Nano Magic Inc 10-K for FY2022
Nano Magic Inc. (NMGX)
About this 10-K
Nano Magic Inc filed this 10-K on April 11, 2023, covering the fiscal year ended December 31, 2022 (FY2022).
Headline figures
Fiscal year ended December 31, 2022, as reported in this filing, compared with the same period a year earlier where the filing states it.
- Revenue
- $2.58M
- down 40.2% from $4.31M a year earlier
- Net loss
- $2.1M
- compared with a net loss of $1.57M a year earlier
- Diluted EPS
- -$0.21
- compared with -$0.17 a year earlier
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
| Annual report under Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For
the fiscal year ended
| Transition report under Section 13 or 15(d) of the Securities Exchange Act of 1934 |
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The
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on the OTCQB system on June 30, 2022 of $0.25, was approximately $
As of April 11, 2023, the registrant had shares of common stock issued and outstanding.
Documents
Incorporated by Reference:
NANO MAGIC INC.
FORM 10-K
TABLE OF CONTENTS
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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K (this “Report”) contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, which includes information about us and our industry that involve substantial risks and uncertainties. All statements, other than statements of historical facts, included in this Report regarding our strategy, future operations, future financial position, future net sales, projected expenses, prospects and plans and objectives of management are forward-looking statements. These statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, levels of activity, performance or achievement to be materially different from those expressed or implied by the forward-looking statements.
In some cases, you can identify forward-looking statements by terms such as “anticipate,” “believe,” “estimate,” “expect,” “intend,” “may,” “might,” “plan,” “project,” “will,” “would,” “should,” “could,” “can,” “potential,” “continue,” or the negative of these terms, and similar expressions intended to identify forward-looking statements. However, not all forward-looking statements contain these identifying words. These forward-looking statements reflect our current views about future events and are based on assumptions and subject to risks and uncertainties. Given these uncertainties, you should not place undue reliance on these forward-looking statements. Actual events or results could differ materially from those expressed or implied by these forward-looking statements as a result of various factors. There may be other factors that cause our actual results to differ materially from the forward-looking statements.
These forward-looking statements represent our estimates and assumptions only as of the date of this report. Unless required by U.S. federal securities laws, we do not intend to update any of these forward-looking statements to reflect circumstances or events that occur after the statement is made or to conform these statements to actual results.
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PART I
Item 1. Business
Nano Magic Inc., a Delaware corporation (“we”, “us”, “our”, “Nano Magic” or the “Company”), formerly Nano Magic Holdings Inc., develops, commercializes and markets nanotechnology powered consumer and industrial cleaners and coatings to clean, protect, and enhance products for peak performance. Consumer products include lens and screen cleaners and coatings, anti-fog solutions, and household and automotive cleaners and protective coatings sold direct-to-consumer and in big box retail. Nano Magic also sells branded and private label cleaners and coatings into the optical, safety, and industrial channels. Our focus is to expand our direct-to-consumer sales through e-commerce and to grow sales to big box retailers. We continue to sell our consumer products directly to opticians and ophthalmologists and small optical retailers.
Effective May 31, 2022, we sold a 70% interest in our subsidiary, Applied Nanotech, Inc. (“ANI”). The contract research services performed by ANI for governmental and private customers was previously reported as our Contract research segment. As a result of this sale, the Company has deconsolidated ANI from its financial reporting, and we will report as only one segment. We retain a 30% interest in ANI that is now recorded as an equity investment. On December 31, 2022, our wholly-owned subsidiary Nano Magic LLC was merged into the parent company and we changed our name to Nano Magic Inc.
Our revenue is based on the retail and institutional sale of specialty products utilizing nanotechnology to deliver unique performance attributes. We work to understand surfaces at the nano scale, and our products for surfaces can be used on a wide variety of substrates. Our consumer products are sold as liquids, gels, foam and as wet and dry towelettes. Institutional coating products are typically sold in liquid form enabling application by a variety of common commercial techniques We rely on intellectual property including trade secret formulations to protect our proprietary technology.
We have multiple product technology platforms that offer solutions to common surface problems such as ease of cleaning, preventing fogging, preventing accumulation of dirt or grime, improving resistance to scuffing and wear and surface protection. All our products have some “nano” characteristic about them – whether it is being active at the molecular level, incorporation of submicron-particles, or creating very thin, self-assembling coatings that are 20 nanometers or less in thickness.
Our consumer products are primarily customized cleaning and protection solutions. With respect to our consumer products, we strive to create segment leading brands for solutions that are sustainable, of high quality, and that are both easy and safe to apply. We emphasize convenience, such as our product that combines antifog and cleaning into one product for convenience for our users. This, and other products can be used on eyeglasses, safety goggles and glasses, extreme sport glasses, goggles and visors. Our solutions are also packaged for use on electronic screens, windows, mirrors, shower doors, and other similar clear surfaces along with the cleaning of everyday household surfaces. We have also expanded into the auto care sector with Force Field® windshield protection. This product creates a non-stick, super water repellent protective barrier — like a force field — to protect the windshield against rain, bugs, and salt. The coating solution is easy-to-apply and improves visibility and safety while driving.
Industrial surface treatment products include a family of coating liquids that create nano-thin, strongly-bound, invisible, “forcefield”-like coatings on glass and ceramic surfaces and a series of clear coatings for plastics incorporating submicron sized particles to improve abrasion resistance and wear resistance without sacrificing transparency. We manufacture our formulations internally to protect our technology and strive to maintain the highest quality for the products that we and our commercial partners bring to the marketplace.
