Nano Magic Inc. - Quarter Report: 2022 September (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

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

For the quarterly period ended September 30, 2022

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

COMMISSION FILE NO. 1-11602

NANO MAGIC HOLDINGS INC.

(Exact name of registrant as specified in its charter)

31601 Research Park Drive, Madison Heights, MI 48071

(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 whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ☐ Yes ☒ 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 ☒ No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “accelerated filer”, “large accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Emerging growth company ☐

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

As of November 14, 2022, the registrant had 10,430,460 shares of Common Stock issued and outstanding.

Nano Magic Holdings Inc.

INDEX

FORWARD-LOOKING STATEMENTS

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

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

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

NANO MAGIC HOLDINGS INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited)

See accompanying notes to condensed consolidated financial statements.

NANO MAGIC HOLDINGS INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(unaudited)

See accompanying notes to consolidated financial statements.

NANO MAGIC HOLDINGS INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2022 AND 2021

(unaudited)

See accompanying notes to condensed consolidated financial statements.

NANO MAGIC HOLDINGS INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2022 AND 2021

(unaudited)

See accompanying notes to condensed consolidated financial statements.

NANO MAGIC HOLDINGS INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

See accompanying notes to condensed consolidated financial statements.

NANO MAGIC HOLDINGS INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2022

(unaudited)

NOTE 1 – ORGANIZATION AND BASIS OF PRESENTATION

Organization

Nano Magic Holdings Inc. (“we”, “us”, “our”, “Nano Magic” or the “Company”), a Delaware corporation, develops and sells a portfolio of nano-layer coatings, nano-based cleaners, and nano-composite products based on its proprietary technology. On March 3, 2020, we changed our name from PEN Inc. to Nano Magic Inc. and on March 2, 2021 we changed our name to Nano Magic Holdings Inc.

Through the Company’s wholly-owned subsidiary, Nano Magic LLC, formerly known as PEN Brands LLC, we develop, manufacture and sell consumer and institutional products using nanotechnology to deliver unique performance attributes on the surfaces of a wide variety of substrates. These products are marketed internationally directly to consumers and also to retailers and other institutional customers. On March 31, 2020, PEN Brands LLC changed its name to Nano Magic LLC.

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

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“US GAAP”) for interim financial information. Accordingly, they do not include all the information and disclosures required by US GAAP for annual financial statements. In the opinion of management, such statements include all adjustments (consisting only of normal recurring items) which are considered necessary for a fair presentation of the unaudited condensed consolidated financial statements of the Company as of September 30, 2022 and for the three and nine months ended September 30, 2022 and 2021. The results of operations for the three and nine months ended September 30, 2022 are not necessarily indicative of the operating results for the full year ending December 31, 2022 or any other period. The balance sheet at December 31, 2021 has been derived from the audited financial statement at that date but does not include all the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. These unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and related disclosures of the Company as of December 31, 2021 and for the year then ended, which were filed with the Securities and Exchange Commission on Form 10-K on March 30, 2022.

Going Concern

These unaudited consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the settlement of liabilities and commitments in the normal course of business. As reflected in the unaudited consolidated financial statements, the Company had losses from continuing operations and net cash used by continuing operations of $2,448,637 and $1,488,818 for the nine months ended September 30, 2022 and a loss from continuing operations of $993,452 and cash used by continuing operations of $520,310 for the nine months ended September 30, 2021. These factors raise substantial doubt about the Company’s ability to continue as a going concern within one year after the date that these unaudited consolidated financial statements are issued. Management cannot provide assurance that the Company will ultimately achieve profitable operations, become cash flow positive or raise additional capital. The accompanying financial statements have been prepared assuming that the Company will continue as a going concern, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. They do not include any adjustments related to the recoverability and/or classification of the recorded asset amounts and/or the classification of the liabilities that might be necessary should the Company be unable to continue as a going concern.

