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Document and Entity Information

v2.4.0.8
Document and Entity Information (USD $)
12 Months Ended
Dec. 31, 2014
Jun. 30, 2014
Apr. 06, 2015
Class A Common Stock [Member]
Apr. 06, 2015
Class B Common Stock [Member]
Apr. 06, 2015
Class Z Commmon Stock [Member]
Entity Registrant Name PEN INC.        
Entity Central Index Key 0000891417        
Document Type 10-K        
Document Period End Date Dec. 31, 2014        
Amendment Flag false        
Current Fiscal Year End Date --12-31        
Entity a Well-known Seasoned Issuer No        
Entity a Voluntary Filer No        
Entity's Reporting Status Current Yes        
Entity Filer Category Smaller Reporting Company        
Entity Public Float   $ 12,000,000      
Entity Common Stock, Shares Outstanding     243,842,916 251,017,063 42,273,470
Document Fiscal Period Focus FY        
Document Fiscal Year Focus 2014        

Consolidated Balance Sheets

v2.4.0.8
Consolidated Balance Sheets (USD $)
Dec. 31, 2014
Dec. 31, 2013
CURRENT ASSETS:    
Cash $ 464,735 $ 100,367
Accounts receivable, net 1,032,995 1,524,303
Accounts receivable - related party 38,246 17,224
Inventory 1,557,100 1,484,456
Prepaid expenses and other current assets 200,079 107,718
Total Current Assets 3,293,155 3,234,068
OTHER ASSETS:    
Property, plant and equipment, net 850,847 672,704
Intangible assets, net 239,338   
Other assets 41,841 73,504
Total Other Assets 1,132,026 746,208
TOTAL ASSETS 4,425,181 3,980,276
CURRENT LIABILITIES:    
Bank revolving line of credit 773,344 199,919
Current portion of bank term loan    60,000
Convertible notes payable, net 13,333   
Accounts payable 1,426,465 721,860
Accrued expenses 964,587 344,271
Deferred revenue 28,790   
Total Current Liabilities 3,206,519 1,326,050
LONG-TERM LIABILITIES:    
Bank term loan, net of current portion    515,000
Other long-term liabilities    127,914
Total Long-term Liabilities    642,914
Total Liabilities 3,206,519 1,968,964
STOCKHOLDERS' EQUITY:    
Preferred stock, $.0001 par value, 20,000,000 shares authorized; No shares issued and outstanding      
Additional paid-in capital 4,640,278 3,083,413
Accumulated deficit (3,474,919) (1,104,665)
Total Stockholders' Equity 1,218,662 2,011,312
Total Liabilities and Stockholders' Equity 4,425,181 3,980,276
Class A Common Stock [Member]
   
STOCKHOLDERS' EQUITY:    
Common stock value 23,474 2,767
Class B Common Stock [Member]
   
STOCKHOLDERS' EQUITY:    
Common stock value 25,102 25,070
Class Z Commmon Stock [Member]
   
STOCKHOLDERS' EQUITY:    
Common stock value $ 4,727 $ 4,727

Consolidated Balance Sheets (Parenthetical)

v2.4.0.8
Consolidated Balance Sheets (Parenthetical) (USD $)
Dec. 31, 2014
Dec. 31, 2013
Preferred stock, par value $ 0.0001 $ 0.0001
Preferred stock, shares authorized 20,000,000 20,000,000
Preferred stock, shares issued      
Preferred stock, shares outstanding      
Common stock, par value $ 0.0001  
Common stock, shares authorized 1,800,000,000  
Class A Common Stock [Member]
   
Common stock, par value $ 0.0001 $ 0.0001
Common stock, shares authorized 1,300,000,000 1,300,000,000
Common stock, shares issued 234,744,655 27,670,187
Common stock, shares outstanding 234,744,655 27,670,187
Class B Common Stock [Member]
   
Common stock, par value $ 0.0001 $ 0.0001
Common stock, shares authorized 400,000,000 400,000,000
Common stock, shares issued 251,017,063 250,698,105
Common stock, shares outstanding 251,017,063 250,698,105
Class Z Commmon Stock [Member]
   
Common stock, par value $ 0.0001 $ 0.0001
Common stock, shares authorized 100,000,000 100,000,000
Common stock, shares issued 47,273,470 47,273,470
Common stock, shares outstanding 47,273,470 47,273,470

Consolidated Statements of Operations

v2.4.0.8
Consolidated Statements of Operations (USD $)
12 Months Ended
Dec. 31, 2014
Dec. 31, 2013
REVENUES:    
Products (including related party sales of $198,858 and $209,170 for the year ended December 31, 2014 and 2013, respectively) $ 9,177,568 $ 9,075,348
Research and development services 772,909   
Total Revenues 9,950,477 9,075,348
COST OF REVENUES:    
Products 5,014,296 5,644,017
Research and development services 635,820   
Total Cost of Revenues 5,650,116 5,644,017
GROSS PROFIT 4,300,361 3,431,331
OPERATING EXPENSES:    
Selling and marketing expenses 235,234 284,236
Salaries, wages and contract labor 2,003,996 1,247,484
Research and development 607,049 878,364
Professional fees 814,518 453,319
General and administrative expenses 996,238 747,856
Impairment loss 1,933,144   
Total Operating Expenses 6,590,179 3,611,259
LOSS FROM OPERATIONS (2,289,818) (179,928)
OTHER INCOME (EXPENSES):    
Interest income    40
Interest expenses (28,967) (80,326)
Other income, net 86,132 41,894
Total Other Income/(Expense) 57,165 (38,392)
Loss before income taxes (2,232,653) (218,320)
Income tax benefit (expense) (84,183)   
NET LOSS (2,316,836) (218,320)
Net (income) loss attributable to former non-controlling interest (53,418) 31,694
NET LOSS ATTRIBUTABLE TO PEN, INC. $ (2,370,254) $ (186,626)
NET LOSS PER COMMON SHARE:    
Basic $ (0.01) $ 0.00
Diluted $ (0.01) $ 0.00
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:    
Basic 396,641,386 325,641,762
Diluted 396,641,386 325,641,762

Consolidated Statements of Operations (Parenthetical)

v2.4.0.8
Consolidated Statements of Operations (Parenthetical) (USD $)
12 Months Ended
Dec. 31, 2014
Dec. 31, 2013
Income Statement [Abstract]    
Sales Revenue from related parties $ 198,858 $ 209,170

Consolidated Statements of Changes in Stockholders' Equity

v2.4.0.8
Consolidated Statements of Changes in Stockholders' Equity (USD $)
Class A Common Stock [Member]
Class B Common Stock [Member]
Class Z Commmon Stock [Member]
Additional Paid-In Capital [Member]
Accumulated Deficit [Member]
Total
Balance at Dec. 31, 2012 $ 27,837    $ 4,727 $ 3,115,107 $ (918,039) $ 2,229,632
Balance, shares at Dec. 31, 2012 278,368,292    47,273,470      
Conversion of shares (25,070) 25,070            
Conversion of shares, shares (250,698,105) 250,698,105        
Net loss       (31,694) (186,626) (218,320)
Balance at Dec. 31, 2013 2,767 25,070 4,727 3,083,413 (1,104,665) 2,011,312
Balance, shares at Dec. 31, 2013 27,670,187 250,698,105 47,273,470      
Shares deemed issued in reverse merger 20,336       1,214,946    1,235,282
Shares deemed issued in reverse merger, shares 203,363,059            
Common stock issued for services 139 8    96,173    96,320
Common stock issued for services, shares 1,392,305 76,922         
Common stock issued from conversion of convertible debt and interest 232 24    137,248    137,504
Common stock issued from conversion of convertible debt and interest, shares 2,319,104 242,036         
Accretion of Class A shares issuable based on market conditions       55,080   55,080
Net loss       53,418 (2,370,254) (2,316,836)
Balance at Dec. 31, 2014   $ 25,102 $ 4,727 $ 4,640,278 $ (3,474,919) $ 1,218,662
Balance, shares at Dec. 31, 2014   251,017,063 47,273,470      

Consolidated Statements of Cash Flows

v2.4.0.8
Consolidated Statements of Cash Flows (USD $)
12 Months Ended
Dec. 31, 2014
Dec. 31, 2013
CASH FLOWS FROM OPERATING ACTIVITIES    
Net loss $ (2,316,836) $ (218,320)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:    
Change in inventory obsolescence reserve (57,855) 166,605
Bad debt expense    4,446
Impairment loss 1,933,144   
Depreciation and amortization expense 324,433 200,174
Amortization of deferred lease incentives (12,830) (12,830)
Change in value of stock appreciation righta (12,853) (6,678)
Change in value of equity credits 99 (12,477)
Stock-based compensation 151,400   
Change in operating assets and liabilities:    
Accounts receivable 770,306 (475,420)
Accounts receivable related party (21,022) 71,154
Inventory (14,789) (376,083)
Prepaid expenses and other assets (8,697) (36,504)
Accounts payable (77,325) 430,929
Accrued expenses 8,149 50,925
Income taxes payable      
Deferred revenue (117,677)   
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 547,647 (214,079)
CASH FLOWS FROM INVESTING ACTIVITIES    
Cash acquired in acquisition 48,121   
Purchases of property and equipment (229,825) (66,109)
NET CASH USED IN INVESTING ACTIVITIES (181,704) (66,109)
CASH FLOWS FROM FINANCING ACTIVITIES    
Proceeds from equity credits employee receivable    3,381
Equity credits repurchased    (3,242)
Proceeds from bank line of credit 7,153,129 725,000
Repayment of bank lines of credit (6,579,704) (525,081)
Proceeds from bank loan    600,000
Repayment of bank loans (575,000) (25,000)
Repayment of notes payable related to member redemptions    (1,935,084)
NET CASH USED IN FINANCING ACTIVITIES (1,575) (1,160,026)
NET INCREASE (DECREASE) IN CASH 364,368 (1,440,214)
CASH, beginning of year 100,367 1,540,581
CASH, end of year 464,735 100,367
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION    
Interest 28,967 80,326
Income taxes 84,183   
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:    
Value of equity credits forfeited at original purchase price, in exchange for cancellation of receivables 18,313   
Common stock issued for convertible notes and accrued interest 137,504   
Liabilities assumed in share exchange 1,589,070   
Less: assets acquired in share exchange 496,693   
Net liabilities assumed 1,092,377   
Fair value of shares exchanged 1,235,282   
Increase in intangible assets $ 2,327,659   

Organization and Basis of Presentation

v2.4.0.8
Organization and Basis of Presentation
12 Months Ended
Dec. 31, 2014
Accounting Policies [Abstract]  
Organization and Basis of Presentation

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.

