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 SeptemberJune 30, 20172023

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

COMMISSION FILE NO. 1-11602

PENNANO MAGIC INC.

(Exact name of registrant as specified in its charter)

Delaware47-1598792
(State or other jurisdiction of(I.R.S. Employer
incorporation or organization)Identification No.)

31601 Research Park Drive, Madison Heights, MI48071

(Address of principal executive office, including Zip Code)

Registrant’s telephone number, including area code: (844)273-6462

Securities registered pursuant to Section 12(b) of the Exchange Act:

701 Brickell Ave., Suite 1550Title of each classTrading SymbolName of Each Exchange on Which Registered
Miami, FLCommon Stock, $0.0001 par value33131
(Address of principal executive offices)NMGX(Zip Code)OTC Markets

(844) 273-6462
(Registrant’s telephone number, including area code)

Former name or former address, if changed since last report:Securities registered pursuant to Section 12(g) of the Exchange Act: Not applicableNone.

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. [X] Yes [  ] 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.No.

As of November 13, 2017,August 14, 2023, the registrant had 1,686,48611,429,666 shares of Class A common stock, par value $.0001 per share (including 37,778 shares that are subject to forfeiture) and 1,420,176 shares of Class B common stock, par value $.0001 per share,Common Stock issued and outstanding.

 

 
 

PEN INC.Nano Magic Inc.

INDEX

 Page
Part I. Financial Information
 
Item 1. Financial Statements (Unaudited)F-1
 F-1
Consolidated Balance Sheets—September 30, 2017 (unaudited) and December 31, 2016F-1
 
Condensed Consolidated Statements of Operations—Three and NineSix Months Ended SeptemberJune 30, 20172023 and 2016 (unaudited)2022F-2
 F-1
Condensed Consolidated Balance Sheets—June 30, 2023 and December 31, 2022F-2
Condensed Consolidated Statements of Changes in Stockholders’ Equity for the Three Months Ended June 30, 2023 and 2022F-3
Consolidated Statements of Changes in Stockholders’ Equity for the Six Months Ended June 30, 2023 and 2022 (unaudited)F-4
Condensed Consolidated Statements of Cash Flows—NineSix Months Ended SeptemberJune 30, 20172023 and 2016 (unaudited)2022F-3
 F-5
Condensed Notes to Unaudited Condensed Consolidated Financial StatementsF-4
 F-6
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations4
 4
Item 3. Quantitative and Qualitative Disclosures about Market Risk9
 7
Item 4. Controls and Procedures10
 8
Part II. Other Information
 
Item 1. Legal Proceedings11
 8
Item 1A. Risk Factors11
 8
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds11
 8
Item 3. Defaults Upon Senior Securities11
 9
Item 4. Mine Safety Disclosures11
 9
Item 5. Other Information11
 9
Item 6. Exhibits11
 9
Signatures1210

2

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.

3
 

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

PENNANO MAGIC INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETSSTATEMENTS OF OPERATIONS

  September 30,2017  December 31, 2016 
  (unaudited)    
ASSETS      
CURRENT ASSETS:        
Cash $73,927  $189,128 
Accounts receivable, net  819,306   722,845 
Accounts receivable - related party  14,226   10,474 
Inventory  1,133,502   1,035,499 
Prepaid expenses and other current assets  42,314   75,080 
Total Current Assets  2,083,275   2,033,026 
         
OTHER ASSETS:        
Property, plant and equipment, net  400,778   709,627 
Other assets  89,325   51,078 
Total Other Assets  490,103   760,705 
         
Total Assets $2,573,378  $2,793,731 
         
LIABILITIES AND STOCKHOLDERS’ DEFICIT        
         
CURRENT LIABILITIES:        
Bank revolving line of credit $689,232  $979,688 
Current portion of notes payable  79,979   90,449 
Accounts payable  1,606,816   1,078,527 
Accounts payable - related parties  20,887   52,887 
Deferred revenue  70,180   - 
Accrued expenses  649,331   904,166 
         
Total Current Liabilities  3,116,425   3,105,717 
         
LONG-TERM LIABILITIES:        
Notes payable, net of current portion  227,397   266,110 
         
Total Long-Term Liabilities  227,397   266,110 
         
Total Liabilities  3,343,822   3,371,827 
         
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; 1,648,708 and 1,367,431 issued and outstanding at September 30, 2017 and December 31, 2016, respectively  165   136 
Class B common stock: $0.0001 par value, 2,500,000 shares authorized; 1,420,176 and 1,402,104 issued and outstanding at September 30, 2017 and December 31, 2016, respectively  142   140 
Class Z common stock: $0.0001 par value, 300,000 shares authorized; 0 and 262,631 shares issued and outstanding at September 30, 2017 and December 31, 2016, respectively  -   26 
Additional paid-in capital  5,480,924   5,321,769 
Accumulated deficit  (6,251,675)  (5,900,167)
         
Total Stockholders’ Deficit  (770,444)  (578,096)
         
Total Liabilities and Stockholders’ Deficit $2,573,378  $2,793,731 

(unaudited)

  2023  2022  2023  2022 
  For the Three Months Ended  For the Six Months Ended 
  June 30,  June 30, 
  2023  2022  2023  2022 
             
NET REVENUES $709,293  $493,782  $1,406,322  $1,012,925 
                 
COST OF SALES  507,155   458,330   1,129,434   990,894 
                 
GROSS PROFIT  202,138   35,452   276,888   22,031 
                 
OTHER OPERATING INCOME  11,420   -   11,420   - 
                 
OPERATING EXPENSES:                
Selling and marketing expenses  54,018   96,301   113,442   175,830 
Salaries, wages and related benefits  189,986   316,752   468,562   712,718 
Stock compensation expense  260,249   39,366   290,393   106,621 
Research and development  6,371   3,211   12,275   10,700 
Professional fees  112,762   188,794   302,221   442,773 
General and administrative expenses  258,508   211,463   447,514   463,261 
                 
Total Operating Expense  881,894   855,887   1,634,407   1,911,903 
                 
LOSS FROM OPERATIONS  (668,336)  (820,435)  (1,346,099)  (1,889,872)
                 
OTHER INCOME (EXPENSE)                
Income (loss) from investment in subsidiary  8,782   (3,161)  40,938   (3,161)
Interest expense  (7,575)  (8,337)  (21,943)  (15,635)
Other income  16,264   3,886   23,202   2,625 
Total Other Income (Expense)  17,471   (7,612)  42,197   (16,171)
                 
LOSS FROM CONTINUING OPERATIONS  (650,865)  (828,047)  (1,303,902)  (1,906,043)
                 
INCOME (LOSS) FROM DISCONTINUED OPERATIONS                
Income (loss) from discontinued operations  -   (13,045)  -   1,300 
Gain on sale of discontinued operations  -   1,148,225   -   1,148,225 
                 
NET INCOME FROM DISCONTINUED OPERATIONS  -   1,135,180   -   1,149,525 
                 
NET (LOSS) INCOME $(650,865) $307,133  $(1,303,902) $(756,518)
                 
NET (LOSS) INCOME PER SHARE - BASIC:                
Continuing operations $(0.06) $(0.08) $(0.12) $(0.19)
Discontinued operations $-  $0.11  $-  $0.11 
NET (LOSS) INCOME PER SHARE - BASIC: $(0.06) $0.03  $(0.12) $(0.08)
                 
NET (LOSS) INCOME PER SHARE - DILUTED:                
Continuing operations $(0.06) $(0.08) $(0.12) $(0.19)
Discontinued operations $-  $0.11  $-  $0.11 
NET (LOSS) INCOME PER SHARE - DILUTED: $(0.06) $0.03  $(0.12) $(0.08)
                 
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:                
Basic  10,963,268   10,084,334   10,907,579   10,082,511 
Diluted  10,963,268   10,084,334   10,907,579   10,082,511 

See accompanying condensed notes to unauditedcondensed consolidated financial statements.

F-1
 

PENNANO MAGIC INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONSBALANCE SHEETS

  For the Three Months Ended  For the Nine Months Ended 
  September 30,  September 30, 
  2017  2016  2017  2016 
  (unaudited)  (unaudited)  (unaudited)  (unaudited) 
REVENUES:                
                 
Products (including related party sales of $26,093 and $52,328 and $138,004, and $148,624 for the three and nine months ended September 30, 2017 and 2016, respectively) $1,772,960  $1,781,755  $5,523,785  $5,391,305 
Contract services  255,301   225,083   723,435   804,522 
                 
Total Revenues  2,028,261   2,006,838   6,247,220   6,195,827 
                 
COST OF REVENUES:                
Products  1,121,039   1,116,987   3,237,221   3,175,629 
Contract services  274,240   258,768   787,443   864,905 
                 
Total Cost of Revenues  1,395,279   1,375,755   4,024,664   4,040,534 
                 
GROSS PROFIT  632,982   631,083   2,222,556   2,155,293 
                 
OPERATING EXPENSES:                
Selling and marketing expenses  20,933   57,942   257,803   177,274 
Salaries, wages and related benefits  253,615   375,794   820,051   1,241,033 
Research and development  82,544   71,921   297,697   236,534 
Professional fees  135,261   118,818   536,284   364,450 
General and administrative expenses  188,760   242,380   653,008   738,909 
                 
Total Operating Expenses  681,113   866,855   2,564,843   2,758,200 
                 
LOSS FROM OPERATIONS  (48,131)  (235,772)  (342,287)  (602,907)
                 
OTHER (EXPENSE) INCOME:                
Interest expense  (20,124)  (26,000)  (54,038)  (82,270)
Loss on disposal of fixed assets  (122,050)  -   (122,050)  - 
Other income, net  65,575   50,870   166,867   228,649 
                 
Total Other (Expense) Income  (76,599)  24,870   (9,221)  146,379 
                 
NET LOSS $(124,730) $(210,902) $(351,508) $(456,528)
                 
NET LOSS PER COMMON SHARE:                
Basic $(0.04) $(0.07) $(0.12) $(0.15)
Diluted $(0.04) $(0.07) $(0.12) $(0.15)
                 
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:                
Basic  3,062,759   3,020,062   3,051,826   3,006,837 
Diluted  3,062,759   3,020,062   3,051,826   3,006,837 

(unaudited)