NOTE 2 – DISCONTINUED OPERATIONS

Effective May 31, 2022, we sold a 70% interest in our subsidiary ANI to two of its officers and long-term employees in exchange for a promissory note in the face amount of $450,000. The note bears interest at 7% and has semi-annual payments of principal initially in the amount of $20,000, increasing to $25,000 in May 2024 and to $30,000 in May 2026, with a final balloon payment of $80,000 due on December 31, 2029. The note is secured by a stock pledge, described below. In conjunction with the sale, we recognized a one-time gain of $1,148,225.

In connection with the sale, the capital structure of Applied Nanotech was changed to give us, as the holder of Class B common stock of Applied Nanotech, a 30% economic interest, certain information rights, special consent rights, and tag-along rights, as well as the obligation to sell our stock under certain circumstances if other stockholders are selling. The Class A stock acquired by the buyers was pledged to secure the promissory note given in payment of the purchase price.

The following includes the detail of major classes of assets and liabilities of discontinued operations summarized on the accompanying unaudited consolidated financial statements:

 SCHEDULE OF DISPOSAL GROUPS ASSETS AND LIABILITIES OF DISCONTINUED OPERATIONS SUMMARIZED

The following is the detail of major line items that constitute income from discontinued operations:

 SCHEDULE OF INCOME (LOSS) FROM DISCONTINUED OPERATIONS

NOTE 3 – INVENTORY

At September 30, 2022 and December 31, 2021, inventory consisted of the following:

 SCHEDULE OF INVENTORY

NOTE 4 – INVESTMENT IN SUBSIDIARY

The Company is accounting for its 30% ownership interest in ANI by the equity method of accounting under which the Company’s share of the net income (loss) of ANI is recognized as income (loss) in the Company’s statement of operations. Any dividends received from ANI as well as periodic losses for the Company’s 30% share will be treated as a reduction of the investment account. As of June 30, 2022, the investment was $189,696. For the three-month period ended September 30, 2022, the Company recorded income from the investment of $19,203 increasing the balance to $208,899 on September 30, 2022.

NOTE 5 – FACTORING

Since September 1, 2020, The Company has participated in a factoring program with NOWaccount ® Network Corporation (“NOW”). At the time of a sale, NOW buys the receivables at a discount, based on the due date and other terms. The Company has not been using this program in 2022, and there were no costs associated with this program for the three-month and nine-month periods ended September 30, 2022. Costs associated with this program were $1,451 and $10,511 for the three-month and nine-month periods ended September 30, 2021, respectively.

NOTE 6 – DEBT AND EQUIPMENT FINANCING

On February 10, 2015, Nano Magic 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 instalments 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. On June 18, 2019, Nano Magic entered into an Amendment to the Equipment Note with the Bank. By the amendment, the maturity date of the note was extended until April 10, 2022, the interest rate was raised to 6.29% per year, and the monthly payments were reduced to $4,053 per month, including interest. On May 2, 2022, we amended the Equipment Note with Key Bank to extend the due date on the note until December 10, 2022. The interest rate remains the same at 6.29% per year and the monthly payments remain at $4,053 per month. At September 30, 2022, the principal amount due under the Equipment Note amounted to $14,421 and is current.

On August 11, 2020, the company entered into a finance lease for furniture. We financed $60,684 over a period of 36 months with monthly payments of $1,972 during that time. As of September 30, 2022, the balance on the lease was $18,806 and is current.

On September 24, 2020, the company entered into a finance lease with Raymond Leasing Corporation for a forklift. Nano Magic LLC financed $14,250. The lease term is 36 months with monthly payments of $425. As of September 30, 2022, the balance on the lease was $4,977 and is current.

In December 2020, the company entered into a finance lease for production equipment. We financed $85,000 over a period of 48 months with monthly payments of $2,135 during that time. As of September 30, 2022, the balance on the lease was $51,258; the current and non-current portions were $21,380 and $29,878, respectively.

In January and February of 2022, the company issued three convertible promissory notes for $200,000. In the three months ended September 30, 2022, three additional notes were issued aggregating $100,000. The notes bear interest at a rate of 8% per annum and accrue during the term of the loan, payable semi-annually. The notes mature on March 31, 2025 and March 31, 2026, and all can be converted to common stock at any time at the option of the holders at a conversion price of $1.75 per share. The convertible promissory notes have not been included in diluted earnings per share as they would be anti-dilutive.

