Nano Magic Inc 10-Q for FY2021 Q2
Nano Magic Inc. (NMGX)
About this 10-Q
Nano Magic Inc filed this 10-Q on October 28, 2021, covering the quarter ended June 30, 2021 (FY2021 Q2).
Headline figures
Quarter ended June 30, 2021, as reported in this filing, compared with the same period a year earlier where the filing states it.
- Revenue
- $1.37M
- up 18.7% from $1.15M a year earlier
- Net loss
- $473.6K
- compared with a net loss of $282.28K a year earlier
- Diluted EPS
- -$0.05
- compared with -$0.04 a year earlier
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM
For
the quarterly period ended
COMMISSION
FILE NO.
(Exact name of registrant as specified in its charter)
| (State or other jurisdiction of | (I.R.S. Employer | |
| incorporation or organization) | Identification No.) |
(Address of principal executive office, including Zip Code)
Registrant’s
telephone number, including area code:
Securities registered pursuant to Section 12(b) of the Exchange Act:
| Title of each class | Trading Symbol | Name of Each Exchange on Which Registered | ||
| OTC Markets |
Securities registered pursuant to Section 12(g) of the Exchange Act: None
Indicate
by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. ☐ Yes ☒
Indicate
by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive
Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (232.405 of this chapter) during the preceding
12 months (or for such shorter period that the registrant was required to submit and post such files). ☐
Yes ☒
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “accelerated filer”, “large accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer ☐ | Accelerated filer ☐ |
| Smaller
reporting company |
Emerging
growth company
Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ☐ Yes ☒
As of October 15, 2021, the registrant had shares of Common Stock issued and outstanding.
Nano Magic Holdings Inc.
INDEX
| 2 |
FORWARD-LOOKING STATEMENTS
This Form 10-Q contains certain forward-looking statements that we believe are within the meaning of the federal securities laws. For this purpose, any statements that are not statements of historical fact may be deemed to be forward-looking statements, including the statements under “Management’s Discussion and Analysis of Financial Condition and Results of Operations” regarding our strategy, future operations, future expectations or future estimates, financial position and objectives of management. Those statements in this Form 10-Q containing the words “believes,” “anticipates,” “plans,” “expects” and similar expressions constitute forward-looking statements, although not all forward-looking statements contain such identifying words. These forward-looking statements are based on our current expectations and are subject to a number of risks, uncertainties and assumptions relating to our operations, results of operations, competitive factors, shifts in market demand and other risks and uncertainties.
Although we believe that the assumptions underlying our forward-looking statements are reasonable, any of the assumptions could be inaccurate and actual results may differ from those indicated by the forward-looking statements included in this Form 10-Q. In light of the significant uncertainties inherent in the forward-looking statements included in this Form 10-Q, you should not consider the inclusion of such information as a representation by us or anyone else that we will achieve such results. Moreover, we assume no obligation to update these forward-looking statements to reflect actual results, changes in assumptions or changes in other factors affecting such forward-looking statements.
| 3 |
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
NANO MAGIC HOLDINGS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
| 1 | 2 | 3 | 4 | |||||||||||||
| For the Three Months Ended | For the Six Months Ended | |||||||||||||||
| June 30, | June 30, | |||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
| REVENUES: | ||||||||||||||||
| Products | $ | $ | $ | $ | ||||||||||||
| Contract services | ||||||||||||||||
| Total Revenues | ||||||||||||||||
| COST OF REVENUES: | ||||||||||||||||
| Products | ||||||||||||||||
| Contract services | ||||||||||||||||
| Total Cost of Revenues | ||||||||||||||||
| GROSS PROFIT | ||||||||||||||||
| OPERATING EXPENSES: | ||||||||||||||||
| Selling and marketing expenses | ||||||||||||||||
| Salaries, wages and related benefits | ||||||||||||||||
| Research and development | ||||||||||||||||
| Professional fees | ||||||||||||||||
| General and administrative expenses | ||||||||||||||||
| Other operating income | ( | ) | ( | ) | ||||||||||||
| Total Operating Expense, net | ||||||||||||||||
| LOSS FROM OPERATIONS | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| OTHER (EXPENSE) INCOME: | ||||||||||||||||
| Interest expense | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Miscellaneous (Expense) Income, net | ( | ) | ( | ) | ||||||||||||
| Total Other (Expense) Income | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| NET (LOSS) | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| NET (LOSS) PER COMMON SHARE: | ||||||||||||||||
| Basic | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Diluted | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| WEIGHTED AVERAGE COMMON SHARES OUTSTANDING: | ||||||||||||||||
| Basic | ||||||||||||||||
| Diluted | ||||||||||||||||
See accompanying notes to condensed consolidated financial statements.