  June 30  December 31 
  2023  2022 
ASSETS        
         
CURRENT ASSETS:        
Cash $19,813  $259,223 
Accounts receivable, net  353,750   348,565 
Inventory, net  1,049,562   1,120,073 
Prepaid expenses  23,203   132,997 
Current portion of note receivable  45,000   40,000 
Total Current Assets  1,491,328   1,900,858 
Operating lease right-of-use assets  943,100   1,037,749 
Property, plant and equipment, net  472,373   525,809 
Note receivable, non-current  326,175   375,983 
Non-marketable equity investment in subsidiary  291,085   250,146 
Total Assets $3,524,061  $4,090,545 
         
LIABILITIES AND STOCKHOLDERS’ EQUITY        
         
CURRENT LIABILITIES:        
Accounts payable $690,066  $762,524 
Accounts payable - related parties  100,617   87,119 
Accrued expenses and other current liabilities  327,761   276,132 
Current portion of notes payable  25,000   26,629 
Current portion of finance leases  26,248   39,005 
Advances from related parties  42,887   42,887 
Current portion of operating lease liabilities  153,488   142,173 
Total Current Liabilities  1,366,067   1,376,469 
Notes payable and debt discount, net of current portion  394,667   350,000 
Finance leases, net of current portion  12,396   24,194 
Operating lease liabilities, net of current portion  630,646   722,420 
Total Liabilities    2,403,776   2,473,083 
         
Commitments and Contingencies (See Note 11)  -   - 
         
STOCKHOLDERS’ EQUITY:        
Preferred stock, $0.0001 par value, 100,000 shares authorized; no shares issued and outstanding  -   - 
Common stock: $0.0001 par value, 30,000,000 shares authorized; 11,180,953 and 10,722,431 issued and outstanding at June 30, 2023 and December 31, 2022, respectively  1,117   1,072 
Additional paid-in capital  14,569,823   13,763,143 
Accumulated deficit  (13,450,655)  (12,146,753)
Total Stockholders’ Equity  1,120,285   1,617,462 
Total Liabilities and Stockholders’ Equity $3,524,061  $4,090,545 

See accompanying condensed notes to unaudited consolidated financial statements.

 

F-2
 

NANO MAGIC INC.

PEN INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWSCHANGES IN STOCKHOLDERS’ EQUITY

  For the Nine Months Ended 
  September 30, 
  2017  2016 
  (unaudited)  (unaudited) 
CASH FLOWS FROM OPERATING ACTIVITIES        
Net loss $(351,508) $(456,528)
Adjustments to reconcile net loss to net cash provided by operating activities:        
Change in inventory obsolescence reserve  50,390   34,184 
Bad debt expense  -   12,034 
Depreciation and amortization expense  100,325   136,598 
Amortization of deferred lease incentives  5,346   9,623 
Gain on sale of property and equipment, net  (527)  (21,866)
Gain on settlement of accounts payable  -   (33,511)
Gain on settlement of accrued salary  -   (36,973)
Loss on disposal of property and equipment  122,050   - 
Stock-based compensation  140,160   151,856 
Change in operating assets and liabilities:        
Accounts receivable  (96,461)  452,113 
Accounts receivable - related party  (3,752)  (28,352)
Inventory  (148,393)  (212,461)
Prepaid expenses and other assets  (5,481)  76,634 
Accounts payable  545,714   41,557 
Accounts payable - related parties  (32,000)  14,823 
Accrued expenses  (112,462)  70,420 
Deferred revenue  70,180   (21,692)
         
NET CASH PROVIDED BY OPERATING ACTIVITIES  283,581   188,459 
         
CASH FLOWS FROM INVESTING ACTIVITIES        
Proceeds from sales of property and equipment  87,000   21,866 
Purchases of property, plant and equipment  -   (4,000)
         
NET CASH PROVIDED BY INVESTING ACTIVITIES  87,000   17,866 
         
CASH FLOWS FROM FINANCING ACTIVITIES        
Proceeds from bank lines of credit  4,964,067   5,193,000 
Repayment of bank lines of credit  (5,383,241)  (5,522,951)
Repayment of bank loans  (56,138)  (55,785)
Proceeds from sale of common stock  -   50,000 
Payment of issuance costs related to sale of common stock  -   (2,000)
Repayment of loan to third party  (10,470)  (4,394)
         
NET CASH USED IN FINANCING ACTIVITIES  (485,782)  (342,130)
         
NET DECREASE IN CASH  (115,201)  (135,805)
         
CASH, beginning of period  189,128   262,519 
         
CASH, end of period $73,927  $126,714 
         
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION        
Cash paid during the period for interest        
Interest $55,554  $82,270 
Income taxes $-  $- 
         
SUPPLEMENTAL DISCLOSURE OF NON-CASH        
INVESTING AND FINANCING ACTIVITIES:        
Reclassification of accrued salary to notes payable - long-term $17,425  $51,239 
Accrued director fees settled with common stock $19,000  $- 

FOR THE THREE MONTHS ENDED JUNE 30, 2023 AND 2022

(unaudited)

  Shares  Amount  Capital  Deficit  Equity 
  Class A Common Stock  Additional
Paid-in
  Accumulated  Total
Stockholders’
 
  Shares  Amount  Capital  Deficit  Equity 
                
Balance, March 31, 2023  10,850,037  $1,084  $13,954,274  $(12,799,790) $1,155,568 
                     
Common stock issued for cash, net of issuance costs  253,994   25   346,039   -   346,064 
                     
Stock-based compensation  -   -   255,539   -   255,539 
                     
Stock issued for services  76,922   8   4,702   -   4,710 
                     
Warrants and options on private placement  -   -   9,269   -   9,269 
                     
Net loss  -   -   -   (650,865)  (650,865)
                     
Balance, June 30, 2023  11,180,953   1,117   14,569,823   (13,450,655)  1,120,285 
                     
Balance, March 31, 2022  10,077,681  $1,008  $12,702,228  $(11,108,815) $1,594,421 
                     
Common stock issued for cash, net of issuance costs  283,334   28   495,806   -   495,834 
                     
Stock-based compensation  -   -   39,366   -   39,366 
                     
Warrants and options on private placement  -   -   14,165   -   14,165 
                     
Net Income  -   -   -   307,133   307,133 
                     
Balance, June 30, 2022  10,361,015   1,036   13,251,565   (10,801,682)  2,450,919 

See accompanying condensed notes to unauditedcondensed consolidated financial statements.

F-3
 

PENNANO MAGIC INC.

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

FOR THE SIX MONTHS ENDED JUNE 30, 2023 AND SUBSIDIARIES2022

(unaudited)

  Class A Common Stock  Additional
Paid-in
  Accumulated  Stockholders’ 
  Shares  Amount  Capital  Deficit  Equity 
                
Balance, December 31, 2022  10,722,431  $1,072  $13,763,143  $(12,146,753) $1,617,462 
                     
Common stock issued for cash, net of issuance costs  328,800   32   439,539   -   439,571 
                     
Stock-based compensation  -   -   285,683   -   285,683 
                     
Stock issued for services  52,800   5   65,995   -   66,000 
                     
Restricted stock issued for services  76,922   8   4,702   -   4,710 
                     
Warrants and options on private placement  -   -   10,761   -   10,761 
                     
Net loss  -   -   -   (1,303,902)  (1,303,902)
                     
Balance, June 30, 2023  11,180,953   1,117   14,569,823   (13,450,655)  1,120,285 
                     
Balance, December 31, 2021  9,702,680  $970  $11,960,011  $(10,045,164) $1,915,817 
Balance  9,702,680  $970  $11,960,011  $(10,045,164)  1,915,817 
                     
Common stock issued for cash, net of issuance costs  658,335   66   1,152,020   -   1,152,086 
                     
Stock-based compensation  -   -   106,621   -   106,621 
                     
Warrants and options on private placement  -   -   32,913   -   32,913 
                     
Net loss  -   -   -   (756,518)  (756,518)
Net income (loss)  -   -   -   (756,518)  (756,518)
                     
Balance, June 30, 2022  10,361,015   1,036   13,251,565   (10,801,682)  2,450,919 
Balance  10,361,015   1,036   13,251,565   (10,801,682)  2,450,919 

See accompanying notes to condensed consolidated financial statements.

F-4

NANO MAGIC INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

  2023  2022 
  For the Six Months Ended 
  June 30, 
  2023  2022 
       
CASH FLOWS FROM OPERATING ACTIVITIES        
Net loss from continuing operations $(1,303,902) $(1,906,043)
Net income from discontinued operations  -   1,149,525 
Adjustments to reconcile net loss to net cash provided by operating activities:        
Change in inventory obsolescence reserve  (3,680)  2,331 
Depreciation and amortization expense  56,265   56,159 
Bad debt expense  47,997   30,629 
Stock-based compensation and stock issued for services  356,393   106,621 
Income from investment in subsidiary  (40,938)  - 
Change in operating assets and liabilities:        
Accounts receivable  (53,181)  23,121 
Inventory  74,190   52,166 
Prepaid expenses and contract assets  109,794   30,636 
Accounts payable  (47,650)  249,340 
Accounts payable - related party  13,498   (6,065)
Operating lease liabilities  14,190   29,575 
Accrued expenses  51,629   79,607 
Contract liabilities  -   159,688 
Total adjustments  578,507   813,808 
         
Net cash used by continuing operating activities  (725,395)  (1,092,235)
Net cash used by discontinued operating activities  -   (70,945)
         
NET CASH USED BY OPERATING ACTIVITIES  (725,395)  (1,163,180)
         
CASH FLOWS FROM CONTINUING INVESTING ACTIVITIES        
Proceeds from note receivable  20,000   - 
Purchases of property and equipment  (2,829)  (4,910)
         
NET CASH PROVIDED (USED) BY INVESTING ACTIVITIES  17,171   (4,910)
         
CASH FLOWS FROM CONTINUING FINANCING ACTIVITIES        
Proceeds from sale of common stock and warrants  445,000   1,184,999 
Proceeds from issuance of convertible debt and warrants  50,000   200,000 
Repayment of bank loans  (1,630)  (15,454)
Repayment of finance leases  (24,556)  (20,334)
Repayment of advances from related parties  -   (51,065)
Net cash provided by continuing financing activities  468,814   1,298,146 
Net cash provided by discontinued financing activities  -   20,000 
         
NET CASH PROVIDED BY FINANCING ACTIVITIES  468,814   1,318,146 
         
NET (DECREASE) INCREASE IN CASH  (239,410)  150,056 
         
CASH in continuing operations, beginning of period  259,223   197,932 
CASH in discontinued operations, beginning of period  -   44,542 
         
CASH, end of period $19,813  $392,530 
         
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION        
Cash paid during the period for interest $21,943  $15,635 

See accompanying notes to condensed consolidated financial statements.