NOTE 7 – RELATED PARTY TRANSACTIONS

For the three month and nine-month periods ended September 30, 2022, we accrued $6,000 each period in fees for each of the directors. Other compensation paid to directors was:

 SCHEDULE OF RELATED PARTY TRANSACTIONS

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

Mr. Ron Berman and Mr. Tom Berman are the managers of the limited liability company that is the manager of PEN Comeback, LLC, PEN Comeback 2, LLC, Magic Growth, LLP, Magic Growth 2 LLC and Magic Growth 3 LLC. These five limited liability companies purchased shares of common stock and derivative securities from us in 2018, 2019, 2020, 2021 and 2022. See the subsection on Sales of Stock under Issuances of Common Stock in Note 8.

In addition, Mr. Tom Berman and Mr. Ron Berman are two of three individuals who share voting power of the sole manager of the limited liability company that is our landlord in Michigan. Together, Tom and Ron Berman hold, in the aggregate, a 5% economic interest in the landlord entity. Another director, Miles Gatland, owns a 12.5% interest in the Michigan landlord and he is a co-guarantor on the debt of that limited liability company. The lease for the Michigan facility gives us the right, during the first three years of the lease, to buy up to a 49% interest in the landlord for a price equal to 49% of the contributions received from other members.

NOTE 8 – STOCKHOLDERS’ EQUITY

Description of Preferred and Common Stock

Preferred Stock

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

Common Stock

The rights of each share of common are the same with respect to dividends, distributions and rights upon liquidation. Holders of common stock each have one vote per share in the election of directors and other matters submitted to a vote of the stockholders.

Issuances of Common Stock

Common Stock Issued for Services

On March 2, 2021, we issued an aggregate of 37,890 shares of common stock to our directors as compensation to them for service on our Board. These shares were valued on that date at $0.95 per share based on the quoted price of the stock for a total value of $36,000.

Sales of Common Stock and Derivative Equity Securities

On March 2, 2021, the Company sold to Magic Growth 2 LLC, 769,231 shares of common stock for proceeds of $961,539 and warrants to purchase up to 769,225 shares of common stock for proceeds of $38,461. The warrants are exercisable at any time during the four years after date of issue at a warrant exercise price of $2.00 per share. PEN Comeback Management, LLC, owned by Tom J. Berman and Ronald J. Berman, is the sole voting member of Magic Growth 2 LLC.

On March 17, 2021, the Company sold to Magic Growth 2 LLC, 385,231 shares of common stock for proceeds of $481,539 and warrants to purchase up to 385,225 shares of common stock for proceeds of $19,260. The warrants are exercisable at any time during the four years after date of issue at a warrant exercise price of $2.00 per share.

On January 7, 2022, and again on February 14, 2022, the Company sold to several investors an aggregate of $200,000 convertible promissory notes due March 31, 2025. Issued at face value, the notes bear interest at 8% per annum, payable quarterly in cash. The notes are convertible at any time at the option of the holder into shares of common stock at a conversion price of $1.75 per share.

On January 11, 2022, the Company sold to Magic Growth 3 LLC 222,223 shares of common stock for proceeds of $388,890 and warrants to purchase up to 222,195 shares of common stock for proceeds of $11,110. The warrants are exercisable at any time during the four years after date of issue at a warrant exercise price of $2.25.

On February 22, 2022, the Company sold to Magic Growth 3 LLC 152,778 shares of common stock for proceeds of $267,362 and warrants to purchase up to 152,770 shares of common stock for proceeds of $7,638. The warrants are exercisable at any time during the four years after date of issue at a warrant exercise price of $2.25.

On April 14, 2022, the Company sold to Magic Growth 3 LLC 69,445 shares of common stock for proceeds of $121,529 and warrants to purchase up to 69,425 shares of common stock for proceeds of $3,471. The warrants are exercisable at any time during the four years after date of issue at a warrant exercise price of $2.25.

On May 27, 2022, the Company sold to Magic Growth 3 LLC 213,889 shares of common stock for proceeds of $374,305 and warrants to purchase up to 213,885 shares of common stock for proceeds of $10,694. The warrants are exercisable at any time during the four years after date of issue at a warrant exercise price of $2.25.

