Nano Magic Inc. - Annual Report: 2015 (Form 10-K)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

or

COMMISSION FILE NO. 1-11602

PEN Inc.

(Exact name of registrant as specified in its charter)

701 Brickell Ave., Suite 1550, Miami, Florida 33131

(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:

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

Indicate by check mark if the registrant is a well-known seasoned issuer as defined in Rule 405 of the Securities Act. Yes [  ] No [X]

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes [  ] No [X]

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 past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [  ]

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes [X] No [  ]

Indicate by check mark if disclosure of delinquent filers in response to Item 405 of Regulation S-K is not contained in this form and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.

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

The aggregate market value of the Common Stock held by non-affiliates of the Registrant, based upon the average of the closing bid and asked price of the Common Stock on the OTCQB system on June 30, 2015 of $0.032, was approximately $7.2 million.

As of March 30, 2016, the registrant had 1,378,312 shares of Class A Common Stock, 1,396,302 shares of Class B Common Stock, and 262,631 shares of Class Z Common Stock issued and outstanding.

Documents Incorporated by Reference

No documents are incorporated by reference into this annual report on Form 10-K

PEN INC.

FORM 10-K

TABLE OF CONTENTS

PART I

Item 1. Business

PEN’s primary business is the marketing and sale of products enabled by nanotechnology. We develop and sell products based on our portfolio of intellectual property. Our current products are a portfolio of nano-layer coatings, nano-based cleaners, printable inks and pastes, and thermal management materials. Additionally, we conduct research and development services for governmental and private customers.

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 years ended December 31, 2015 and 2014 were (i) the Product Segment (which we formerly called the Nanofilm segment) and (ii) the Research and Development Segment.

Product Segment

Revenue is based on the successful development of specialty products utilizing nanotechnology to deliver unique performance attributes at the surfaces of a wide variety of substrates. Our products are sold in liquid form enabling application by a number of common commercial techniques and in some instances also as wet and dry towelettes. We rely on intellectual property and or trade secret formulations to protect our proprietary technology.

We have three broad product technology platforms that offer solutions to some common problems such as ease of cleaning, preventing fogging, preventing accumulation of dirt or grime, improving resistance to scuffing and wear. All our products have some “nano” characteristic about them – whether it is being active at the molecular level, incorporation of submicron-particles, or creating very thin, self-assembling coatings that are 20 nanometers or less in thickness.

One line of commercial products center on our customized optical and eyewear cleaning and de-fogging treatments. Another is a family of coating liquids that create very thin, strongly-bound, clear coatings on surfaces used for glass and ceramic surfaces. The third product family is series of clear coatings for plastics incorporating submicron size particles to improve abrasion resistance and wear resistance without sacrificing transparency. Our goal continues to be to create segment leading brands through sales of high quality consumer products, and by developing and producing customized formulas for sale to strategic, industrial partners to be incorporated into their customer’s products. We manufacture our formulations internally to protect our technology and maintain the highest quality for the products that we and our commercial partners bring to the marketplace.

Our products encompass:

New products under development include products targeted to our current customer base in the optical, transportation, military, sports, and safety industries.

Separate from our historical business, we are also focused on creating products enabled by nanotechnology that tackle and solve big, global problems in growing markets. We have three primary areas of new product focus:

The first new product is expected to be part of a family of cleaning products that protect and fortify surfaces at the nanoscale-level. The patent-pending product is a spray that penetrates and fortifies the surface. This surface fortifier is safe for use on many surfaces, both natural and man-made. After application, the product continues to fortify and protect, creating a healthy surface.

Our product is made with safe ingredients and does not use harsh chemicals or disinfectants. We start with a natural mineral that is milled and engineered into a smaller shape and size. Then, the milled mineral is mixed with a proprietary cleaner solution to create our product. The mineral chosen is stable in air and water. No governmental approvals are required for sale of this product. The product:

We believe that our manufacturing capacity and contractors with whom we have established relationships will enable us to fill orders for the early sales. Ingredients and packaging materials are readily available from a number of suppliers. As sales increase, we will need to expand manufacturing, but we believe there are sufficient subcontractors that manufacturing will not be a problem.

Marketing and Distribution

We sell our current products directly to retailers in the United States and internationally, including manufacturers who utilize product formulations in their own branded products. For our new products to our traditional customer base, and for certain customers or market segments, we rely on outside sales agents or distributors.

Manufacturing Operations

Most of our manufacturing is done at our 50,000 square foot facility in Valley View, Ohio. Additional manufacturing, packaging and assembly is done by third-party contract manufacturers in the United States, India and Taiwan.

Intellectual Property and Proprietary Rights

Our nanotechnology expertise and related intellectual property used in our current products is specialized in the areas of surface science, molecular self-assembly, transparent composites, and surfactants. The intellectual property developed from this work is protected with a combination of selective patents and primarily by trade secrets. This intellectual property strategy is similar to that used by leading companies in the fragrance and flavors industry. We have twenty four issued patents and two pending patent applications. No single patent is significant to any of our products.

Competition

Products sold into the optical segment and the eyewear cleaning segments have a small number of significant competitors. Our products are known to be the “benchmark” products in these segments and generally outperform our competitors’. Some of our products in these segments do compete for certain customers or certain applications against lower priced, traditional materials. Most of the companies selling products into these market segments are privately-held, U.S. packaging or catalog companies. Examples in the U.S. are include Hilco Accessories, California Accessories, and Amcon Laboratories and, internationally, the catalog company, Prosben, Inc., from the Peoples Republic of China. In the nano-coating products area or the anti-fog product line we are not aware of any competitive products that match our product performance or processing characteristics.

Backlog

Sales are primarily pursuant to purchase orders for delivery of products. We do not believe that a backlog as of any particular date is indicative of future results. Some agreements give customers the right to purchase a specific quantity of products during a specified time period, but these agreements do not obligate the customers to purchase any minimum quantity. The quantities actually purchased by the customer, as well as the shipment schedules, are frequently revised during the agreement term to reflect changes in the customer’s needs. Because of our relatively small size, a customer’s delay of a product shipment can make a difference in the results for a particular accounting period. For these reasons we do not believe that these agreements are meaningful for determining backlog amounts.

Geographical Information

All long-lived assets are located in the United States.

Sources and availability of raw materials and the names of principal suppliers

We use third-party suppliers and contract manufacturers in the United States to obtain substantially all of our raw materials, components and packaging products. Over time, one unrelated third party has become our leading supplier in the United States. As is customary in our industry, historically we have not had long-term or exclusive agreements with third-party suppliers or contract manufacturers and have generally made purchases through purchase orders. We believe that we have good relationships with our suppliers and manufacturers and that there are alternative sources should one or more of these suppliers or manufacturers become unavailable. However, the disruption of our operations if a change becomes necessary and the likelihood of shipment delays means that the loss of, or a significant adverse change in our relationship with, any of our key suppliers or manufacturers, or any other supply change disruptions could have a material adverse effect on our business, prospects, results of operations, financial condition or cash flows.

Key Customers

A limited number of key customers account for a substantial portion of our commercial revenue. In particular, revenues from two customers constituted approximately 28% and 11% respectively, of 2015 total revenue. Revenues from three customers constituted approximately 24 %, 16% and 10% respectively, of 2014 total revenue. Many of our customers are significantly larger than we are and, therefore, may be able to exert a high degree of influence over us. The loss of one of the largest customers or the failure to attract new customers could have a material adverse effect on our business, results of operations and financial condition.