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Our surface treating products include:
| ● | Liquid and towelette formulations packaged for retail sale to consumers for cleaning and protecting clear surfaces – such as electronic touchscreens, windshields, windows, mirrors, shower doors, eyeglass and sunglass lenses. | |
| ● | Liquid formulation packaged for retail and industrial sale for cleaning surfaces. | |
| ● | Anti-fogging liquid and towelette formulations packaged for retail sale to consumers for safety glasses, protective eye wear including face shields, and sporting goggles. | |
| ● | Anti-fogging towelettes for sale to the military and first responders for safety, anti-fogging and conditioning of lenses, masks, head gear and other applications such as head’s up displays, | |
| ● | Mar-resistant and stain-resistant coatings for high end vitreous china tableware used for heavy duty, usage situations such as restaurants, cruise ships, casinos. | |
| ● | Clear protective coatings used on display panels and touch screens to make it easy to remove fingerprints. Applications include automotive and hand-held devices. | |
| ● | Protective and water-repelling coatings on interior and exterior glass and ceramic surfaces to make it easy to clean and prevent scale and grime encrustation. | |
| ● | Coatings for ceramic insulators used in transit and underground subways systems to prevent caking of metal dust and greases on surfaces to reduce maintenance and current leakage losses. |
Our vision is to harness the power of nanotechnology to create a safer, more socially conscious, and higher performing world. We have three primary areas of focus:
| 1. | Surface cleaning for safety, time and cost savings: Treating surfaces at the nano-scale for easy clean performance – to clean better and to stay cleaner longer; | |
| 2. | Preventing fogging: Surface treatments at the nano-scale to prevent fogging for safety and improved performance, especially on lenses, sportwear and protective eyewear; and | |
| 3. | Sustainability: Creating nano-scale devices and formulas using safe, natural ingredients and manufacturing methods while avoiding the use of harsh chemicals whenever possible. |
Marketing and Distribution
We sell our Nano Magic branded consumer products directly to consumers and retailers in the United States and through a distributor in Canada. Direct-to-consumer sales are through our website, nanomagic.com, on Amazon and other online marketplaces. We also have products in pharmacies, and big box retailers. Sales to big box retailers also include private label products under the retailers’ names. Some of our products are incorporated into our customer’s branded products. We continue direct sales to opticians and ophthalmologists.
Our industrial coating products are sold directly to institutional and industrial customers.
Manufacturing Operations
We manufacture, pack and label liquids and towelettes as well as specialty surface coatings at our 29,220-square foot facility in Madison Heights, Michigan.
Intellectual Property and Proprietary Rights
Our nanotechnology expertise and the related intellectual property used in our current products is specialized in the areas of surface science, molecular self-assembly, transparent composites, surfactants, sub-micron metallic inks and pastes and graphene foils. The intellectual property developed from this work is protected with a combination of selective patents and primarily by trade secrets. This intellectual property strategy is like that used by leading companies in the fragrance and flavors industry. No single patent is significant to any of our commercial products. Please refer to the section entitled “Intellectual Property Rights” in this Item 1 for a more detailed discussion of these matters.
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Competition
Products sold into the optical segment, which has historically been our core sales channel, have a small number of significant competitors. Our products are known to be the “benchmark” products in the optical segment and generally outperform those of our competitors. Some of our products in this segment do compete for certain customers or certain applications against lower-priced, traditional materials. Most of the companies selling products into the optical segment are privately-held U.S. packaging or catalog companies. Examples in the U.S. include Hilco Accessories, California Accessories, and Amcon Laboratories. Internationally, the catalog company, Prosben, Inc., from the Peoples Republic of China is a competitor. These companies sell to opticians and optical stores but are not selling direct to consumer or in big box retail and pharmacies. Optical company, Carl Zeiss, sells its branded optical products in big box retail in those chains where it has optical stores.
In the nano-coating products area or the anti-fog product line we are not aware of any competitive products that we believe match our product performance or processing characteristics. With the COVID-19 pandemic and fogging caused by increased use of masks, other companies have made more of an effort to sell anti-fog products and there were new entrants into this market, but no company has a significant portion of the market.
Backlog
Sales are primarily made under purchase orders for delivery of products. We do not believe that a backlog as of any date is indicative of future results. Some agreements give customers the right to purchase a specific quantity of products during a specified period, but these agreements do not obligate the customers to purchase any minimum quantity. Private label customers are required to commit either to minimums or to repurchase unique inventory items related to their product(s). The quantities purchased by the customer, as well as the shipment schedules, are frequently revised during the agreement term to reflect changes in the customer’s needs. Because of our relatively small size, a customer’s delay of a product shipment can make a difference in the results for an accounting period.
Geographical Information
All long-lived assets are in the United States.
Sources and availability of raw materials and the names of principal suppliers
We use third-party suppliers in the United States to obtain substantially all raw materials, components and packaging products. As is customary in our industry, historically we have not had long-term or exclusive agreements with third-party suppliers and have generally made purchases through purchase orders.
Key Customers
A limited number of key customers historically accounted for a majority of our revenue. In 2022, two accounts represented 44% of revenues. In 2021, four accounts represented 58% of revenue.
Intellectual Property Rights
An important part of our overall business and product development strategy is to protect our intellectual property and, when appropriate, we seek patent protection for our products and proprietary technology. Trade secret protection is most important to our products. Our patent portfolio consists of approximately a dozen issued patents.
The patenting of technology-related products and processes involves uncertain and complex legal and factual questions. The legal standards change from time to time, and administrative and court interpretations are not always consistent in one jurisdiction, or across different jurisdictions. Therefore, there is no assurance what scope of protection any issued patents will provide, or whether any such patents ultimately will be upheld as valid by a court of competent jurisdiction in the event of a legal challenge. The costs of such proceedings would be significant and an unfavorable outcome could result in the loss of rights to the invention at issue in the proceedings.