| F-1 |
NANO MAGIC HOLDINGS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)
| June 30 | December 31 | |||||||
| 2021 | 2020 | |||||||
| ASSETS | ||||||||
| CURRENT ASSETS: | ||||||||
| Cash | $ | $ | ||||||
| Investments | ||||||||
| Accounts receivable, net | ||||||||
| Accounts receivable - related party | - | |||||||
| Inventory | ||||||||
| Prepaid expenses and contract assets | ||||||||
| Total Current Assets | ||||||||
| Operating lease right-of-use assets | ||||||||
| Property, plant and equipment, net | ||||||||
| Other assets | ||||||||
| Total Assets | $ | $ | ||||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
| CURRENT LIABILITIES: | ||||||||
| Accounts payable | $ | $ | ||||||
| Accounts payable - related parties | - | |||||||
| Accrued expenses and other current liabilities | ||||||||
| Customer deposits | - | |||||||
| Current portion of debt | ||||||||
| Advances from related parties | ||||||||
| Current portion of operating lease liabilities | ||||||||
| Contract liabilities | - | |||||||
| Total Current Liabilities | ||||||||
| Debt, net of current portion | ||||||||
| Operating Lease liabilities, net of current portion | ||||||||
| Total Liabilities | ||||||||
| Commitments and Contingencies (See Note 7) | - | - | ||||||
| STOCKHOLDERS’ EQUITY: | ||||||||
| Preferred stock, $ par value, shares authorized; shares issued and outstanding | - | - | ||||||
| Class A common stock: $par value, shares authorized; issued and outstanding at June 30, 2021 and December 31, 2020, respectively | ||||||||
| Additional paid-in capital | ||||||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| Total Stockholders’ Equity | ||||||||
| Total Liabilities and Stockholders’ Equity | $ | $ | ||||||
See accompanying notes to condensed consolidated financial statements.
| F-2 |
NANO MAGIC HOLDINGS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
FOR THE THREE MONTHS ENDED JUNE 30, 2021 AND 2020
(unaudited)
| 1 | 2 | 3 | 4 | |||||||||||||||||
| Additional | Total | |||||||||||||||||||
| Class A Common Stock | Paid-in | Accumulated | Stockholders’ | |||||||||||||||||
| Shares | Amount | Capital | Deficit | Equity | ||||||||||||||||
| Balance, March 31, 2021 | $ | $ | $ | ( | ) | $ | | |||||||||||||
| Common stock issued for cash, net of issuance costs | ||||||||||||||||||||
| Common stock issued for cash, net of issuance costs, shares | ||||||||||||||||||||
| Common stock issued for services | ||||||||||||||||||||
| Common stock issued for services, shares | ||||||||||||||||||||
| Warrants, options, and warrant options on private placement | ||||||||||||||||||||
| Warrants issued in connection with building lease | ||||||||||||||||||||
| Stock subscription payable | ||||||||||||||||||||
| Stock-based compensation | - | |||||||||||||||||||
| Net loss | - | ( | ) | ( | ) | |||||||||||||||
| Balance, June 30, 2021 | $ | $ | $ | ( | ) | $ | ||||||||||||||
| Balance, March 31, 2020 | $ | $ | $ | ( | ) | $ | ||||||||||||||
| Stock based compensation | - | |||||||||||||||||||
| Common stock issued for services | - | |||||||||||||||||||
| Warrants issued in connection with building lease | - | |||||||||||||||||||
| Net loss | - | ( | ) | ( | ) | |||||||||||||||
| Balance, June 30, 2020 | $ | $ | $ | ( | ) | $ | ||||||||||||||
See accompanying notes to condensed consolidated financial statements.
| F-3 |
NANO MAGIC HOLDINGS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
FOR THE SIX MONTHS ENDED JUNE 30, 2021 AND 2020
(unaudited)
| Additional | Total | |||||||||||||||||||
| Class A Common Stock | Paid-in | Accumulated | Stockholders’ | |||||||||||||||||
| Shares | Amount | Capital | Deficit | Equity | ||||||||||||||||
| Balance, December 31, 2020 | $ | $ | $ | ( | ) | $ | ||||||||||||||
| Common stock issued for cash, net of issuance costs | ||||||||||||||||||||
| Common stock issued for services | ||||||||||||||||||||
| Warrants, options, and warrant options on private placement | - | |||||||||||||||||||
| Stock based compensation | - | |||||||||||||||||||
| Net Loss | - | ( | ) | ( | ) | |||||||||||||||
| Balance, June 30, 2021 | $ | $ | $ | ( | ) | $ | ||||||||||||||
| Balance, December 31, 2019 | $ | $ | $ | ( | ) | $ | ( | ) | ||||||||||||
| Common stock issued for cash, net of issuance costs | ||||||||||||||||||||
| Common stock issued for services | ||||||||||||||||||||
| Stock based compensation | - | |||||||||||||||||||
| Warrants, options, and warrant options on private placement | - | |||||||||||||||||||
| Warrants issued in connection with building lease | - | |||||||||||||||||||
| Stock subscription payable | - | |||||||||||||||||||
| Net loss | - | ( | ) | ( | ) | |||||||||||||||
| Balance, June 30, 2020 | $ | $ | $ | ( | ) | $ | ||||||||||||||
See accompanying notes to condensed consolidated financial statements.