Research and Development Segment

We are a global leader in nanotechnology research and development and this segment focuses on generating revenues through performing research services. Our nanotechnology research is aimed at solving problems at the molecular level - working with the basic properties of matter to create new and improved materials and technologies. We do both research and development, including proof of concepts and prototypes, for proposed PEN products and research and development under contract for government and private entities. In our work on products for PEN we focus on using only the submicron size particles, not smaller nanoparticles that are subject to much greater government regulation. Our work generally falls under one of three technology platforms:

We continue to focus on stabilizing our financial situation and operating this segment at break-even or better based solely on revenues from our research activities.

Since development of intellectual property has been a critical part of our strategy, before starting on, or accepting, a project, we analyze the potential to develop intellectual property. Following the Combination, an additional filter has been added and we also consider how the proposed research may tie in to existing products and manufacturing expertise in our Product Segment or to other potential, new products that we may choose to develop.

Much of our contract research is done under government contracts. Government contracts frequently limit profit on work done. With private research contracts there is a relationship between revenues received under the contract and rights granted to the licensee under the contract. Since a critical component of any research contract is for us to retain intellectual property rights, we must contribute to the overall cost of the project. Our goal on private research contracts is, at a minimum, to cover all out of pocket costs and contribute to our overall overhead.

In commercializing our technology, because of limited resources, we historically focused on licensing our technology to others. Our research partners frequently have licensing rights as a result of the research that they funded, and upon completion of the work, they will license the technology for specific applications. Following the Combination we are more focused on developing products that we can sell. We expect that licensing considerations will be less important for new contract research in the future. If we conclude that we are not in a good position to commercialize products from a particular part of our intellectual property portfolio, we may seek to realize value for that intellectual property by license arrangements or the sale of that intellectual property.

We have had small scale success with commercial sales of conductive inks and pastes and from thermal management materials. We expect to work to increase sales of those products as our resources permit.

Nanoelectronics Applications – Inks and Pastes

Metallic Inks & Pastes

Copper Inks - As a result of the move towards flexible electronics, soldering is disappearing. New digital processes allow industries to move from the design process directly to the production line. We believe that at this time, only submicron particles are capable of producing inks that are compatible with the nozzles used in digital printing.

We have had a long-standing relationship with Ishihara Chemical Company, Ltd., a leading industrial chemical products company headquartered in Japan, to develop conductive inks that can be deposited using an additive process such as ink-jet printing, aerosol-jet printing or screen printing. Our work with Ishihara started in early 2006 and in past years, we received over $2.5 million in research funding from Ishihara and a $1.5 million up-front license payment. Because of Ishihara’s heavy financial commitment to the project, all intellectual property generated by the project is jointly owned by ANI and Ishihara and the license agreement signed in 2009 gave Ishihara the exclusive right to use this technology. Ishihara can choose to give up this exclusivity at any time. Ishihara may introduce a product at some point in the future. We may at some point in the future receive royalties of up to 4% on Ishihara product sales. If, however, Ishihara chooses to give up its exclusivity, it will owe no future royalties.

Other metallic inks - After our initial work in copper, we expanded our work with conductive inks to include nickel, silver, aluminum, and other inks, as well as conductive pastes. In particular, we have developed aluminum and silver inks and pastes that can improve the production of solar cells. We have also developed a highly efficient aluminum paste that can be used in solar cell production.

In 2014 we amended, agreements with our former licensee Sichuan Anxian Yinhee Construction and Chemical Company (“YHCC”), transferring certain solar-ink-related patents to an affiliate of YHCC and receiving back a royalty free license to use the patents in fields other than solar applications.

There are silver inks on the market today, but because of the high cost of silver relative to copper, a successful copper ink is likely to be of greater commercial interest to potential customers. Most inks and pastes sold today are manufactured and sold by large multinational chemical companies. For example, the two largest suppliers of inks and pastes for solar cell production are DuPont and Ferro. We are unable to compete directly with companies of that size in established markets.

Technical Inks Printing Solution (TIPS)

Conductive inks have the potential to revolutionize many types of electronics manufacturing. Our strategy is to provide a comprehensive solution for end users not just by developing inks, but assisting in the process from start to finish. We call this our Technical Inks Printing Solution. We have done extensive research on the raw materials (submicron particles) and developed relationships with suppliers that allow us to supply a variety of submicron particles. In addition, we have studied a variety of potential end user products to help develop specifications for the inks. We have also formed relationships with hardware manufacturers with the goal of providing seamless integration into high volume manufacturing for companies wishing to use conductive inks in their manufacturing processes. In addition to traditional 2D printing applications, we developed a multifunctional copper ink for 3D printing applications, the fastest growing segment of printed electronics.

Numerous other companies are working with other technologies for the commercial use of conductive inks and pastes. The commercialization of products using our technology depends on the results of our research compared with results achieved by others, as well as other factors including raw material costs, marketing, resources, and production capabilities.

Sensors

Our approach to sensor technology offers the unique advantage of recognizing and sometimes measuring materials at the molecular level. We are pursuing multiple technology platforms to address specific market needs. Our competition in the sensor area will come from a variety of technologies and companies depending on the purpose and use of the sensor. The areas where we are currently active are:

Ion Mobility Sensors. We are currently developing sensors based on Ion Mobility Sensor (“IMS”) technology focusing on Differential Mobility Spectroscopy (“DMS”). These sensors are ideal for use when both high sensitivity and high selectivity (low false positives) are required. We have also improved on existing IMS and DMS technology by developing our proprietary nonradioactive gas ionization sources to replace the radioactive isotopes that are currently used in these tools. We are currently involved in projects to develop highly sensitive Mercaptan and Methane sensors for use in the natural gas industry under funding from the Northeast Gas Association, and sensors for detection of citrus greening disease under funding from the California Citrus Research Board and the U.S. Department of Agriculture (“USDA”).

We have also applied this technology to other applications including other agricultural pathology areas, wound care, and breath analysis. For example, we have received National Institute of Health (“NIH”) funding to develop technology for early detection of pressure ulcers (aka bed sores) in collaboration with the University of California – Davis. We are also funded by the NIH to develop a breath analyzer for detecting alcoholic hepatitis in collaboration with Cleveland Clinic. The U.S. Army funded work to identify pollen based on odor analysis for forensic applications. We also received funding from the USDA for developing rapid tests for food safety.

Hydrogen Sensors. These sensors were initially targeted for use in fuel cells for automobiles and for remote monitoring of large power transformers. We developed a hydrogen sensor for use in the measurement of hydrogen in power transformer products. We may explore options to realize the value of this sensor technology by sale or license to third parties.

Carbon Monoxide Sensors. We have developed a low-power carbon monoxide sensor that can last for 10,000 hours on a single battery. The sensor will be specific to carbon monoxide with no cross sensitivity to other gases and elements and is also easily portable and highly sensitive.

Submicron Particle Formulations and Materials for Health and Safety Applications

Our work in the health and safety area builds on our understanding of certain compounds from our extensive work related to inks and pastes. The understanding of the chemistry of these particles and their interaction with surfactants and other solutions was combined with research and development work done for products already sold commercially resulted in new product concepts and materials with superior properties for applications in the field of health and safety. Using our experience with metallic inks and our prior work with carbon nanotube composites we developed a new thin carbon foil made of layers of graphene for use in cyclotron accelerators that produce nuclear pharmaceuticals used by the medical field in Positron Emission Tomography(PET) imaging

Intellectual Property Rights

An important part of our overall business and product development strategy is to protect our intellectual property and we seek, when appropriate, protection for our products and proprietary technology through the use of patents. Historically, we made filings in the United States and selected foreign jurisdictions. Beginning in 2014, as a cost saving measure, we became much more selective in filing patents and in the jurisdictions where we act to protect our rights with respect to work that is less likely to result in products that we can sell ourselves. Still, our patent portfolio consists of approximately 75 patents, including issued patents and patent applications pending before foreign and United States Patent and Trademark Offices. Trade secret protection is also important to our products.