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If we fail to obtain patents or elect not to file for patent protection, there can be no assurance that we can protect our rights in the technology, or that others will not independently develop substantially equivalent proprietary products and techniques, or otherwise gain access to our technology.
Competitors have filed applications for, or have been issued, patents, and may obtain additional patents and proprietary rights relating to products or processes used in, necessary to, competitive with, or otherwise related to, our patents. The scope and validity of these patents, and the extent to which we may be required to obtain licenses under these patents or under other proprietary rights and the cost and availability of licenses is unknown. This may limit our ability to use and to license our technology. Litigation concerning these or other patents could be protracted and expensive. If suit were brought against us for patent infringement, we could potentially challenge the validity of the other patent but would need to overcome a presumption of validity. If we were found to infringe and the patent was held valid (or was unchallenged), there could be no assurance that the prevailing party would grant us a license. Even if a license were available, the payments that would be required would be unknown and could materially reduce the value of our interest in the affected products.
We require our employees, directors, consultants, outside scientific collaborators, sponsored researchers, and other advisors to execute confidentiality agreements upon the commencement of employment or consulting relationships with us. These agreements provide that all confidential information developed or made known to the individual through the relationship is to be kept confidential and not disclosed to third parties except in specific circumstances. In the case of employees and some consultants, the agreements provide that all inventions conceived by the individual while working for us will be our property. There is no assurance, however, that these agreements will provide sufficient protection for our trade secrets in the event of unauthorized use or disclosure of such information.
Research and Development
Research and development drive our new products and improvement of existing products. Research and development costs incurred in the development of the Company’s products was $16,777 for the year ended December 31, 2022, and $34,875 for the year ended December 31, 2021. This represented approximately 0.47% and 0.89% of our total operating costs in each of those years. The ability to engineer product performance using nanotechnology is one of the ways we distinguish our products in marketing and sales of our products. Product research and development work includes branding and packaging, development and refinement of formulas, engineering of liquid formulas that can be applied both by hand and by machine, optimization for a variety of performance characteristics, testing and characterization, and work on manufacturing processes and techniques both for producing the product, and for a customer’s use of the product.
Compliance with Laws and Regulations
Our operations must satisfy governmental safety standards. Applicable safety standards are established by the U.S. Occupational Safety and Health Administration (“OSHA”), pollution control standards by the U.S. Environmental Protection Agency (“EPA”) and other state and local regulations, including foreign regulation for products manufactured or shipped outside the U.S. We take these requirements into account in product development. Cost of compliance with these regulations has not been significant in the past and we do not expect it to be material in the future.
OSHA, the EPA, and other governmental agencies, both in the United States, the specific states in which we or our customers sell products, and foreign countries, may adopt additional rules and regulations that may affect us and products using our technology. The cost of compliance with these regulations has not been significant to us in the past and is not expected to be material in the future. Changing regulations, including those regulating polyfluoroalkyl substances (PFASs), can affect us and our customers, and we have in the past, and may be required in the future, to reformulate or change formulas and packaging to address regulatory issues. This can affect timing of sales which may be significant in an accounting period.
Our commercial products do not require any government approvals.
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Employees and Human Capital
As of December 31, 2022, we had 19 full-time employees. Our employees are valued team members and are important to our growth and success. This is especially true given our relatively small size. By cross-training so that individuals can master a number of different tasks, we try to create a more challenging work environment and minimize disruption in the case of absence or employee departures. We strive to provide a positive work environment emphasizing a positive attitude, team work and ethical behavior. In the first quarter of 2023, some of our key personnel agreed to take half their salary in stock to help us conserve cash. We are not subject to any collective bargaining agreements, and we consider our relations with our employees to be good.
Available Information
General information about the Company can be found on our website, www.nanomagic.com
Item 1A. Risk Factors
The pandemic has disrupted the global economy and Nano Magic’s supply chain and the long-term effects of the pandemic and related economic disruption cannot be predicted.
The COVID-19 pandemic coupled with government orders and regulations designed to address the effects of the pandemic disrupted the U.S. and global economies. The duration of the disruption and the short and long-term effects of new and changing requirements and new consumer and business behaviors are impossible to predict.
Nano Magic experienced increased demand for its anti-fog product as a result of the pandemic which attracted new entrants to that market segment. That demand has fallen as mask mandates and mask wearing has declined. The staying power of new entrants who took advantage of the demand is unknown.
Labor shortages, inflation, and a variety of government regulations continue to affect Nano Magic customers – both consumer and retail stores – and the continuing impact on customers, the supply chain, raw materials supply and pricing, and the distribution of Nano Magic products, cannot be foreseen.
Supply chain disruption and sales growth can put additional strain on our need for working capital.
Disruption in the supply chain has caused some higher prices and longer lead times. To assure supply, Nano Magic must order materials further in advance, increasing the time between its payments to vendors and the time when Nano Magic can realize a sale. Increased order volume and increased sales will also require that Nano Magic buy larger quantities of raw material inventory and packaging materials. Sales growth will increase our working capital needs, as Nano Magic must pay for the materials before it can see the increased revenue from customers. Similarly, labor must be paid for before the revenue is realized. This can create a greater need for growth capital when funds are already curtailed by Nano Magic’s operating losses.
Nano Magic has limited resources which can hamper its ability to execute its business plan.