| F-4 |
NANO MAGIC HOLDINGS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
| 1 | 2 | |||||||
| For the Six Months Ended | ||||||||
| June 30, | ||||||||
| 2021 | 2020 | |||||||
| CASH FLOWS FROM OPERATING ACTIVITIES | ||||||||
| Net loss | $ | ( | ) | $ | ( | ) | ||
| Adjustments to reconcile net loss to net cash provided by operating activities: | ||||||||
| Change in inventory obsolescence reserve | ||||||||
| Depreciation and amortization expense | ||||||||
| Bad debt expense | ||||||||
| Stock-based compensation | ||||||||
| Change in operating assets and liabilities: | ||||||||
| Accounts receivable | ( | ) | ||||||
| Accounts receivable - related party | ( | ) | ||||||
| Inventory | ( | ) | ( | ) | ||||
| Prepaid expenses and contract assets | ( | ) | ( | ) | ||||
| Accounts payable | ( | ) | ||||||
| Operating lease liabilities | ||||||||
| Customer deposits | ||||||||
| Accrued expenses | ( | ) | ||||||
| Contract liabilities | ( | ) | ( | ) | ||||
| NET CASH USED BY OPERATING ACTIVITIES | ( | ) | ( | ) | ||||
| CASH FLOWS FROM INVESTING ACTIVITIES | ||||||||
| Net activity on CD investments | ( | ) | ( | ) | ||||
| Capitalized lease cost | ( | ) | ||||||
| Purchases of property, plant and equipment | ( | ) | ( | ) | ||||
| NET CASH USED BY INVESTING ACTIVITIES | ( | ) | ( | ) | ||||
| CASH FLOWS FROM FINANCING ACTIVITIES | ||||||||
| Repayment of bank lines of credit | ( | ) | ||||||
| Advances from related parties | ( | ) | ||||||
| Proceeds from bank loans | ||||||||
| Proceeds from sale of common stock and warrants | ||||||||
| Repayment of debt | ( | ) | ( | ) | ||||
| NET CASH PROVIDED BY FINANCING ACTIVITIES | ||||||||
| NET INCREASE IN CASH | ||||||||
| CASH, beginning of year | ||||||||
| CASH, end of period | $ | $ | ||||||
| SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION | ||||||||
| Cash paid during the period for interest | ||||||||
| Interest | $ | $ | ||||||
See accompanying notes to condensed consolidated financial statements.
| F-5 |
NANO MAGIC HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2021
(unaudited)
NOTE 1 – ORGANIZATION AND BASIS OF PRESENTATION
Organization
Nano Magic Holdings Inc. (“we”, “us”, “our”, “Nano Magic” or the “Company”), a Delaware corporation, develops and sells a portfolio of nano-layer coatings, nano-based cleaners, and nano-composite products based on its proprietary technology, and performs nanotechnology product research and development generating revenues through performing contract services. On March 3, 2020, we changed our name from PEN Inc. to Nano Magic Inc. and on March 2, 2021 we changed our name to Nano Magic Holdings Inc.
Through the Company’s wholly-owned subsidiary, Nano Magic LLC, formerly known as PEN Brands LLC, we develop, manufacture and sell consumer and institutional products using nanotechnology to deliver unique performance attributes at the surfaces of a wide variety of substrates. These products are marketed internationally directly to consumers and also to retailers and other institutional customers. On March 31, 2020, PEN Brands LLC changed its name to Nano Magic LLC.
Through the Company’s wholly-owned subsidiary, Applied Nanotech, Inc., we primarily perform contract research services for the Company and for governmental and private customers.
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“US GAAP”) for interim financial information. Accordingly, they do not include all the information and disclosures required by US GAAP for annual financial statements. In the opinion of management, such statements include all adjustments (consisting only of normal recurring items) which are considered necessary for a fair presentation of the unaudited condensed consolidated financial statements of the Company as of June 30, 2021 and for the three and six months ended June 30, 2021 and 2020. The results of operations for the three and six months ended June 30, 2021 are not necessarily indicative of the operating results for the full year ending December 31, 2021 or any other period. The balance sheet at December 31, 2020 has been derived from the audited financial statement at that date but does not include all the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. These unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and related disclosures of the Company as of December 31, 2020 and for the year then ended, which were filed with the Securities and Exchange Commission on Form 10-K on May 28, 2021.
| F-6 |
Going Concern Matters and Management’s Plan
As
indicated in the accompanying condensed consolidated financial statements, the company has positive working capital on June 30,
2021 and at December 31, 2020, including $
The accompanying condensed consolidated financial statements have been prepared assuming that the Company will continue as a going concern, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. They do not include any adjustments related to the recoverability and/or classification of the recorded asset amounts and/or the classification of the liabilities that might be necessary should the Company be unable to continue as a going concern.
NOTE 2 – INVENTORY
At June 30, 2021 and December 31, 2020, inventory consisted of the following:
SCHEDULE OF INVENTORY
| June 30, 2021 | December 31, 2020 | |||||||
| Raw materials | $ | $ | ||||||
| Work-in-progress | ||||||||
| Finished goods | ||||||||
| Inventory, gross | ||||||||
| Less: reserve for obsolescence | ( | ) | ( | ) | ||||
| Inventory, net | $ | $ | ||||||
NOTE 3 – FACTORING
Since
September 1, 2020, The Company has participated in a factoring program with NOWaccount ® Network Corporation (“NOW”).
At the time of a sale, NOW buys the receivables at a discount, based on the due date and other terms. Costs associated with this program
were $
NOTE 4 – DEBT
On
February 10, 2015, Nano Magic entered into a $
| F-7 |
On
May 8, 2020, Nano Magic LLC obtained a loan from Fifth Third Bank for $
On
August 11, 2020, the company entered into a finance lease for furniture. We financed $
On
September 24, 2020, the company entered into a finance lease with Raymond Leasing Corporation for a forklift. Nano Magic LLC financed
$
In
December 2020, the company entered into a finance lease for production equipment. We financed $
On
February 1, 2021, our subsidiary Applied Nanotech obtained a loan from Amegy Bank of Texas for $
Other
Applied Nanotech long term debt was $
NOTE 5 – RELATED PARTY TRANSACTIONS
For
the three month and six-month periods ended June 30, 2021, we accrued $
Other compensation paid to directors was:
| Three Months ended June 30, | Six Months ended June 30, | |||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
| Ronald J. Berman | $ | $ | $ | $ | ||||||||||||
| Tom J. Berman | $ | * | $ | $ | + | $ | * | |||||||||
| Jeanne M Rickert | $ | $ | $ | $ | ||||||||||||
| Scott E. Rickert | $ | ++ | $ | $ | ++ | $ | ||||||||||
| + | |
| * | |
| ++ |
Mr. Ron Berman and Mr. Tom Berman are the managers of the limited liability company that is the manager of PEN Comeback, LLC, PEN Comeback 2, LLC, Magic Growth, LLP and Magic Growth 2 LLC. These four limited liability companies purchased shares of common stock and derivative securities from us in 2018, 2019, 2020, and 2021. See the subsection on Sales of Stock under Issuances of Common Stock in Note 6.
