement some price increases. The increased use of face masks and other personal protective equipment
as a result of the pandemic has created additional demand for our antifog product. There has also been a slow-down in business
activity as a result of the COVID-19 pandemic, and the severity of the disruption and the length of the slow-down and timing of
recovery are unknown.
As disclosed above, on May 8, 2020, we
obtained a loan from Fifth Third Bank for $130,000 under the Small Business Administration Paycheck Protection Program.
Depending on the severity and term of the disruptions from the COVID-19 pandemic, our business may still suffer from a lack
of working capital.