Nano Magic is a small company with limited human and financial resources. This limits the resources Nano Magic can devote to the sale and promotion of its products, and may limit its ability to tackle issues that arise in manufacturing and distribution. Nano Magic’s size curtails the resources Nano Magic can devote to promoting its existing products and developing brand recognition. Nano Magic’s limited resources can constrain its ability to take advantage of opportunities, may limit its growth and may give competitors time to challenge its products in the marketplace. These factors will make it harder for Nano Magic to be successful.
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Nano Magic is dependent on key executives and the loss of its President and CEO or other key personnel could adversely affect its results of operations and financial condition.
Nano Magic’s President and CEO, Tom Berman, is under contract through the end of 2023. His vision and leadership are very important to the execution of the Nano Magic business plan, and loss of his services would adversely affect Nano Magic’s results of operations and the value of its stock. Other executives and employees are at-will employees, so they may terminate their employment relationship at any time. Loss of experienced personnel and their knowledge of Nano Magic’s business and industry would be extremely difficult to replace. Moreover, because of Nano Magic’s small size, it would be very difficult for remaining personnel to perform the duties fulfilled by the loss of personnel.
Increased sales under the Nano Magic brand name and building a strong brand with consumer brand loyalty will take time.
Nano Magic has placed a number of Nano Magic branded products in pharmacies and big box retailers. Developing customer loyalty and brand awareness takes time. The time frame could be shortened if Nano Magic had greater resources for marketing and advertising.
Consumer confidence and spending habits have been affected by the COVID-19 pandemic and its after effects, but what that means and how this will affect sales of Nano Magic products remains unknown.
Nano Magic is a small company and the marketplace for consumer cleaning products is competitive.
Nano Magic has a limited line of products; retail chains and big-box stores may only want suppliers that offer a more extensive product line. Nano Magic has fewer resources than many of its competitors to devote to extending product lines, and to new products and packaging. Its inability to devote the required resources to adapt to the demands of consumers or to meet competitive product offerings may limit Nano Magic’s ability to execute on its business plan and hurt its revenue.
If we or our third-party service providers experience a security breach, data loss or other compromise, including if unauthorized access to our data, our business operations may be interrupted, our reputation and business relationships may be harmed, and we may incur other costs.
We use cloud-based computer systems for our communications (e-mail, voice, data exchange, etc.), for other aspects of our operations and for our business and financial records. Any security breach, data loss, or other compromise, including those resulting from a cybersecurity attack, phishing attack, or any unauthorized access, unauthorized usage, virus or similar breach or disruption could result in the loss or destruction of or unauthorized access to, or use, alteration, disclosure, or acquisition of, data, business disruptions and delays as well as damage to our reputation, litigation, regulatory investigations, or other liabilities. Our website and technology infrastructure also may experience performance issues due to a variety of factors, including infrastructure changes, human or software errors, hosting disruptions, capacity constraints, technical failures, natural disasters, or fraud.
We also rely on cloud technologies from third parties in order to operate critical functions of our business, including financial management services, relationship management services, and aspects of our manufacturing and sales functions. If our service agreements are terminated, or there is a lapse of service, elimination of services or features that we utilize, interruption of internet service provider connectivity or damage to our providers’ facilities, we could experience business interruptions as well as significant delays and additional expense in arranging or creating new facilities and services and/or re-architecting our cloud-based offerings for deployment on a different cloud infrastructure service provider, which could adversely affect our business, financial condition and results of operations. Our vendors and service providers may also be the targets of cyberattacks, malicious software, phishing schemes, and fraud. Any of the foregoing could have a material adverse effect on our business, including our financial condition, results of operations and reputation.
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 or service interruptions, this could cause further disruptions to our operations or damages to important systems or facilities 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.
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Drug stores and big-box retail chains that Nano Magic has targeted as a distribution channel to increase its sales volume have their own challenges in the marketplace and demand a high level of support from vendors which will be challenging for Nano Magic, due to its size and limited resources.
The after effects of the pandemic continue to pose challenges for retail stores and this can make them cautious about ordering product or trying new products. In addition, to supply a large number of stores and maintain brand quality, drug stores and big-box retail chains often require, among other things, that their vendors comply with scheduling and packaging requirements, maintain back-up inventory in reserves and impose other standards and restrictions on their vendors. Retail customers may delay or defer orders that can slow sales for Nano Magic. And, if Nano Magic, because of its limited resources, cannot meet customer requirements, then it will not be able to service these distribution channels, and Nano Magic’s potential for revenue growth will be harmed. Moreover, losing a customer may leave Nano Magic with significant obsolete inventory.
Sales of specialized coatings to industrial customers that incorporate Nano Magic products into their own product offerings make us dependent on Nano Magic’s industrial customers’ commitment to the product and dependent on the success of Nano Magic’s customers.
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.
Risks Relating to Nano Magic’s Technology and Commercialization
Nano Magic’s products may infringe the intellectual property rights of others, which may subject it to claims, or prevent or delay its product development efforts and stop it from selling or increase the costs of its products.
Nano Magic’s commercial success depends in part on its ability to operate without infringing the patents and other intellectual property rights of third parties. If claims are made that Nano Magic is using third party technology without authorization or that any third-party patents cover Nano Magic’s products or their use, then the holders of any of these patents or other intellectual property may be able to block the sale of Nano Magic’s products unless Nano Magic obtains a license or changes the products so as not to use the third-party’s intellectual property. Nano Magic could incur significant costs defending against any claim; and, if Nano Magic is liable, then Nano Magic may not be able to enter licensing arrangements or to redesign the products at a reasonable cost or on reasonable terms.
Nano Magic may be unable to adequately prevent disclosure of trade secrets and other proprietary information.