 

Immediately prior to the effective date, outstanding convertible notes of Applied Nanotech were converted into common stock, for which an aggregate of 32,379,288 shares of PEN Class A common stock were issued, and 11,164,620 shares of PEN Class A common stock were issued to directors of the Company in payment of accrued fees. PEN also issued 1,500,000 shares of Class A common stock in satisfaction of a note held by the former CFO of the Company. Accordingly, immediately prior the Effective Date, the Company had 203,363,059 PEN Class A shares outstanding.

 

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 27,670,187 shares of Class A common stock of PEN and 250,698,105 shares of Class B common stock of PEN. Additionally, the Class Z member interests of Nanofilm (the non-controlling interests) were exchanged for 47,273,470 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

 

The Company’s consolidated financial statements include the financial statements of its wholly-owned subsidiaries, Applied Nanotech, Inc., EZ Diagnostix, Inc. (inactive), PEN Technology LLC, and Nanofilm, Ltd. On December 19, 2014, EZ Diagnostix was merged into Applied Nanotech, Inc. All significant intercompany accounts and transactions have been eliminated in consolidation.

 

The Company's historical results of operations include an allocation of the net income (loss) of Nanofilm, Ltd. to the 14.5% non-controlling interest of Nanofilm, Ltd. up to the effective date of the merger 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.

 

As a result of the exchange, the non-controlling interest is reflected retroactively for all periods presented in additional paid-in capital of the Company including $53,418 and $(31,694) for the year ended December 31, 2014 and 2013, respectively.

Summary of Significant Accounting Policies

v2.4.0.8
Summary of Significant Accounting Policies
12 Months Ended
Dec. 31, 2014
Accounting Policies [Abstract]  
Summary of Significant Accounting Policies

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Use of estimates

 

The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. Significant estimates for the years ended December 31, 2014 and 2013 include estimates for allowance for doubtful accounts on accounts receivable, the estimates for obsolete inventory, the useful life of property and equipment, assumptions used in assessing impairment of long-term assets, the fair value of assets acquired and liabilities assumed in the merger, estimates of current and deferred income taxes and deferred tax valuation allowances, the fair value of non-cash equity transactions, and the fair value of equity incentives.

 

Fair value of financial instruments and fair value measurements

 

The Company adopted the guidance of Accounting Standards Codification (“ASC”) 820 for fair value measurements which clarifies the definition of fair value, prescribes methods for measuring fair value, and establishes a fair value hierarchy to classify the inputs used in measuring fair value as follows:

 

Level 1-Inputs are unadjusted quoted prices in active markets for identical assets or liabilities available at the measurement date.

 

Level 2-Inputs are quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets and liabilities in markets that are not active, inputs other than quoted prices that are observable, and inputs derived from or corroborated by observable market data.

 

Level 3-Inputs are unobservable inputs which reflect the reporting entity’s own assumptions on what assumptions the market participants would use in pricing the asset or liability based on the best available information.

 

The carrying amounts reported in the consolidated balance sheets for cash and cash equivalents, accounts receivable, loans and lines of credit, accounts payable, accrued expenses, and other payables approximate their fair market value based on the short-term maturity of these instruments.

 

The Company analyzes all financial and non-financial instruments with features of both liabilities and equity under the FASB’s accounting standard for such instruments. Under this standard, financial and non-financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. The Company accounts for three instruments at fair value using level 3 valuation.

 

Description   Level 1     Level 2     Level 3  
December 31, 2014:                        
Intangible assets     -       -     $ 239,338  
Stock Appreciation Rights Plan A     -       -     $ 46,146  
Equity Credits Issued     -       -     $ 25,178  
                         
December 31, 2013                        
Stock Appreciation Rights Plan A     -       -     $ 58,999  
Equity Credits Issued     -       -     $ 25,079  

 

Fair value of financial instruments and fair value measurements (continued)

 

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

 

    Intangible
Assets
    Stock Appreciation
Rights Plan A
    Equity Credits
Issued
 
Balance at December 31, 2012   $ -       65,677     $ 59,111  
Equity credits forfeited     -       -       (18,313 )
Equity credits repurchased     -       -       (3,242 )
Change in fair value included in net loss     -       (6,678 )     (12,477 )
Balance at December 31, 2013     -       58,999       25,079  
Intangible assets acquired     2,327,659       -       -  
Amortization of intangible assets     (155,177 )     -       -  
Change in fair value included in net loss     (1,933,144 )     (12,853 )     99  
Balance at December 31, 2014   $ 239,338       46,146     $ 25,178  

 

ASC 825-10 “Financial Instruments”, allows entities to voluntarily choose to measure certain financial assets and liabilities at fair value (fair value option). The fair value option may be elected on an instrument-by-instrument basis and is irrevocable, unless a new election date occurs. If the fair value option is elected for an instrument, unrealized gains and losses for that instrument should be reported in earnings at each subsequent reporting date. The Company did not elect to apply the fair value option to any outstanding instruments.

 

Cash and cash equivalents

 

For purposes of the consolidated statements of cash flows, the Company considers all highly liquid instruments with a maturity of three months or less at the purchase date and money market accounts to be cash equivalents.

 

Accounts receivable

 

The Company recognizes an allowance for losses on accounts receivable in an amount equal to the estimated probable losses net of recoveries. The allowance is based on an analysis of historical bad debt experience, current receivables aging, and expected future write-offs, as well as an assessment of specific identifiable customer accounts considered at risk or uncollectible. The expense associated with the allowance for doubtful accounts is recognized as general and administrative expense.

 

Inventory

 

Inventory is stated at the lower of cost or market. Cost is determined using the first-in, first-out (FIFO) method.

 

Property and equipment

 

Property and equipment are stated at cost and are depreciated using the straight-line method over their estimated useful lives, which range from three to ten years. Leasehold improvements are depreciated over the shorter of the useful life or lease term including scheduled renewal terms. Maintenance and repairs are charged to expense as incurred. When assets are retired or disposed of, the cost and accumulated depreciation are removed from the accounts, and any resulting gains or losses are included in income in the year of disposition. The Company examines the possibility of decreases in the value of these assets when events or changes in circumstances reflect the fact that their recorded value may not be recoverable.

 

Intangible assets

 

Intangible assets, consisting of patents, patent pending technologies and other technologies being amortized on a straight-line method over the estimated useful life of 5 years.

 

Impairment of long-lived assets

 

In accordance with ASC Topic 360, the Company reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be fully recoverable, or at least annually. The Company recognizes an impairment loss when the sum of expected undiscounted future cash flows is less than the carrying amount of the asset. The amount of impairment is measured as the difference between the asset’s estimated fair value and its book value.

 

Revenue recognition

 

Pursuant to the guidance of ASC Topic 605, the Company recognizes sales when persuasive evidence of an arrangement exists, delivery has occurred or services have been provided, the purchase price is fixed or determinable and collectability is reasonably assured.

 

Types of revenue:

 

  Net product sales by our subsidiary Nanofilm,
     
  Reimbursements under agreements to perform research and development for government agencies and others by our subsidiary, Applied Nanotech. We do not perform research contracts that are contingent upon successful results. Larger projects are sometimes broken down in phases to allow the customer to determine at the end of each phase if they wish to move to the next phase. The agreements with federal government agencies generally provide that, upon completion of a technology development program, the funding agency is granted a royalty-free license to use any technology developed during the course of the program for its own purposes, but not any preexisting technology that we use in connection with the program. We retain all other rights to use, develop, and commercialize the technology. Agreements with nongovernmental entities generally allow the entity the first opportunity to license the technology from us upon completion of the project.
     
  Product sales and other miscellaneous revenues from our subsidiary, Applied Nanotech such as the sale of conductive inks and thermal management materials.

 

Revenue Recognition Criteria

 

  Net product sales by our subsidiary Nanofilm, are recognized when the product is shipped to the customer and title is transferred.
     
  Revenue from research and development government contracts is recognized when it is earned pursuant to the terms of the contract. These projects are usually billed monthly based on costs, hours, or some other measure of activity during the month and revenue is recognized as services are provided. If there is substantive acceptance terms then revenue will not be recognized until acceptance occurs. The recognition of revenue may not correspond with the billings allowable under the contract. To the extent that billings exceed revenue earned, a portion of the revenue is deferred until such time as it is earned.
     
  Revenue from research and development non-governmental contracts is recognized when it is earned pursuant to the terms of the contract. Each contract is unique and tailored to the needs of the customer and goals of the project. Some contracts may call for a monthly payment for a fixed period of time. Other contracts may be for a fixed dollar amount with an unspecified time period, although there is frequently a targeted completion date. These contracts generally involve some sort of up-front payment. Some contracts may call for the delivery of samples, or may call for the transfer of equipment or other items developed during the project to the customer. These projects are usually billed monthly based on costs, hours, or some other measure of activity during the month and revenue is recognized as services are provided. If there is substantive acceptance terms then revenue will not be recognized until acceptance occurs.
     
  Revenue from other product sales is recognized at the time the product shipped. The Company’s subsidiary Applied Nanotech's primary business is research and development and the licensing of its technology, not the sale of products. Product sales are generally insignificant in number, and are generally limited to the sale of conductive inks, thermal management materials, samples, proofs of concepts, prototypes, or other items resulting from its research.
     
  Other miscellaneous revenue is recognized as deemed appropriate given the facts of the situation and is generally not material.

 

Sales incentives and consideration paid to customers

 

The Company accounts for certain promotional costs such as sales incentives and cooperative advertising as a reduction of sales. For the years ended December 31, 2014 and 2013, the Company recorded approximately $123,868 and $140,833, respectively, as a reduction of sales related to these costs.

 

Cost of sales

 

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

 

Shipping and handling costs

 

Shipping and handling costs incurred relating to the purchase of inventory are included in inventory which is charged to cost of sales as product are sold. Shipping and handling costs charged to customers are included in sales. For the years ended December 31, 2014 and 2013, shipping and handling costs incurred for product shipped to customers are included in cost of sales and amounted to $195,444 and $239,755, respectively.