The patenting of technology-related products and processes involves uncertain and complex legal and factual questions. The legal standards change from time to time, and administrative and court interpretations are not always consistent in one jurisdiction, or across different jurisdictions. Therefore, there is no assurance that our pending United States and foreign applications will issue, or what scope of protection any issued patents will provide, or whether any such patents ultimately will be upheld as valid by a court of competent jurisdiction in the event of a legal challenge. Interference proceedings, to determine priority of invention, also could arise in any of our pending patent applications. The costs of such proceedings would be significant and an unfavorable outcome could result in the loss of rights to the invention at issue in the proceedings. If we fail to obtain patents, and are required to rely on unpatented proprietary technology, there is no assurance that we can protect our rights in such unpatented proprietary technology, or that others will not independently develop substantially equivalent proprietary products and techniques, or otherwise gain access to our proprietary technology.

Competitors have filed applications for, or have been issued patents, and may obtain additional patents and proprietary rights relating to products or processes used in, necessary to, competitive with, or otherwise related to, our patents. The scope and validity of these patents, and the extent to which we may be required to obtain licenses under these patents or under other proprietary rights and the cost and availability of licenses is unknown. This may limit our ability to use and to license our technology. Litigation concerning these or other patents could be protracted and expensive. If suit were brought against us for patent infringement, a challenge in the suit by us as to the validity of the other patent would have to overcome a legal presumption of validity. There can be no assurance that the validity of the patent would not be upheld by the court or that, in such event, a license of the patent to us would be available. Moreover, even if a license were available, the payments that would be required are unknown and could materially reduce the value of our interest in the affected products. We do, however, consider our patents to be very strong and defendable in any action that may be brought against us.

We also rely upon unpatented trade secrets. No assurance can be given that others will not independently develop substantially equivalent proprietary information and techniques or otherwise gain access to our trade secrets or disclose such technology or that we can meaningfully protect our rights to our unpatented trade secrets.

We require our employees, directors, consultants, outside scientific collaborators, sponsored researchers, and other advisors to execute confidentiality agreements upon the commencement of employment or consulting relationships with us. These agreements provide that all confidential information developed or made known to the individual during the course of the relationship is to be kept confidential and not disclosed to third parties except in specific circumstances. In the case of employees and some consultants, the agreements provide that all inventions conceived by the individual while working for us will be our property. There is no assurance, however, that these agreements will provide sufficient protection for our trade secrets in the event of unauthorized use or disclosure of such information.

Government Contracts

A portion of our revenue consists of reimbursement of expenditures under U.S. government contracts. We recognized $1,187,994 of revenue from government contracts during the year ended December 31, 2015. These reimbursements represent all or a portion of the costs associated with such contracts. As of December 31, 2015, we have several government contracts in process that have approximately $928,200 of revenue yet to be recognized. Government contracts are subject to delays and risk of cancellation. Also, government contractors generally are subject to various kinds of audits and investigations by government agencies. These audits and investigations involve review of a contractor’s performance on its contracts, as well as its pricing practices, the costs it incurs and its compliance with all applicable laws, regulations and standards. We have been audited by the government, with no material changes, and in the future we expect to be audited by the government; however we expect the results of any government audits to have an insignificant effect on our operations and our financial statements.

Research and Development

Research and development activity is the driver of our new product development and improvement of existing products. For the years ended December 31, 2015 and 2014 research and development costs incurred in the development of the Company’s products were $ 744,346 and $607,049 respectively This represents approximately 15% and 13% of our total operating costs in each of those years (prior to an impairment loss in 2015 and 2014). The ability to engineer product performance using nanotechnology is one of the ways we distinguish our products in marketing and sales of our products. Research and development work includes development and refinement of formulas, engineering of liquid formulas that can be applied both by hand and by machine, optimization for a variety of performance characteristics, testing and characterization, and work on manufacturing processes and techniques both for producing the product, and for a customer’s use of the product. As we continued to reduce our costs in 2015, we eliminated some unfunded research and development cost.

Much of our intellectual property and contract research relates to potential next-generation technologies. Significant additional development work is required before products can be commercialized using these technologies. Since the Combination we have started to analyze which areas in our intellectual property portfolio have a greater, near term potential to be commercialized and whether we, or others, are best suited to do so. That analysis is ongoing.

Compliance with Environmental Laws

Our products and manufacturing and research operations must satisfy governmental safety standards. Applicable safety standards are established by the U.S. Occupational Safety and Health Administration (“OSHA”), pollution control standards by the U.S. Environmental Protection Agency (“EPA”) and other state and local regulations, including foreign regulation for products manufactured or shipped outside the U.S. Some of our research work, and products developed may also be subject to regulation under the Radiation Control for Health and Safety Act administered by the Center for Devices and Radiological Health (“CDRH”) of the U.S. Food and Drug Administration. We take these requirements into account in product development. Cost of compliance with these regulations has not been significant in the past and we do not expect it to be material in the future.

OSHA, the EPA, the CDRH and other governmental agencies, both in the United States, the states where we or our customers sell products, and foreign countries, may adopt additional rules and regulations that may affect us and products using our technology. The cost of compliance with these regulations has not been significant to us in the past and is not expected to be material in the future. Changing regulations can affect our customers, and we have in the past, and may be required in the future, to reformulate or change packaging to address regulatory issues. This can affect timing of sales which may be significant in a particular accounting period.

Employees

As of December 31, 2015 we had 38 full-time employees, plus 3 executive officers. At the present time, we do not anticipate the need to hire significant additional employees to support our existing business. If product sales increase, or we begin to see commercial sales of new products, we may hire additional employees. We are not subject to any collective bargaining agreements, and we consider our relations with our employees to be good.

ITEM 1A. RISK FACTORS

Risks relating to our Business

The timeline for commercial sales of new products, the profit margins that new products can command and customer acceptance of new products, are all key to our success and all are unpredictable.

We plan to create new products using our intellectual property. To implement this plan, we must identify products that can benefit from our intellectual property, take the products from concept to prototype, and make and sell the new product commercially. Many factors affect a customer’s acceptance of new products and many new product ideas are never realized. Many others never achieve commercial success. If we cannot develop and commercialize new products it will adversely impact our business and results of operations.

We may be unable to continue as a going concern if we do not successfully raise additional capital.

We may need to raise additional funds through public or private debt or equity financings, as well as obtain credit from vendors to be able to fully execute our business plan. If we are unable to successfully raise the capital we need, we may need to reduce the scope of our business to fully satisfy our future short-term liquidity requirements. If we cannot raise additional capital or reduce the scope of our business, we may be otherwise unable to achieve our goals or continue our operations. While we believe that we will be able to adjust our operations or raise the capital we need to continue our operations, there can be no assurances that we will be successful in these efforts or will be able to resolve our liquidity issues or eliminate our operating losses. In addition, any additional capital raised through the sale of equity may dilute your ownership interest. We may not be able to raise additional funds on favorable terms, or at all. If we are unable to obtain additional funds or credit from our vendors, we will be unable to execute our business plan and you could lose your investment.