Nano Magic relies on trade secrets to protect its proprietary know-how and technology, especially where Nano Magic does not believe patent protection is appropriate or obtainable. Others independently may develop the same or similar technology, or otherwise obtain access to Nano Magic’s proprietary technology. Nano Magic relies in part on confidentiality agreements with its employees and consultants to protect its trade secrets and other proprietary information. These agreements may not effectively prevent disclosure of confidential information and may not provide an adequate remedy in the event of unauthorized disclosure. Costly and time-consuming litigation could be necessary to enforce and determine the scope of Nano Magic’s proprietary rights. Failure to obtain or maintain trade secret protection could enable competitors to use Nano Magic’s proprietary information and to develop products that better compete with its products.
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Any lawsuits relating to infringement of intellectual property rights necessary to defend Nano Magic or enforce its rights will be costly and time consuming.
Nano Magic’s ability to defend its intellectual property may require litigation to enforce its rights or to defend litigation brought by a third-party. Any of these lawsuits, regardless of their success, could be time consuming and expensive to defend and resolve and may require delay or suspension of commercial sales while they are pending. The cost could cause Nano Magic to forego litigation or to settle on terms that are disadvantageous. If litigation is undertaken or defended, that attendant cost or delay could have a material, adverse impact on Nano Magic’s results of operations.
Some health effects of nanotechnology are unknown.
There has been scientific debate on the health effects of nanomaterials. The science of nanotechnology is engineering at the molecular level to modify or build materials. Many nano-materials are found in nature; others are not naturally occurring. Some scientists believe that certain nanomaterials may be hazardous to human health or the environment. The health effect of new materials is unknown, and can be affected by how they are incorporated and bonded to other materials. Nano Magic focuses on materials larger than 100 nanometers so that they are not regulated as nanoparticles, and Nano Magic carefully evaluates potential health effects of its products on its customers and the effects of handling materials on Nano Magic’s employees. Changing regulations, including those regulating polyfluoroalkyl substances (PFASs) can affect us and our customers. Nano Magic is very mindful of the risks of materials Nano Magic uses and focuses on health and safety. However, debate about the health effects of PFASs, nanoparticles and nanotechnology may adversely affect market acceptance of Nano Magic’s products and adversely affect its financial performance.
Risks Related to Ownership of Nano Magic’s Common Stock
Nano Magic’s common stock is thinly traded, and the number of free trading shares is small, thereby contributing to price volatility.
There is little trading of Nano Magic common stock. As a result, an investor may not be able to sell Nano Magic common stock at the time that the investor would like to sell. Furthermore, if a stock is thinly traded, then any sale may depress the market price.
The limited number of Nano Magic’s free trading shares may limit its ability to raise capital through private placements forcing Nano Magic to offer its stock using more costly qualification or registration procedures.
To remain eligible for the OTCQB, Nano Magic must have a minimum float of 10% of the outstanding stock. Shares sold in a private placement are restricted, and issuing too many restricted shares will take Nano Magic below the float required to remain on the OTCQB. This may force Nano Magic to use available qualification and registration procedures for any capital raise. This in turn would require additional time and resources before Nano Magic would have additional funds for operations or other purposes.
The market price of Nano Magic’s common stock is subject to potential significant price fluctuation because the common stock is thinly traded, and that could result in substantial losses for investors and subject Nano Magic to securities class action litigation.
Among the factors that may cause the market price of Nano Magic’s common stock to fluctuate are the risks described in this “Risk Factors” section and other factors, including:
| ● | The trading volume of Nano Magic’s common stock; | |
| ● | Changes in Nano Magic’s capital structure, such as future issuances of securities or the incurrence of debt; | |
| ● | Actual or expected sales of Nano Magic’s common stock by its stockholders; | |
| ● | Failure of Nano Magic’s products to achieve or maintain market acceptance or commercial success; | |
| ● | Changes in the estimation of the future size and growth rate of Nano Magic’s markets; | |
| ● | Fluctuation in Nano Magic’s quarterly operating results; | |
| ● | Recruitment or departure of key personnel; | |
| ● | The commencement or outcome of litigation involving Nano Magic, its industry segments, or some combination; and | |
| ● | Changes in legislation or regulatory policies, practices, or actions. |
| 11 |
In addition, the stock market in general, the OTCQB and the market for nanotechnology companies in particular, may experience a loss of investor confidence. Such loss of investor confidence may result in extreme price and volume fluctuations in Nano Magic common stock that are unrelated or disproportionate to the operating performance of Nano Magic’s business, financial condition or results of operations. These broad market and industry factors may materially harm the market price of Nano Magic’s common stock and expose Nano Magic to securities class action litigation. Such litigation, even if unsuccessful, could be costly to defend and divert management’s attention and resources, which could further materially harm Nano Magic’s financial condition and results of operations.
Concentration of stock ownership with affiliates could make a management change or an acquisition of Nano Magic more difficult.
Approximately 84% of the common stock on a fully-diluted basis is owned or controlled by Nano Magic’s present officers and directors. Certain provisions of Nano Magic’s organizational documents could discourage potential acquisition proposals, delay or prevent a change in control of us or limit the price that investors may be willing to pay in the future for shares of Nano Magic’s common stock. For example, the amended and restated certificate of incorporation and amended and restated by-laws will:
| ● | authorize the issuance of preferred stock that can be created and issued by Nano Magic’s board of directors without prior stockholder approval, commonly referred to as “blank check” preferred stock, with rights senior to those of its common stock; | |
| ● | limit the persons who can call special stockholder meetings; | |
| ● | permit written action by voting stockholders, permitting affiliates acting alone to accomplish most stockholder actions; | |
| ● | establish advance notice requirements to nominate persons for election to Nano Magic’s board of directors or to propose matters that can be acted on by stockholders at stockholder meetings; | |
| ● | not provide for cumulative voting in the election of directors; and | |
| ● | provide for the filling of vacancies on Nano Magic’s Board of Directors by action of a majority of the directors and not by the stockholders. |
These provisions could also limit the price that investors would be willing to pay in the future for shares of Nano Magic common stock.