 

Research and development

 

Research and development costs incurred in the development of the Company’s products and under other Company sponsored research and development projects are expensed as incurred. Costs such as direct labor, direct costs, and other allocated costs incurred to perform research and development service pursuant to government and private research projects are in included in cost of sales. For the years ended December 31, 2014 and 2013, research and development costs incurred in the development of the Company’s products were $607,049 and $878,364, respectively, and are included in operating expenses on the accompanying consolidated statements of operations.

 

Advertising costs

 

The Company participates in various advertising programs. All costs related to advertising of the Company’s products are expensed in the period incurred. For the years ended December 31, 2014 and 2013, advertising costs charged to operations were $93,257 and $134,144, respectively and are included in sales and marketing on the consolidated accompanying statements of operations. These advertising expenses do not in include cooperative advertising and sales incentives which have been deducted from sales.

 

Federal and state income taxes

 

The Company accounts for income tax using the liability method prescribed by ASC 740, “Income Taxes”. Under this method, deferred tax assets and liabilities are determined based on the difference between the financial reporting and tax bases of assets and liabilities using enacted tax rates that will be in effect in the year in which the differences are expected to reverse. The Company records a valuation allowance to offset deferred tax assets if based on the weight of available evidence, it is more-likely-than-not that some portion, or all, of the deferred tax assets will not be realized. The effect on deferred taxes of a change in tax rates is recognized as income or loss in the period that includes the enactment date.

 

Prior to the February 24, 2014, the Company’s subsidiary, Nanofilm, operated as a limited liability company and passed all income and loss to each member based on their proportionate interest in Nanofilm. After February 24, 2014, the date on which Nanofilm reorganized by creating a corporation parent, NanoHolding Inc., approximately 85.5% of the net income (loss) of Nanofilm, was passed through to the majority member, NanoHolding Inc. After the effective date of the merger, 100% of the net income (loss) of Nanofilm is passed through to the Company.

 

The Company follows the accounting guidance for uncertainty in income taxes using the provisions of Accounting Standards Codification (ASC) 740 Income Taxes. Using that guidance, tax positions initially need to be recognized in the financial statements when it is more likely than not the position will be sustained upon examination by the tax authorities. As of December 31, 2014 and 2013, the Company had no uncertain tax positions that qualify for either recognition or disclosure in the financial statements. Tax years that remain subject to examination are the years ending on and after December 31, 2010. The Company recognizes interest and penalties related to uncertain income tax positions in other expense. However, no such interest and penalties were recorded as of December 31, 2014.

 

Stock-based compensation

 

Stock-based compensation is accounted for based on the requirements of the Share-Based Payment Topic of ASC 718 which requires recognition in the financial statements of the cost of employee and director services received in exchange for an award of equity instruments over the period the employee or director is required to perform the services in exchange for the award (presumptively, the vesting period). The ASC also requires measurement of the cost of employee and director services received in exchange for an award based on the grant-date fair value of the award.

 

Pursuant to ASC Topic 505-50, for share-based payments to consultants and other third-parties, compensation expense is determined at the “measurement date.” The expense is recognized over the service period of the award. Until the measurement date is reached, the total amount of compensation expense remains uncertain. The Company initially records compensation expense based on the fair value of the award at the reporting date.

 

Income (loss) per share of common stock

 

ASC 260 “Earnings Per Share”, requires dual presentation of basic and diluted earnings per share (“EPS”) with a reconciliation of the numerator and denominator of the basic EPS computation to the numerator and denominator of the diluted EPS computation. Basic EPS excludes dilution. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the entity. Basic net income (loss) per common share is computed by dividing net income (loss) available to common shareholders by the weighted average number of shares of common shares outstanding during the period. Diluted net income per common share is computed by dividing net income by the weighted average number of shares of common stock, common stock equivalents and potentially dilutive securities outstanding during each period. As of December 31, 2014, 6,800,000 contingently common shares issuable based on certain market conditions (see Note 11) are not included in the potential dilutive shares in calculating the diluted EPS. Additionally, potentially dilutive common shares consist of common stock options (using the treasury stock method). These common stock equivalents may be dilutive in the future. Potentially dilutive common shares were excluded from the computation of diluted shares outstanding as they would have an anti-dilutive impact on the Company’s net losses and consisted of the following:

 

    December 31, 2014     December 31, 2013  
Total stock options     4,357,528       -  
                 

 

 Additionally, there are an unknown quantity of common stock equivalents that result from a potential conversion of equity credits and stock appreciation rights. (See Notes 13, 15 and 16).

 

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

 

Net loss per common shares outstanding:   Year ended
December 31, 2014
    Year ended
December 31, 2013
 
Class A common stock   $ (0.02 )   $ 0.00  
Class B common stock   $ (0.01 )   $ 0.00  
Class Z common stock   $ (0.05 )   $ 0.00  
                 
Weighted average shares outstanding:                
Class A common stock     98,615,228       102,536,196  
Class B common stock     250,752,688       175,832,096  
Class Z common stock     47,273,470       47,273,470  
Total weighted average shares outstanding     396,641,386       325,641,762  

 

Reclassification

 

Certain reclassifications have been made in prior year’s consolidated financial statements to conform to the current year’s financial presentation. The reclassifications are primarily within operating expenses to reflect research and development as a separate line item.

 

Segment reporting

 

The Company uses “the management approach” in determining reportable operating segments. The management approach considers the internal organization and reporting used by the Company’s chief operating decision maker for making operating decisions and assessing performance as the source for determining the Company’s reportable segments. The Company’s chief operating decision maker is the Chairman and chief executive officer (“CEO”) of the Company, who reviews operating results to make decisions about allocating resources and assessing performance for the entire Company. The Company classified the reportable operating segments into (i) the development, manufacture and sale of 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.

Acquisition

v2.4.0.8
Acquisition
12 Months Ended
Dec. 31, 2014
Business Combinations [Abstract]  
Acquisition

NOTE 3 – ACQUISITION

 

Effective August 27, 2014, pursuant to the reverse merger and recapitalization as discussed in Note 1, the Company and Nano merged. Both Nano and Applied Nanotech were interested in the Combination because of the opportunity to commercialize new products enabled by nanotechnology. The fact that Applied Nanotech was public will facilitate access to growth capital. The strong intellectual property portfolio of Applied Nanotech, combined with the experience of the Nano team, is to be the platform for the Company to expand its product offerings and commercialize the acquired technologies.

 

On the Effective Date, the merger was accounted for as a reverse merger and recapitalization of Nano using the acquisition method in accordance with ASC 805-10 and related subsections since the shareholders of Nano and its subsidiary, the legal acquiree, owned 61.6% of the aggregate outstanding common shares of PEN immediately following the completion of the merger, had its current officers assume all corporate and day-to-day management of PEN including chief executive officer and chief financial officer, and board members of Nano control a majority of the board after the Combination. Accordingly, Nano was deemed to be the accounting acquirer in the transaction and, consequently, the transaction is treated as a reverse merger with Nano as the acquiring company.

 

Accordingly, the assets and liabilities and the historical operations that are reflected in the PEN consolidated financial statements after the Effective Date are those of Nano and Subsidiary and are recorded at the historical cost basis of Nano. Applied Nanotech’s assets and liabilities were recorded at their fair values as of the effective date and the results of operations of Applied Nanotech are consolidated with results of operations of Nano starting on the Effective Date.

 

To determine the fair value of the consideration given to acquire Applied Nanotech, the accounting acquiree, the Company analyzed the fair value of Nano, the accounting acquirer. Accordingly, the acquisition-date fair value of the consideration transferred by Nano for its interest in Applied Nanotech was based on the number of equity interests that Nano issued to give the owners of Applied Nanotech the same percentage equity interest in the combined entity that resulted from the reverse merger. The Company used the fair value of Nano since it was determined to be a better indicator of the fair value of the consideration given to acquire Applied Nanotech.

 

In connection with the acquisition, the fair value of equity consideration given to acquire Applied Nanotech was $1,235,282 and is reflected as 203,363,059 Class A common shares deemed issued to the pre-merger shareholders of Applied Nanotech and replacement options to purchase 5,525,825 Class A common shares of PEN. The purchase price exceeded the fair value of net liabilities acquired by $2,327,659. The Company allocated the $2,327,659 excess to intangible assets consisting and patents, patents pending and other technologies, which will be amortized over a 60-month period. The results of operations of Applied Nanotech are included in the consolidated results of operations of the Company from the Effective Date of August 27, 2014 to December 31, 2014. For the period from the Effective Date to December 31, 2014, revenues and net income included in the consolidated statement of operations from Applied Nano amounted to $772,909 and $48,529, respectively.

 

In connection with the Combination, for the year ended December 31, 2014, the Company incurred acquisition related costs of $235,000 which, pursuant to ASC 805, are expensed and included in professional fees on the accompanying consolidated statement of operations.

 

In connection with the merger, the Company entered into an at will employment agreement with the former CEO of Applied Nanotech, The Company determined that the consideration under this employment agreement did not qualify as additional purchase consideration.

 

The fair value of the assets acquired and liabilities assumed from Applied Nanotech are as follows:

 

    At August 27, 2014  
Assets acquired:        
Cash   $ 48,121  
Accounts receivable     278,997  
Prepaid expenses     34,383  
Property and equipment     117,574  
Intangible assets     2,327,659  
Other     17,618  
Total assets     2,824,352  
Liabilities assumed:        
Accounts payable     781,930  
Convertible notes payable, net     146,667  
Accrued expenses and other current liabilities     565,245  
Deferred revenue     95,228  
Total liabilities     1,589,070  
Purchase price   $ 1,235,282  

 

The following unaudited pro forma consolidated results of operations have been prepared as if the acquisition of Applied Nanotech had occurred as of the beginning of the following periods:

 

    Year Ended
December 31, 2014
    Year Ended
December 31, 2013
 
Net Revenues   $ 11,879,532     $ 12,993,710  
Net Loss   $ (2,685,794 )   $ (3,359,208 )
Net Loss per Share   $ (0.01 )   $ (0.01 )

 

Pro forma data does not purport to be indicative of the results that would have been obtained had these events actually occurred at the beginning of the periods presented and is not intended to be a projection of future results.