Our strategy to commercialize new products from our intellectual property may be more difficult, costly or time-consuming than expected, any of which could adversely affect our results and negatively affect the value of our common stock.

Few companies have been able to develop commercial products based on nanotechnology. Nanofilm, our subsidiary, under the leadership of our Chairman and Chief Executive Officer, Scott Rickert, has been successful with products of limited scope. Identifying new products that can be manufactured, marketed and sold at margins that justify the investment and then taking those products to market will take time. If we cannot successfully develop and sell products enhanced by nanotechnology, or if the process drags on, the value of PEN common stock may be affected adversely.

The failure to manage successfully our existing businesses while new products are under development until they can generate commercial sales may adversely affect our future results.

Our management team must continue to manage current operations to give us time to accomplish our growth plans. At the same time, we must fund product development, create or contract for manufacturing capability, and establish sales, marketing and distribution for the new products. Disruptions or the failure to address changes in our current businesses could adversely affect ours results, financial condition and stock price.

Our increased focus on commercializing products from our intellectual property library may affect our ability to attract funding for private research as we may be perceived as a potential competitor. At the same time, to support our research staff we need sufficient research projects to pay the expenses of the research segment and related salaries. The inability to obtain research funding could adversely affect our results of operations.

We have limited resources.

We are a small company with limited human and financial resources. Most of our competitors are larger than us with greater financial strength. Our limited resources will require that we limit the potential new products that we work on at any time and may limit our ability to tackle issues that arise in development, manufacturing, regulatory approvals or marketing. Our limited resources and potential constraints on our ability to take advantage of opportunities, may give competitors time to challenge our products in the marketplace and to bring pressure on us by devoting more resources to marketing and distribution that may make it harder for us to be successful with new products.

New products directed at new market sectors or to consumers are expected to require expenditures for sales and marketing greater than revenues from sales of new products. Some new products may also require patent protection in order to protect our technology and patent protection requires significant up-front cost before the marketplace success of the product can be known. To fund these expenses we will require additional financing and our results of operations and the value of our stock may be adversely affected if we cannot obtain additional funding when needed or on reasonable terms. In addition, delay in obtaining financing may adversely affect acceptance of the new products and may afford competitors the opportunity to respond or challenge our products that may also adversely affect our results of operations.

Our business plan contemplates the acquisition of businesses that have distribution channels and who know the customers for our new products to help us with marketing, sales and distribution, but our ability to negotiate those deals, the time required to close the deals, and the costs to accomplish these acquisitions are unknown.

To understand the potential market for new products, to better understand target customers, and to augment our resources to market and distribute new products, we expect to identify businesses that are already knowledgeable about the marketing, sales and distribution to target customers to accelerate sales of new products. Identifying those companies, negotiating the acquisition and integrating new personnel into the product development team must all happen for PEN’s new products to benefit from these acquisitions. If we cannot identify, or cannot successfully negotiate or finance the acquisition of a product company, our ability to implement our business plan will be delayed either until an acquisition can be identified and consummated, until we can obtain the funding to create and grow our own marketing and distribution, or until a different product opportunity is identified where such an acquisition can be accomplished.

Our marketing and acquisition strategy is expected to require additional capital, and our failure to raise capital when needed could prevent it from growing.

To fund acquisitions of product companies, to acquire technology to complete the development of new products, or to pay for sales and marketing of new products, PEN expects that it will be required to raise capital through public or private financings. If financing is not available on acceptable terms, or at all, PEN’s failure to raise capital when needed could harm its business. Moreover, because there will not be earnings from new products for some period of time, financings are expected to be equity financings that will dilute the holders of PEN common stock.

Our executive team has not previously worked together to lead a public company, and any inability of members of the executive team to work together effectively or the loss of any of them could adversely affect its performance.

While the executive officers have significant experience, some do not have any experience working for a public company, and they have not worked together. None of the executives has experience as a manager of a public holding company with several operating subsidiaries. Moreover, our acquisition strategy will also mean that new key players will be expected to join the management team to accomplish the development, marketing, sales and distribution of new products. Our success will depend, in part, on the ability of our executives to work effectively as a team in this new environment. Any inability of our executive team to work together effectively or the loss of any of them, could impair PEN’s ability to execute its strategy.

PEN is disadvantaged by its relatively small size in selling into the optical industry, and its size also limits its ability to introduce its existing products to customers outside the optical industry.

PEN is smaller in size than other companies that sell products into the optical industry. Larger companies may have a broader product line to offer customers and have the resources to put products into more distribution channels than we have the resources to pursue. Our size also means we has fewer resources to hire people to pursue sales and marketing opportunities for products to those and to other customers which inhibits our growth.

Sales to industrial customers that incorporate PEN products into their own product offerings make us dependent on our industrial customer’s commitment and on its success.

Some of our existing products are, and potential new products may also be, sold to industrial customers that incorporate our product into their own products for their customers. This means the success of our product is dependent on the level of support, marketing and customer assistance provided by our industrial customer, and we cannot control timing, marketing or introduction of our products or improved products, the timing or methods used to address customer concerns, and we cannot directly affect marketing or distribution of the products or services that incorporate our products. If our industrial customer has other priorities or is unsuccessful in its marketing or its customer service, the sales of our products and our results of operations will be adversely affected.

Terms of secured debt make PEN vulnerable if operational issues adversely impact its working capital.

Nanofilm redeemed a majority in number of its members in 2012 and took on secured debt in 2013 to pay notes issued to some former members in the redemption. That debt was refinanced in April 2014. PEN must comply with the terms of the debt agreements in order to borrow for its regular working capital needs. Customer decisions to delay shipments, disruption in the supply chain or other operating difficulties that increase the inventory on hand or that delay collection of accounts receivable could mean that the lender will no longer advance funds and PEN could need different terms from its lender or might need to curtail its business.

PEN’s products may infringe the intellectual property rights of others, which may subject it to claims, or prevent or delay its product development efforts and stop it from selling or increase the costs of its products.

Our commercial success depends in part on our ability to operate without infringing the patents and other intellectual property rights of third parties. If claims are made that we are using third party technology without authorization or that any third-party patents cover our products or their use, the holders of any of these patents or other intellectual property may be able to block the sale of our products unless we obtain a license or changes the products so as not to use the third-party’s intellectual property. We could incur significant costs defending against any claim, and, if we is liable, we may not be able to enter into licensing arrangements or redesign the products at a reasonable cost or on reasonable terms.

We may be unable to adequately prevent disclosure of trade secrets and other proprietary information.

PEN relies on trade secrets to protect its proprietary know-how and technology, especially where PEN does not believe patent protection is appropriate or obtainable. Others may independently develop the same or similar technology, or otherwise obtain access to our proprietary technology. We rely in part on confidentiality agreements with our employees and consultants to protect our trade secrets and other proprietary information. These agreements may not effectively prevent disclosure of confidential information and may not provide an adequate remedy in the event of unauthorized disclosure. Costly and time-consuming litigation could be necessary to enforce and determine the scope of our proprietary rights. Failure to obtain or maintain trade secret protection could enable competitors to use our proprietary information and to develop products that better compete with our products.

Any lawsuits relating to infringement of intellectual property rights necessary to defend PEN or enforce its rights will be costly and time consuming.

Our ability to defend our intellectual property may require litigation to enforce our rights or to defend litigation brought by a third-party. Any of these lawsuits, regardless of their success, could be time consuming and expensive to defend and resolve and may require delay or suspension of commercial sales while they are pending. The cost could cause us to forego litigation or to settle on terms that are disadvantageous. If litigation is undertaken or defended, that attendant cost or delay could have a material, adverse impact on PEN’s results of operations.