Nano Magic does not intend to pay dividends for the foreseeable future.
Nano Magic intends to retain earnings for the foreseeable future to finance the operation and expansion of its business, and Nano Magic does not anticipate paying cash dividends. Stockholders can expect to receive a return on common stock only if the market price of the stock increases.
Future sales of Nano Magic’s common stock may depress its share price.
Sales of substantial number of shares of Nano Magic’s common stock in the public market following a capital raise,
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Nano Magic’s common stock is a “penny stock” under SEC rules, and it may be more difficult to resell securities classified as “penny stock.”
Nano Magic’s common stock is a “penny stock” under applicable SEC rules (generally defined as non-exchange traded stock with a per-share price below $5.00). Unless Nano Magic maintains a per-share price above $5.00, these rules impose additional sales practice and disclosure requirements on broker-dealers that recommend the purchase or sale of penny stocks to persons other than those who qualify as “established customers” or “accredited investors.” The additional burdens imposed upon broker-dealers by such requirements may discourage broker-dealers from effecting transactions in Nano Magic’s securities, which could severely limit the market price and liquidity of Nano Magic’s securities. These requirements may also affect your ability to resell Nano Magic’s common stock.
Nano Magic has reported material weaknesses in its internal controls over financial reporting.
In order to remedy the identified deficiencies in its internal controls over financial reporting, Nano Magic may be required to add additional staff. Nano Magic may not be able to remediate any future material weaknesses, or to complete its evaluation, testing and any required remediation in a timely fashion. During the annual evaluation process, if Nano Magic identifies one or more material weaknesses in its internal controls over financial reporting, then Nano Magic may be unable to assert that its internal controls are effective. If Nano Magic is unable to assert that its internal controls over financial reporting are effective, investors then could lose confidence in the accuracy and completeness of its financial reports, which could harm Nano Magic’s stock price.
Nano Magic’s obligations associated with being a public company require significant resources and management attention, and carry significant cost.
As a public company, Nano Magic has legal, accounting, administrative and other costs and expenses that burden its profit As a reporting company under the Exchange Act, Nano Magic is required to file annual, quarterly and current reports with respect to its business and financial condition, and proxy and other information statements, and is subject to the rules and regulations implemented by the Commission, the Sarbanes-Oxley Act, and the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, and accounting pronouncements and standards of the Public Company Accounting Oversight Board, each of which imposes additional reporting and other obligations on public companies.
Moreover, Nano Magic must monitor changes and comply with any changes to these rules and regulations, and with any future changes in laws, regulations and standards relating to corporate governance and public disclosure. Nano Magic’s need to comply with existing and evolving regulatory requirements imposes administrative expense and also diverts management’s time and attention from revenue-generating activities to compliance activities, which could have a material adverse effect on its business, financial condition and results of operations.
Item 1B. Unresolved Staff Comments
Not applicable.
Item 2. Properties.
We lease our headquarters and the office, warehouse, manufacturing and laboratory space in Madison Heights, Michigan. These facilities are adequate for our current needs.
Item 3. Legal Proceedings.
None.
Item 4. Mine Safety Disclosures.
Not applicable.
| 13 |
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Our common stock, $0.0001 par value, trades on the OTC system under the symbol “NMGX”. The following table sets forth, on a per share basis for the periods indicated, the high and low sale prices for the common stock as reported by that system. These quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not represent actual transactions.
| High | Low | |||||||||||
| 2021 | First Quarter | $ | 1.00 | $ | 0.0151 | |||||||
| Second Quarter | $ | 1.00 | $ | 0.0005 | ||||||||
| Third Quarter | $ | .002 | $ | 0.0001 | ||||||||
| Fourth Quarter | $ | 1.50 | $ | 0.0001 | ||||||||
| 2022 | First Quarter | $ | 0.20 | $ | 0.16 | |||||||
| Second Quarter | $ | 0.25 | $ | 0.20 | ||||||||
| Third Quarter | $ | 0.48 | $ | 0.05 | ||||||||
| Fourth Quarter | $ | 0.26 | $ | 0.05 | ||||||||
As of April 10, 2023, the closing sale price for our common stock as reported on the OTCQB system was $0.25 per share. As of that date, there were approximately 357 shareholders of record for our common stock. This does not include beneficial owners holding common stock in street name in brokerage accounts. As of our last record of total shareholders, including those holding stock in street name, there were approximately 3,460 shareholders.
Cash Dividends
We have never paid cash dividends on our common stock, have no plans to pay any dividends, and it is unlikely that we will pay any dividends in the foreseeable future. We currently intend to invest future earnings, if any, to finance expansion of our business. Any payment of cash dividends in the future will be dependent upon our earnings, financial condition, capital requirements, and other factors determined by our board of directors.
Recent Issuance of Unregistered Securities
On February 16, 2021, the Company sold to Magic Growth 2 LLC, 769,231 shares of common stock for proceeds of $961,538 and warrants to purchase up to 769,225 shares of common stock for proceeds of $38,463. 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 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 $19,260. The warrants are exercisable at any time during the four years after date of issue at a warrant exercise price of $2.00 per share.