Accounts Receivable

v2.4.0.8
Accounts Receivable
12 Months Ended
Dec. 31, 2014
Receivables [Abstract]  
Accounts Receivable

NOTE 4 – ACCOUNTS RECEIVABLE

 

At December 31, 2014 and 2013, accounts receivable consisted of the following:

 

    December 31, 2014     December 31, 2013  
Accounts receivable   $ 1,040,826     $ 1,550,875  
Less: Allowance for doubtful accounts     (7,831 )     (16,017 )
Less: Allowance for sales discount     -       (10,555 )
Accounts receivable, net   $ 1,032,995     $ 1,524,303  

Inventory

v2.4.0.8
Inventory
12 Months Ended
Dec. 31, 2014
Inventory Disclosure [Abstract]  
Inventory

NOTE 5 – INVENTORY

 

At December 31, 2014 and 2013, inventory consisted of the following:

 

    December 31, 2014     December 31, 2013  
Raw materials   $ 953,566     $ 1,055,667  
Finished goods     813,353       696,461  
      1,766,919       1,752,128  
Less: reserve for obsolete inventory     (209,819 )     (267,672 )
Inventory, net   $ 1,557,100     $ 1,484,456  

Property and Equipment

v2.4.0.8
Property and Equipment
12 Months Ended
Dec. 31, 2014
Property, Plant and Equipment [Abstract]  
Property and Equipment

NOTE 6 - PROPERTY AND EQUIPMENT

 

At December 31, 2014 and 2013, property and equipment consisted of the following:

 

    Useful Life   2014     2013  
Machinery and equipment   5 - 10 Years   $ 3,510,398     $ 3,387,141  
Furniture and office equipment   3-7 Years     994,684       918,368  
Leasehold improvements   7 - 15 Years     287,162       287,162  
Construction in progress   -     201,027       53,200  
          4,993,271       4,645,871  
Less: accumulated depreciation         (4,142,424 )     (3,973,167 )
Property and equipment, net       $ 850,847     $ 672,704  

 

For the years ended December 31, 2014 and 2013, depreciation and amortization expense amounted to $169,256 and $200,174, respectively, of which $119,566 and $84,603, respectively, is included in cost of sales and the remainder is included in operating expenses.

Intangible Assets

v2.4.0.8
Intangible Assets
12 Months Ended
Dec. 31, 2014
Goodwill and Intangible Assets Disclosure [Abstract]  
Intangible Assets

NOTE 7 – INTANGIBLE ASSETS

 

In connection with the acquisition (See Note 3), the fair value of equity consideration given to acquire Applied Nanotech exceeded the fair value of net liabilities acquired by $2,327,659. The Company allocated the $2,327,659 excess to intangible assets consisting and patents, patents pending and other technologies, which was to be amortized over a 60-month period.

 

In December 2014, the Company assessed its long-lived assets for any impairment and concluded that there were indicators of impairment as of December 31, 2014 and we calculated that the estimated undiscounted cash flows were less than the carrying amount of the intangible asset. Based on the Company’s analysis, the Company recognized an impairment loss of $1,933,144 for the year ended December 31, 2014 which reduced the value of intangible assets acquired to $239,338. The Company did not record any impairment charge for the year ended December 31, 2013.

 

For the years ended December 31, 2014 and 2013, amortization expense related to these intangibles amounted to $155,177 and $0, respectively.

 

At December 31, 2014 and 2013, intangible assets consisted of the following:

 

    Useful Life   2014     2013  
Patents, patents pending and other technologies   4.7 Years   $ 239,338     $ -  
Less: accumulated amortization         -       -  
Intangible assets, net       $ 239,338     $ -  

 

For the years ended December 31, 2014 and 2013, amortization expense amounted to $155,177 and $0, respectively.

 

Amortization of intangible assets attributable to future periods is as follows:

 

Years ending December 31:      
2015   $ 51,287  
2016     51,287  
2017     51,287  
2018     51,287  
2019     34,190  
    $ 239,338  

Bank Loans and Lines of Revolving Credit Facility

v2.4.0.8
Bank Loans and Lines of Revolving Credit Facility
12 Months Ended
Dec. 31, 2014
Debt Disclosure [Abstract]  
Bank Loans and Lines of Revolving Credit Facility

NOTE 8 – BANK LOANS AND LINES OF REVOLVING CREDIT FACILITY

 

In April 2014, 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 to Lender a late charge of 5.0% of any monthly payment not received by Lender within 10 calendar days after its due date. The Company may, at any time or from time to time upon three business days’ written notice to Lender, prepay the Note in whole provided that (i) if Borrower prepays the Revolving Note in full and terminates the Revolving Note, or (ii) Lender terminates the Revolving Note after default, then Borrower will pay a termination premium equal to 2.0% of the maximum loan amount. Nanofilm used $988,000 of proceeds of the Revolving Note to pay off its indebtedness to Fifth Third Bank.

 

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 or pay cash dividends upon any of its stock, or distribute any of its property, make any loans, make investments, redeem, retire or acquire any of its stock, d) become liable for the indebtedness of anyone else, as defined, and e) incur indebtedness, other than trade payables.

 

At December 31, 2014, the Company had $773,344 in borrowings outstanding under the Revolving Note with $726,656 available for borrowing under such note. The weighted average interest rate during the period was approximately 6.8%.

Convertible Notes Payable

v2.4.0.8
Convertible Notes Payable
12 Months Ended
Dec. 31, 2014
Debt Disclosure [Abstract]  
Convertible Notes Payable

NOTE 9 – CONVERTIBLE NOTES PAYABLE

 

In connection with the reverse merger, the Company assumed certain 8% convertible notes payable dated from April 2014 to August 2014, with an aggregate principal amount of $50,000, which are due on July 15, 2015. These Notes will automatically convert into shares of Class A Common Stock of PEN Inc. on the later of (i) the day 180 days after the Note dates which range from April to August 2014, (ii) the day 60 days after the closing under the Merger & Exchange Agreement which closed effective August 27, 2014, or (iii) October 15, 2014. Principal and accrued interest will be converted into shares using a conversion price equal to 75% of the average closing price of the Company’s Class A Common Stock for the twenty trading days immediately preceding the conversion date.

 

Pursuant to ASC Topic 470-20-525 (Debt with conversion and other options), since these convertible notes had fixed conversion percentages of 75% of the stock price, the Company determined it had a fixed monetary amounts that can be settled for the debt. Accordingly, on the respective note date, the Company accrued a put premium amount aggregating $16,666 since these convertible notes are convertible for the conversion premium. Upon conversion, the Company reclassified $13,333 of the conversion premium to additional paid-in capital, which is included on the “common stock issued for conversion of convertible debt and interest” line item on the consolidated statement of stockholders’ equity.

 

From October 26, 2014 to December 7, 2014, the Company issued 1,086,420 shares of Class A common stock upon the automatic conversion in accordance with their terms of $40,000 of aggregate principal amount of these convertible promissory notes and accrued interest of $1,614. The notes converted based on 75% of the average closing price of the Company’s common shares for the 20 day trading period ending on the last trading day prior to the conversion. At December 31, 2014, principal amount due under these convertible notes amounted to $10,000.

 

At December 31, 2014 and 2013, aggregate convertible notes payable consisted of the following:

 

    December 31, 2014     December 31, 2013  
Convertible notes payable   $ 10,000     $ -  
Put premium     3,333       -  
Total   $ 13,333     $ -  

Related Party Transactions

v2.4.0.8
Related Party Transactions
12 Months Ended
Dec. 31, 2014
Related Party Transactions [Abstract]  
Related Party Transactions

NOTE 10 – RELATED PARTY TRANSACTIONS

 

Sales to related party

 

During the year ended December 31, 2014 and 2013, the Company engaged in certain sales transactions with a company which is a shareholder and related to a director of the Company. These transactions were conducted during the normal course of the Company’s business on terms consistent with similar transactions with unrelated parties. Sales to the related party totaled $198,858 and $209,170 for the year ended December 31, 2014 and 2013, respectively. Accounts receivable from the related party totaled $38,246 and $17,224 at December 31, 2014 and 2013, respectively.

 

Convertible notes payable – related parties

 

In connection with the reverse merger, the Company assumed certain 8% convertible notes payable from related parties dated from April 2014 to August 2014, with an aggregate principal amount of $60,000, which are due on the Note dates which range from April to May 2014. These Notes will automatically convert into shares of Class A Common Stock of PEN Inc. on the later of (i) the day 180 days after the Note dates which range from April to August 2014, (ii) the day 60 days after the closing under the Merger & Exchange Agreement which closed effective August 27, 2014, or (iii) October 15, 2014. Principal and accrued interest will be converted into shares using a conversion price equal to 75% of the average closing price of the Company’s Class A Common Stock for the twenty trading days immediately preceding the conversion date.

 

Pursuant to ASC Topic 470-20-525 (Debt with conversion and other options), since these convertible notes had fixed conversion percentages of 75% of the stock price, the Company determined it had a fixed maximum amounts that can be settled for the debt. Accordingly, the Company accrued a put premium amount aggregating $20,001 since these convertible notes are convertible for the conversion premium. Upon conversion, the Company reclassified $20,001 of the conversion premium to additional paid-in capital.

 

From October 26, 2014 to November 17, 2014, the Company issued 1,232,684 shares of Class A common stock and 242,036 shares of Class B common stock upon the automatic conversion in accordance with their terms of $60,000 of aggregate principal amount of related party convertible promissory notes, and accrued interest of $2,556. The notes converted based on 75% of the average closing price of the Company’s common shares for the 20 day trading period ending on the last trading day prior to the conversion date. At December 31, 2014, principal amount due under these convertible notes amounted to $0.

 

Other

 

A board member is a principal in an investment advisory firm which the Company paid approximately $232,872 in fees and expenses during the year ended December 31, 2014.

Stockholders' Equity

v2.4.0.8
Stockholders' Equity
12 Months Ended
Dec. 31, 2014
Equity [Abstract]  
Stockholders' Equity

NOTE 11 - STOCKHOLDERS’ EQUITY

 

Description of Preferred and Common Stock

 

The Company is authorized to issue up to a total of 1,820,000,000 shares of capital stock, consisting of 20,000,000 shares of Preferred Stock, par value $0.0001 per share (“preferred stock”), 1,300,000,000 shares of Class A Common Stock, par value $0.0001 per share (“Class A common stock”), 400,000,000 shares of Class B Common Stock, par value $0.0001 per share (“Class B common stock”), and 100,000,000 shares of Class Z Common Stock, par value $0.0001 per share (“Class Z common stock”).

