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Contingencies
6 Months Ended
Jun. 30, 2014
Commitments and Contingencies Disclosure [Abstract]  
Contingencies

6. Contingencies

 

Proposed Business Combination

 

On March 10, 2014, we entered into an agreement for a proposed business combination between the Company and NanoHolding, Inc., a privately held company with a leading market position for specialty optical coatings, cleaners, and nano-composite products. The specific mechanics of the proposed transaction are included in an 8-K dated March 11, 2014, but the business combination, if approved by stockholders, will result in a combined entity with the Company and NanoHolding, Inc., operating under the name PEN, Inc. A shareholder meeting is scheduled for August 22, 2014 to vote on the transaction. A definitive proxy dated July 3, 2014 is on file with the SEC and was mailed to shareholders beginning July 7, 2014.

 

If the Company’s stockholders approve the proposed business combination and the business combination is completed, the Company will be obligated to issue 7,074,000 shares of restricted common stock to all outside Directors of the Company, except for Director David Li, as compensation for management functions assumed by those Directors in 2013 and 2014 that they believe went beyond their role as Directors, as well as the role that they played in facilitating the business combination. No liability for the issuance of these shares is recorded in the financial statements as of June 30, 2014, as the Company has no obligation to issue these shares unless the business combination is completed.

 

In addition, all of the outside Directors have been deferring a portion of their normal monthly compensation. As of June 30, 2014, the financial statements reflect a liability of approximately $201,000 for these deferred fees. If the business combination is completed, the Directors have agreed to accept payment of these fees in the stock of PEN, Inc. based on a price of $0.05 per share. If the stock of PEN, Inc. is trading above $0.05 per share at the time of payment, that will result in additional expense beyond that currently reflected in the financial statements, based on the difference between the price at the time and $0.05 per share.

 

If the stockholders approve the proposed business combination and the business combination is completed, the Company will be obligated to issue up to 6.8 million shares of restricted common stock to the Company’s Chief Operating Officer (“COO”) as part of an amended compensation package. These restricted stock grants will vest based on achievement of certain price targets for the stock of the new entity. No liability is recorded in the financial statements as of June 30, 2014 for this potential grant, since the Company has no obligation to issue this grant unless the business combination is completed. The Company does have a liability of $215,427 recorded for unpaid compensation due to the COO. The previously described restricted stock grant will supersede and replace any amounts due to the COO, including accrued compensation, or any severance due to the COO upon termination of employment.

 

Litigation

 

The Company is a defendant in minor lawsuits described in greater detail in its 2013 Annual Report on Form 10-K. The Company expects any potential eventual payment to have no material effect on the financial statements.

 

Authorized shares

 

As discussed in the Annual Report on Form 10-K for the fiscal year ended December 31, 2013, the Company has potential commitments to issue shares in excess of its current authorized share limit. It has included a proposal to increase its authorized shares to 502 million at the shareholder meeting scheduled for August 22, 2014, however; if its share price increases significantly prior to an increase in the authorized limit, the Company may be liable to convertible note holders or optionees for damages equal to their lost profits if it is unable to deliver shares in accordance with its existing agreements. As discussed in note 3 above, in April and May 2014, the Company amended the majority of its notes payable to lower the conversion price. These lowered conversion prices increase the amount of shares the Company is committed to release, as the conversion price was lowered to below the existing market price of the common stock at the time of amendment on a significant portion of the notes.