In
addition, Mr. Tom Berman and Mr. Ron Berman are two of three individuals who share voting power of the sole manager of the limited liability
company that is our landlord in Michigan. Together, Tom and Ron Berman hold, in the aggregate, a
| F-8 |
NOTE 6 - STOCKHOLDERS’ EQUITY
Description of Preferred and Common Stock
On July 2, 2020, we amended and restated our certification of incorporation to eliminate the Company’s Class B common stock and Class Z common stock and rename as “common stock” the Company’s Class A Common Stock. As part of the amendment, we increased the number of authorized shares of common stock from to . The par value of the common stock remained the same at $ per common share. The Company is also authorized to issue shares of Preferred Stock, par value $ per share.
Preferred Stock
The preferred stock may be issued in one or more series. The Company’s board of directors are authorized to issue the shares of preferred stock in such series and to fix from time to time before issuance thereof the number of shares to be included in any such series and the designation, powers, preferences and relative, participating, optional or other rights, and the qualifications, limitations or restrictions thereof, of such series.
Common Stock
Issuances of Common Stock
Common Stock Issued for Services and Stock Appreciation Rights
Pursuant to the agreement entered into on October 20, 2020, with the holder of substantially all the outstanding stock appreciation rights, on March 2, 2021, we issued shares of common stock at value of $ in partial settlement of that holder’s stock appreciation rights.
On
March 2, 2021, we issued an aggregate of shares of common stock to our directors as compensation to them for service on our Board.
These shares were valued on that date at $ per share based on the quoted price of the stock for a total value of $
Sales of Common Stock and Derivative Equity Securities
On
March 2, 2021, the Company sold to Magic Growth 2 LLC, shares of common stock for proceeds of $
On
March 17, 2021, the Company sold to Magic Growth 2 LLC, shares of common stock for proceeds of $
In
total for the six months ended June 30, 2021, shares of common stock were sold and issued for
$
| F-9 |
Stock Options
Vesting is as follows:
SCHEDULE OF STOCK OPTIONS VESTING
| The right to purchase: | Consisting of: | Is vested on: | ||
| Tranche 1 | Option Shares | |||
| Tranche 2 | Option Shares | |||
| Tranche 3 | Option Shares | |||
| Tranche 4 | Option Shares | |||
| Tranche 5 | Option Shares | |||
| Tranche 6 | Option Shares | |||
| Tranche 7 | Up to Option Shares | |||
| Tranche 8 | Up to Option Shares | |||
| Tranche 9 | Up to Option Shares | |||
| Tranche 10 | Up to million Option Shares |
On March 2, 2021, we granted an option to Ronald J. Berman as part of his consulting contract entered into on that day. Under the consulting agreement, Mr. Berman oversees sales and marketing for Nano Magic LLC and will work on special projects as requested by the President & CEO. Mr. Berman is a director and is the father of our President, Tom J. Berman.
On March 2, 2021, our Board adopted the 2021 Nano Magic 2021 Equity Incentive Plan described below.
Stock
options to purchase common stock outstanding at June 30, 2021 include the options granted under the 2021 Equity Incentive Plan,
and
| Number of Options | Weighted Average Exercise Price | Weighted Average Remaining Contractual Term (Years) | Aggregate Intrinsic Value | |||||||||||||
| Outstanding December 31, 2020 | $ | |||||||||||||||
| Exercised | - | |||||||||||||||
| Issued | $ | - | - | |||||||||||||
| Expired & forfeited | ( | ) | - | - | ||||||||||||
| Outstanding June 30, 2021 | $ | $ | ||||||||||||||
| Exercisable June 30, 2021 | $ | $ | ||||||||||||||
SCHEDULE OF STOCK OPTIONS AND WARRANTS
| June 30, 2021 | December 31, 2020 | |||||||
| Stock options | ||||||||
| Stock warrants | ||||||||
| Total | ||||||||
| F-10 |
Warrants
As
of June 30, 2021, there were outstanding and exercisable warrants to purchase
2015 Equity Incentive Plan
On
November 30, 2015, the Board of Directors authorized the 2015 Equity Incentive Plan. On December 31, 2019, we issued an aggregate of
shares to employees in settlement of accrued
salaries totaling $
2021 Equity Incentive Plan
On March 2, 2021, our Board adopted the 2021 Nano Magic 2021 Equity Incentive Plan (the “Plan”) to allow equity compensation for those who provide services to the Company and to encourage ownership in the Company by personnel whose service to the Company is important to its continued progress, to encourage recipients to act as owners and thereby in the stockholders’ interest and to enable recipients to share in the Company’s success. Initially, shares were available for issuance under the Plan and that number of options were also granted to employees on March 2, 2021. On April 8, 2021 the number of shares under the Plan was increased by , and an additional options were granted. On June 21, 2021 an additional shares were made available for issuance under the Plan and options for shares were granted, but subsequently forfeited.