 

Preferred Stock

 

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

 

Common Stock – General

 

The rights of each share of Class A common stock, each share of Class B common stock and each share of Class Z common stock are the same with respect to dividends, distributions and rights upon liquidation.

 

Class A Common Stock

 

Holders of the Class A common stock are entitled to one vote per share in the election of directors and other matters submitted to a vote of the stockholders.

 

Class B Common Stock

 

Conversion Rights. Shares of Class B common stock can be converted, one-for-one, into shares of Class A common stock at any time at the option of the holder. Shares of Class B common stock will automatically be converted into shares of Class A common stock if the shares of Class B common stock are not owned by the Company’s chief executive officer, his spouse, or their descendants and their spouses, or by entities or trusts wholly-owned by them.

 

Voting Rights Holders of PEN Class B common stock are entitled to 100 votes per share in the election of directors and other matters submitted to a vote of the stockholders.

 

Class Z Common Stock

 

Conversion Rights. Shares of Class Z common stock can be converted, one-for-one, into shares of Class A common stock at any time at the option of the holder. Shares of Class Z common stock will automatically be converted into shares of Class A common stock if the shares of Class Z common stock are not owned by Zeiss or an entity wholly owned by the ultimate parent of Zeiss. In addition, if Zeiss and other permitted holders of shares of Class Z common stock sell or convert more than one-half of the shares of Class Z common stock that are received in the Combination, all shares of Class Z common stock will automatically convert into Class A common stock.

 

Voting Rights. Holders of PEN Class Z common stock do not vote in the election of directors or otherwise, but they do have the right to designate a director to the PEN Board, have anti-dilution rights described below and have consent rights with respect to certain amendments to PEN’s certificate of incorporation.

 

Other Rights. The Class Z common stock has anti-dilutive rights that, subject to limited exceptions, permit holders of Class Z common stock to purchase additional shares or equity rights issued by PEN (on the same terms as made available to third parties by PEN) to maintain their economic ownership percentage. The holders of Class Z common stock are also entitled to receive a copy of any notice sent to the holders of Class A common stock or Class B common stock, as and when the notice is sent to such holders. There were no equity issuances through December 31, 2014 that triggered anti-dilutive purchase rights.

 

Issuances of Common Stock

 

On April 19, 2013, the Nanofilm Operating Agreement was amended to allow for Class B units which are now reflected as Class B common stock in the accompanying consolidated financial statements. In connection with this amendment, 250,698,105 Class A common shares beneficially owned by the Company’s chief executive officer were converted to Class B common shares.

 

On the Effective Date, the pre-merger shares of NanoHolding, Inc. were exchanged for an aggregate of 27,670,187 shares of Class A common stock of PEN and 250,698,105 shares of Class B common stock of PEN. Additionally, the Class Z member interests of Nanofilm (the non-controlling interests) were exchanged for 47,273,470 Class Z shares of PEN. The effect of these exchanges is reflected retroactively in the accompanying consolidated financial statements for all periods presented.

 

Immediately prior to the Effective Date, outstanding convertible notes of Applied Nanotech were converted into common stock, for which an aggregate of 32,379,288 shares of PEN Class A common stock were issued, and 11,164,620 shares of PEN Class A common stock were issued to directors of the Company in payment of accrued fees. PEN also issued 1,500,000 shares of Class A common stock in satisfaction of a note held by the former CFO of the Company. Accordingly, immediately prior the Effective Date, the Company had 203,363,059 PEN Class A shares outstanding. These 203,363,509 Class A common shares are reflected as shares deemed issued as merger consideration in the accompanying consolidated financial statements.

 

Common stock issued for services

 

On September 1, 2014, the Company issued 1,200,000 shares of Class A common stock to the former chief financial officer of Applied Nanotech pursuant to a Stock Grant Agreement dated in February 2014. These shares were valued on the measurement date of September 1, 2014 at $0.0686 per share based on the quoted trading price of the stock for a total value of $82,320. For the year ended December 31, 2014, in connection with the issuance of these shares, the Company recorded stock-based compensation of $82,320.

 

On September 24, 2014, the Company issued 83,610 shares of Class A common stock and 33,444 shares of Class B common stock to directors for services rendered. These shares are valued were valued on the date of grant of September 24 2014 at $0.0598 per share based on the quoted price of the stock for a total value of $7,000. Additionally, on December 10, 2014, the Company issued 108,695 shares of Class A common stock and 43,478 shares of Class B common stock to directors for services rendered. These shares are valued were valued on the date of grant of December 10, 2014 at $0.046 per share based on the quoted trading price for a total value of $7,000. For the year ended December 31, 2014, in connection with the issuance of these shares, the Company recorded stock- based compensation of $14,000.

 

Common stock issued for convertible debt and interest

 

From October 26, 2014 to December 7, 2014, the Company issued 1,086,420 shares of Class A common stock upon the automatic conversion in accordance with their terms of $40,000 of aggregate principal amount of convertible promissory notes and accrued interest of $1,614 (See Note 9).

 

From October 26, 2014 to November 17, 2014, the Company issued 1,232,684 shares of Class A common stock and 242,036 shares of Class B common stock upon the automatic conversion in accordance with their terms of $60,000 of aggregate principal amount of related party convertible promissory notes, and accrued interest of $2,556 (See Note 10).

 

Stock Options

 

Stock options outstanding are to purchase Class A common stock, Stock option activities for the years ended December 31, 2014 and 2013 are summarized as follows:

 

    Number of
Options
    Weighted
Average
Exercise
Price
    Weighted Average
Remaining
Contractual Term
(Years)
    Aggregate
Intrinsic
Value
 
Balance Outstanding December 31, 2013     -     $ -       -     $ -  
Stock options assumed in acquisition     5,525,825       0.60       -       -  
Exercised     -       -       -       -  
Forfeited     (1,168,297 )     (0.98 )     -       -  
Balance Outstanding December 31, 2014     4,357,528     $ 0.50       4.06     $ -  
                                 
Exercisable, December 31, 2014     4,357,528     $ 0.50       4.06     $ -  

 

Contingently issuable Class A common shares

 

On August 27, 2014, the Company entered into a Restricted Stock Agreement with Dr. Zvi Yaniv, the former Chief Operating Officer and President, of Applied Nanotech, and a current employee of the Company granting Dr. Yaniv 6,800,000 shares of Class A common stock, subject to forfeiture. All these shares become vested and not subject to forfeiture on the earlier of a change of control of us, Dr. Yaniv’s death, or if more than 180 days after closing, the average trading price of the shares during a measurement period of ten consecutive trading days reaches certain price thresholds. At a $0.10 price, one million of the shares vest, with additional tranches of one million shares vesting if the price reaches $0.15, $0.20, $0.25 and $0.30. The last 1.8 million shares vest at a $0.35 price threshold. Any shares that have not vested five years after the Effective Date will be forfeited. We also entered into a Piggyback Registration Rights Agreement that will allow Dr. Yaniv, subject to other customary terms and conditions, to register shares that are no longer subject to forfeiture if we are registering our shares. Pursuant to ASC 718-10 and related subsections, these shares were valued on the date of grant of August 27, 2014 at $0.0729 per shares for a total value of $495,720. The Company estimates the fair value of the awards with market conditions using a Binomial simulation, which utilizes several assumptions including the risk-free interest rate, the volatility of the Company’s stock and the exercise behavior of award recipients. The grant-date fair value of $495,720 of the awards will be recognized over the requisite service period of 3 years, which represents the derived service period for the stock grant as determined by the Binomial simulation. For the year ended December 31, 2014, in connection with the amortization of the fair value of this stock grant, the Company recorded stock-based compensation of $55,080.

 

In connection with a Stock Grant Agreement with the former chief financial officer of Applied Nanotech dated in March 2014, the Company shall issue 889,580 shares on January 31, 2015 and 1,200,000 shares of Class A common stock on or around February 27, 2015. These shares were valued on the date of grant of February 18, 2014 at $0.059 per share based on the quoted trading price for a total value of $123,285. In connection with these shares, during the year ended December 31, 2014, the Company recorded compensation expense of $123,285 and included $123,285 in accrued expenses on the accompanying consolidated balance sheet. In January and February 2015, shares issuable pursuant to the Stock Grant Agreement were issued (See Note 18).

Income Taxes

v2.4.0.8
Income Taxes
12 Months Ended
Dec. 31, 2014
Income Tax Disclosure [Abstract]  
Income Taxes

NOTE 12 – INCOME TAXES

 

The Company maintains deferred tax assets and liabilities that reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The net deferred tax asset has been fully offset by a valuation allowance because of the uncertainty of the attainment of future taxable income.

 

For the period from January 2014 to February 28, 2014 and for the year ended December 31, 2013, the Company operated as a limited liability company and passed all income and loss to each member based on their proportionate interest in the Company. Accordingly, no provision for federal and state income taxes has been made in these consolidated financial statements for these periods. Had the Company been subject to income taxes during the period from January 2014 to February 28, 2014 and for the year ended December 31, 2013, the pro forma effect of income taxes on the Company’s net income (loss) based of the Company’s statutory income tax rate of 34% was not material.

 

The items accounting for the difference between income taxes at the effective statutory rate and the provision for income taxes for the years ended December 31, 2014 and 2013 were as follows:

 

    Years Ended December 31,  
    2014     2013  
Income tax benefit at U.S. statutory rate of 34%   $ (759,000 )   $ (74,229 )
Forfeiture of stock options     184,000       -  
Non-deductible expenses     615,000       -  
Loss allocated to prior LLC members     -       74,229  
Income tax incurred on LLC profits prior to acquisition     84,183       -  
Change in valuation allowance     (40,000 )     -  
Total provision for income tax   $ 84,183     $ -  

 

The Company’s approximate net deferred tax assets as of December 31, 2014 and 2013 were as follows:

 

    December 31, 2014     December 31, 2013  
Deferred Tax Assets:                
Net operating loss carryforward   $ 2,407,000     $ -  
Stock-based compensation     392,000       -  
Allowance for inventory obsolescence     72,000       -  
Accrued compensation     106,000       -  
Other     61,000       -  
Total deferred tax assets     3,038,000       -  
Less: deferred tax liability: intangible assets     (81,000 )     -  
Net deferred tax assets before valuation allowance     2,957,000       -  
Valuation allowance     (2,957,000 )     -  
Net deferred tax asset   $ -     $ -  

 

The estimated net operating loss carryforward was approximately $7,084,000 at December 31, 2014 which is an estimate of the Company’s net operating loss carryforward acquired in the Combination after giving effect to the limitation on the usage of such net operating loss carryforwards due to a change in ownership in accordance with Section 382 of the Internal Revenue Code. The Company provided a valuation allowance equal to the net deferred income tax asset for the years ended December 31, 2014 because it was not known whether future taxable income will be sufficient to utilize the loss carryforward. The increase in the valuation allowance was $40,000 from the date of Combination (August 27, 2014) to December 31, 2014. The potential tax benefit arising from tax loss carryforwards will expire in 2034.