On December 15, 2021, we issued an aggregate of 45,333 shares of common stock to our directors as compensation to them for service on our Board. These shares were valued on that date at $0.75 per share for a total value of $34,000.
On January 7, 2022, and again on February 14, 2022, the Company sold to several investors an aggregate of $200,000 convertible promissory notes due March 31, 2026. Issued at face value, the notes bear interest at 8% per annum, payable semi-annually in cash. The notes are convertible at any time at the option of the holder into shares of common stock at a conversion price of $1.75 per share.
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On January 11, 2022, the Company sold to Magic Growth 3 LLC 222,223 shares of common stock for proceeds of $388,887 and warrants to purchase up to 222,195 shares of common stock for proceeds of $11,114. The warrants are exercisable at any time during the four years after date of issue at a warrant exercise price of $1.75.
On February 22, 2022, the Company sold to Magic Growth 3 LLC 152,778 shares of common stock for proceeds of $267,362 and warrants to purchase up to 152,770 shares of common stock for proceeds of $7,638. The warrants are exercisable at any time during the four years after date of issue at a warrant exercise price of $1.75.
On April 14, 2022, the Company sold to Magic Growth 3 LLC 69,445 shares of common stock for proceeds of $121,529 and warrants to purchase up to 69,425 shares of common stock for proceeds of $3,471. The warrants are exercisable at any time during the four years after date of issue at a warrant exercise price of $2.25.
On May 27, 2022, the Company sold to Magic Growth 3 LLC 213,889 shares of common stock for proceeds of $374,305 and warrants to purchase up to 213,885 shares of common stock for proceeds of $10,694. The warrants are exercisable at any time during the four years after date of issue at a warrant exercise price of $2.25.
On July 27, 2022, and again on August 22, 2022, the Company sold to several investors an aggregate of $100,000 convertible promissory notes due March 31, 2026. Issued at face value, the notes bear interest at 8% per annum, payable semi-annually in cash. The notes are convertible at any time at the option of the holder into shares of common stock at a conversion price of $1.75 per share.
On August 29, 2022, the Company sold to Magic Growth 3 LLC 69,445 shares of common stock for proceeds of $121,529 and warrants to purchase up to 69,425 shares of common stock for proceeds of $3,471. The warrants are exercisable at any time during the four years after date of issue at a warrant exercise price of $2.25.
On October 26, 2022, the Company sold to an investor a $25,000 convertible promissory note due October 31, 2023. Issued at face value, the note bears interest at 8% per annum, payable semi-annually in cash. The notes are convertible at any time at the option of the holder into shares of common stock at a conversion price of $1.75 per share.
On October 31, 2022, the Company sold to Magic Growth 3 LLC 13,889 shares of common stock for proceeds of $24,306 and warrants to purchase up to 13,885 shares of common stock for proceeds of $694. The warrants are exercisable at any time during the four years after date of issue at a warrant exercise price of $2.25.
In December 2022, the Company sold 102,082 shares of common stock to individual, accredited investors for aggregate proceeds of $127,603 and sold to those investors warrants to purchase up to 101,875 shares of common stock for proceeds of $2,037. The warrants are exercisable at any time during the four years after date of issue at a warrant exercise price of $1.75.
On December 6, 2022, we issued an aggregate of 176,000 shares of common stock to our directors as compensation to them for service on our Board. These shares were valued on that date at $0.75 per share for a total value of $132,000.
On December 18, 2022, the Company sold to an investor a $50,000 convertible, secured promissory note due June 17, 2024. Issued at face value, the note bears interest at 8% per annum accrued during the term of the loan, payable on maturity. The note is convertible at any time at the option of the holder into shares of common stock at a conversion price of $1.75 per share.
In January 2023, the Company sold 15,749 shares of common stock to an individual, accredited investor for proceeds of $19,686 and sold to that investor warrants to purchase up to 15,688 shares of common stock for proceeds of $314. The warrants are exercisable at any time during the four years after date of issue at a warrant exercise price of $1.75.
In February 2023 we reached agreement with the landlord of our Michigan facility to accept $66,000 worth of our common stock at a price of $1.25 per share as partial payment of rent for the six-month period from October 2022 through March 2023.
On March 23, 2023, the Company sold 39,371 shares of common stock to an individual, accredited investor for proceeds of $49,214 and sold to that investor warrants to purchase up to 39,313 shares of common stock for proceeds of $786. The warrants are exercisable at any time during the four years after date of issue at a warrant exercise price of $1.75.
The issuances of all shares described in this section were exempt from registration under the Securities Act of 1933, as amended, in reliance on Section 4(a)(2).
Stock Options
In connection with the three-year extension of the contract with our President and Chief Executive Officer, he was granted an option on March 3, 2021 to purchase up to 2,350,000 shares of common stock at an exercise price of $0.75. Vesting is as follows:
| The right to purchase: | Consisting of: | Vesting: | ||
| Tranche 1 | 150,000 Option Shares | Vested on June 30, 2021 | ||
| Tranche 2 | 150,000 Option Shares | Vested on December 31, 2021 | ||
| Tranche 3 | 150,000 Option Shares | Vested on June 30, 2022 | ||
| Tranche 4 | 150,000 Option Shares | Vested on December 31, 2022 | ||
| Tranche 5 | 150,000 Option Shares | Will vest on June 30, 2023 | ||
| Tranche 6 | 150,000 Option Shares | Will vest on December 31, 2023 | ||
| Tranche 7 | Up to 150,000 Option Shares | Forfeited because sales bonus for 2021 did not reach cap | ||
| Tranche 8 | Up to 150,000 Option Shares | Forfeited because sales bonus for 2022 did not reach cap | ||
| Tranche 9 | Up to 150,000 Option Shares | Will vest if the aggregate sales bonus payable for 2023 exceeds $300,000 | ||
| Tranche 10 | Up to 1 million Option Shares | If a profit bonus is payable under the employment contract and the Board determines to pay some or all of it with options, the number vested as determined by the Board |
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On March 2, 2021, we granted an option to Ronald J. Berman as part of his consulting contract. Based on sales revenue in 2021, he vested in options to purchase 37,500 shares at an exercise price of $0.75 and the balance of the option was forfeited. Mr. Berman is a director and is the father of our President, Tom J. Berman.