F-5

NANO MAGIC INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBERJUNE 30, 20172023

(UNAUDITED)(unaudited)

NOTE 1 –ORGANIZATION AND BASIS OF PRESENTATION

Organization

PENNano Magic Inc. (“we”, “us”, “our”, “PEN”“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.

Throughtechnology. On March 2, 2021 we changed our name to Nano Magic Holdings Inc. On December 31, 2022, our wholly-owned subsidiary PEN BrandsNano Magic LLC formerly known as Nanofilm, Ltd.,was merged into the parent company and 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 May 2, 2017, Nanofilm, Ltd. changed itsour name to PEN Brands LLC.Nano Magic Inc.

ThroughEffective May 31, 2022, we sold a 70% interest in our wholly-owned subsidiary, Applied Nanotech, Inc., we primarily perform design and development (“ANI”). The contract research services for ourselves andperformed by ANI for governmental and private customers.customers was previously reported as our Contract research segment. As a result of this sale, the Company has deconsolidated ANI from its financial reporting, and we now report as only one segment. We retain a 30% interest in ANI that is now recorded as an equity investment.

Basis of Presentation

The accompanying unaudited condensed 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 condensed consolidated financial statements of the Company as of SeptemberJune 30, 20172023 and for the three and ninesix months ended SeptemberJune 30, 20172023 and 2016.2022. The results of operations for the three and ninesix months ended SeptemberJune 30, 20172023 are not necessarily indicative of the operating results for the full year ending December 31, 20172023 or any other period. The balance sheet at December 31, 2022 has been derived from the audited financial statement at that date but does not include all the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. 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, 20162022 and for the year then ended, which were filed with the Securities and Exchange Commission on Form 10-K on March 29, 2017.April 11, 2023.

Going Concern

These unaudited 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 unaudited consolidated financial statements, filed with our Form 10-K on March 29, 2017, the Company had alosses from continuing operations and net losscash used by continuing operations of $556,001$1,303,902 and $1,869,247$725,395 for the yearssix months ended December 31, 2016June 30, 2023 and 2015. Additionally, the Company had a net loss from continuing operations of $124,730$1,906,043 and $351,508cash used by continuing operations $1,092,235 for the three and ninesix months ended SeptemberJune 30, 2017. Furthermore, the Company had an accumulated deficit, a stockholders’ deficit and a working capital deficit of $6,251,675, $770,444 and $1,033,150, respectively, at September 30, 2017.2022. These factors raise substantial doubt about the Company’s ability to continue as a going concern within one year after the date that thethese unaudited consolidated 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 2016 and continuing in the first three quarters of 2017, management has taken measures to reduce operating expenses. Although the Company has historically raised capital from sales of equity and from the issuance of promissory notes, there is no assurance that it will be able to continue to do so. If the Company is unable to raise additional capital or secure additional lending in the near future, management expectsThe accompanying financial statements have been prepared assuming that the Company will need to curtail its operations. These unaudited consolidated financial statementscontinue as a going concern, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. They do not include any adjustments related to the recoverability andand/or classification of assets the recorded asset amounts and/or the amounts and classification of the liabilities that might be necessary should the Company be unable to continue as a going concern.

Reclassifications

Certain accounts and financial statement captions in the prior periods have been reclassified to conform to the current period. These reclassifications had no effect on the previously reported net loss.

NOTE 2 –SUMMARY OF SIGNIFICANT ACCOUNTING POLICIESDISCONTINUED OPERATIONS

Principles of Consolidation

The Company’s consolidated financial statements include the financial statementsEffective May 31, 2022, we sold a 70% interest in our subsidiary ANI to two of its wholly-owned subsidiaries, Applied Nanotech, Inc., PEN Brands LLCofficers and PEN Technology LLC. On December 15, 2016, PEN Technology LLC was merged into 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 nine months ended September 30, 2017 and 2016 include estimates for allowance for doubtful accounts on accounts receivable, the estimates for obsolete inventory, the estimates for cooperative advertising liability, 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 three instruments at fair value using level 3 valuation.

   At September 30, 2017  At December 31, 2016 
Description  Level 1   Level 2   Level 3   Level 1  Level 2  Level 3 
Stock Appreciation Rights Plan A  -   -  $54,538   -   -  $53,108 
Equity Credits Issued  -   -  $2,278   -   -  $2,278 

A rollforward of the level 3 valuation of these three financial instruments is as follows:

  Stock Appreciation Rights Plan A  Equity Credits Issued 
Balance at December 31, 2016 $53,108  $2,278 
Change in fair value included in net loss  1,430   - 
Balance at September 30, 2017 $54,538  $2,278 

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. The cash balance included $10,003 which is restricted in its use as it serves as collateral for a credit card.

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 September 30, 2017 and December 31, 2016, inventory consisted of the following:

  September 30, 2017  December 31, 2016 
Raw materials $660,800  $927,833 
Work in process  136   - 
Finished goods  753,983   338,643 
   1,414,919   1,266,528 
Less: reserve for obsolescence  (281,417)  (231,027)
Inventory, net $1,133,502  $1,035,499 

Effective January 1, 2017, the Company adopted FASB Accounting Standards Update (“ASU”) No. 2015-11, “Simplifying the Measurement of Inventory,” (“ASU 2015-11”) which requires an entity to measure most inventory at the lower of cost and net realizable value, thereby simplifying the current guidance under which an entity must measure inventory at the lower of cost or market. The adoption of this standard did not have a material impact on the Company’s unaudited consolidated financial statements.

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 three and nine months ended September 30, 2017 and 2016.

Revenue Recognition

Pursuant to the guidance of ASC Topic 605, 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 under government contracts is recognized when it is earned pursuant to the terms of the contract. These projects are usually billed monthly based on costs, hours, or some other measure of activity during the month and revenue is recognized as services are provided. If there is substantive acceptance terms then revenue will not be recognized until acceptance occurs. The recognition of revenue may not correspond with the billings allowable under the contract. To the extent that billings exceed revenue earned, a portion of the revenue is deferred until it is earned.
Revenue from contract services performed under non-governmental contracts is recognized when it is earned pursuant to the terms of the contract. Each contract is unique and tailored to the needs of the customer and goals of the project. Some contracts may call for a monthly payment for a fixed period of time. Other contracts may be for a fixed dollar amount with an unspecified time period, although there is frequently a targeted completion date. These contracts generally involve some sort of up-front payment. Some contracts may call for the delivery of samples, or may call for the transfer of equipment or other items developed during the project to the customer. These projects are usually billed monthly based on costs, hours, or some other measure of activity during the month and revenue is recognized as services are provided. If there are substantive acceptance terms then revenue will not be recognized until acceptance occurs.

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 months ended September 30, 2017 and 2016 the Company recorded $29,526 and $40,471, respectively and $103,031 and $106,262 for the nine months ended September 2017 and 2016 respectively, as a reduction of sales related to these costs.

The Company has recently become aware of industry trends related to cooperative advertising, such that, during the quarter ended September 30, 2017, management now believes it has sufficient data and experience to effect a change in accounting estimate. As a result, the Company recorded a one-time adjustment to reduce its cooperative advertising liability by approximately $346,000 to $100,000 as of September 30, 2017 with a corresponding $346,000 increase to product revenue for the three and nine months ended September 30, 2017.

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 September 30, 2017 and 2016 shipping and handle costs amounted to $39,102 and $46,255, respectively, and were $136,260 and $140,059 for the nine months ended September 30, 2017 and 2016, 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 September 30, 2017 and 2016 were $82,544 and $71,921, respectively, and were $297,697 and $236,534 for the nine months ended September 30, 2017 and 2016, 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 September 30, 2017 and 2016 were $0 and $5,193, respectively, and were $14,626 and $23,624 for the nine months ended September 30, 2017 and 2016, respectively, and are included in selling 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 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 September 30, 2017 and December 31, 2016, 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 September 30, 2017 or December 31, 2016.

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 receivedemployees in exchange for an awarda promissory note in the face amount 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)$450,000. The ASC also requires measurementnote bears interest at 7% and has semi-annual payments of the cost of employee and director services receivedprincipal initially 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”$20,000, requires dual presentation of basicincreasing to $25,000 in May 2024 and diluted earnings per share (“EPS”)to $30,000 in May 2026, with a reconciliationfinal balloon payment 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 September 30, 2017, and$80,000 due on December 31, 2016, 37,778 contingently issuable common shares that are issuable based on certain market conditions (see Note 8) are not included in2029. The note is secured by a stock pledge, described below. In conjunction with the potential dilutive shares in calculating the diluted EPS. Additionally, potentially dilutive common shares consistsale, we recognized a one-time gain of common stock options and warrants (using the treasury stock method)$1,148,225.


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:

  September 30, 2017  December 31, 2016 
Stock options  20,370   20,483 
Stock warrants  712   712 
Restricted Stock  37,778   37,778 
Total  58,860   58,973 

Additionally, there are an unknown quantity of common stock equivalents that result from a potential conversion of equity credits and stock appreciation rights (See Notes 8 and 9).

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

Net (loss) income per common shares outstanding: Three Months Ended
September 30, 2017
  Three Months Ended
September 30, 2016
  Nine Months Ended
September 30, 2017
  Nine Months Ended
September 30, 2016
 
Class A common stock $(0.11) $(0.07) $(0.13) $(0.15)
Class B common stock $(0.11) $(0.07) $(0.12) $(0.15)
Class Z common stock $-  $(0.07) $-  $(0.15)
                 
Weighted average shares outstanding:                
Class A common stock  1,645,033   1,358,234   1,502,367   1,346,656 
Class B common stock  1,417,726   1,399,197   1,411,890   1,399,550 
Class Z common stock  -   262,631   137,569   262,631 
Total weighted average shares outstanding  3,062,759   3,020,062   3,051,826   3,006,837 

F-10F-6
 

Segment Reporting

In connection with the sale, the capital structure of Applied Nanotech was changed to give us, as the holder of Class B common stock of Applied Nanotech, a 30% economic interest, certain information rights, special consent rights, and tag-along rights, as well as the obligation to sell our stock under certain circumstances if other stockholders are selling. The Company uses “the management approach” in determining reportable operating segments. The management approach considers the internal organization and reporting usedClass A stock acquired by the Company’s chief operating decision maker for making operating decisions and assessing performance asbuyers was pledged to secure the source for determining the Company’s reportable segments. The Company’s chief operating decision maker is the Chairman and chief executive officer (“CEO”)promissory note given in payment of the Company, who reviews operating results to make decisions about allocating resourcespurchase price.