NOTE 7 - COMMITMENTS AND CONTINGENCIES
Litigation
The
Company may be, from time to time, subject to various administrative, regulatory, and other legal proceedings arising in the ordinary
course of business. On May 28, 2021, we entered into a settlement and release with a former consultant under which we will pay $
As of June 30, 2021 we were not a defendant in any proceedings. See Note 9, Subsequent Events, regarding a collection suit previously reported that is settled. Our policy is to accrue costs for contingent liabilities, including legal proceedings or unasserted claims that may result in legal proceedings, when a liability is probable and the amount can be reasonably estimated.
As
of June 30, 2021, the Company has
NOTE 8 – 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
| F-11 |
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 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 three and six months ended June 30, 2021 and 2020 was as follows:
SCHEDULE OF SEGMENT INFORMATION
| Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
| Revenues: | ||||||||||||||||
| Product segment | $ | $ | $ | $ | ||||||||||||
| Contract services segment | ||||||||||||||||
| Total segment and consolidated revenues | $ | $ | $ | $ | ||||||||||||
| Cost of revenues: | ||||||||||||||||
| Products | $ | $ | $ | $ | ||||||||||||
| Contract services segment | ||||||||||||||||
| Total segment and consolidated cost of revenues | $ | $ | $ | $ | ||||||||||||
| Gross profit: | ||||||||||||||||
| Product segment | $ | $ | $ | $ | ||||||||||||
| Contract services segment | ||||||||||||||||
| Total segment and consolidated gross profit | $ | $ | $ | $ | ||||||||||||
| Gross margin: | ||||||||||||||||
| Product segment | % | % | % | % | ||||||||||||
| Contract services segment | % | % | % | % | ||||||||||||
| Total gross margin | % | % | % | % | ||||||||||||
| Segment operating expenses: | ||||||||||||||||
| Product segment | $ | $ | $ | $ | ||||||||||||
| Contract services segment | ||||||||||||||||
| Total segment operating expenses | $ | $ | $ | $ | ||||||||||||
| (Loss) income from operations: | ||||||||||||||||
| Product segment | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Contract services segment | ( | ) | ||||||||||||||
| Total segment (loss) income | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Total consolidated (loss) income from operations | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Depreciation and amortization: | ||||||||||||||||
| Product segment | $ | $ | $ | $ | ||||||||||||
| Contract services segment | ||||||||||||||||
| Total segment depreciation and amortization | ||||||||||||||||
| Unallocated depreciation | - | - | - | - | ||||||||||||
| Total consolidated depreciation and amortization | $ | $ | $ | $ | ||||||||||||
| Capital additions: | ||||||||||||||||
| Product segment | $ | $ | $ | $ | ||||||||||||
| Contract services segment | - | - | - | - | ||||||||||||
| Total segment capital additions | ||||||||||||||||
| Unallocated capital additions | - | - | - | - | ||||||||||||
| Total consolidated capital additions | $ | $ | $ | $ | ||||||||||||
| June 30, 2021 | June 30, 2020 | |||||||
| Segment total assets: | ||||||||
| Product segment | $ | $ | ||||||
| Contract services segment | ||||||||
| Total consolidated total assets | $ | $ | ||||||
NOTE 9 - SUBSEQUENT EVENTS
The reduction in mask wearing as a result of the waning of the COVID-19- restrictions as well as the ability for more of the population to be outside during the summer months, drove a drop in sales of anti-fog products that continued into the third quarter. Other effects of the pandemic that affect business generally, for example, labor shortages, also affect us, making it harder for us to hire for both production and salaried positions. Supply chain disruptions also continue, leading to continued long lead times to get materials as well as on-going cost increases.
On
August 3, 2021, we were notified of a collection suit for approximately $
On August 6, 2021 we completed the loan forgiveness application with Fifth Third Bank for the Paycheck Protection Plan loan we received through that bank. On August 11, 2021 we were notified by Amegy Bank that the Small Business Administration had reviewed our loan forgiveness application filed earlier and that the entire amount of the loan to Applied Nanotech Inc. was forgiven.
On August 10, 2021 we issued the option to purchase up to shares that had been approved by the Board in May, 2021 in connection with a consulting agreement.
| F-12 |
ITEM 2: MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following is management’s discussion and analysis of certain significant factors that have affected our financial position and operating results during the periods included in the accompanying unaudited condensed consolidated financial statements.
OVERVIEW
Nano Magic develops, commercializes, and markets consumer and industrial products enabled by nanotechnology that solve everyday problems for customers in the optical, transportation, military, sports and safety industries. Our primary business is the formulation, marketing and sale of products enabled by nanotechnology including the ULTRA CLARITY brand eyeglass cleaner, CLARITY DEFOGIT brand defogging products and CLARITY ULTRASEAL nanocoating products for glass and ceramics. We also sell an environmentally friendly surface protector, fortifier, and cleaner. Our design center conducts development services for us and for government and private customers and develops and sells printable inks and pastes, thermal management materials, and graphene foils and windows.
Our principal operating segments coincide with our different business activities and types of products sold. This is consistent with our internal reporting structure. Our two reportable segments for the three and six months ended June 30, 2021 were (i) the Product Segment and (ii) the Contract services Segment. For the three and six months ended June 30, 2020, the Company operated the same two segments.
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RESULTS OF OPERATIONS
The following comparative analysis on results of operations was based primarily on the comparative condensed consolidated financial statements, footnotes and related information for the periods identified below and should be read in conjunction with the unaudited condensed consolidated financial statements and the notes to those statements that are included elsewhere in this report. The results discussed below are for the three months ended June 30, 2021 and 2020.
