PEN INC.

Our facilities, as well as the facilities of third-parties that provide or maintain, or have access to our data or network infrastructure, are vulnerable to damage or interruption from earthquakes, hurricanes, floods, fires, cyber security attacks, terrorist attacks, power losses, telecommunications failures and similar events. In the event that our or any third-party provider’s systems or service abilities are hindered by any of the events discussed above, our ability to operate may be impaired. A third party’s decision to close facilities or terminate services without adequate notice, or other unanticipated problems, could adversely impact our operations. If business continuity and disaster recovery plans of ours or of a third-party provider prove to be inadequate in preventing the loss of data, service interruptions, this could cause further disruptions to our operations or damages to important systems or facilities. in our operations or damage to our computer hardware or systems or those of our employees, or customers. Our systems have been the target of cyber-attacks. Although we have taken and continue to take steps to enhance our cybersecurity posture, we cannot assure that future cyber incidents will not occur or that our systems will not be targeted or breached in the future.

Some of Nano Magic’s existing products are sold to institutional customers that incorporate Nano Magic’s product into their own product or service offering to their customers. This means the success of Nano Magic’s product is dependent on the level of support, marketing and customer assistance provided by the institutional customers. Also, Nano Magic cannot control timing, marketing or introduction of its products or improved products, the timing or methods used to address customer concerns, and Nano Magic cannot affect directly marketing or distribution of the products or services that incorporate its products. If Nano Magic’s industrial customer has other priorities or is unsuccessful in its marketing or provides poor customer service, then the sales of Nano Magic’s products and Nano Magic’s results of operations will be adversely affected. To the extent that Nano Magic’s customers feel the effects of an economic downturn from the COVID-19 pandemic, that may lessen their interest in introducing products or services incorporating Nano Magic products.

Revenue in the contract research segment is dependent on government funding for technology development that is subject to a number of risks that could adversely impact Nano Magic.

Research contracts funded by the U.S. government are awarded through multiple agencies. Agency priorities and focus can change over time, and government funding overall is affected by political considerations affecting priorities and budgets. Government funding and priorities will also be impacted by the COVID-19 pandemic. Many of Nano Magic’s projects originate with the SBIR program. The initial grant is small, but if Nano Magic establishes proof of concept, then it will be eligible for larger, follow-on grants. However, eligibility for such additional grants also require approval and grant award funding. If funding priorities change, then new grants may not be made in areas that are a focus for Nano Magic’s research, and Nano Magic may need to refocus its funding proposals or apply to different agencies. Moreover, some parts of most projects are the responsibility of subcontractors, and a failure of performance by a subcontractor may adversely affect performance under the contract and may affect follow-on funding or Nano Magic’s reputation as a government contractor or subcontractor. Failure to receive awards of new research funding will adversely affect revenue and margin in Nano Magic’s Contract research segment.

To become a supplier to a new institutional customer Nano Magic must complete the customer’s internal approval process and be set up as a new vendor. This process is outside of Nano Magic’s control and puts a strain on its limited resources. When the product is a coating product, Nano Magic’s technology may need to be incorporated into the customer’s manufacturing or the production processes of its customers. This can require an initial small-scale pilot project before the process with Nano Magic’s coating or technology is expanded to full-scale commercial production. If that occurs, even if no problems are encountered, then commercial sales will be delayed, and Nano Magic must allocate the technical resources to support the customer as it scales-up production. The time and resources required make the effort more risky for Nano Magic, as the customer could stop the project at any point. The process also requires a significant commitment from the customer, and recognizing the limits of Nano Magic’s resources, potential customers may choose not to work with a small supplier.

Some of Nano Magic’s technology development is in its early stages and the viability of commercial products is uncertain.

Some applications of Nano Magic’s intellectual property, and certain products that use these technologies, will require significant additional development, engineering, testing and investment prior to commercialization. Nano Magic has developed proof of concepts of potential products based on some of its technologies, others are not that far in the process. It is uncertain whether commercially viable products can be developed from a number of Nano Magic’s technologies, the size of the potential customer base, and the resources that will be required to develop, test, standardize, manufacture, market, distribute and sell these potential products. Evaluating the potential commercial uses of a product under development is a matter of judgment, and errors in judgment relating to products Nano Magic is developing would reduce the resources available for other potential products and delay commercialization which would adversely affect Nano Magic’s results of operations and may require Nano Magic to seek additional capital that may not be available on acceptable terms, if at all. Development partners face the same challenges and may elect not to continue funding development work based on Nano Magic’s technologies.