 

Additionally, the future utilization of the net operating loss carryforward to offset future taxable income may be subject to special tax rules which may limit their usage under the Separate Return Limitation Year (“SRLY”) rules. If necessary, the deferred tax assets will be reduced by any carryforward that expires prior to utilization as a result of such limitations, with a corresponding reduction of the valuation allowance.

 

The Company does not have any uncertain tax positions or events leading to uncertainty in a tax position. The Company’s 2012, 2013 and 2014 Corporate Income Tax Returns are subject to Internal Revenue Service examination.

Commitments and Contingencies

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Commitments and Contingencies
12 Months Ended
Dec. 31, 2014
Commitments and Contingencies Disclosure [Abstract]  
Commitments and Contingencies

NOTE 13 – COMMITMENTS AND CONTINCENGIES

 

Leases

 

The Company leases its facilities and certain equipment under non-cancelable operating leases. The Company has the right to renew certain facility leases for an additional five years. Rent expense for operating leases was $426,488 and $375,330 for the years ended December 31, 2014 and 2013, respectively, including $12,830 of amortization for deferred lease incentives for the years ended December 31, 2014 and 2013. Future minimum lease payments under non-cancelable operating leases at December 31, 2014 are as follows:

 

Years ending December 31,      
2015   $ 587,465  
2016     584,638  
2017     469,347  
2018     192,400  
2019     32,200  
Total minimum non-cancelable operating lease payments   $ 1,866,050  

 

Equity Credits

 

Equity credits may become convertible into an unknown amount of capital stock of the Company to be determined by the Company’s board of directors (See Note 15).

 

Stock Appreciation Rights

 

If the Company completes an IPO, the value of stock appreciation rights calculated based on the IPO formula may cause a material increase in the value of the liability (See Note 16).

Concentrations

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Concentrations
12 Months Ended
Dec. 31, 2014
Risks and Uncertainties [Abstract]  
Concentrations

NOTE 14 – CONCENTRATIONS

 

Concentrations of credit risk

 

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

 

The Company places its cash in banks at levels that, at times, may exceed federally insured limits. There were no balances in excess of FDIC insured levels as of December 31, 2014 and 2013. The Company has not experienced any losses in such accounts through December 31, 2014.

 

Customer concentrations

 

Customer concentrations for the years ended December 31, 2014 and 2013 are as follows:

 

    Revenues  
    For the Years ended December 31,  
    2014     2013  
Customer A     24 %     31 %
Customer B     16 %     14 %
Customer C     10 %     12 %
Total     50 %     57 %

 

    Accounts Receivable  
    As of December 31,     As of December 31,  
    2014     2013  
Customer A     31 %     35 %
Customer B     3 %     32 %
Customer C     10 %     8 %
Total     44 %     75 %

 

A reduction in sales from or loss of such customers would have a material adverse effect on our consolidated results of operations and financial condition.

 

Geographic concentrations of sales

 

For the year ended December 31, 2014 and 2013, total sales in the United States represent 89% and 85% of total sales, respectively. No other geographical area accounting for more than 10% of total sales during the years ended December 310, 2014 and 2013.

 

Vendor concentrations

 

For the year ended December 31, 2014, the Company purchased approximately 49% of its inventory from four suppliers (24%, 9%, 8% and 8%, respectively). For the year ended December 31, 2013, the Company purchased 14% of its inventory from one supplier.

Equity Credits

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Equity Credits
12 Months Ended
Dec. 31, 2014
Equity Credits  
Equity Credits

NOTE 15 – EQUITY CREDITS

 

During 1997, Nanofilm established The Equity Credit Incentive Program. This program enables select employees the opportunity to purchase equity credits that increase in value based upon an increase in Nanofilm’s revenue over a base year of 1996. Eligible credits can be redeemed after two years at the equity credit value for that year. Under certain circumstances, the equity credits are convertible into Nano equity on a one-for-one basis.

 

The maximum number of credits available for issuance is 385,000. During the year ended December 31, 2014, no equity credits were forfeited and no units were redeemed. In 2013, 65,000 equity credits were forfeited and 17,450 units were redeemed. As of December 31, 2014, 77,700 equity credits were issued and outstanding with an approximate value of $0.3240 per credit and, as of December 31, 2013, 77,700 equity credits were issued and outstanding with an approximate value of $0.3228 per credit. A long-term employee receivable of $0 and $35,880 is included in other assets at December 31, 2014 and 2013, respectively. The receivable relates to the purchases of 44,250 and 99,000 equity credits in 2009 and 2008, respectively, whereby participants are guaranteed no less than their purchase price of $0.3206 and $0.2817 per credit, respectively, a portion of which were forfeited during 2012 and 2011. In August 2014, the remaining $13,705 receivable was collected from the employees. At December 31, 2014 and 2013, $25,178 and $25,079 respectively, was accrued, and included in accrued expenses, representing the redemption value associated with the equity credits outstanding for both years.

 

For the year ended December 31, 2014 and 2013, a gain (loss) from the change in value of the equity credits was $(99) and $6,678, respectively, and is included in operating expenses on the accompanying consolidated statements of operations. Under the terms of the Plan, when the Company completes a registered offering of its common stock, the equity credit participants will have the option to convert the equity credits into Class A common shares of the Company, or in the case of our President, into shares of Class B common stock.

Stock Appreciation Plan

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Stock Appreciation Plan
12 Months Ended
Dec. 31, 2014
Stock Appreciation Plan  
Stock Appreciation Plan

NOTE 16 – STOCK APPRECIATION PLAN

 

From June 1, 1988, until December 31, 1997, when the plan was terminated, Nanofilm had in place a Stock Appreciation Rights Plan A (the “Plan”), intended to provide employees, directors, members of a technical advisory board and certain independent contractors selected by the Board with equity-like participation in the growth of Nanofilm. The maximum number of stock appreciation rights that could be granted by the Board was 1,000,000.

 

There were 235,782 fully vested stock appreciation rights (“SARS”) outstanding under the terms of the Plan at December 31, 2014 and 2013. The SARS unit value is based on the book value of the Company as of the last fiscal year end multiplied by a SARS multiplier stipulated in the SARS plan. However, in the event of an initial public offering (“IPO”) of Nano, the SARS are redeemable based on a value equal to offering price of the stock in an IPO times the total outstanding shares of the Company just subsequent to the completion of the IPO, multiplied by the SARS multiplier. The SARS multiplier is to be adjusted, as the Board determines, to reflect changes in the capitalization of Nanofilm. Generally, the SARS are redeemable in cash, at their then fair value as computed pursuant to the Plan, in the event of termination of employment or business relationship, death, permanent and total disability, or sale of Nano (as defined).. Upon an IPO, SARS are to be redeemed by applying 70% of the redemption value to purchase common shares, with the remaining 30% being distributed in cash to the participant.

 

The August 2014 Combination does not qualify as an IPO under the Plan; however, a future underwritten registered offering may qualify.

 

The accrued redemption value associated with the stock appreciation rights amounted to $46,146 and $58,999, at December 31, 2014 and 2013, respectively. If the Company completes an IPO, the value of SARS calculated based on the IPO formula may cause a material increase in the value of the liability

Segment Reporting

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Segment Reporting
12 Months Ended
Dec. 31, 2014
Segment Reporting [Abstract]  
Segment Reporting

NOTE 17 – SEGMENT REPORTING

 

The Company’s principal operating segments coincide with the types of products to be sold. The products from which revenues are derived are consistent with the reporting structure of the Company’s internal organization. The Company’s two reportable segments for the year ended December 31, 2014 were i) the Product Segment and ii) the Research and Development Segment. For the 2013 periods, the Company only operated in the Product Segment. The Company’s chief operating decision-maker has been identified as the Chairman and CEO, who reviews operating results to make decisions about allocating resources and assessing performance for the entire Company. Segment information is presented based upon the Company’s management organization structure as of December 31, 2014 and the distinctive nature of each segment. Future changes to this internal financial structure may result in changes to the reportable segments disclosed. There are no inter-segment revenue transactions and, therefore, revenues are only to external customers. As the Company primarily generates its revenues from customers in the United States, no geographical segments are presented.

 

Segment operating profit is determined based upon internal performance measures used by the chief operating decision-maker. The Company derives the segment results from its internal management reporting system. The accounting policies the Company uses to derive reportable segment results are the same as those used for external reporting purposes. Management measures the performance of each reportable segment based upon several metrics, including net revenues, gross profit and operating income (loss). Management uses these results to evaluate the performance of, and to assign resources to, each of the reportable segments. The Company manages certain operating expenses separately at the corporate level and does not allocate such expenses to the segments. Segment income from operations excludes interest income/expense and other income or expenses and income taxes according to how a particular reportable segment’s management is measured. Management does not consider impairment charges, and unallocated costs in measuring the performance of the reportable segments.

 

Segment information available with respect to these reportable business segments for the years ended December 31, 2014 and 2013 was as follows:

 

    Year Ended December 31,  
    2014     2013  
Revenues:                
Product segment   $ 9,177,568     $ 9,075,348  
Research and development segment     772,909       -  
Total segment and consolidated revenues     9,950,477       9,075,348  
Gross profit:                
Product segment     4,163,272       3,431,331  
Research and development segment     137,089       -  
Total segment and consolidated gross profit     4,300,361       3,431,331  
                 
Income (loss) from operations                
Product segment   $ 509,888     $ (179,928 )
Research and development segment     (69,157 )     -  
Total segment income (loss)     440,731       (179,928 )
Unallocated costs     (797,405 )     -  
Total consolidated loss from operations   $ (356,674 )   $ (179,928 )
                 
Depreciation and amortization:                
Product segment   $ 151,438     $ 200,174  
Research and development segment     17,818       -  
Total segment depreciation and amortization     169,256       200,174  
Unallocated depreciation     155,177       -  
Total consolidated depreciation and amortization     324,433       200,174  
                 
Capital additions:                
Product segment   $ 229,385     $ 66,109  
Research and development segment     440       -  
Total segment capital additions     229,825       66,109  
Unallocated capital additions     -       -  
Total consolidated capital additions   $ 229,825     $ 66,109  

 

    December 31, 2014     December 31, 2013  
Segment tangible assets:                
Product segment   $ 750,651     $ 672,704  
Research and development segment     100,196       -  
Total consolidated tangible assets   $ 850,847     $ 672,704  

 

The Company does not allocate any general and administrative expenses, other income or income taxes to its reportable segments because these activities are managed at a corporate level.