Comparison of Results of Operations for the Three Months ended June 30, 2021 and 2020
Revenues:
For the three and six months ended June 30, 2021 and 2020, revenues consisted of the following:
| Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
| Revenue: | ||||||||||||||||
| Product segment | $ | 1,130,397 | $ | 908,062 | $ | 3,312,843 | $ | 1,149,779 | ||||||||
| Contract services segment | 238,171 | 244,422 | 366,900 | 450,879 | ||||||||||||
| Total consolidated revenue | $ | 1,368,568 | $ | 1,152,484 | $ | 3,679,743 | $ | 1,600,658 | ||||||||
For the three months ended June 30, 2021, sales from the Product segment increased by $222,335 or 24% as compared to the three months ended June 30, 2020. For the six months ended June 30, 2021 revenue from the Product segment increased by $2,163,064 or 188%, as compared to the six months ended June 30, 2020. The increases were due to increased sales to new customers added in 2020, increased internet sales and new retail customers.
For the three months ended June 30, 2021, sales from the Contract services segment decreased by $6,251 or 3% as compared to the three months ended June 30, 2020 primarily due to less funding under government research contracts. For the six months ended June 30, 2021 revenue from the Contract services segment decreased by $83,979 or 19%, as compared to the six months ended June 30, 2020.
Cost of revenues
Cost of revenues includes inventory costs, materials and supplies costs, internal labor and related benefits, subcontractor costs, depreciation, overhead and shipping and handling costs incurred and costs related to government and private research contracts in our Contract services segment.
For the three months ended June 30, 2021, cost of revenues decreased by $76,362 or 10% as compared to the three months ended June 30, 2020. For the six months ended June 30, 2021, cost of revenues increased by $818,119 or 71% as compared to the three months ended June 30, 2020. These changes are reflected in the chart that follows. We have seen some price increases and shortages for some of our raw materials and packaging as a result of the COVID-19 pandemic, but thus far we have been able to obtain adequate supply.
| Three Months ended June 30, | Six Months ended June 30, | |||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
| Cost of revenues: | ||||||||||||||||
| Product segment | $ | 499,173 | $ | 600,781 | $ | 1,630,941 | $ | 823,599 | ||||||||
| Contract services segment | 180,250 | 155,004 | 332,680 | 321,903 | ||||||||||||
| Total segment and consolidated cost of revenues | $ | 679,423 | $ | 755,785 | $ | 1,963,621 | $ | 1,145,502 | ||||||||
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Gross profit and gross margin
For the three months ended June 30, 2021, gross profit increased by $292,446 or 74%. For the six months ended June 30, 2021, gross profit increased by $1,260,966 or 277%. Gross profit and gross margin by segment are as follows:
| Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||||||||||||||||||
| 2021 | % | 2020 | % | 2021 | % | 2020 | % | |||||||||||||||||||||||||
| Gross profit: | ||||||||||||||||||||||||||||||||
| Product segment * | $ | 631,224 | 55.8 | % | 307,281 | 33.8 | % | $ | 1,681,902 | 50.8 | % | 326,180 | 28.4 | % | ||||||||||||||||||
| Contract services segment * | $ | 57,921 | 24.3 | % | 89,418 | 36.6 | % | $ | 34,220 | 9.3 | % | 128,976 | 28.6 | % | ||||||||||||||||||
| Total gross profit | $ | 689,145 | 50.4 | % | 396,699 | 34.4 | % | 1,716,122 | 46.6 | % | 455,156 | 28.4 | % | |||||||||||||||||||
* Gross margin % based on respective segments revenues.
For the three months ended June 30, 2021, as compared to the comparable 2020 period, the gross profit in the Product segment increased by $323,943 or 105%. Similarly, for the six months period gross profit increased $1,355,722 or 416% for the period ended June 30, 2021, as compared to the six months ended June 30, 2020. For the three- and six-month periods the increases were due to product mix, pricing changes and changes in product formulations that improved margin. The gross profit for the Contract research segment for the three and six months ended June 30, 2021 as compared to the three and six months ended June 30, 2020 decreased by $31,497 and $94,756, or 35% and 73%, respectively. The changes in the Contract research segment were primarily due to completion of government contracts without new or renewal research contracts.