The following includes the detail of major classes of assets and assessing performance for the entire Company. The Company classified the reportable operating segments into (i) the development, manufacture and saleliabilities 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

In March 2016, the FASB issued ASU No. 2016-09 (“ASU 2016-09”) to amend the accounting guidance for share-based payment accounting. The areas for simplification in ASU 2016-09 involve several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classificationdiscontinued operations summarized on the statement of cash flows. ASU 2016-09 is effective for annual periods beginning after December 15, 2016. The adoption of this standard did not have a material impact on the Company’saccompanying unaudited consolidated financial statements.statements:

In May 2017,The following is the FASB issued ASU No. 2017-09, “Compensation—Stock Compensation (Topic 718): Scopedetail of Modification Accounting” (“ASU 2017-09”). ASU 2017-09 provides clarity onmajor line items that constitute income (loss) from discontinued operations:

SCHEDULE OF INCOME (LOSS) FROM DISCONTINUED OPERATIONS

  2023  2022  2023  2022 
  For the Three Months Ended  For the Six Months Ended 
  June 30,  June 30, 
  2023  2022  2023  2022 
             
Net Revenues $-  $91,329  $-  $258,444 
Cost of Sales  -   76,947   -   211,029 
Gross Profit  -   14,382   -   47,415 
                 
Salaries, wages and related benefits  -   17,684   -   23,573 
General and administrative expenses  -   9,514   -   21,961 
Professional fees  -   -   -   - 
Interest and other expense  -   229   -   581 
Net income (loss) on discontinued operations $-  $(13,045) $-  $1,300 

NOTE 3 – INVENTORY

At June 30, 2023 and December 31, 2022, inventory consisted of the accounting for modifications of stock-based awards. ASU 2017-09 requires adoption on a prospective basis in the annual and interim periods beginning after December 15, 2017 for share-based payment awards modified on or after the adoption date. following:

SCHEDULE OF INVENTORY

  June 30, 2023  December 31, 2022 
Raw materials $665,155  $695,774 
Work-in-progress  241,110   256,095 
Finished goods  324,495   353,082 
Inventory, gross  1,230,760   1,304,951 
Less: reserve for obsolescence  (181,198)  (184,878)
Inventory, net $1,049,562  $1,120,073 

NOTE 4 – INVESTMENT IN SUBSIDIARY

The Company is currently evaluatingaccounting for its 30% ownership interest in ANI by the effect that adopting this newequity method of accounting guidance will have on its unaudited consolidated financial statements and related disclosures.

In July 2017,under which 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, suchCompany’s share of the net income (loss) of ANI is recognized as warrants and convertible instruments may contain down round features that resultincome (loss) in the strike price being reduced onCompany’s statement of operations. Any dividends received from ANI as well as periodic losses for the basis of the pricing of future equity offerings. Under ASU 2017-11, a down round featureCompany’s 30% share 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 andtreated as a reduction of the investment account. At June 30, 2023, the investment was $291,085, included in non-current assets. For the three- and six-month periods ended June 30, 2023, the Company recorded 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 evaluatingfrom the effect that adopting this new accounting guidance will have on its unaudited 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 prior period amountsinvestment in the unaudited consolidated financial statements have been reclassifiedsubsidiary of $8,782 and $40,938 respectively. For the three and six-month periods ended June 30, 2022, the Company recorded a net loss from the investment in subsidiary of $3,161.

NOTE 5 – NOTES PAYABLE AND FINANCE LEASES

Notes Payable

On January 7, 2022, the Company sold to one investor a $100,000 convertible note due March 31, 2025. On January 26, 2022, and January 31, 2022, the Company sold two $50,000 convertible notes to two different investors. The two $50,000 notes are due March 31, 2026. All three notes were issued at face value, and bear interest at 8% per annum, payable semi-annually in cash. The notes are convertible at any time at the option of the holder into shares of common stock at a conversion price of $1.75 per share.

On July 27, 2022, the Company sold two convertible notes, one for comparative purposes to conform to$50,000 and one for $25,000, both due on March 31, 2025. On August 22, 2022, the fiscal 2017 presentation. These reclassifications have no impact onCompany sold a $25,000 convertible promissory note due March 31, 2026. All three notes were issued at face value, and bear interest at 8% per annum, payable semi-annually in cash. The notes are convertible at any time at the previously reported net loss.option of the holder into shares of common stock at a conversion price of $1.75 per share.

F-11F-7
 

NOTE 3 –BANK LOANS AND LINES OF REVOLVING CREDIT FACILITYOn October 26, 2022, the Company sold to an investor a $25,000 convertible promissory note due October 31, 2023. Issued at face value, the note bears interest at 8% per annum, payable semi-annually in cash. The note is convertible at any time at the option of the holder into shares of common stock at a conversion price of $1.75 per share.

In April 2014, our subsidiary, PEN Brands LLCOn December 18, 2022, the Company issued a convertible promissory note for $50,000 that is secured by certain payroll tax credits the Company is entitled to receive under the Employee Retention Tax Credit program. The note was issued at face value and bears interest at 8% per annum, payable at maturity which is eighteen months from date of issue. The note can be converted to common stock at any time at the option of the holders at a conversion price of $1.75 per share at which point accrued interest will be paid in cash.

On June 14, 2023, the Company issued a convertible, secured note and warrants to purchase 10,000 shares of the Company’s common stock for $50,000 with the same terms as the one issued on December 18, 2022. The warrants were recorded as a debt discount on the date of issuances for a total value of $5,333.

At June 30, 2023 and at December 31, 2022, we had outstanding convertible notes aggregating $419,667 and $375,000 in principal amount, net of unamortized debt discount of $5,333 and $0, respectively. The convertible promissory notes have not been included in diluted earnings per share as they would be anti-dilutive.

On February 10, 2015, Nano Magic entered into a $1,500,000 revolving credit line agreement$373,000 promissory note (the “Revolving“Equipment Note”) with Mackinac Commercial Credit, LLCKeyBank, N.A. (the “Lender”“Bank”) with draws limited to a borrowing base as defined in the Revolving Note.. The unpaid principal balance of this RevolvingEquipment Note iswas payable on demand, isin 60 equal monthly instalments payments of principal and interest through June 10, 2020. The Equipment Note was secured by all of PEN Brands LLC’s assets,certain equipment, as defined in the Equipment Note, and bearsbore 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 Lenderof 4.35% per annum based on a late chargeyear 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.360 days. On May 1, 2015, PEN Brands LLC and the LenderJune 18, 2019, Nano Magic entered into an amendmentAmendment to the Loan and Security Agreement extendingEquipment Note with 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.,Bank. By the parent company, guaranteed PEN Brands LLC’s obligations to the Lender. On April 4, 2016,amendment, the maturity date underof the Loan & Security Agreement between PEN Brands LLC and the Lendernote 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.

Onuntil 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 reduced10, 2022, the interest rate was raised to 3.0% above6.29% per year, and the Prime Rate, as reportedmonthly payments were reduced to $4,053 per month, including interest. On May 2, 2022, we amended the Equipment Note with Key Bank to extend the due date on the note until December 10, 2022. The interest rate remained the same at 6.29% per year and the monthly payments remained at $4,053 per month. At June 30, 2023, the principal amount due under the Equipment Note had been paid in the Wall Street Journal.

full. At September 30, 2017 and December 31, 2016, the Company had $689,232 and $979,688, respectively, which includes accrued interest of $10,324 and $17,494, respectively, in amounts2022, $1,629 was outstanding under the Revolving NoteEquipment Note.

Finance Leases

On August 11, 2020, the company entered into a finance lease for furniture. We financed $60,684 over a period of 36 months with availabilitymonthly payments of up to $810,768 as$1,972 during that time. As of SeptemberJune 30, 2017, depending2023, the balance on the borrowing base atlease was $1,955 all of which is current.

On September 24, 2020, the timecompany entered into a finance lease with Raymond Leasing Corporation for a forklift. Nano Magic LLC financed $14,250. The lease term is 36 months with monthly payments of $425. As of June 30, 2023, the request for the advance. The weighted average interest rate during the nine months ended September 30, 2017 and 2016 was approximately 6.8% and 8.1%, respectively.

See Note 12 – Subsequent Events for additional detailsbalance on the Revolving Note.lease was $1,266, all of which is current.

NOTE 4 –NOTES PAYABLE

In January 2017, we issuedDecember 2020, the company entered into a promissory note infinance lease for production equipment. We financed $85,000 over a period of 48 months with monthly payments of $2,135 during that time. As of June 30, 2023, the principal amount of $17,425 to a departing employee representingbalance on the amount of his accruedlease was $35,422; the current and unpaid salary. The note does not bear interestnon-current portions were $23,026 and is due in January 2027.$12,396, respectively.

NOTE 56RELATED PARTY TRANSACTIONS

Sales to Related Party

During the threeAt June 30, 2023 and nine months ended September 30, 2017 and 2016, the Company engaged in certain sales transactions with a company which is a shareholder and related to a director of the Company. Sales to the related party totaled $26,093 and $52,328 for the three months ended September 30, 2017 and 2016, respectively. and totaled $138,004 and $148,624 for the nine months ended September 30, 2017 and 2016. Accounts receivable from the related party totaled $14,227 at September 30, 2017 and $10,474 at December 31, 2016. As2022, accounts payable – related parties totaled $100,617 and $87,119, respectively, and is presented separately in current liabilities. These balances consist of May 23, 2017, that director no longer served onamounts owed to directors and officers as well as to the Company’s Board and the shareholder was no longer an affiliate.

Other

A board member is a principal in DHJH Holdings LLC, the firm that provided the serviceslandlord controlled by two of the Company’s chief financial officerdirectors.