Subsequent Events

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Subsequent Events
12 Months Ended
Dec. 31, 2014
Subsequent Events [Abstract]  
Subsequent Events

NOTE 18 - SUBSEQUENT EVENTS

 

In connection with a Stock Grant Agreement with the former chief financial officer of Applied Nanotech dated in March 2014, in January and February 2015, the Company issued an aggregate of 2,089,580 shares of Class A common stock in satisfaction of amounts due pursuant to the Stock Grant Agreement (see Note 11).

 

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.

 

On February 7, 2015, the Company issued 208,681 shares of Class A common stock upon the automatic conversion in accordance with its terms of $10,000 of principal amount of convertible promissory notes, and accrued interest of $393. Upon conversion, the Company reclassified $3,333 of the conversion premium to additional paid-in capital.

Summary of Significant Accounting Policies (Policies)

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Summary of Significant Accounting Policies (Policies)
12 Months Ended
Dec. 31, 2014
Accounting Policies [Abstract]  
Use of estimates

Use of estimates

 

The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. Significant estimates for the years ended December 31, 2014 and 2013 include estimates for allowance for doubtful accounts on accounts receivable, the estimates for obsolete inventory, the useful life of property and equipment, assumptions used in assessing impairment of long-term assets, the fair value of assets acquired and liabilities assumed in the merger, estimates of current and deferred income taxes and deferred tax valuation allowances, the fair value of non-cash equity transactions, and the fair value of equity incentives.

Fair value of Financial Instruments and Fair Value Measurements

Fair value of financial instruments and fair value measurements

 

The Company adopted the guidance of Accounting Standards Codification (“ASC”) 820 for fair value measurements which clarifies the definition of fair value, prescribes methods for measuring fair value, and establishes a fair value hierarchy to classify the inputs used in measuring fair value as follows:

 

Level 1-Inputs are unadjusted quoted prices in active markets for identical assets or liabilities available at the measurement date.

 

Level 2-Inputs are quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets and liabilities in markets that are not active, inputs other than quoted prices that are observable, and inputs derived from or corroborated by observable market data.

 

Level 3-Inputs are unobservable inputs which reflect the reporting entity’s own assumptions on what assumptions the market participants would use in pricing the asset or liability based on the best available information.

 

The carrying amounts reported in the consolidated balance sheets for cash and cash equivalents, accounts receivable, loans and lines of credit, accounts payable, accrued expenses, and other payables approximate their fair market value based on the short-term maturity of these instruments.

 

The Company analyzes all financial and non-financial instruments with features of both liabilities and equity under the FASB’s accounting standard for such instruments. Under this standard, financial and non-financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. The Company accounts for three instruments at fair value using level 3 valuation.

 

Description   Level 1     Level 2     Level 3  
December 31, 2014:                        
Intangible assets     -       -     $ 239,338  
Stock Appreciation Rights Plan A     -       -     $ 46,146  
Equity Credits Issued     -       -     $ 25,178  
                         
December 31, 2013                        
Stock Appreciation Rights Plan A     -       -     $ 58,999  
Equity Credits Issued     -       -     $ 25,079  

 

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

 

    Intangible
Assets
    Stock Appreciation
Rights Plan A
    Equity Credits
Issued
 
Balance at December 31, 2012   $ -       65,677     $ 59,111  
Equity credits forfeited     -       -       (18,313 )
Equity credits repurchased     -       -       (3,242 )
Change in fair value included in net loss     -       (6,678 )     (12,477 )
Balance at December 31, 2013     -       58,999       25,079  
Intangible assets acquired     2,327,659       -       -  
Amortization of intangible assets     (155,177 )     -       -  
Change in fair value included in net loss     (1,933,144 )     (12,853 )     99  
Balance at December 31, 2014   $ 239,338       46,146     $ 25,178  

 

ASC 825-10 “Financial Instruments”, allows entities to voluntarily choose to measure certain financial assets and liabilities at fair value (fair value option). The fair value option may be elected on an instrument-by-instrument basis and is irrevocable, unless a new election date occurs. If the fair value option is elected for an instrument, unrealized gains and losses for that instrument should be reported in earnings at each subsequent reporting date. The Company did not elect to apply the fair value option to any outstanding instruments.

Cash and Cash Equivalents

Cash and cash equivalents

 

For purposes of the consolidated statements of cash flows, the Company considers all highly liquid instruments with a maturity of three months or less at the purchase date and money market accounts to be cash equivalents.

Accounts Receivable

Accounts receivable

 

The Company recognizes an allowance for losses on accounts receivable in an amount equal to the estimated probable losses net of recoveries. The allowance is based on an analysis of historical bad debt experience, current receivables aging, and expected future write-offs, as well as an assessment of specific identifiable customer accounts considered at risk or uncollectible. The expense associated with the allowance for doubtful accounts is recognized as general and administrative expense.

Inventory

Inventory

 

Inventory is stated at the lower of cost or market. Cost is determined using the first-in, first-out (FIFO) method.

Property and Equipment

Property and equipment

 

Property and equipment are stated at cost and are depreciated using the straight-line method over their estimated useful lives, which range from three to ten years. Leasehold improvements are depreciated over the shorter of the useful life or lease term including scheduled renewal terms. Maintenance and repairs are charged to expense as incurred. When assets are retired or disposed of, the cost and accumulated depreciation are removed from the accounts, and any resulting gains or losses are included in income in the year of disposition. The Company examines the possibility of decreases in the value of these assets when events or changes in circumstances reflect the fact that their recorded value may not be recoverable.

Intangible Assets

Intangible assets

 

Intangible assets, consisting of patents, patent pending technologies and other technologies being amortized on a straight-line method over the estimated useful life of 5 years.

Impairment of Long-Lived Assets

Impairment of long-lived assets

 

In accordance with ASC Topic 360, the Company reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be fully recoverable, or at least annually. The Company recognizes an impairment loss when the sum of expected undiscounted future cash flows is less than the carrying amount of the asset. The amount of impairment is measured as the difference between the asset’s estimated fair value and its book value.

Revenue Recognition

Revenue recognition

 

Pursuant to the guidance of ASC Topic 605, the Company recognizes sales when persuasive evidence of an arrangement exists, delivery has occurred or services have been provided, the purchase price is fixed or determinable and collectability is reasonably assured.

 

Types of revenue:

 

  Net product sales by our subsidiary Nanofilm,
     
  Reimbursements under agreements to perform research and development for government agencies and others by our subsidiary, Applied Nanotech. We do not perform research contracts that are contingent upon successful results. Larger projects are sometimes broken down in phases to allow the customer to determine at the end of each phase if they wish to move to the next phase. The agreements with federal government agencies generally provide that, upon completion of a technology development program, the funding agency is granted a royalty-free license to use any technology developed during the course of the program for its own purposes, but not any preexisting technology that we use in connection with the program. We retain all other rights to use, develop, and commercialize the technology. Agreements with nongovernmental entities generally allow the entity the first opportunity to license the technology from us upon completion of the project.
     
  Product sales and other miscellaneous revenues from our subsidiary, Applied Nanotech such as the sale of conductive inks and thermal management materials.

 

Revenue Recognition Criteria

 

  Net product sales by our subsidiary Nanofilm, are recognized when the product is shipped to the customer and title is transferred.
     
  Revenue from research and development government contracts is recognized when it is earned pursuant to the terms of the contract. These projects are usually billed monthly based on costs, hours, or some other measure of activity during the month and revenue is recognized as services are provided. If there is substantive acceptance terms then revenue will not be recognized until acceptance occurs. The recognition of revenue may not correspond with the billings allowable under the contract. To the extent that billings exceed revenue earned, a portion of the revenue is deferred until such time as it is earned.
     
  Revenue from research and development non-governmental contracts is recognized when it is earned pursuant to the terms of the contract. Each contract is unique and tailored to the needs of the customer and goals of the project. Some contracts may call for a monthly payment for a fixed period of time. Other contracts may be for a fixed dollar amount with an unspecified time period, although there is frequently a targeted completion date. These contracts generally involve some sort of up-front payment. Some contracts may call for the delivery of samples, or may call for the transfer of equipment or other items developed during the project to the customer. These projects are usually billed monthly based on costs, hours, or some other measure of activity during the month and revenue is recognized as services are provided. If there is substantive acceptance terms then revenue will not be recognized until acceptance occurs.
     
  Revenue from other product sales is recognized at the time the product shipped. The Company’s subsidiary Applied Nanotech's primary business is research and development and the licensing of its technology, not the sale of products. Product sales are generally insignificant in number, and are generally limited to the sale of conductive inks, thermal management materials, samples, proofs of concepts, prototypes, or other items resulting from its research.
     
  Other miscellaneous revenue is recognized as deemed appropriate given the facts of the situation and is generally not material.

 

Sales Incentives and Consideration Paid to Customers

Sales incentives and consideration paid to customers

 

The Company accounts for certain promotional costs such as sales incentives and cooperative advertising as a reduction of sales. For the years ended December 31, 2014 and 2013, the Company recorded approximately $123,868 and $140,833, respectively, as a reduction of sales related to these costs.

Cost of Sales

Cost of sales

 

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

Shipping and Handling Costs

Shipping and handling costs

 

Shipping and handling costs incurred relating to the purchase of inventory are included in inventory which is charged to cost of sales as product are sold. Shipping and handling costs charged to customers are included in sales. For the years ended December 31, 2014 and 2013, shipping and handling costs incurred for product shipped to customers are included in cost of sales and amounted to $195,444 and $239,755, respectively.