Operating expenses
For the three months ended June 30, 2021, operating expenses increased by $478,805 or 71% compared to the three months ended June 30, 2020. Similarly, for the six months period operating expenses increased by $685,813 or 61% for the period ended June 30, 2021, as compared to the six months ended June 30, 2020. For the three and six months ended June 30, 2021 and 2020, operating expenses consisted of the following:
| Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
| Selling and marketing expenses | $ | 40,324 | $ | 4,826 | $ | 77,220 | $ | 15,883 | ||||||||
| Salaries, wages and related benefits | 781,602 | 163,831 | 1,333,332 | 308,464 | ||||||||||||
| Research and development | 7,437 | 14,383 | 9,313 | 31,035 | ||||||||||||
| Professional fees | 198,419 | 359,420 | 410,525 | 484,172 | ||||||||||||
| General and administrative expenses | 294,238 | 136,234 | 478,820 | 273,304 | ||||||||||||
| Other income, net | (164,521 | ) | - | (500,538 | ) | - | ||||||||||
| Total | $ | 1,157,499 | $ | 678,694 | $ | 1,808,672 | $ | 1,122,859 | ||||||||
| ● | For the three months ended June 30, 2021, selling and marketing expenses increased by $35,498 or 736% as compared to the three months ended June 30, 2020, due to increased advertising, sales consultants and trade show expenses. For the six months ended June 30, 2021, selling and marketing expenses increased by $61,337 or 386% as compared to the six months ended June 30, 2020, due to the foregoing factors. |
| ● | For the three months ended June 30, 2021, salaries, wages and related benefits increased by $617,771 or 377%, as compared to the three months ended June 30, 2020. For the six months ended June 30, 2021, salaries, wages and related benefits increased by $1,024,867 or 332%, as compared to the six-months ended June 30, 2020. These increases for the six-month period were $259,717 for equity compensation expenses, and the balance was higher management and personnel costs. |
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| ● | For the three months ended June 30, 2021, research and development costs decreased by $6,946 or 48%, as compared to the three months ended June 30, 2020. For the six months ended June 30, 2021, research and development costs decreased by $21,722 or 70%, as compared to the six months ended June 30, 2020. For the three-month and six-month periods, the changes were due to reduced use of outside contractors in 2021. |
| ● | For the three months ended June 30, 2021, professional fees decreased by $161,001 or 45%, as compared to the three months ended June 30, 2020. For the six months ended June 30, 2021, professional fees decreased by $73,647 or 15%, as compared to the six months ended June 30, 2020. The changes for both the three-month and six-month periods were due to significant outside legal expenses incurred in 2020. |
| ● | For the three months ended June 30, 2021, general and administrative expenses increased by $158,004 or 116% as compared to the three months ended June 30, 2020, For the six months ended June 30, 2021, general and administrative expenses increased by $205,516 or 75% as compared to the six months ended June 30, 2020, reflecting subscriptions for new software tools, consulting fees for software implementation and increased general overhead to support the larger business operation.
|
| ● | Other operating income for the period ended June 30, 2021 reflects payments received under a settlement agreement based on the counterparty’s sales to certain customers. |
Loss (income) from operations
As a result of the factors described above, for the three months ended June 30, 2021, loss from operations amounted to $468,354 as compared to a loss of $281,995 for the three months ended June 30, 2020, a change of $186,077 or 66%. For the six months ended June 30, 2021, loss from operations amounted to $92,550 as compared to a loss of $657,703 for the six months ended June 30, 2020, an improvement of $556,153 or 84%.
Other non-operating expense (income)
For the three months ended June 30, 2021, other expense was $5,243 as compared to $282 for the three months ended June 30, 2020, an increase of $4,961 or 1,759%. For the six months ended June 30, 2021, other expense was $10,650 as compared to $2,390 for the six months ended June 30, 2020, an increase of $8,260 or 346%. The change was primarily due to increased interest expense for financing leases.
Net loss (income)
For the three months ended June 30, 2021, net loss amounted to $473,597 as compared to a loss of $282,277 for the three months ended June 30, 2020. For the six months ended June 30, 2021, net loss amounted to $103,200 as compared to a loss of $660,093 for the six months ended June 30, 2020. For the three-month period and the six-month period, the change was $(191,320) or 68% and $556,893 or 84%, respectively.
For the three months ended June 30, 2021 and June 30, 2020, net loss amounted to $(0.05) per common share (basic and diluted), and $(0.04), respectively. For the six months ended June 30, 2021 and June 30, 2020, net (loss) amounted to $(0.01) per common share (basic and diluted), and $(0.10), respectively.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity is the ability of an enterprise to generate adequate amounts of cash to meet its needs for cash requirements. We had working capital of $2,197,673 and $1,694,347 of unrestricted cash as of June 30, 2021 and working capital of $633,572 and $288,134 of unrestricted cash as of December 31, 2020.
The following table sets forth a summary of changes in our working capital from December 31, 2020 to June 30, 2021:
December 31, 2020 to June 30, 2021 | ||||||||||||||||
| June 30, 2021 | December 31, 2020 | Change in Working Capital | Percentage Change | |||||||||||||
| Working capital: | ||||||||||||||||
| Total current assets | $ | 3,989,238 | $ | 2,653,831 | $ | 1,335,407 | 50.32 | % | ||||||||
| Total current liabilities | 1,791,565 | 2,020,259 | (228,694 | ) | (11.32 | )% | ||||||||||
| Working capital: | $ | 2,197,673 | $ | 633,572 | $ | 1,564,101 | 246.87 | % | ||||||||
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The increase in current assets was due in substantial part to an increase in cash as a result of the sale of equity securities. The decrease in current liabilities was due to a reduction in accrued expenses and other current liabilities and to a reduction in the current portion of lease payments.
Net cash used by operating activities was $(42,736) for the six months ended June 30, 2021 as compared to net cash used in operating activities of $(944,751) for the six months ended June 30, 2020, a net change of $902,015 or 95%. Net cash used by operating activities for the six months ended June 30, 2021 primarily resulted from net loss of $(103,200) adjusted for add-backs of $427,126 and changes in operating assets and liabilities of $(366,662).
Net cash flow used by investing activities was $(62,883) for the six months ended June 30, 2021 and $(316,551) for the six months ended June 30, 2020.
Net cash provided by financing activities was $1,511,832 for the six months ended June 30, 2021 reflecting $1,500,800 in proceeds from sales of common stock and warrants, as compared to net cash provided of $1,268,240 for the same period in 2020.
Future Liquidity and Capital Needs.
Our principal future uses of cash are for working capital requirements, including working capital to support increased product sales, sales and marketing expenses and reduction of accrued liabilities. Application of funds among these uses will depend on numerous factors including our sales and other revenues and our ability to control costs.
