| Summary of Significant Accounting Policies | NOTE 2 – SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES Principles of Consolidation The Company’s consolidated financial
statements include the financial statements of its wholly-owned subsidiaries, Applied Nanotech, Inc. and PEN Brands LLC. All significant
intercompany accounts and transactions have been eliminated in consolidation. Use of Estimates The preparation of consolidated financial
statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements
and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.
Significant estimates for the three months ended March 31, 2018 and 2017 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 March 31, 2018 At December 31, 2017
Description Level 1 Level 2 Level 3 Level 1 Level 2 Level 3
Stock Appreciation Rights Plan A - - $ - - - $ -
Equity Credits Issued - - $ - - - $ 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, 2017 $ - $ 2,278
Change in fair value included in net loss - (2,278 )
Balance at March 31, 2018 $ - $ - 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
calculated from PEN Brands trial balance and money market accounts to be cash equivalents. Accounts Receivable The Company recognizes an allowance
for losses on accounts receivable in an amount equal to the estimated probable losses net of recoveries. The allowance is based
on an analysis of historical bad debt experience, current receivables aging, and expected future write-offs, as well as an assessment
of specific identifiable customer accounts considered at risk or uncollectible. The expense associated with the allowance for doubtful
accounts is recognized as general and administrative expense. Inventory Inventory is stated at the lower of
cost or net realizable value. Cost is determined using the first-in, first-out (FIFO) method. At March 31, 2018 and December 31,
2017, inventory consisted of the following:
March 31, 2018 December 31, 2017
Raw materials $ 836,594 $ 595,747
Work in process 54,546 -
Finished goods 389,091 388,060
1,280,231 983,807
Less: reserve for obsolescence (259,595 ) (249,828 )
Inventory, net $ 1,020,636 $ 733,979 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
months ended March 31, 2018 and 2017. Revenue Recognition Pursuant to the guidance of ASC Topic
605 and ASU 2014-09, 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 give the funder rights to the technology developed under the contract.
● Product sales and other miscellaneous revenues from our subsidiary, Applied Nanotech such as the sale of conductive inks, graphene foils and thermal management materials. Revenue recognition criteria:
● Net product sales by our subsidiary PEN Brands LLC, are recognized when the product is shipped to the customer and title is transferred.
● Revenue from contract services performed is generally recognized based on what we have a right to invoice.
● Revenue from other product sales is recognized at the time the product shipped. The Company’s subsidiary Applied Nanotech’s primary business is contract services, not the sale of products. Product sales are generally insignificant in number and are generally limited to the sale of conductive inks, graphene foils, thermal management materials, samples, proofs of concepts, prototypes, or other items resulting from its contract services.
● Other miscellaneous revenue is recognized as deemed appropriate given the facts of the situation and is generally not material. Sales
Incentives and Consideration Paid to Customers The Company historically accounted for
certain promotional costs such as sales incentives and cooperative advertising as a reduction of sales. For the three months ended
March 31, 2018 the Company recorded $21,041 as a reduction of sales related to sales incentives as compared to $38,618 for the
prior period. 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 March 31,
2018 and 2017 shipping and handling costs amounted to $33,325 and $44,557, 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 March 31, 2018 and 2017 were $8,193 and $68,722,
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 March 31, 2018 and 2017 were $405 and $5,028, 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 On December 22, 2017, H.R. 1, known
as the “Tax Cuts and Jobs Act” (the Act), was signed into law. The Act includes a number of changes in existing tax
law impacting businesses including, among other things, a permanent change in the corporate income tax rate to a fixed rate of
21%. The new rate took effect on January 1, 2018. As a result, the Company revalued its deferred taxes at December 31, 2017. Stock-Based Compensation Stock-based compensation is accounted
for based on the requirements of the Share-Based Payment Topic of ASC 718 which requires recognition in the financial statements
of the cost of employee and director services received in exchange for an award of equity instruments over the period the employee
or director is required to perform the services in exchange for the award (presumptively, the vesting period). The ASC also requires
measurement of the cost of employee and director services received in exchange for an award based on the grant-date fair value
of the award. Pursuant to ASC Topic 505-50, for share-based
payments to consultants and other third-parties, compensation expense is determined at the “measurement date.” The
expense is recognized over the service period of the award. Until the measurement date is reached, the total amount of compensation
expense remains uncertain. The Company initially records compensation expense based on the fair value of the award at the reporting
date. Loss Per Share of Common Stock ASC 260 “Earnings Per Share”,
requires dual presentation of basic and diluted earnings per share (“EPS”) with a reconciliation of the numerator and
denominator of the basic EPS computation to the numerator and denominator of the diluted EPS computation. Basic EPS excludes dilution.
Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised
or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the entity. Basic
net loss per common share is computed by dividing net loss available to common shareholders by the weighted average number of shares
of common shares outstanding during the period. Diluted net loss per common share is computed by dividing net loss by the weighted
average number of shares of common stock, common stock equivalents and potentially dilutive securities outstanding during each
period. As of March 31, 2018, and December 31, 2017, 37,778 contingently issuable common shares that are issuable based on certain
market conditions (see Note 9) are not included in the potential dilutive shares in calculating the diluted EPS. Additionally,
potentially dilutive common shares consist of common stock options and warrants (using the treasury stock method). These common stock equivalents may be
dilutive in the future .