Research and Development

Research and development

 

Research and development costs incurred in the development of the Company’s products and under other Company sponsored research and development projects are expensed as incurred. Costs such as direct labor, direct costs, and other allocated costs incurred to perform research and development service pursuant to government and private research projects are in included in cost of sales. For the years ended December 31, 2014 and 2013, research and development costs incurred in the development of the Company’s products were $607,049 and $878,364, respectively, and are included in operating expenses on the accompanying consolidated statements of operations.

Advertising Costs

Advertising costs

 

The Company participates in various advertising programs. All costs related to advertising of the Company’s products are expensed in the period incurred. For the years ended December 31, 2014 and 2013, advertising costs charged to operations were $93,257 and $134,144, respectively and are included in sales and marketing on the consolidated accompanying statements of operations. These advertising expenses do not in include cooperative advertising and sales incentives which have been deducted from sales.

Federal and State Income Taxes

Federal and state income taxes

 

The Company accounts for income tax using the liability method prescribed by ASC 740, “Income Taxes”. Under this method, deferred tax assets and liabilities are determined based on the difference between the financial reporting and tax bases of assets and liabilities using enacted tax rates that will be in effect in the year in which the differences are expected to reverse. The Company records a valuation allowance to offset deferred tax assets if based on the weight of available evidence, it is more-likely-than-not that some portion, or all, of the deferred tax assets will not be realized. The effect on deferred taxes of a change in tax rates is recognized as income or loss in the period that includes the enactment date.

 

Prior to the February 24, 2014, the Company’s subsidiary, Nanofilm, operated as a limited liability company and passed all income and loss to each member based on their proportionate interest in Nanofilm. After February 24, 2014, the date on which Nanofilm reorganized by creating a corporation parent, NanoHolding Inc., approximately 85.5% of the net income (loss) of Nanofilm, was passed through to the majority member, NanoHolding Inc. After the effective date of the merger, 100% of the net income (loss) of Nanofilm is passed through to the Company.

 

The Company follows the accounting guidance for uncertainty in income taxes using the provisions of Accounting Standards Codification (ASC) 740 Income Taxes. Using that guidance, tax positions initially need to be recognized in the financial statements when it is more likely than not the position will be sustained upon examination by the tax authorities. As of December 31, 2014 and 2013, the Company had no uncertain tax positions that qualify for either recognition or disclosure in the financial statements. Tax years that remain subject to examination are the years ending on and after December 31, 2010. The Company recognizes interest and penalties related to uncertain income tax positions in other expense. However, no such interest and penalties were recorded as of December 31, 2014.

Stock-Based Compensation

Stock-based compensation

 

Stock-based compensation is accounted for based on the requirements of the Share-Based Payment Topic of ASC 718 which requires recognition in the financial statements of the cost of employee and director services received in exchange for an award of equity instruments over the period the employee or director is required to perform the services in exchange for the award (presumptively, the vesting period). The ASC also requires measurement of the cost of employee and director services received in exchange for an award based on the grant-date fair value of the award.

 

Pursuant to ASC Topic 505-50, for share-based payments to consultants and other third-parties, compensation expense is determined at the “measurement date.” The expense is recognized over the service period of the award. Until the measurement date is reached, the total amount of compensation expense remains uncertain. The Company initially records compensation expense based on the fair value of the award at the reporting date.

Income (Loss) Per Share of Common Stock

Income (loss) per share of common stock

 

ASC 260 “Earnings Per Share”, requires dual presentation of basic and diluted earnings per share (“EPS”) with a reconciliation of the numerator and denominator of the basic EPS computation to the numerator and denominator of the diluted EPS computation. Basic EPS excludes dilution. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the entity. Basic net income (loss) per common share is computed by dividing net income (loss) available to common shareholders by the weighted average number of shares of common shares outstanding during the period. Diluted net income per common share is computed by dividing net income by the weighted average number of shares of common stock, common stock equivalents and potentially dilutive securities outstanding during each period. As of December 31, 2014, 6,800,000 contingently common shares issuable based on certain market conditions (see Note 11) are not included in the potential dilutive shares in calculating the diluted EPS. Additionally, potentially dilutive common shares consist of common stock options (using the treasury stock method). These common stock equivalents may be dilutive in the future. Potentially dilutive common shares were excluded from the computation of diluted shares outstanding as they would have an anti-dilutive impact on the Company’s net losses and consisted of the following:

 

    December 31, 2014     December 31, 2013  
Total stock options     4,357,528       -  
                 

 

 Additionally, there are an unknown quantity of common stock equivalents that result from a potential conversion of equity credits and stock appreciation rights. (See Notes 13, 15 and 16).

 

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

 

Net loss per common shares outstanding:   Year ended
December 31, 2014
    Year ended
December 31, 2013
 
Class A common stock   $ (0.02 )   $ 0.00  
Class B common stock   $ (0.01 )   $ 0.00  
Class Z common stock   $ (0.05 )   $ 0.00  
                 
Weighted average shares outstanding:                
Class A common stock     98,615,228       102,536,196  
Class B common stock     250,752,688       175,832,096  
Class Z common stock     47,273,470       47,273,470  
Total weighted average shares outstanding     396,641,386       325,641,762  

Reclassification

Reclassification

 

Certain reclassifications have been made in prior year’s consolidated financial statements to conform to the current year’s financial presentation. The reclassifications are primarily within operating expenses to reflect research and development as a separate line item.

Segment Reporting

Segment reporting

 

The Company uses “the management approach” in determining reportable operating segments. The management approach considers the internal organization and reporting used by the Company’s chief operating decision maker for making operating decisions and assessing performance as the source for determining the Company’s reportable segments. The Company’s chief operating decision maker is the Chairman and chief executive officer (“CEO”) of the Company, who reviews operating results to make decisions about allocating resources and assessing performance for the entire Company. The Company classified the reportable operating segments into (i) the development, manufacture and sale of 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.

Summary of Significant Accounting Policies (Tables)

v2.4.0.8
Summary of Significant Accounting Policies (Tables)
12 Months Ended
Dec. 31, 2014
Accounting Policies [Abstract]  
Schedule of Reconciliation of Fair Value of Level 3 Valuation of Financial Instruments

The Company accounts for three instruments at fair value using level 3 valuation.

 

Description   Level 1     Level 2     Level 3  
December 31, 2014:                        
Intangible assets     -       -     $ 239,338  
Stock Appreciation Rights Plan A     -       -     $ 46,146  
Equity Credits Issued     -       -     $ 25,178  
                         
December 31, 2013                        
Stock Appreciation Rights Plan A     -       -     $ 58,999  
Equity Credits Issued     -       -     $ 25,079  

Schedule of Reconciliation of Fair Value of Asset Liabilities Measured Recurring Basis

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

 

    Intangible
Assets
    Stock Appreciation
Rights Plan A
    Equity Credits
Issued
 
Balance at December 31, 2012   $ -       65,677     $ 59,111  
Equity credits forfeited     -       -       (18,313 )
Equity credits repurchased     -       -       (3,242 )
Change in fair value included in net loss     -       (6,678 )     (12,477 )
Balance at December 31, 2013     -       58,999       25,079  
Intangible assets acquired     2,327,659       -       -  
Amortization of intangible assets     (155,177 )     -       -  
Change in fair value included in net loss     (1,933,144 )     (12,853 )     99  
Balance at December 31, 2014   $ 239,338       46,146     $ 25,178  

Schedule of Anti-dilutive Per Share Information

All potentially dilutive common shares were excluded from the computation of diluted shares outstanding as they would have an anti-dilutive impact on the Company’s net losses and consisted of the following:

 

    December 31, 2014     December 31, 2013  
Total stock options     4,357,528       -  
                 

Schedule of Reconciliation of Basic and Diluted Net Income Loss

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

 

Net loss per common shares outstanding:   Year ended
December 31, 2014
    Year ended
December 31, 2013
 
Class A common stock   $ (0.02 )   $ 0.00  
Class B common stock   $ (0.01 )   $ 0.00  
Class Z common stock   $ (0.05 )   $ 0.00  
                 
Weighted average shares outstanding:                
Class A common stock     98,615,228       102,536,196  
Class B common stock     250,752,688       175,832,096  
Class Z common stock     47,273,470       47,273,470  
Total weighted average shares outstanding     396,641,386       325,641,762  

Acquisition (Tables)

v2.4.0.8
Acquisition (Tables)
12 Months Ended
Dec. 31, 2014
Business Combinations [Abstract]  
Schedule of Fair Value of Assets Acquired and Liabilities Assumed

The fair value of the assets acquired and liabilities assumed from Applied Nanotech are as follows:

 

    At August 27, 2014  
Assets acquired:        
Cash   $ 48,121  
Accounts receivable     278,997  
Prepaid expenses     34,383  
Property and equipment     117,574  
Intangible assets     2,327,659  
Other     17,618  
Total assets     2,824,352  
Liabilities assumed:        
Accounts payable     781,930  
Convertible notes payable, net     146,667  
Accrued expenses and other current liabilities     565,245  
Deferred revenue     95,228  
Total liabilities     1,589,070  
Purchase price   $ 1,235,282  

Schedule Pro Forma Consolidated Results of Operations

The following unaudited pro forma consolidated results of operations have been prepared as if the acquisition of Applied Nanotech had occurred as of the beginning of the following periods:

 

    Year Ended
December 31, 2014
    Year Ended
December 31, 2013
 
Net Revenues   $ 11,879,532     $ 12,993,710  
Net Loss   $ (2,685,794 )   $ (3,359,208 )
Net Loss per Share   $ (0.01 )   $ (0.01 )

Accounts Receivable (Tables)

v2.4.0.8
Accounts Receivable (Tables)
12 Months Ended
Dec. 31, 2014
Receivables [Abstract]  
Schedule of Accounts Receivable

At December 31, 2014 and 2013, accounts receivable consisted of the following:

 

    December 31, 2014     December 31, 2013  
Accounts receivable   $ 1,040,826     $ 1,550,875  
Less: Allowance for doubtful accounts     (7,831 )     (16,017 )
Less: Allowance for sales discount     -       (10,555 )
Accounts receivable, net   $ 1,032,995     $ 1,524,303  

Inventory (Tables)

v2.4.0.8
Inventory (Tables)
12 Months Ended
Dec. 31, 2014
Inventory Disclosure [Abstract]  
Schedule of Inventory

At December 31, 2014 and 2013, inventory consisted of the following:

 

    December 31, 2014     December 31, 2013  
Raw materials   $ 953,566