On August 29, 2022, the Company sold to Magic Growth 3 LLC 69,445 shares of common stock for proceeds of $121,529 and warrants to purchase up to 69,425 shares of common stock for proceeds of $3,471. The warrants are exercisable at any time during the four years after date of issue at a warrant exercise price of $2.25.

In total for the nine months ended September 30, 2022, 727,780 shares of common stock were sold and issued for $1,273,615. Additionally, 727,700 warrants were sold for $36,385 and six convertible notes were issued for $300,000.

Stock Options

Stock options to purchase common stock outstanding at September 30, 2022 include the 130,700 options granted in February 2022 and 15,000 options granted in August 2022 under the 2021 Equity Incentive Plan. No options were exercised during the period. No options have been included in diluted earnings per share as they would be anti-dilutive.

 SCHEDULE OF STOCK OPTION PLAN ACTIVITY

SCHEDULE OF ANTIDILUTIVE SECURITIES EXCLUDED FROM COMPUTATION OF EARNINGS PER SHARE 

Warrants

As of September 30, 2022, there were outstanding and exercisable warrants to purchase 7,324,878 shares of common stock. On May 26, 2022, the Board acted to extend the term of warrants that were issued in 2018, 2019, or the first quarter of 2020, adding an additional two years to the term of each of the 4,052,003 warrants issued in that period. The outstanding warrants have a weighted average exercise price of $1.72 per share and a weighted average remaining contractual term of 61.3 months. As of September 30, 2022, there was no intrinsic value for the warrants. No warrants have been included in diluted earnings per share as they would be anti-dilutive.

2015 Equity Incentive Plan

On November 30, 2015, the Board of Directors authorized the 2015 Equity Incentive Plan. On December 31, 2019, we issued an aggregate of 102,500 shares to employees in settlement of accrued salaries totaling $66,615. On January 31, 2020 we granted an option to purchase 100,000 shares to a senior member of the sales team with vesting tied directly to 2020 sales goals. On April 8, 2021, the Board terminated the 2015 Equity Incentive Plan.

2021 Equity Incentive Plan

On March 2, 2021, our Board adopted the 2021 Nano Magic 2021 Equity Incentive Plan (the “Plan”) to allow equity compensation for those who provide services to the Company and to encourage ownership in the Company by personnel whose service to the Company is important to its continued progress, to encourage recipients to act as owners and thereby in the stockholders’ interest and to enable recipients to share in the Company’s success. Initially, 85,000 shares were available for issuance under the Plan and that number of options were also granted to employees on March 2, 2021. On April 8, 2021 the number of shares under the Plan was increased by 2,500, and an additional 2,500 options were granted. On June 21, 2021 an additional 200,000 shares were made available for issuance under the Plan and options for 100,000 shares were granted, but subsequently forfeited. In February 2022, we granted 130,700 options with an exercise price of $0.80 and weighted average fair value on the grant date of $0.60. In August 2022, we granted 15,000 options with an exercise price of $0.80 and weighted average fair value on the grant date of $0.60.

NOTE 9 – COMMITMENTS AND CONTINGENCIES

Litigation

The Company may be, from time to time, subject to various administrative, regulatory, and other legal proceedings arising in the ordinary course of business. As of September 30, 2022 we were not a defendant in any proceedings. Our policy is to accrue costs for contingent liabilities, including legal proceedings or unasserted claims that may result in legal proceedings, when a liability is probable and the amount can be reasonably estimated. As of September 30, 2022, the Company has not accrued any amount for litigation contingencies.

NOTE 10 – SUBSEQUENT EVENTS

On October 26, 2022, the Company received $25,000 for a convertible promissory note with a one-year maturity and 8% interest rate.