Other compensation paid to directors was:

SCHEDULE OF RELATED PARTY TRANSACTIONS

  2023  2022  2023  2022 
  Three Months ended June 30,  Six Months ended June 30, 
  2023  2022  2023  2022 
Ronald J. Berman $-  $30,000+ $-  $84,150+
Tom J. Berman $

60,000

* $60,300* $

120,000

* $115,600*
Scott E. Rickert $-  $15,000++ $-  $30,000++
Other compensation $-  $15,000++ $-  $30,000++

+Legal and consulting fees.
*Indicates gross amount accrued as salary. In an effort to save cash, the company is satisfying the accrued salary through a combination of cash and stock in each period.
++Repayment of advances previously made to the Company

F-8

At June 30, 2023 and at December 31, 2022, aggregate advances from Scott & Jeanne Rickert were $42,887. On both those dates, accrued payroll for the Rickerts was an aggregate of $16,000, which is included within accounts payable – related parties on the accompanying balance sheets.

We granted options to our President and CEO Tom Berman in lieu of salary: In April, an option to purchase up to 30,000 shares, fully vested for salary not paid from January to March, and, in May, 2016a second option for up to 69,228 shares that vest at the rate of 7,692 shares monthly for salary not paid in April and subsequent months of 2023. Also in May, we granted our Chief Financial Officer an option for up to 100,000 shares in recognition of his services from 2019 through February 2017. 2022. Both our CFO and our General Counsel were granted options in May for up to 60,000 shares, vesting 5,000 shares per month starting in January 2023 and each month thereafter. In May, 2023, we also granted director Ronald Berman an option to purchase up to 50,000 shares for services previously rendered and granted him an option for 45,000 shares that vest at the rate of 5,000 shares per month beginning in April and for each calendar month of 2023. All options have an exercise price of $0.65 per share and a four-year term.

One of the purchasers of the 70% interest in Applied Nanotech in May, 2022, was Richard Fink who was one of our named executive officers until that sale.

Mr. Ron Berman and Mr. Tom Berman are the managers of the limited liability company that is the manager of PEN Comeback, LLC, PEN Comeback 2, LLC, Magic Growth, LLP, Magic Growth 2 LLC and Magic Growth 3 LLC. These five limited liability companies purchased shares of common stock and derivative securities from us in 2018, 2019, 2020, 2021 and 2022. See the subsection on Sales of Stock under Issuances of Common Stock in Note 7.

In addition, Mr. Tom Berman and Mr. Ron Berman are two of three individuals who share voting power of the sole manager of the limited liability company that is our landlord in Michigan. Together, Tom and Ron Berman hold, in the aggregate, a 5% economic interest in the landlord entity. Another director, Miles Gatland, owns a 12.5% interest in the Michigan landlord and he is a co-guarantor on the debt of that limited liability company. The Company recognized no fees and expenseslease for the Michigan facility gives us the right, during the first three months ended September 30, 2017 and 2016 and $0 and $13,195 in fees and expenses during the nine months ended September 30, 2017 and 2016, respectively.

As of September 30, 2017, the Company included the following within accounts payable-related parties: $1,000 of director fees and $19,887 due to certainyears of the Company’s executives.lease, to buy up to a 49% interest in the landlord for a price equal to 49% of the contributions received from other members. See Note 7, Stockholder’s Equity regarding the issuance of stock in partial satisfaction of unpaid rent. At June 30, 2023 and at December 31, 2022, rents accrued and unpaid totaled $57,111 and $57,119, respectively.

NOTE 6 -7 – 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 toeach have one vote per share in the election of directors and other matters submitted to a vote of the stockholders.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

Common Stock Issued for Services

OnIn February 24, 2017,2023, we reached an agreement with the Company issued an aggregatelandlord of 3,846our Michigan facility to accept 52,800 shares of Class Aour common stock and 2,564 sharesat a price of Class B common stock to the Company’s directors as payment for their service on the Company’s board. These shares were valued on the date of grant at $1.56$1.25 per share based onas partial payment of rent for the quoted price of the stock for a total value of $10,000 recognized as stock-based compensation expense.

On April 28, 2017, the Company issued an aggregate of 10,000six-month period from October 2022 through March 2023. Those shares of Class A common stock and 12,308 shares of Class B common stock to the Company’s directors as payment for their service on the Company’s board. The shares issued included 4,617 Class A and 3,078 Class B shares as compensation for attendance at the meeting on that date and the rest were issued in payment of $19,000 in accrued director fees from a prior year. These shares are valued were valued on the date of grant of April 28, 2017 at $1.30 per share based on the quoted price of the stock for a total value of $29,000 with $10,000 recognized as stock-based compensation expense.March, 2023.

On July 28, 2017, the Company issued an aggregate of 4,800 shares of Class A common stock and 3,200 shares of Class B common stock to the Company’s directors as payment for their service on the Company’s board. These shares were valued on the date of grant at $1.25 per share based on the quoted closing price of the stock for a total value of $10,000 recognized as stock-based compensation expense.

Stock Options

Stock options outstanding are to purchase Class A common stock. Stock option activities for the nine months ended September 30, 2017 are summarized as follows:

  Number of Options  Weighted Average Exercise Price  Weighted Average Remaining Contractual Term (Years)  Aggregate Intrinsic Value 
Outstanding December 31, 2016  20,483  $41.77                       
Exercised  -   -         
Expired  (113)  230.40         
Outstanding September 30, 2017  20,370  $40.72   3.26  $- 
                 
Exercisable September 30, 2017  10,370  $77.28   2.72  $- 

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 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 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. The Company 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 the Company is registering its 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 will be 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 months ended September 30, 2017 and 2016, in connection with the amortization of the fair value of this stock grant, the Company recorded stock-based compensation of $27,540 and $41,310 respectively, and $110,160 and $123,930, for the nine months ended September 30, 2017 and 2016, respectively. At September 30, 2017, there is no unamortized stock-based compensation expense to be recognized in future periods.

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.

F-15F-9
 

NOTE 7 –CONCENTRATIONS

ConcentrationsIn May 2023, we reached a further agreement with the landlord that calls for us to pay cash each month to cover the cost of Credit Risk

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

Lender Concentration

The Company relies primarily on one lender under a $1,500,000 Revolving Note.

Customer Concentrations

Customer concentrationsthe lease for the nine months ended September 30, 2017 and 2016 are as follows:

  Revenues 
  For the Nine Months Ended
September 30,
 
  2017  2016 
Customer A  32%  32%
Customer B  12%  14%
Total  44%  46%

  Accounts Receivable 
  As of
September 30,
  As of
December 31,
 
  2017  2016 
Customer A  43%  14%
Customer B  14%  16%
Customer C  *%  15%
Total  57%  45%

*Less than 10%

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

Forlighting fixtures, but that will allow us to pay the nine months ended September 30, 2017 and 2016, total sales in the United States represent approximately 88% and 91% of total consolidated revenues, respectively. No other geographical area accounting for more than 10% of total sales during the nine months ended September 30, 2017 and 2016.

Vendor Concentrations

Vendor concentrations for inventory purchases for the nine months ended September 30, 2017 and 2016 are:

  For the Nine Months Ended
September 30,
 
  2017  2016 
Vendor A  26%  31%
Vendor B  *%  11%
Vendor C  12%  *%
Total  38%  42%

*Less than 10%

NOTE 8 –EQUITY CREDITS

In 1997, PEN Brands 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 PEN Brands LLC’s revenue over a base year of 1996. Eligible credits can be redeemed after two years at the equity credit value for that year. Under certain circumstances, the equity credits are convertible into PEN Brands LLC equity on a one-for-one basis. During the three months ended September 30, 2017, no equity credits were forfeited and no units were redeemed. As of September 30, 2017 and December 31, 2016, 8,250 equity credits were issued and outstanding with an aggregate redemption value of $2,278. At September 30, 2017 and December 31, 2016, $2,278 was accrued, and included in accrued expenses, representing the redemption value associated with the equity credits outstanding.

Under the termsbalance of the Plan, when the Company completes a registered offeringrent by issuing shares of its commonour stock the equity credit participants willvalued at $0.75 per share. We have the option to convertcontinue to use stock to pay a portion of the equity credits into Class A commonrent through 2024.

On May 30, 2023, the Company issued 76,922 shares of restricted common stock to a consultant as compensation for services. The shares are subject to forfeiture until vested. So long as the consulting services agreement remains in effect 4,273 shares vested in May for prior service, and another 4,273 shares vest at the end of May and each calendar month thereafter, with 4,277 shares vesting in December 2023. During 2024, 3,205 shares will vest at the end of each month, with 3,206 shares vesting at the end of December 2024.

Sales of Common Stock and Derivative Equity Securities

During the quarter ended June 30, 2023, the Company or in the case of our President, into sold 253,994 shares of Class B common stock.

NOTE 9 –STOCK APPRECIATION PLAN

Fromstock for proceeds of $346,064 and warrants to purchase up to 196,813 shares of common stock for proceeds of $4,136. The warrants are exercisable at any time during the four years after date of issue at a warrant exercise price of $1.75. During the six-months ended June 1, 1988, until December 31, 1997, when30, 2023 the plan was terminated, PEN Brands LLC hadCompany sold 328,800 shares of common stock for proceeds of $439,571 and warrants to purchase up to 271,439 shares of common stock for proceeds of $5,428. The warrants are exercisable at any time during the four years after date of issue at a warrant exercise price of $1.75. Also during the three-months ended June 30, 2023, the Company sold 10,000 warrants in place a Stock Appreciation Rights Plan A (the “Plan”), intended to provide employees, directors, membersconnection with the issuance of a technical advisory board and certain independent contractors selected by the Boardconvertible note payable of $50,000 as disclosed in Note 5. In accordance with equity-like participation in the growthASC 470, 11% 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 September 30, 2017 and December 31, 2016. 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 $54,538 and $53,108, at September 30, 2017 and December 31, 2016, respectively. 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.total convertible note payable was allocated to the warrants.

During the quarter ended June 30, 2022, the Company sold 283,334 shares of common stock for proceeds of $495,834 and warrants to purchase up to 283,310 shares of common stock for proceeds of $14,165. The warrants are exercisable at any time during the four years after date of issue at a warrant exercise price of $2.25. During the six-months ended June 30, 2022, the Company sold 658,335 shares of common stock for proceeds of $1,152,086 and warrants to purchase up to 658,275 shares of common stock for proceeds of $32,913. The warrants are exercisable at any time during the four years after date of issue at a warrant exercise price of $2.25.

Stock Options

Stock options to purchase common stock outstanding at June 30, 2023 include those described below. No options were exercised during the period. No options have been included in diluted earnings per share as they would be anti-dilutive.