We have limited experience in sales and marketing and may be unable to successfully commercialize new products, and it will take time and may be difficult to build brand loyalty.

Our marketing, sales and distribution experience and capabilities are limited. Our ability to achieve success with new products depends on successfully marketing products and attracting customers and building brand loyalty. To successfully perform sales, marketing, distribution and customer support functions we have strengthened our management team and plan to make strategic acquisitions, but if we cannot accomplish that, may be forced to endeavor to accomplish this ourselves. If that occurs, we will face a number of risks, including:

Even if we are successful in acquiring a product company with relevant sales, marketing and distribution capability, the expertise will need to be applied to our products, and methods may need to be changed to be successful with our products.

Some of our technology development is in its early stages and the viability of commercial products is uncertain

Some of our applications of our intellectual property, and certain products that use these technologies, will require significant additional development, engineering, testing and investment prior to commercialization. We are exploring the use of our technology in several different types of products. We have developed proof of concepts of potential products based on some of our technologies, others are not that far in the process. It is uncertain whether commercially viable products can be developed from a number of our technologies, the size of the potential customer base, and the resources that will be required to develop, test, standardize, manufacture, market, distribute and sell these potential products. Evaluating the potential commercial uses of a product under development is a matter of judgment, and mistakes would reduce the resources available for other potential products and delay commercialization which would adversely affect our results of operations and may require us to seek additional capital that may not be available on acceptable terms, if at all.

Our development partners have certain rights to jointly developed property and to license our technology.

In several cases involving our sensor technologies, we have committed to license our technology to our development partners in designated fields of use upon completion of certain development projects that are in process. Whether we can be the development partner, and the terms of these licenses have not yet been finalized. Our development partners usually also have rights to jointly developed intellectual property; however, any such jointly developed property would likely be based, at least in part, on our underlying technology which would require our partners to enter into a license agreement with us.

Some health effects of nanotechnology are unknown.

There is scientific debate on the health effects of nanomaterials, but some scientists believe that certain nanomaterials may be hazardous to human health or the environment. The science of nanotechnology is engineering at the molecular level to modify or build materials. Many nano-materials are found in nature, others are not naturally occurring. The health effect of new materials is unknown, and can depend on how they are incorporated and bonded to other materials. We carefully evaluate potential health effects of our products on our customers and the effects of handling materials on our employees and those who manufacture for us. We are very mindful of the risks of materials we use and focus on health and safety. However, the ongoing debate about the health effects of nanoparticles and nanotechnology and increasing government regulation for some nano materials may adversely affect market acceptance of our products and adversely affect our financial performance.

Risks Related to Ownership of Our Common Stock

There has been little trading of our common stock, and an active trading market for our common stock may not develop.

Although our Class A common stock is listed on the OTCQB; volume has been small. An active trading market for shares of our common stock may never develop or be sustained. If no trading market develops, securities analysts may not initiate or maintain research coverage of our company, which could further depress the market for our common stock. As a result, investors may not be able to sell their shares of our common stock at the time that they would like to sell. The limited market for our shares may also impair our ability to raise capital by selling additional shares and our ability to acquire other companies or technologies by using our common stock as consideration.

The market price of our common stock may be volatile and fluctuate significantly, which could result in substantial losses for investors and subject us to securities class action litigation.

If an active market for our stock develops and continues, our stock price nevertheless may be volatile. Among the factors that may cause the market price of our common stock to fluctuate are the risks described in this “Risk Factors” section and other factors, including:

In addition, the stock market in general, the OTCQB and the market for nanotechnology companies in particular, may experience a loss of investor confidence. Such loss of investor confidence may result in extreme price and volume fluctuations in our common stock that are unrelated or disproportionate to the operating performance of our business, financial condition or results of operations. These broad market and industry factors may materially harm the market price of our common stock and expose us to securities class action litigation. Such litigation, even if unsuccessful, could be costly to defend and divert management’s attention and resources, which could further materially harm our financial condition and results of operations.

If equity research analysts do not publish research or reports about our business or if they issue unfavorable commentary or downgrade our common stock, the price of our common stock could decline.

The liquidity of the trading market for our common stock may be affected in part by the research and reports that equity research analysts publish about us and our business. At present, no analysts follow our stock. If that should change, the price of our stock could decline if one or more equity analysts downgrade our stock or if those analysts issue other unfavorable commentary or cease publishing reports about us or our business.

PEN does not intend to pay dividends for the foreseeable future.

We intend to retain all of our earnings for the foreseeable future to finance the operation and expansion of our business and we do not anticipate paying cash dividends. As a result, stockholders can expect to receive a return on our Class A common stock only if the market price of the stock increases.

Our Chairman and CEO has control over key decision making as a result of his control of a majority of our voting stock.

Scott Rickert, our Chairman and CEO has the power to vote all the Class B common stock of PEN, representing approximately 46% of the outstanding PEN common stock and approximately 99% of the voting power of our outstanding common stock. As a result, Mr. Rickert has the ability to control the outcome of matters submitted to PEN stockholders for approval, including the election of directors and any merger, consolidation, or sale of all or substantially all of its assets. Under the terms of the Rickert Family, Limited Partnership, at the time of his death, control will transfer to his wife Jeanne Rickert. As a board member and officer, Mr. Rickert owes a fiduciary duty to our stockholders and must act in good faith in a manner he reasonably believes to be in the best interests of our stockholders. As a stockholder, even a controlling stockholder, Mr. Rickert is entitled to vote as the general partner of Rickert Family, Limited Partnership in the interest of the Rickert family, which may not always be in the interests of our stockholders generally.

Certain provisions of our corporate governing documents could make an acquisition of our company more difficult.

Certain provisions of our organizational documents could discourage potential acquisition proposals, delay or prevent a change in control of us or limit the price that investors may be willing to pay in the future for shares of our common stock. For example, our amended and restated certificate of incorporation and amended and restated by-laws will:

These and other provisions in our organizational documents could allow our board of directors to affect your rights as a stockholder in a number of ways, including making it more difficult for stockholders to replace members of the board of directors. Because our board of directors is responsible for approving the appointment of members of our management team, these provisions could in turn affect any attempt to replace the current management team. These provisions could also limit the price that investors would be willing to pay in the future for shares of our common stock.

Future sales of our common stock may depress our share price.

Sales of substantial shares of our common stock in the public market following a capital raise, or the perception that these sales may occur, could cause the market price of our common stock to decline.

Our common stock has in the past been a “penny stock” under SEC rules and it may be more difficult to resell securities classified as “penny stock.”

In the past, our common stock was a “penny stock” under applicable SEC rules (generally defined as non-exchange traded stock with a per-share price below $5.00). Unless we maintain a per-share price above $5.00, these rules impose additional sales practice and disclosure requirements on broker-dealers that recommend the purchase or sale of penny stocks to persons other than those who qualify as “established customers” or “accredited investors.” The additional burdens imposed upon broker-dealers by such requirements may discourage broker-dealers from effecting transactions in our securities, which could severely limit the market price and liquidity of our securities. These requirements may also affect your ability to resell our common stock.

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENT

This document contains forward-looking statements about us and our industry that involve substantial risks and uncertainties. All statements, other than statements of historical facts, included in this prospectus regarding our strategy, future operations, future financial position, future net sales, projected expenses, prospects and plans and objectives of management are forward-looking statements. These statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, levels of activity, performance or achievement to be materially different from those expressed or implied by the forward-looking statements.