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

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

OVERVIEW

Nano Magic develops, commercializes and markets cutting-edge consumer and industrial products powered by nanotechnology to clean, protect and enhance every-day surfaces. Our primary business is the formulation, marketing and sale of products powered by nanotechnology bearing the Nano Magic brand as well as Ultra Clarity and Defog It brand names and we also private label our solutions, such as our eyeglass cleaner, our defogging products and nanocoating products for glass and ceramics. We have historically sold our consumer products directly to opticians and ophthalmologists and small optical retailers and we will continue to do so, even as we are now working to expand product portfolio and our consumer sales through big box retailers and e-commerce.

Effective May 31, 2022, we sold a majority interest in our subsidiary, Applied Nanotech, Inc. (“ANI”). ANI performs contract research services for the Company and for governmental and private customers and that work was previously reported as our Contract research segment. We retain a 30% interest in ANI that is now recorded as an equity investment.

RESULTS OF OPERATIONS

The following comparative analysis on results of operations was based primarily on the comparative condensed consolidated financial statements, footnotes and related information for the periods identified below and should be read in conjunction with the unaudited condensed consolidated financial statements and the notes to those statements that are included elsewhere in this report. The results discussed below are for the three and nine months ended September 30, 2022 and 2021.

Comparison of Results of Continuing Operations for the Three and Nine Months ended September 30, 2022 and 2021

Revenues:

For the three and nine months ended September 30, 2022 and 2021, revenues from continuing operations were:

For the three months ended September 30, 2022, sales from continuing operations increased by $261,511 or 48% as compared to the three months ended September 30, 2021. For the nine months ended September 30, 2022 revenues decreased by $1,853,312 or 50%, as compared to the nine months ended September 30, 2021. The increase for the three-month period was due primarily to growth in the company’s e-commerce sales channel. The decrease for the nine-month period was primarily due to the high sales of anti-fog products during the first half of 2021 when masks were required in many situations due to the COVID-19 pandemic.

Cost of sales

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

For the three months ended September 30, 2022, cost of revenues increased by $172,556 or 33% as compared to the three months ended September 30, 2021. For the nine months ended September 30, 2022, cost of revenues decreased by $420,088 or 20% as compared to the nine months ended September 30, 2021. For the three-month period, the increase reflects the higher sales volume as compared to the prior year. For the nine-month period, cost of sales decreased as sales volume dropped, but did not reduce proportionately because of overhead and other fixed production costs. We saw some price increases and shortages for some of our raw materials and packaging during the COVID-19 pandemic and the ongoing supply chain disruption, but thus far we have been able to obtain adequate supply.

Gross profit and gross margin

For the three months ended September 30, 2022, gross profit was $108,578 as compared to $19,623 for the prior year, an increase of $88,955 or 453%. For the nine months ended September 30, 2022, gross profit was $130,609 as compared to $1,563,833 for the prior year, a decrease of $1,433,224 or 92%. For the nine months ended September 30, 2022, gross margin was 7.2% as compared to 42.6% in the prior year. For the three months ended September 30, 2022, gross margin was 13.5% as compared to 3.6% in the prior year. For the three-month period the improvement was due to a combination of higher sales volume and lower fixed overhead costs at the plant. For the nine-month period the decrease was due to lower sales volumes as well as product mix.

Other operating income

For the three months ended September 30, 2022, other operating income increased by $44,129 or 86% compared to the three months ended September 30, 2021. This was due primarily to settlement income from a customer in the third quarter of 2022. For the nine months ended September 30, 2022, other operating income decreased by $456,408 or 83% compared to the nine months ended September 30, 2021. This was due primarily to settlement income from a third party received in the first half of 2021 that significantly decreased in subsequent periods.

Operating expenses

For the three months ended September 30, 2022, operating expenses decreased by $104,924 or 12% compared to the three months ended September 30, 2021. Similarly, for the nine months period operating expenses decreased by $418,063 or 14% for the period ended September 30, 2022, as compared to the nine months ended September 30, 2021. For the three and nine months ended September 30, 2022 and 2021, operating expenses consisted of the following:

Loss from operations

As a result of the factors described above, for the three months ended September 30, 2022, loss from operations amounted to $561,285 as compared to a loss of $799,293 for the three months ended September 30, 2021, a change of $238,008 or 30%. For the nine-month period ended September 30,2022, the loss was $2,451,157, as compared to a loss of $979,588 for the nine months ended September 30, 2021, an increase of $1,471,569 or 150%.