SCHEDULE OF STOCK OPTION PLAN ACTIVITY

  Number of
Options
  Weighted
Average
Exercise
Price
  Weighted
Average
Remaining
Contractual
Term
(Years)
  

Aggregate

Intrinsic

Value

 
Outstanding December 31, 2022  2,760,991  $0.77   4.09  $777,723 
Exercised  -   -   -   - 
Issued  636,909   0.65   3.90   222,918 
Expired & forfeited  (21,580)  0.88   -   (5,382)
Outstanding June 30, 2023  3,376,320  $0.71   3.65  $995,259 
                 
Exercisable June 30, 2023  1,686,793  $0.67   2.92  $552,087 

SCHEDULE OF ANTIDILUTIVE SECURITIES EXCLUDED FROM COMPUTATION OF EARNINGS SHARE

  June 30, 2023  December 31, 2022 
Stock options  3,376,320   2,760,991 
Stock warrants  7,722,078   7,440,639 
Total  11,098,398   10,201,630 

F-17F-10
 

NOTE 10 –SEGMENT REPORTINGWarrants

The Company’s principal operating segments coincide withAs of June 30, 2023, there were outstanding and exercisable warrants to purchase 7,722,078 shares of common stock. On May 26, 2022, the typesBoard acted to extend the term of products to be sold. The products from which revenues are derived are consistent withwarrants that were issued in 2018, 2019, or the reporting structurefirst quarter of the Company’s internal organization. The Company’s2020, adding an additional two reportable segments for the three and nine months ended September 30, 2017 and 2016 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 September 30, 2017 and the distinctive nature of each segment. Future changes to this internal financial structure may result in changesyears 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 performanceterm 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.4,052,003 warrants issued in that period. The Company manages certain operating expenses separately atoutstanding warrants have a weighted average exercise price of $1.72 per share and a weighted average remaining contractual term of 23.9 months. As of June 30, 2023, there was no intrinsic value for the corporate level and does not allocate such expenseswarrants. No warrants have been included in diluted earnings per share as they would be anti-dilutive.

2021 Equity Incentive Plan

On March 2, 2021, our Board adopted the 2021 Nano Magic 2021 Equity Incentive Plan (the “Plan”) to allow equity compensation for those who provide services to the segments. Segment income from operations excludesCompany and to encourage ownership in the Company by personnel whose service to the Company is important to its continued progress, to encourage recipients to act as owners and thereby in the stockholders’ interest income/expense and other income or expensesto enable recipients to share in the Company’s success. Initially, 85,000 shares were available for issuance under the Plan and income taxes accordingthat number of options were also granted to howemployees on March 2, 2021. On April 8, 2021 the number of shares under the Plan was increased by 2,500, and an additional 2,500 options were granted. On June 21, 2021 an additional 200,000 shares were made available for issuance under the Plan and options for 100,000 shares were granted, but subsequently forfeited. In February 2022, we granted 130,700 options with an exercise price of $0.80 and weighted average fair value on the grant date of $0.60.

On April 12, 2023, the Company granted 47,610 options under the 2021 Equity Plan. On May 30, 2023 the Board granted an additional 175,071 options under the 2021 Equity Plan to employees and a particular reportable segment’s managementconsultant. All options are at an exercise price of $0.65.

Other Options

On April 12, 2023, the Company issued an additional 30,000 options to Tom J. Berman, our President. On May 30, 2023, the Board granted 384,228 options to officers and to a consultant who is measured. Management does not consider impairment charges, and unallocated costs in measuring the performance of the reportable segments.also a director.

Segment information available with respect to these reportable business segments for the three and nine months ended September 30, 2017 and 2016 was as follows:

  Three Months Ended
September 30,
  Nine Months Ended
September 30,
 
  2017  2016  2017  2016 
Revenues:            
Product segment $1,772,960  $1,781,755  $5,523,785  $5,391,305 
Contract services segment  255,301   225,083   723,435   804,522 
Total segment and consolidated revenues $2,028,261  $2,006,838  $6,247,220  $6,195,827 
                 
Gross profit:                
Product segment $651,921  $664,768  $2,286,564  $2,215,676 
Contract services segment  (18,939)  (33,685)  (64,008)  (60,383)
Total segment and consolidated gross profit $632,982  $631,083  $2,222,556  $2,155,293 
                 
Income (loss) from operations:                
Product segment $224,228  $108,634  $535,846  $409,115 
Contract services segment  (73,449)  (91,391)  (219,084)  (248,765)
Total segment income  150,779   17,243   316,762   160,350 
Unallocated costs  (198,910)  (253,015)  (659,049)  (763,257)
Total consolidated loss from operations $(48,131) $(235,772) $(342,287) $(602,907)
                 
Depreciation and amortization:                
Product segment $28,769  $34,516  $89,795  $103,546 
Contract services segment  2,679   7,826   10,530   33,052 
Total segment depreciation and amortization  31,448   42,342   100,325   136,598 
Unallocated depreciation  -   -   -   - 
Total consolidated depreciation and amortization $31,448  $42,342  $100,325  $136,598 
                 
Capital additions:                
Product segment $-  $-  $-  $4,000 
Contract services segment  -   -   -   - 
Total segment capital additions  -   -   -   4,000 
Unallocated capital additions  -   -   -   - 
Total consolidated capital additions $-  $-  $-  $4,000 

  September 30, 2017  December 31, 2016 
Segment total assets:        
Product segment $2,330,603  $2,577,034 
Contract services segment  169,937   146,193 
Corporate  72,838   70,504 
Total consolidated total assets $2,573,378  $2,793,731 

NOTE 11 -8 – COMMITMENTS AND CONTINCENGIESCONTINGENCIES

Equity CreditsLitigation

Equity credits may become convertible into an unknown amount of capital stock of the Company to be determined by the Company’s board of directors (See Note 8).

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 9).

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 areAs of June 30, 2023 we were 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.

On September 20, 2017, As of June 30, 2023, the Company entered intohas not accrued any amount for litigation contingencies.

NOTE 9 – SUBSEQUENT EVENTS

On June 16, 2023, the Company issued a three-year lease agreementnote at face value of $50,000 and sold that investor, for 22,172 square feeta price of office space in Brooklyn Heights, Ohio beginning September 20, 2017 and ending September 20, 2020. Monthly lease payments$0.02 per warrant, warrants to purchase up to 10,000 shares of common stock at an exercise price of $1.75. In July 24, 2023, the Company sold a convertible note at its face amount of $50,000. On that same day, the Company sold 133,333 shares of common stock for proceeds of $100,000.

On July 19, 2023, the Board authorized the creation of an Advisory Committee. In August the Company agreed to $8,688 forissue to each of three individuals who will serve on that committee a total of approximately $312,76838,460 shares of restricted stock for the total term of the lease.their services during 2023.

NOTE 12 -SUBSEQUENT EVENTS

Sale of Fixed Assets

Subsequent to September 30, 2017, the Company entered into an asset purchase agreement (the “Asset Purchase Agreement”) in which certain machinery and equipment of the Company has been sold to a third party for aggregate gross proceeds of $85,000.

Amended Loan Agreement

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.

F-20F-11
 

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 condensed consolidated financial statements.

OVERVIEW

PEN develops, commercializesNano Magic is a leader in developing and marketsbringing to market cutting-edge nanotechnology-powered industrial and consumer cleaning, protection and industrial products enabled byanti-fog solutions formulated in Detroit, Michigan. Nano Magic focuses on innovative and advanced product solutions harnessing the magic power of nanotechnology that solve everyday problemsto create a safer, more socially conscious, and higher performing world. Visit www.nanomagic.com for customersmore information.

Effective May 31, 2022, we sold a majority interest 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 developmentour subsidiary, Applied Nanotech, Inc. (“ANI”). ANI performs contract research services for usthe Company and for governmentgovernmental and private customers and develops and sells printable inks and pastes, thermal management materials, and graphene foils and windows.that work was previously reported as our Contract research segment. We retain a 30% interest in ANI that is now recorded as an equity investment.

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 nine months ended September 30, 2017 were (i) the Product Segment and (ii) the Contract services Segment. For the three and nine months ended September 30, 2016, the Company operated the same two segments.

RESULTS OF OPERATIONS

The following comparative analysis on results of operations was based primarily on the comparative condensed consolidated financial statements, footnotes and related information for the periods identified below and should be read in conjunction with the unaudited condensed 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 ninesix months ended SeptemberJune 30, 20172023 and 2016.2022.

Comparison of Results of Continuing Operations for the Three and NineSix Months ended SeptemberJune 30, 20172023 and 20162022

Revenues:

For the three and ninesix months ended SeptemberJune 30, 20172023 and 2016,2022, revenues consisted of the following:from continuing operations were:

  Three Months Ended
September 30,
  Nine Months Ended
September 30,
 
  2017  2016  2017  2016 
Sales:                
Product segment $1,772,960  $1,781,755  $5,523,785  $5,391,305 
Contract services segment $255,301   225,083   723,435   804,522 
Total segment and consolidated sales $2,028,261  $2,006,838  $6,247,220  $6,195,827 
  Three Months Ended June 30,  Six Months Ended June 30, 
  2023  2022  2023  2022 
Total revenue $709,293  $493,782  $1,406,322  $1,012,925 

For the three months ended SeptemberJune 30, 2017, sales2023, revenues from the Product segment were essentially flat, decreasingcontinuing operations increased by $8,795$215,511 or 44% as compared to the three months ended SeptemberJune 30, 2016.2022. For the ninesix months ended SeptemberJune 30, 2017 revenue from the Product segment2023 revenues increased slightly by $132,480$393,397 or 2%39%, as compared to the ninesix months ended SeptemberJune 30, 2016. During the three and nine months ended September 30, 2017, we recorded a one-time adjustment2022. The increases were due to Product revenues as a result of our changesales increases in estimate related to our cooperative advertising liability, which resulted in an increase of $346,353 to Product revenues on the statements of operations.multiple channels.

For the three months ended September 30, 2017, sales from the Contract services segment increased by $30,218 or 13% as compared to the three months ended September 30, 2016 because of the final award of several new government contracts. For the nine months ended September 30, 2017 revenue from the Contract services segment decreased by $81,087 or 10%, as compared to the nine months ended September 30, 2016 because of research contracts that were completed in prior periods that were not replaced.