In some cases, you can identify forward-looking statements by terms such as “anticipate,” “believe,” “estimate,” “expect,” “intend,” “may,” “might,” “plan,” “project,” “will,” “would,” “should,” “could,” “can,” “predict,” “potential,” “continue,” “objective,” or the negative of these terms, and similar expressions intended to identify forward-looking statements. However, not all forward-looking statements contain these identifying words. These forward-looking statements reflect our current views about future events and are based on assumptions and subject to risks and uncertainties. Given these uncertainties, you should not place undue reliance on these forward-looking statements. Actual events or results could differ materially from those expressed or implied by these forward-looking statements as a result of various factors, including the risk factors described in greater detail in the section entitled “Risk Factors.”

These forward-looking statements represent our estimates and assumptions only as of the date of this prospectus. Unless required by U.S. federal securities laws, we do not intend to update any of these forward-looking statements to reflect circumstances or events that occur after the statement is made or to conform these statements to actual results.

Item 1B. Unresolved Staff Comments

Not applicable.

Item 2. Properties.

We lease facilities in three locations. Our headquarters is in leased space in Miami, Florida. Our leased space in Austin, Texas is used primarily by our Research and development segment. Leased office, manufacturing and laboratory space in Valley View, Ohio is used by our Product segment. These facilities are adequate for our current needs.

Item 3. Legal Proceedings.

We are a defendant in the matter of Dongsheng Mao v. PEN Inc., Cause No. D-1-GN-16-00065 in the 345^th Judicial District Court of Travis County, Texas. The plaintiff is a former employee of Applied Nanotech Inc. His employment was terminated in 2015 and he seeks payment of deferred compensation allegedly due to him. We will contest the case vigorously. The claim is for $83,000, but the loss in the event of an unfavorable outcome could include other fees and expenses such as statutory interest, attorney’s fees and other costs.

Item 4. Mine Safety Disclosures.

Not Applicable

PART II

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

Our Class A common stock, $0.0001 par value, trades on the OTCQB system under the symbol “PENC”. The following table sets forth, on a per share basis for the periods indicated, the high and low sale prices for the common stock as reported by that system. These quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not represent actual transactions. None of the prices shown reflect the 180 to 1 reverse stock split that was effective on January 26, 2016.

As of March 29, 2016, the closing sale price for our Class A common stock as reported on the OTCQB system was $3.20. As of that date, there were approximately 354 shareholders of record for our Class A common stock, three holders of record of our Class B common stock and one holder of record of our Class Z common stock. This does not include beneficial owners holding Class A common stock in street name in brokerage accounts. As of our last record of total shareholders, including those holding stock in street name, there were approximately 5,115 shareholders.

Cash Dividends

We have never paid cash dividends on our common stock, have no plans to pay any dividends, and it is unlikely that we will pay any dividends in the foreseeable future. We currently intend to invest future earnings, if any, to finance expansion of our business. Any payment of cash dividends in the future will be dependent upon our earnings, financial condition, capital requirements, and other factors deemed relevant by our board of directors.

Recent Sales of Unregistered Securities

On November 30, 2015, we issued an aggregate of 1,048 shares of Class A common stock and 524 shares of Class B common stock to our directors as partial compensation for their Board service. Additionally, on February 17, 2016, we issued 1,248 shares of Class A common stock and 624 shares of Class B common stock to our directors as partial compensation for their Board service. The issuances of these shares were exempt from registration under the Securities Act of 1933, as amended, in reliance on Section 4(a)(2) and 3(a)(9).

Equity Compensation Plan Information

The table below sets out as of December 31, 2015 the number of securities to be issued upon the exercise of outstanding options, warrants and rights (column (a)), the weighted average exercise price of those options, warrants and rights (column (b)), and other than the securities to be issued upon the exercise of the outstanding options, warrants an rights, the number of securities remaining available for future issuance under the plan (column (c)).

Not reflected in the chart below are rights in the Stock Appreciation Rights Plan of Nanofilm that was assumed by us in the Combination. The number of rights that will be issued under that Plan will be determined at the time of our first registered offering based on the price of the shares and therefore the number of shares to be issued is not calculable at this time. No further Stock Appreciation Rights are issuable under that Plan. For further information about that Plan see Note 17 to our Consolidated Financial Statements. 

Item 6. Selected Financial Data

Not applicable.

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operation.

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 consolidated financial statements. PEN is the result of a business combination (the “Combination”), that closed at the end of August, 2014 (and disclosed elsewhere in this annual report).

OVERVIEW

PEN’s business is the marketing and sale of products enabled by nanotechnology. We develop and sell products based on our strong portfolio of intellectual property. Our current products are a portfolio of nano-layer coatings, nano-based cleaners, printable inks and pastes, gas detectors and thermal management materials.

PEN applies knowledge derived from our ongoing nanotechnology research and development to control and manipulate materials at the molecular level to solve everyday problems for customers in the optical, transportation, military, sports, and safety industries. Our primary commercial products center on our customized eye care glass cleaning and de-fogging products, precision mold release treatments, stay-clean surface treatments for ceramic surfaces, and scuff-resistant treatments for commercial dinnerware. These products are marketed globally. We are also engaged in research and development under contract with the government and others with the goal of developing new and improved products using our proprietary technology, and also sell printable inks and pastes, gas detectors, and thermal management materials.

Our principal operating segments coincide with the types of products to be sold. The products from which revenues are derived are consistent with the reporting structure of the Company’s internal organization. The Company’s two reportable segments for the year ended December 31, 2015 and for the 2014 period were (i) the Product Segment and (ii) the Research and Development Segment.

Product segment

Revenue is based on the successful development of products and technologies using proprietary intellectual property and the sale of liquid products, and wet and dry towelettes, based on these technologies. Our goal continues to be to create segment leading brands through sales of high quality consumer products, and by developing and producing customized formulas for sale to strategic, industrial partners to be incorporated into their customer’s products. Whenever feasible, we seek to be actively involved in the manufacture of formulas in order to produce reliable, consistent quality for the products that we and our commercial partners bring to the marketplace.

Our main products are:

In addition, we have developed a series of formulations used in the manufacture of precision casting and decorative architectural glass products which provides a barrier to soiling, helping keep decorative art-glass clean longer and making it easier to clean.

Separate from our historical business, we are also focused on creating products enabled by nanotechnology that tackle and solve big, global problems in growing markets. We have three primary areas of new product focus:

The first new product is expected to be part of a family of cleaning products that clean and fortify surfaces at the nanoscale-level. This fortifier and protector can clean and protect many surfaces, both natural and man-made. After application, the product continues to fortify and protect, creating a healthy surface

Research and development segment

This segment focuses its efforts on research and development of proof of concepts and prototypes for proposed PEN products and on performing research and development services to government and private entities. We are developing technologies that generally fall under one of three technology platforms. These platforms are:

Our research and development efforts are currently focused in these and emerging areas.

RECENT DEVELOPMENTS

PEN is focused on the development of new products using the strong intellectual property portfolio acquired in the Combination. The Product segment will continue to grow its product sales and develop its product offerings. The Research and Development segment is working on product prototypes for new product offerings and is also continues to perform research and development for a fee from government and private customers. Currently, our research and development segment includes research and development activities of our newly formed subsidiary, Pen Technology, LLC.