Income from investment in subsidiary

As a result of the sale of a 70% interest in ANI , we now report our 30% share of ANI’s income or loss as an investment in a subsidiary. For the three months ended September 30, 2022 that was income of $19,203, and for the nine months then ended income of $16,042.

Interest expense

For the three months ended September 30, 2022 interest expense was $10,799 as compared to $3,879 in the prior year, and for the nine months ended September 30, 2022 interest expense was $26,414 up from $13,874 in the prior year. The increases were due to interest expense for convertible notes issued in 2022.

Other income

For the three months ended September 30, 2022, other income was $10,267 as compared to $0 for the three months ended September 30, 2021. For the nine months ended September 30, 2022, other income was $12,892 as compared to $10 for the nine months ended September 30, 2021. The increases were due to interest income accrued on notes receivable issued in 2022.

Loss from continuing operations

As a result of the foregoing, we reported a loss from continuing operations of $542,594 for the three-month period ended September 30, 2022 and a loss of $803,172 for the three-month period in the prior year, a decrease of $260,578 or 32%. For the nine-month period ended September 30, 2022 our loss from continuing operations was $2,448,637 as compared to $993,452 for the nine-month period ended September 30, 2021, an increase of $1,455,185 or 146%.

Income (loss) from discontinued operations

Effective May 31, 2022, we sold a 70% interest in our subsidiary ANI to two of its officers and long-time employees in exchange for a promissory note in the face amount of $450,000. We recognized no income on that discontinued operation for the three-month period ended September 30, 2022 and on a comparative basis we recognized income of $45,603 for the three-month period ended September 30, 2021. For the nine months ended September 30, 2022 we had income from discontinued operations of $1,300 and income of $132,863 on a comparative basis for the three-month period ended September 30, 2021. For the nine months ended September 30, 2022, we reported a gain on sale of discontinued operations of $1,148,225 and $0 on a comparative basis for the nine-month period ended September 30, 2021.

Net loss (income)

For the three months ended September 30, 2022, net loss was $542,594 as compared to a net loss of $757,569 for the three months ended September 30, 2021. For the nine months ended September 30, 2022, net loss amounted to $1,299,112 as compared to a loss of $860,769 for the nine months ended September 30, 2021.

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 of $942,354 and $206,286 of unrestricted cash as of September 30, 2022 and working capital of $1,003,127 and $197,932 of unrestricted cash as of December 31, 2021.

The following table sets forth a summary of changes in our working capital from December 31, 2021 to September 30, 2022:

The decrease in current assets is primarily attributable to a decrease in inventory and prepaid expenses partially offset by an increase in accounts receivable.

Net cash used by operating activities was $(1,561,063) for the nine months ended September 30, 2022 as compared to net cash used by operating activities of $(641,196) for the nine months ended September 30, 2021, a net change of $(919,867) or 143%. Net cash used by operating activities for the nine months ended September 30, 2022 primarily resulted from net loss from continuing operations of $(2,448,637) adjusted for add-backs of $240,421 and changes in operating assets and liabilities of $719,398.

Net cash provided by continuing investing activities was $20,090 for the nine months ended September 30, 2022, as compared to net cash used by continuing investing activities of $(104,585) for the same period in 2021. Net cash used by discontinued investing activities was $0 and $(242) for the nine months ended September 30, 2022 and September 30, 2021, respectively.

Net cash provided by continuing financing activities was $1,484,785 for the nine months ended September 30, 2022 reflecting $1,610,000 in proceeds from sales of common stock, warrants and convertible notes, as compared to net cash provided by continuing financing activities of $1,396,555 for the same period in 2021. Net cash provided by discontinued financing activities was $20,000 and $76,305 for the nine months ended September 30, 2022 and September 30, 2021, respectively.

Future Liquidity and Capital Needs.

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

Equipment Financing and Loans

See note 6 to our unaudited condensed consolidated financial statements regarding our equipment loan and financing leases.

Off-Balance Sheet Arrangements

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

ITEM 3. Quantitative and Qualitative disclosures about market risk

Not applicable to smaller reporting companies.