Cost of revenuessales

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

  Three Months ended June 30,  Six Months ended June 30, 
  2023  2022  2023  2022 
Cost of sales: $507,155  $458,330  $1,129,434  $990,894 

For the three months ended SeptemberJune 30, 2017,2023, cost of revenues was essentially flat, increasingincreased by $19,524$48,825 or 1%11 % as compared to the three months ended SeptemberJune 30, 2016.2022. For the ninesix months ended SeptemberJune 30, 2017,2023, cost of revenues was essentially flat, decreasing $15,870increased by $138,540 or 0%. These changes consisted14% as compared to the six months ended June 30, 2022. Cost of sales increased as sales revenue increased, but did not increase proportionately reflecting cost cutting efforts over the following:last year.

  Three Months Ended
September 30,
  Nine Months Ended
September 30,
 
  2017  2016  2017  2016 
Cost of revenues:                
Product segment $1,121,039  $1,116,987  $3,237,221  $3,175,629 
Contract services segment  274,240   258,768   787,443   864,905 
Total segment and consolidated cost of revenues $1,395,279  $1,375,755  $4,024,664  $4,040,534 
4

Gross profit and gross margin

For the three months ended SeptemberJune 30, 2017,2023, gross profit amounted to $632,982was $202,138 as compared to $631,083$35,452 for the three months ended September 30, 2016,prior year, an increase of $1,899. $166,686 or 470%. For the six months ended June 30, 2023, gross profit was $276,888 as compared to $22,031 for the prior year, an increase of $254,857 or 1,157%. For the three- and six-month periods the increases were due to higher sales volume as well as product mix generating improved margin year over year.

Operating expenses

For the three months ended SeptemberJune 30, 2017 and 2016, gross margin was essentially unchanged at 31.2% and 31.4%, respectively. For the nine months ended September 30, 2017, gross profit amounted to $2,222,556 as compared to $2,155,293 for the nine months ended September 30, 2016, an increase of $67,2632023, operating expenses increased by $26,007 or 3%. For the nine months ended September 30, 2017 and 2016, gross margins were 35.6% and 34.8%, respectively, essentially unchanged.

Gross profit and gross margin by segment is as follows:

  Three Months Ended September 30,  Nine Months Ended September 30, 
  2017  %  2016  %  2017  %  2016  % 
Gross profit:                                
Product segment * $651,921   36.8% $664,768   37.3% $2,286,564   41.4% $2,215,676   41.1%
Contract services segment *  (18,939)  (7.4)%  (33,685)  (15.0)%  (64,008)  (8.8)%  (60,383)  (7.5)%
Total gross profit $632,982   31.2%  631,083   31.4%  2,222,556   35.6%  2,155,293   34.8%

* Gross margin % based on respective segments revenues.

For the three and nine months ended September 30, 2017, as compared to the comparable 2016 periods, margins were essentially unchanged.

The improvement in gross margin from the research development segment for the three months ended September 30, 2017 as compared to the three months ended SeptemberJune 30, 2016 was attributable2022. For the six-month period ended June 20, 2023, operating expenses decreased by $277,497 or 15% as compared to increased revenuethe six months ended June 30, 2022. For the three and fixed costs that were unchanged.six months ended June 30, 2023 and 2022, operating expenses consisted of the following:

  Three Months Ended June 30,  Six Months Ended June 30, 
  2023  2022  2023  2022 
Selling and marketing expenses $54,018  $96,301  $113,442  $175,830 
Salaries, wages and related benefits  189,896   316,752   468,562   712,718 
Stock compensation expense  260,249   39,366   290,393   106,621 
Research and development  6,371   3,211   12,275   10,700 
Professional fees  112,762   188,794   302,221   442,773 
General and administrative expenses  258,508   211,463   447,514   463,261 
Total $881,894  $855,887  $1,634,407  $1,911,903 

For the three months ended June 30, 2023, selling and marketing expenses decreased by $42,283 or 44% as compared to the three months ended June 30, 2022. For the six months ended June 30, 2023, selling and marketing expenses decreased by $62,388 or 35% as compared to the six months ended June 30, 2022. The decreases were due to attendance at fewer trade shows in 2023 and the decision to bring certain consumer marketing efforts in-house.
For the three months ended June 30, 2023, salaries, wages and related benefits decreased by $126,766 or 40%, as compared to the three months ended June 30, 2022. For the six months ended June 30, 2023, salaries, wages and related benefits decreased by $244,156 or 34%, as compared to the six-months ended June 30, 2022. These decreases were due to reductions in headcount.
For the three months ended June 30, 2023, stock compensation expense increased by $220,883 or 561%. For the six months ended June 30, 2023, stock compensation expense increased $183,772 or 172%. The increase was due in substantial part to the grant of options to employees in lieu of cash bonuses, payment of a portion of some salaries in options in lieu of cash, and other stock incentives to employees and consultants.

For the three months ended June 30, 2023, research and development costs increased by $3,160 or 98%, as compared to the three months ended June 30, 2022. For the six months ended June 30, 2023, research and development costs increased by $1,575 or 15%, as compared to the six months ended June 30, 2022. The changes were due to product development and testing expenses.
For the three months ended June 30, 2023, professional fees decreased by $76,032 or 40%, as compared to the three months ended June 30, 2022. For the six months ended June 30, 2023, professional fees decreased by $140,552 or 32%, as compared to the six months ended June 30, 2022. The changes were due to a reduction in fees from professional services firms used by the Company.
For the three months ended June 30, 2023, general and administrative expenses increased by $47,045 or 22% as compared to the three months ended June 30, 2022 due to an increase in bad debt expenses for the quarter. For the six months ended June 30, 2023, general and administrative expenses decreased by $15,747 or 3% as compared to the six months ended June 30, 2022 due to efforts to control costs in light of reduced sales.

5
 

 

Other Operating expensesIncome

 

For the three and six months ended SeptemberJune 30, 2017,2023, other operating expenses decreased by $185,742 or 21% comparedincome amounted to the three months ended September 30, 2016. Operating expenses decreased by $193,357 or 7% for the period ended September 30, 2017,$11,420 as compared to the nine months ended September 30, 2016. For$0 for the three and ninesix months ended SeptemberJune 30, 2017 and 2016, operating expenses consisted2022. The difference is due to one-time income booked for the settlement of the following:a claim with a supplier in April of 2023.

  Three Months Ended
September 30,
  Nine Months Ended
September 30,
 
  2017  2016  2017  2016 
Selling and marketing expenses $20,933  $57,942  $257,803  $177,274 
Salaries, wages and related benefits  253,615   375,794   820,051   1,241,033 
Research and development  82,544   71,921   297,697   236,534 
Professional fees  135,261   118,818   536,284   364,450 
General and administrative expenses  188,760   242,380   653,008   738,909 
Total $681,113  $866,855  $2,564,843  $2,758,200 

For the three months ended September 30, 2017, selling and marketing expenses decreased by $37,009 or 64% as compared to the three months ended September 30, 2016 due to heavy spending earlier in the year. For the nine months ended September 30, 2017, sales and marketing expenses increased by $80,529 or 45% as compared to the nine months ended September 30, 2016. The increase was due to increased spending for commissions, trade shows and social media.
For the three months ended September 30, 2017, salaries, wages and related benefits decreased by $122,179, or 33%, as compared to the three months ended September 30, 2016. For the nine months ended September 30, 2017, salaries, wages and related benefits decreased by $420,982, or 34%, as compared to the nine months ended September 30, 2016. These decreases were attributable to personnel reductions related to our ongoing efforts to reduce costs.

For the three months ended September 30, 2017, research and development costs increased by $10,623 or 15%, as compared to the three months ended September 30, 2016. For the nine months ended September 30, 2017, research and development costs increased by $61,163 or 26%, as compared to the nine months ended September 30, 2016. For the three and nine months ended September 30, 2017, these increases were attributable to further work on specialty coatings for new markets and evaluating different parameters and potential enhancements of the surface protector and fortifier product.
For the three and nine months ended September 30, 2017, professional fees increased by $16,443 or 14%, and $171,834 or 47%, as compared to the three and nine months ended September 30, 2016, respectively. This increase is due to contract services related to the inventory build as well as other services related to the move of the product segment operations that occurred in September and October.
For the three months ended September 30, 2017, general and administrative expenses decreased by $53,620 or 22% as compared to the three months ended September 30, 2016. For the nine months ended September 30, 2017, general and administrative expenses decreased by approximately $85,901 or 12% as compared to the nine months ended September 30, 2016. The decrease for the nine-month period in 2017 was attributable to several factors including the end of amortization of intangibles, and personnel reductions with associated general and administrative expenses.

Loss from operations

As a result of the factors described above, for the three months ended SeptemberJune 30, 2017,2023, loss from operations amounted to $(48,131)$668,336 as compared to a loss from operations of $(235,772)$820,435 for the three months ended SeptemberJune 30, 2016,2022, a decreasereduction of $187,641$152,099 or 80%19%. For the ninesix months ended SeptemberJune 30, 2017,2023, loss from operations amounted to $(342,287)$1,346,099 as compared to a loss from operations of $(602,907)$1,889,872 for the ninesix months ended SeptemberJune 30, 2016,2022, a reduction of $543,773 or 29%.

Income from investment in subsidiary

As a result of the sale of a 70% interest in ANI , we now report our 30% share of ANI’s income or loss as an improvementinvestment in a subsidiary. For the three and six months ended June 30, 2023 there was income of $260,620 or 43%.$8,782 and $40,938, respectively. For the three and six-month periods ended June 30, 2022, we recorded a loss from that investment of $3,161.

Other (income)Interest expense

For the three months ended SeptemberJune 30, 2017, other2023 interest expense was $(76,599)$7,575 as compared to $8,337 in the prior year, and for the six months ended June 30, 2023 interest expense was $21,943 up from $15,635 in the prior year. The decrease for the three-month period was due in substantial part to the payment of the Key Bank financing and reduced interest payable as financing leases mature. The increase in the six-month comparative period was due to accrued interest on convertible notes outstanding.

Other income

For the three months ended June 30, 2023, other income of $24,870was $16,264 as compared to $3,886 for the three months ended SeptemberJune 30, 2016, a decrease of $101,469 or 408%. There was a decrease in interest expense of approximately $5,876 attributable to a reduced interest rate on our revolving credit loan and an increase in2022. For the six months ended June 30, 2023, other income of $14,705 partially offset by a loss on disposal of fixed assets of $122,050. For the nine months ended September 30, 2017 other expense was $(9,221)$23,202 as compared to other income of $146,379$2,625 for the ninesix months ended 2016,June 30, 2022. The increase was due to a decrease of $155,600, or 106%.non-recurring tax refund plus interest income on the note receivable from a subsidiary.