March 31, 2018 December 31, 2017
Stock options 18,726 19,120
Stock warrants 712 712
Restricted Stock 37,778 37,778
Total 57,216 57,610 Additionally, there are an unknown quantity
of common stock equivalents that result from a potential conversion of stock appreciation rights (See Note 9). Net loss per share for each class of
common stock is as follows:
Net (loss) income per common shares outstanding: Three Months Ended March 31, 2018 Three Months Ended March 31, 2017
Class A common stock $ (0.01 ) $ (0.03 )
Class B common stock $ (0.01 ) $ (0.03 )
Class Z common stock $ - $ (0.03 )
Weighted average shares outstanding:
Class A common stock 1,654,852 1,368,927
Class B common stock 1,426,503 1,403,101
Class Z common stock - 262,631
Total weighted average shares outstanding 3,081,355 3,034,659 Segment Reporting The Company uses “the management
approach” in determining reportable operating segments. The management approach considers the internal organization and reporting
used by the Company’s chief operating decision maker for making operating decisions and assessing performance as the source
for determining the Company’s reportable segments. The Company’s chief operating decision maker is the Chairman and
chief executive officer (“CEO”) of the Company, who reviews operating results to make decisions about allocating resources
and assessing performance for the entire Company. The Company classified the reportable operating segments into (i) the development,
manufacture and sale of consumer and institutional products using nanotechnology to deliver unique performance attributes at the
surfaces of a wide variety of substrates (the “Product segment”) and (ii) nanotechnology design and development services
for our future products and for government and private entities and sales of products developed for third parties (the “Contract
services segment”). Recently Issued Accounting Pronouncements In May 2014, the FASB issued Accounting
Standards Update (“ASU”) No. 2014-09, “Revenue from Contracts with Customers (Topic 606),” (“ASU
2014-09”). ASU 2014-09 supersedes the revenue recognition requirements in ASC 605 - Revenue Recognition (“ASC 605”)
and most industry-specific guidance throughout ASC 605. The FASB has issued numerous updates that provide clarification on a number
of specific issues as well as requiring additional disclosures. The core principle of ASC 606 requires that an entity recognize
revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which
the company expects to be entitled in exchange for those goods or services. ASC 606 defines a five-step process to achieve this
core principle and, in doing so, it is possible more judgment and estimates may be required within the revenue recognition process
than required under existing U.S. GAAP including identifying performance obligations in the contract, estimating the amount of
variable consideration to include in the transaction price and allocating the transaction price to each separate performance obligation.
The guidance also requires enhanced disclosures regarding the nature, amount, timing and uncertainty of revenue and cash flows
arising from an entity’s contracts with customers. The guidance may be adopted through either retrospective application to
all periods presented in the financial statements (full retrospective approach) or through a cumulative effect adjustment to retained
earnings at the effective date (modified retrospective approach). The guidance was revised in July 2015 to be effective for public
companies for annual and interim periods beginning on or after December 15, 2017. The Company adopted ASC 606 effective
January 1, 2018 using the modified retrospective method. Implementing ASC 606 the Company concluded that no change was required
in its accounting for any sources of revenue for the year ended December 3, 2017. On February 25, 2016, the FASB issued
ASU No. 2016-02 (“ASU 2016-02”) to amend the accounting guidance for leases. The accounting applied by a lessor is
largely unchanged under ASU 2016-02. However, the standard requires lessees to recognize lease assets and lease liabilities for
leases classified as operating leases on the balance sheet. Lessees will recognize in the statement of financial position a liability
to make lease payments and a right-of-use asset representing its right to use the underlying asset for the lease term. For leases
with a term of 12 months or less, a lessee is permitted to make an accounting policy election by class of underlying asset not
to recognize lease assets and lease liabilities. If a lessee makes this election, it will recognize lease expense for such leases
generally on a straight-line basis over the lease term. ASU 2016-02 is effective for fiscal years beginning after December 15,
2018 and early adoption is permitted. The Company is currently assessing the impact of the guidance on its consolidated financial
statements and notes to its consolidated financial statements. In 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 classification 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’s
consolidated financial statements. In May 2017, the FASB issued ASU No.
2017-09, “Compensation—Stock Compensation (Topic 718): Scope of Modification Accounting” (“ASU 2017-09”).
ASU 2017-09 provides clarity on 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. The Company is currently evaluating the effect that adopting this new accounting guidance will have on its consolidated
financial statements and related disclosures. In July 2017, the FASB issued ASU No.
2017-11, “Earnings Per Share (Topic 260) and Derivatives and Hedging (Topic 815) - Accounting for Certain Financial Instruments
with Down Round Features,” (“ASU 2017-11”). Equity-linked instruments, such as warrants and convertible instruments
may contain down round features that result in the strike price being reduced on the basis of the pricing of future equity offerings.
Under ASU 2017-11, a down round feature will no longer require a freestanding equity-linked instrument (or embedded conversion
option) to be classified as a liability that is remeasured at fair value through the income statement (i.e. marked-to-market).
However, other features of the equity-linked instrument (or embedded conversion option) must still be evaluated to determine whether
liability or equity classification is appropriate. Equity classified instruments are not marked-to-market. For earnings per share
(“EPS”) reporting, the ASU requires companies to recognize the effect of the down round feature only when it is triggered
by treating it as a dividend and as a reduction of income available to common shareholders in basic EPS. The amendments in this
ASU are effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15,
2018. Early adoption is permitted, including adoption in any interim period. The Company is currently evaluating the effect that
adopting this new accounting guidance will have on its consolidated financial statements. There are no other recently issued accounting
standards that apply to us or that are expected to have a material impact on our results of operations, financial condition, or
cash flows. Reclassifications Certain accounts and financial statement
captions in the prior periods have been reclassified to conform to the current period financial statements. |