ITEM 4. Controls and Procedures

Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as of the end of the period covered by this report (the “Evaluation Date”). Based upon this evaluation, our principal executive officer and principal financial officer concluded that we do not have sufficient resources in our accounting function to have segregation of duties so that the initiation of transactions, the custody of assets and the recording of transactions are performed by separate individuals. However, to the extent possible, these tasks are performed by separate individuals. Management evaluated our failure to have segregation of duties on our assessment of our disclosure controls and procedures and has concluded that the control deficiency that resulted represented a material weakness.

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

Changes in Internal Control

There were no changes identified in connection with our internal control over financial reporting during the three months ended September 30, 2022 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

None

ITEM 1A. RISK FACTORS

Not required of smaller reporting companies.

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

Pursuant to the agreement entered into on October 20, 2020, with the holder of substantially all the outstanding stock appreciation rights, on March 2, 2021, we issued 5,000 shares of common stock at value of $1.00 in partial settlement of that holder’s stock appreciation rights.

On March 2, 2021, the Company sold to Magic Growth 2 LLC, 769,231 shares of common stock for proceeds of $961,539 and warrants to purchase up to 769,225 shares of common stock for proceeds of $38,461. The warrants are exercisable at any time during the four years after date of issue at a warrant exercise price of $2.00 per share. PEN Comeback Management, LLC, owned by Tom J. Berman and Ronald J. Berman, is the sole voting member of Magic Growth 2 LLC.

On March 2, 2021, we also issued an aggregate of 37,890 shares of common stock to our directors as compensation to them for service on our Board. These shares were valued on that date at $0.95 per share based on the quoted price of the stock for a total value of $36,000.

On March 17, 2021, the Company sold to Magic Growth 2 LLC, 385,231 shares of common stock for proceeds of $481,539 and warrants to purchase up to 385,225 shares of common stock for proceeds of $19,261. The warrants are exercisable at any time during the four years after date of issue at a warrant exercise price of $2.00 per share.

On January 7, 2022, and again on February 14, 2022, the Company sold to several investors an aggregate of $200,000 convertible promissory notes due March 31, 2025. Issued at face value, the notes bear interest at 8% per annum, payable quarterly in cash. The notes are convertible at any time at the option of the holder into shares of common stock at a conversion price of $1.75 per share.

On January 11, 2022, the Company sold to Magic Growth 3 LLC 222,223 shares of common stock for proceeds of $388,890 and warrants to purchase up to 222,195 shares of common stock for proceeds of $11,110. The warrants are exercisable at any time during the four years after date of issue at a warrant exercise price of $2.25.

On February 22, 2022, the Company sold to Magic Growth 3 LLC 152,778 shares of common stock for proceeds of $267,362 and warrants to purchase up to 152,770 shares of common stock for proceeds of $7,638. The warrants are exercisable at any time during the four years after date of issue at a warrant exercise price of $2.25.

On April 14, 2022, the Company sold to Magic Growth 3 LLC 69,445 shares of common stock for proceeds of $121,529 and warrants to purchase up to 69,425 shares of common stock for proceeds of $3,471. The warrants are exercisable at any time during the four years after date of issue at a warrant exercise price of $2.25.

On May 27, 2022, the Company sold to Magic Growth 3 LLC 213,889 shares of common stock for proceeds of $374,305 and warrants to purchase up to 213,885 shares of common stock for proceeds of $10,694. The warrants are exercisable at any time during the four years after date of issue at a warrant exercise price of $2.25.

On July 27, 2022, the Company sold two additional convertible notes for an aggregate of $75,000.

On August 22, 2022, the Company sold an additional convertible note for an aggregate of $25,000.

On August 29, 2022, the Company sold to Magic Growth 3 LLC 69,445 shares of common stock for proceeds of $121,529 and warrants to purchase up to 69,425 shares of common stock for proceeds of $3,471. The warrants are exercisable at any time during the four years after date of issue at a warrant exercise price of $2.25.

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

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5. OTHER INFORMATION

None.

ITEM 6. EXHIBITS

SIGNATURES

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