Effective January 26, 2016 we effected a 180 to 1 reverse split of our outstanding common stock. At the same time we reduced the number of our authorized shares of common stock to a total of 10,000,000 shares comprised of 7,200,000 shares of Class A common stock, 2,500,000 shares of Class B common stock, and 300,000 shares of Class Z common stock and set a par value of $0.0001 per share of all classes of our common stock upon the effectiveness of the reverse stock split. All share and per share data in this report have been retroactively restated to reflect the effect of the reverse split and authorized shares.

RESULTS OF OPERATIONS

The following comparative analysis on results of operations was based primarily on the comparative consolidated financial statements, footnotes and related information for the periods identified below and should be read in conjunction with the consolidated financial statements and the notes to those statements that are included elsewhere in this report. The results discussed below are for the years ended December 31, 2015 and 2014.

For the 2014 period, substantially all of our results of operations relate to our Product segment since the results of operations related to our research and development segment are only included in our results of operations for the period from August 27, 2014, (the effective date of the merger) to December 31. 2014.

The acquired research and development segment has a history of net losses and negative cash flow from operations. Since the Combination, we have made efforts to cut costs and have subleased excess space in order to reduce net losses and cash used in operations. We continue to monitor costs and to reduce costs in order to achieve positive or break-even cash flow from operations in this segment.

Comparison of Results of Operations for the Year Ended December 31, 2015 and 2014

Revenues:

For the years ended December 31, 2015 and 2014, revenues consisted of the following:

For the year ended December 31, 2015, sales from the Product segment decreased by $1,257,420 or 13.7% as compared to the year ended December 31, 2014 and was primarily attributable to lower sales of anti-fog products. In 2013, we experienced delays in the production of anti-fog cloths which resulted in heavier than normal sales in the first half of 2014.

For the year ended December 31, 2015, sales from our research and development segment totaled $1,764,924. For the year ended December 31, 2014, we reported sales of this segment of $772,909 representing sales from August 27, 2014 (the date of Combination) to December 31, 2014.

Cost of revenues.

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

For the year ended December 31, 2015, cost of revenues amounted to $6,344,133 as compared to $5,650,116 for the year ended December 31, 2014, an increase of $694,017 or 12.3% in large part attributable to the inclusion of the results of the Research and development segment operation for the entire 2015 period. These consisted of the following:

Gross profit and gross margin.

For the year ended December 31, 2015, gross profit amounted to $3,340,939 as compared to $4,300,361 for the year ended December 31, 2014, a decrease of $959,422 or 22.3%. The reduction was due to a combination of the lower revenue in the Product segment which reduced its margins and the inclusion of the Research and development segment for the entire 2015 period. For the years ended December 31, 2015 and 2014, gross margins were 34.5% and 43.2%, respectively.

Gross profit and gross margin by segment is as follows:

Operating expenses:

For the year ended December 31, 2015, operating expenses amounted to $5,081,142 as compared to $6,590,179 for the year ended December 31, 2014, a decrease of $1,509,037 or 22.9%. For the years ended December 31, 2015 and 2014, operating expenses consisted of the following:

Income (loss) from operations.

As a result of the factors described above, for the year ended December 31, 2015, loss from operations amounted to $1,740,203 as compared to a loss from operations of $2,289,818 for the year ended December 31, 2014, a decrease of $549,615 or 24.0%.

Other income (expense).

Other income (expense) includes interest expense, other income, net and interest income. For the year ended December 31, 2015, total other expense amounted to $105,324 as compared to total other income of $57,165 for the year ended December 31, 2014, a difference of $162,489 or 284.2%. The increase in other expenses in 2015 was primarily attributable to an increase in interest expense of approximately $89,000 due to an increase in borrowings, and a decrease in other income of approximately $74,000.

Income taxes

For the year ended December 31, 2015, income tax expense amounted to $23,720 as compared to $84,183 for the year ended December 31, 2014. Beginning at the end of February 2014, Nano became subject to federal and state corporate income taxes and the expense for the year ended December 31, 2014 represents the period from the end of February 2014 date through the date of the Combination on August 27, 2014.

Net income (loss) and net income (loss) attributable to PEN Inc

As a result of the foregoing, for the year ended December 31, 2015, net loss amounted to $1,869,247 as compared to a net loss of $2,316,836 for the year ended December 31, 2014, a decrease of $447,589 or 19.3%.

Our historical results of operations include an allocation of the net loss of Nanofilm, Ltd. to the 14.5% non-controlling interest of Nanofilm, Ltd. up to the effective date of the Combination when the holder of that non-controlling interest exchanged its membership interest for shares of PEN Inc. resulting in Nanofilm, Ltd. becoming a wholly-owned subsidiary of the Company. For the year ended December 31, 2014, net income attributable to former non-controlling interest amounted to $53,418.

For the years ended December 31, 2015 and 2014, net loss attributable to PEN Inc. amounted to $1,869,247 or $(0.63) per share (basic and diluted), and $2,370,254 or $(1.08) per shares (basic and diluted), respectively.

LIQUIDITY AND CAPITAL RESOURCES

Liquidity is the ability of an enterprise to generate adequate amounts of cash to meet its needs for cash requirements. We had working capital deficit of $(889,657) and $262,519 of cash as of December 31, 2015 and working capital of $86,636 and $464,735 of cash as of December 31, 2014.

The following table sets forth a summary of changes in our working capital from December 31, 2014 to December 31, 2015:

The decrease in working capital was primarily attributable to the decrease in cash of approximately $202,000, a decrease in inventory of $474,000, an increase in the bank revolving line of credit of $515,000 and an increase in current portion of notes payable of $74,000 offset by an increase in accounts receivable of approximately $41,000, a decrease in accounts payable of approximately $140,000 and a decrease in accrued expenses of approximately $93,000.

Net cash flow used in operating activities was $(804,208) for the year ended December 31, 2015 as compared to net cash provided by operating activities of $547,647 for the year ended December 31, 2014, a decrease of $1,351,855.

Net cash flow used in investing activities was $248,123 for the year ended December 31, 2015 as compared to $181,704 for the year ended December 31, 2014. During the years ended December 31, 2015 and 2014, we purchased property and equipment of $248,123 and $229,825, respectively. Additionally, in 2014, we acquired cash of $48,121 in the Combination.

Net cash provided by financing activities was $850,115 for the year ended December 31, 2015 as compared to net cash used in financing activities $1,575 for the year ended December 31, 2014. During the year ended December 31, 2015, we received net proceeds from the bank line of credit of $515,404 and received net proceeds from notes payable of $334,711. During the year ended December 31, 2014, we received net proceeds from the bank line of credit of $573,425 and repaid a bank loan of $575,000.

Future Liquidity and Capital Needs.

Our principal future uses of cash are for working capital requirements, including research and development and marketing expenses, legal and other fees incurred in connection with our patents and technologies, capital expenditures and reduction of accrued liabilities. These uses will depend on numerous factors including our sales and other revenues, the extent of our research and development activities and our ability to control costs. We have historically financed our working capital needs primarily through internally generated funds, and bank loans. We collect cash from our customers based on our sales to them and their respective payment terms. We expect to require additional funds through public or private debt or equity financings to be able to increase marketing for our products and to fully execute our business plan. If we are unable to raise the capital we need, we may need to reduce the scope of our business in order to continue our operations.