Equipment Financing and Loans
On February 10, 2015, Nano Magic entered a $373,000 promissory note (the “Equipment Note”) with KeyBank, N.A. (the “Bank”). The unpaid principal balance of this Equipment Note is payable in 60 equal monthly instalments payments of principal and interest through June 10, 2020. The Equipment Note is secured by certain equipment, as defined in the Equipment Note, and bears interest computed at a rate of interest of 4.35% per annum based on a year of 360 days. At June 30, 2021, the principal amount due under the Equipment Note amounted to $64,042.
On June 18, 2019, Nano Magic entered into an Amendment to the Equipment Note with the Bank. By the amendment, the maturity date of the note was extended until April 10, 2022, the interest rate was raised to 6.29% per year, and the monthly payments were reduced to $4,053 per month, including interest.
During the year ended December 31, 2020, we received $105,000 in net proceeds from equipment loans and the bank loan under the Paycheck Protection Program, offset by repayments on loans
Off-Balance Sheet Arrangements
We have not entered into any other financial guarantees or other commitments to guarantee the payment obligations of any third parties. We have not entered into any derivative contracts that are indexed to our shares and classified as shareholder’s equity or that are not reflected in our consolidated unaudited financial statements. Furthermore, we do not have any retained or contingent interest in assets transferred to an unconsolidated entity that serves as credit, liquidity or market risk support to such entity. We do not have any variable interest in any unconsolidated entity that provides financing, liquidity, market risk or credit support to us or engages in leasing, hedging or research and development services with us.
ITEM 3. Quantitative and Qualitative disclosures about market risk
Not applicable to smaller reporting companies.
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ITEM 4. Controls and Procedures
Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as of the end of the period covered by this report (the “Evaluation Date”). Based upon this evaluation, our principal executive officer and principal financial officer concluded as of the Evaluation Date that our disclosure controls and procedures were effective such that the material information required to be included in our Securities and Exchange Commission (“SEC”) reports was recorded, but we lacked the staff or cash to purchase outside resources to process, summarize, and report within the time periods specified in SEC rules and forms.
Our management, including our principal executive officer and principal financial officer, does not expect that our disclosure controls and procedures or our internal controls will prevent all error and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints and the benefits of controls must be considered relative to their costs. Due to the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within our company have been detected.
Changes in Internal Control
There were no changes identified in connection with our internal control over financial reporting during the three months ended June 30, 2021 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. The material weaknesses identified at December 31, 2020 are still in the process of being addressed as of June 30, 2021.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On August 3, 2021, we were notified of a collection suit for approximately $23,000 plus financing charges. We agreed to a negotiated settlement of the matter in August and the case was dismissed with prejudice on September 1, 2021.
ITEM 1A. RISK FACTORS
Not required of smaller reporting companies.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Pursuant to the agreement entered into on October 20, 2020, with the holder of substantially all the outstanding stock appreciation rights, on March 2, 2021, we issued 5,000 shares of common stock at value of $1.00 in partial settlement of that holder’s stock appreciation rights.
On March 2, 2021, the Company sold to Magic Growth 2 LLC, 769,231 shares of common stock for proceeds of $961,539 and warrants to purchase up to 769,225 shares of common stock for proceeds of $38,461. The warrants are exercisable at any time during the four years after date of issue at a warrant exercise price of $2.00 per share. PEN Comeback Management, LLC, owned by Tom J. Berman and Ronald J. Berman, is the sole voting member of Magic Growth 2 LLC.
On March 2, 2021, we also issued an aggregate of 37,890 shares of common stock to our directors as compensation to them for service on our Board. These shares were valued on that date at $0.95 per share based on the quoted price of the stock for a total value of $36,000.
On March 17, 2021, the Company sold to Magic Growth 2 LLC, 385,231 shares of common stock for proceeds of $481,539 and warrants to purchase up to 385,225 shares of common stock for proceeds of $19,261. The warrants are exercisable at any time during the four years after date of issue at a warrant exercise price of $2.00 per share.
The sales and issuances of stock and other securities were exempt from registration under Section 4(2) of the Securities Act. Cash proceeds were used for general corporate purposes.
| 9 |
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS
| Exhibit No. | Description | |
| 10.1* | Form of Indemnification and Advancement Agreement with directors | |
| 31.1* | Rule 13a-14(a)/15d-14(a) Certificate of Principal Executive Officer | |
| 31.2* | Rule 13a-14(a)/15d-14(a) Certificate of Chief Financial Officer | |
| 32.1* | Section 1350 Certificate of Principal Executive Officer and Chief Financial Officer | |
| 101.INS | Inline XBRL Instance Document | |
| 101.SCH | Inline XBRL Taxonomy Extension Schema | |
| 101.CAL | Inline XBRL Taxonomy Extension Calculation | |
| 101.DEF | Inline XBRL Taxonomy Extension Definition | |
| 101.LAB | Inline XBRL Taxonomy Extension Labels | |
| 101.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase | |
| 104 | Cover Page Interactive Data File (embedded within the Inline XBRL document) | |
| * | Filed herewith. |
| 10 |
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned thereunto duly authorized.
Nano Magic Holdings Inc. (Registrant) | |
| Date: October 28, 2021 | /s/ Tom J. Berman |
| Tom J. Berman, | |
| President and Chief Executive Officer | |
| Date: October 28, 2021 | /s/ Leandro Vera |
| Leandro Vera | |
| Chief Financial Officer |
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