Net lossLoss from continuing operations

As a result of the foregoing, we reported a loss from continuing operations of $650,865 for the three-month period ended June 30, 2023 and a loss of $828,047 for the three-month period in the prior year, a reduction of $177,182 or 21%. For the six-month period ended June 30, 2023 our loss from continuing operations was $1,303,902 as compared to $1,906,043 for the six-month period ended June 30, 2022, a reduction of $602,141 or 32%.

Income (loss) from discontinued operations

Effective May 31, 2022, we sold a 70% interest in our subsidiary ANI to two of its officers and long-time employees in exchange for a promissory note in the face amount of $450,000. On a continuing basis, we no longer recognize income from this operation in the statement of operations. For the three and ninesix months ended SeptemberJune 30, 2017, net loss amounted to $(124,730) and $(351,508) as compared to net2022, we recognized a loss of $(210,902)$13,045 and $(456,528) forincome of $1,300, respectively. For the three and ninesix months ended SeptemberJune 30, 2016. For2022, we recognized a one-time gain on the three-month period thesale of discontinued operations of $1,148,225.

Net loss was decreased by $86,172 or 41%. For the nine-month period there was in improvement of $105,020 or 23%.(income)

For the three months ended SeptemberJune 30, 2017 and 2016,2023, net (loss)loss was $650,865 as compared to net income of $307,133 for the three months ended June 30, 2022. For the six months ended June 30, 2023, net loss amounted to $(0.04) per common share (basic and diluted), and $(0.07) per common share (basic and diluted), respectively. For$1,303,902 as compared to a loss of $756,518 for the ninesix months ended SeptemberJune 30, 2017 and 2016,2022. The net (loss) amountedincome in the quarter ended June 30, 2022 was primarily attributed to $(0.12) per common share (basic and diluted), and $(0.15) per common share (basic and diluted), respectively.the one-time gain of $1,148,225 recognized on the sale of ANI that also offset some of the losses for the six-month period in 2022.

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 $1,033,150$125,261 and $73,927$19,813 of unrestricted cash as of SeptemberJune 30, 20172023 and working capital deficit of $1,072,691and $189,128$524,389 and $259,223 of unrestricted cash as of December 31, 2016.2022.

6

The following table sets forth a summary of changes in our working capital from December 31, 20162022 to SeptemberJune 30, 2017:2023:

      December 31, 2016 to
September 30, 2017
      

December 31, 2022 to

June 30, 2023

 
 September 30, 2017  December 31, 2016  Change in Working Capital  Percentage
Change
  June 30,
2023
 December 31, 2022  

Change in

Working

Capital

 

Percentage

Change

 
Working capital:                                
Total current assets $2,083,275  $2,033,026  $50,249   2.47% $1,491,328  $1,900,858  $(409,530)  (21.54)%
Total current liabilities  3,116,425   3,105,717   10,708   0.34%  1,366,067   1,376,469   10,402   0.76%
Working capital deficit: $(1,033,150) $(1,072,691) $60,957   2.81%
Working capital: $125,261  $524,389  $(399,128)  (76.11)%

The increasedecrease in current assets was primarily due to a combination of increased accounts receivable, including those from a related party,reduction in cash and a decrease in pre-paidprepaid expenses. The increase in current liabilities was largelyprimarily due to an increase in accrued expenses, the current portion of notes payable and the current portion of operating lease liabilities, partially offset by a decrease in accounts payable related to the costs of the inventory build late in the second quarter.payable.

Net cash providedused by operating activities was $283,581$(725,395) for the ninesix months ended SeptemberJune 30, 20172023 as compared to $188,459net cash used by operating activities of $(1,163,180) for the ninesix months ended SeptemberJune 30, 2016, an improvement2022, a net change of $95,122$437,785 or 50%a reduction of 38%. Net cash providedused by operating activities for the ninesix months ended SeptemberJune 30, 20172023 primarily reflected aresulted from net loss from continuing operations of ($351,508)$1,303,902 adjusted for add-backs of $417,744$416,037 and changes in operating assets and liabilities of $217,345.$162,470.

We expect our cash used in operating activities to increase slightly due to the following:

additional working capital to support increased sales; and
an increase in advertising, commissions and sales promotions for existing and new brands as we expand within existing markets or enter new markets.

Net cash flow provided by continuing investing activities was $87,000$17,171 for the ninesix months ended SeptemberJune 30, 20172023, as compared to $17,866 for the nine months ended September 30, 2016. For the 2017 period, the increase was due to proceeds from the sale of property and equipment with no offsetting purchases. The 2016 period included proceeds from the sale of property and equipment of $21,866, partially offset by the purchase of property and equipment of $4,000.

Netnet cash used in financingby continuing investing activities of $(485,782) was related to the pay down in obligations on a net basis$(4,910) for the nine months ended September 30, 2017 as compared to $(342,130) in the same period in 2016. During2022. The change was due in substantial part to payment on the ninenote from a subsidiary.

Net cash provided by continuing financing activities was $468,814 for the six months ended SeptemberJune 30, 2017, we paid down2023 reflecting $445,000 in proceeds from sales of common stock, warrants and convertible notes, as compared to net cash provided by continuing financing activities of $1,298,146 for the bank line of credit with proceeds of equipment sales, paid down an equipment loansame period in 2022. Net cash provided by $56,138discontinued financing activities was $0 and paid down $10,470 on a third-party note.$20,000 for the six months ended June 30, 2023 and June 30, 2022, respectively.

Future Liquidity and Capital Needs.

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

Revolving Credit Note

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, the 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 reduced the interest rate to 3.0% above the Prime Rate, as reported in the Wall Street Journal.

At September 30, 2017 and December 31, 2016, the Company had $689,232 and $979,688, respectively, which includes accrued interest of $10,324 and $17,494, respectively, in amounts outstanding under the Revolving Note with availability of up to $810,768 as of September 30, 2017, depending on the borrowing base at the time of the request for the advance. The weighted average interest rate during the nine months ended September 30, 2017 and 2016 was approximately 6.8% and 8.1%, respectively.

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.

Equipment Financing and Loans

On February 10, 2015, PEN Brands entered into a $373,000 promissorySee 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 principal5 to our unaudited condensed consolidated financial statements regarding our equipment loan 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 September 30, 2017, the principal amount due under the Equipment Note amounted to $204,546financing leases.

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.

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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 asthat we do not have sufficient resources in our accounting function to have segregation of duties so that the Evaluation Date thatinitiation of transactions, the custody of assets and the recording of transactions are performed by separate individuals. However, to the extent possible, these tasks are performed by separate individuals. Management evaluated our failure to have segregation of duties on our assessment of our disclosure controls and procedures were effective suchand has concluded that the control deficiency that resulted represented a material information required to be included in our Securities and Exchange Commission (“SEC”) reports is recorded, processed, summarized, and reported within the time periods specified in SEC rules and forms relating to the Company, including, our consolidated subsidiaries, and was made known to them by others within those entities, particularly during the period when this report was being prepared.weakness.

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 SeptemberJune 30, 20172023 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.None

ITEM 1A. RISK FACTORS

Not required of smaller reporting companies.

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

None.

On April 12, 2023, the Company granted 47,610 options under the 2021 Equity Plan and an additional 30,000 in options to Tom J. Berman our President. The options were granted to individuals in lieu of cash for a portion of their salary for the period from December 31, 2022 through March 31, 2023. All options are at an exercise price of $0.65 per share for a four-year term and were fully vested on date of grant.

On April 14, 2023, the Company sold 196,851 shares of common stock to an accredited investor for proceeds of $246,064 and sold to that investor warrants to purchase up to 196,813 shares of common stock for proceeds of $3,936. The warrants are exercisable at any time during the four years after date of issue at a warrant exercise price of $1.75.

On May 8, 2023, as part of a settlement agreement entered into on April 27, 2023, the Company sold to the counterparty 57,143 shares of common stock for proceeds of $100,000 at a price of $1.75 per share.

In March 2023, we issued 52,800 shares of common stock to our landlord in partial payment of our rent in Michigan.

On May 30, 2023 the Board granted 175,071 options under the 2021 Equity Plan to employees and consultants and an additional 399,228 options to officers and to a consultant who is also a director. All options are at an exercise price of $0.65 per share.

On May 30, 2023, the Company issued 76,922 shares of restricted common stock to a consultant as compensation for services.

On June 16, 2023, the Company issued a note at face value of $50,000 and sold that investor, for a price of $0.02 per warrant, warrants to purchase up to 10,000 shares of common stock at an exercise price of $1.75. On July 24, 2023, the Company sold a convertible note at its face amount of $50,000. On that same day, the Company sold 133,333 shares of common stock for proceeds of $100,000.

In July and August 2023, the Company granted an aggregate of 192,302 shares of restricted stock to four individuals who will serve on the advisory committee.

Grants under the 2021 Equity Plan were exempt under Rule 701. The sales and issuances of stock and other securities were exempt from registration under Section 4(a)(2) of the Securities Act. Cash proceeds were used for general corporate purposes.

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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*
10.1*Third Amendment to Loan and Security Agreement and Loan Documents, dated October 17, 2017, between PEN Brands LLC and Mackinac Commercial Credit ABL Division of MBank.
31.1*Rule 13a-14(a)/15d-14(a) Certificate of ChiefPrincipal Executive Officer
31.2*Rule 13a-14(a)/15d-14(a) Certificate of Chief Financial Officer
32.1*Section 1350 Certificate of ChiefPrincipal Executive Officer and Chief Financial Officer
101.INSInline XBRL Instance Document
101.SCHInline XBRL Taxonomy Extension Schema
101.CALInline XBRL Taxonomy Extension Calculation
101.DEFInline XBRL Taxonomy Extension Definition
101.LABInline XBRL Taxonomy Extension Labels
101.PREInline XBRL Taxonomy Extension Presentation Linkbase
*104Filed herewith.Cover Page Interactive Data File (embedded within the Inline XBRL document)
*Filed herewith.

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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.

PENNano Magic Inc.

(Registrant)

Date: NovemberAugust 14, 20172023/s/ Scott RickertTom J. Berman
Scott Rickert.Tom J. Berman,
President and Chief Executive Officer
Date: NovemberAugust 14, 20172023/s/ Jaqueline M. SoptickLeandro Vera
Jacqueline M. SoptickLeandro Vera
Chief AccountingFinancial Officer

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