Revolving Credit Note

In April 2014, our subsidiary, Nanofilm entered into a $1,500,000 revolving credit line agreement (the “Revolving Note”) with Mackinac Commercial Credit, LLC. (the “Lender”). The unpaid principal balance of this Revolving Note is payable on demand, is secured by all of Nanofilm’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. Nanofilm will pay a late charge of 5.0% of any monthly payment not received by Lender within 10 calendar days after the due date. The Company, at any time or from time to time upon three business days’ written notice to Lender, prepay the Revolving Note in full. If Borrower prepays the Revolving Note in full and terminates the Revolving Note aft, or if Lender terminates the Revolving Note after default, then, in addition to all other amounts due to Lender and/or paid by the Company, the Company must pay a termination premium equal to 2.0% of the maximum loan amount.

Without the Lender’s consent, so long as the obligation remains outstanding, in addition to other covenants as defined in the Revolving Note, Nanofilm shall not a) merge or consolidate with any other company, except for the Combination and shall not suffer a change of control; b) make an capital expenditures, as defined, materially affecting the business; c) declare of 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.

At December 31, 2015, we had $1,288,748 in borrowings outstanding under the Revolving Note with $211,252 available for borrowing under such note. The weighted average interest rate during the 2015 and 2014 period was approximately 7.3% and 6.8%, respectively.

Equipment Financing

On February 10, 2015, Nanofilm entered into a $373,000 promissory note (the “Equipment Note”) with KeyBank, N.A. (the “Bank”). The unpaid principal balance of this Equipment Note is payable in 60 equal monthly installments payments of principal and interest through June 10, 2020. The Equipment Note is secured by certain equipment, as defined in the Equipment Note, and bears interest computed at a rate of interest of 4.35% per annum based on a year of 360 days.

CRITICAL ACCOUNTING POLICIES

Our discussion and analysis of our financial condition and results of operations are based upon our audited consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. We continually evaluate our estimates, including those related to income taxes, and the valuation of equity transactions. We base our estimates on historical experience and on various other assumptions that we believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Any future changes to these estimates and assumptions could cause a material change to our reported amounts of revenues, expenses, assets and liabilities. Actual results may differ from these estimates under different assumptions or conditions. We believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of the unaudited consolidated financial statements.

Impairment of long-lived assets

In accordance with ASC Topic 360, we review 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. We recognize 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.

Revenue recognition

Pursuant to the guidance of ASC Topic 605, we recognize 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:

Revenue Recognition Criteria:

Research and development

Research and development costs incurred in the development of our 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 included in cost of sales.

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. We initially record compensation expense based on the fair value of the award at the reporting date.

Segment reporting

We use “the management approach” in determining reportable operating segments. The management approach considers the internal organization and reporting used by our chief operating decision maker for making operating decisions and assessing performance as the source for determining our reportable segments. Our 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. We classified the reportable operating segments into (i) the development, manufacture and sale of personal lens cleaners and accessories and ultra-thin films of organic or polymeric crystals (the “Product Segment”) and (ii) the performance of nanotechnology research and development services for government and private entities and any related sales of related products (the “Research and Development Segment”).

RECENT ACCOUNTING PRONOUNCEMENTS

There are no recent accounting pronouncements that we have not implemented that are expected to have a material impact on our consolidated financial statements.

CONTRACTUAL OBLIGATIONS AND OFF-BALANCE SHEET ARRANGEMENTS

Contractual Obligations

We have certain fixed contractual obligations and commitments that include future estimated payments. Changes in our business needs, cancellation provisions, changing interest rates, and other factors may result in actual payments differing from the estimates. We cannot provide certainty regarding the timing and amounts of payments. We have presented below a summary of the most significant assumptions used in our determination of amounts presented in the tables, in order to assist in the review of this information within the context of our consolidated financial position, results of operations, and cash flows.

The following tables summarize our contractual obligations as of December 31, 2015 (dollars in thousands), and the effect these obligations are expected to have on our liquidity and cash flows in future periods.

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 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 7A. Quantitative and Qualitative Disclosures About Market Risk.

Not Applicable.

Item 8. Financial Statements and Supplementary Data.

PEN INC. AND SUBSIDIARIES

CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2015 and 2014

PEN INC. AND SUBSIDIARIES

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2015 and 2014

CONTENTS

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of:

PEN Inc.

We have audited the accompanying consolidated balance sheets of PEN Inc. and Subsidiaries as of December 31, 2015 and 2014 and the related consolidated statements of operations, changes in stockholders’ equity (deficit), and cash flows for each of the two years in the period ended December 31, 2015. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of PEN Inc. and Subsidiaries as of December 31, 2015 and 2014 and the consolidated results of its operations and its cash flows for each of the two years in the period ended December 31, 2015 in conformity with accounting principles generally accepted in the United States of America.

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the consolidated financial statements, the Company has a net loss and net cash used in operating activities in 2015 of $1,869,247 and $804,208 respectively and has an accumulated deficit, stockholders’ deficit and working capital deficit of $5,344,166, $272,335 and $889,657 respectively, at December 31, 2015. These matters raise substantial doubt about the Company’s ability to continue as a going concern. Management’s Plan in regards to these matters is also described in Note 1. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

/s/ Salberg & Company, P.A.

SALBERG & COMPANY, P.A.

Boca Raton, Florida

March 30, 2016

PEN INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

See accompanying notes to consolidated financial statements.

PEN INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

See accompanying notes to consolidated financial statements.

PEN INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (DEFICIT)

FOR THE YEARS ENDED DECEMBER 31, 2015 AND 2014

See accompanying notes to consolidated financial statements.

PEN INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

See accompanying notes to consolidated financial statements.

PEN INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2015 AND 2014

NOTE 1 – ORGANIZATION AND BASIS OF PRESENTATION

Organization

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

Through our wholly-owned subsidiary, Nanofilm, Ltd., we develop, manufacture and sell products based on technology which permits the fabrication of oriented, ultra-thin films of organic or polymeric crystals, and also produces a line of personal lens cleaners and accessories. These products are marketed internationally primarily to customers in the eyeglass industry.

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

On August 27, 2014 (the “Effective Date”), Applied Nanotech Holdings, Inc., a Texas corporation (“Applied Nanotech”), together with its wholly-owned direct subsidiaries, PEN and NanoMerger Sub Inc., a Delaware corporation (“Merger Sub”), completed a combination (the “Combination”) with NanoHolding Inc. (“Nano”). The Combination included three parts: (i) a redomestication of Applied Nanotech from Texas to Delaware by way of Applied Nanotech’s merger into PEN, (ii) a subsequent merger of Nano into Merger Sub, with Merger Sub (n/k/a Nanofilm Holdings Inc.) the surviving entity, and (iii) a subsequent exchange of 100% of Carl Zeiss, Inc.’s interest in Nanofilm Ltd., Nano’s wholly-owned subsidiary (“Nanofilm”), for stock in PEN. Nanofilm is a company formed under the laws of the Ohio on June 14, 1995 as a limited liability company.

On the Effective Date, the merger was accounted for as a reverse merger and recapitalization of Nano (See Note 3). On the Effective Date, the pre-merger shares of Nano were exchanged for an aggregate of 153,723 shares of Class A common stock of PEN and 1,392,772 shares of Class B common stock of PEN. Additionally, the Class Z member interests of Nanofilm (the non-controlling interests) were exchanged for 262,631 Class Z shares of PEN. The effect of these exchanges is reflected retroactively in the accompanying consolidated financial statements for all periods presented.

On December 17, 2014, the Company formed a new wholly-owned subsidiary, PEN Technology LLC, a Florida limited liability company and on December 19, 2014, Nanofilm Holdings Inc. was merged into PEN.

Basis of Presentation and Principles of Consolidation