In December 2022, the options held by Tom Berman and Ron Berman were amended so that, in the event of their death or disability, their personal representative has the same rights as the original holder to exercise the vested options during their term.
On March 2, 2021, our Board adopted the Nano Magic 2021 Equity Incentive Plan described below.
On August 10, 2021 we issued the option to purchase up to 100,000 shares that had been approved by the Board in May, 2021 in connection with a consulting agreement. No options have been included in diluted earnings per share as they would be anti-dilutive.
Issuer Purchases of Equity Securities
Neither we nor any of our affiliates have engaged in any purchases of our equity securities during the periods discussed in this Report.
Equity Compensation Plan Information
The table below sets out as of December 31, 2022 the number of securities to be issued upon the exercise of outstanding options, warrants and rights (column (a)), the weighted average exercise price of those options, warrants and rights (column (b)), and the number of securities remaining available for future issuance under the plan (other than the securities to be issued upon the exercise of the outstanding options, warrants and rights) (column (c)).
Plan (none of which have been approved by security holders) | Number of securities to be issued upon exercise of outstanding options, warrants and rights | Weighted-average exercise price of outstanding options, warrants and rights ($) | Number of securities remaining available for future issuance under equity compensation plans | |||||||||
| (a) | (b) | (c) | ||||||||||
| 2012 Equity Incentive Plan (1) | 838 | $ | 13.79 | |||||||||
| 2015 Equity Incentive Plan (2) | 50,000 | 0.65 | - | |||||||||
| 2021 Equity Incentive Plan | 172,653 | 0.78 | 240,547 | |||||||||
| Option granted to Tom J. Berman (3) | 450,000 | 0.55 | - | |||||||||
| Option granted to Tom J. Berman (3) | 2,050,000 | 0.75 | - | |||||||||
| Option granted to Ronald Berman (3) | 37,500 | 0.75 | - | |||||||||
| Total | 2,760,991 | $ | 0.72 | 240,547 | ||||||||
| (1) | In April 2012, the Company’s Board of Directors established the 2012 Equity Compensation Plan. The Board has terminated the 2012 Equity Compensation Plan and no new grants can be made under this Plan. | |
| (2) | The 2015 Equity Incentive Plan was adopted by the Board on November 30, 2015. During 2020, 50,000 options were granted under the Plan. In 2021, the Board terminated the 2015 Equity Plan and no new grants can be made under this Plan. | |
| (3) | The options granted to Tom J. Berman and Ronald Berman are not granted under any equity plan. |
| 16 |
Item 6. [Reserved]
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operation.
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 consolidated financial statements.
OVERVIEW
Nano Magic develops, commercializes and markets nanotechnology powered consumer and industrial cleaners and coatings to clean, protect, and enhance products for peak performance. Consumer products include lens and screen cleaners and coatings, anti-fog solutions, and household and automobile cleaners and protective coatings sold direct-to-consumer and in big box retail. Nano Magic also sells branded and private label cleaners and coatings into the optical, safety, and industrial channels. Our focus is to expand our direct-to-consumer sales through e-commerce and to grow sales to big box retailers. We continue to sell our consumer products directly to opticians and ophthalmologists and small optical retailers.
In December 2019, a novel strain of coronavirus disease (“COVID-19”) was first reported in Wuhan, China. Less than four months later, on March 11, 2020, the World Health Organization declared COVID-19 a pandemic. Disruptions to the economy, the supply chain and the labor force caused by the pandemic and government policies adopted to address the pandemic continue to have an effect on our business and the business of our suppliers and customers. For example, despite progress in our efforts to place Nano Magic products in big box retail and secured several national big box retail placements, these customers are also suffering from supply chain disruptions and their focus on their core business is delaying roll-out of some of our solutions. The Company experienced margin erosion as a result of government orders issued in response to the COVID-19 pandemic. Contributing factors included but were not limited to higher raw material prices, longer lead-times, and production delays.
Effective May 31, 2022, we sold a 70% interest in our subsidiary, Applied Nanotech, Inc. (“ANI”). The contract research services performed by ANI for governmental and private customers was previously reported as our Contract research segment. As a result of this sale, the Company has deconsolidated ANI from its financial reporting, and we will report as only one segment. We retain a 30% interest in ANI that is now recorded as an equity investment.
RESULTS OF OPERATIONS
The following comparative analysis on results of operations was based primarily on the comparative consolidated financial statements, footnotes and related information for the periods identified below and should be read in conjunction with the consolidated financial statements and the notes to those statements that are included elsewhere in this report. The results discussed below are for the years ended December 31, 2022 and 2021.
Comparison of Results of Operations for the Year Ended December 31, 2022 and 2021
Revenues
For the years ended December 31, 2022 and 2021, revenues were $2,577,332 and $4,313,443, respectively. For the year ended December 31, 2022, sales decreased by $1,736,111, or 40%, as compared to the year ended December 31, 2021. This decrease is primarily driven by a reduction in high anti-fog product shipments during COVID, in particular high demand in the first half of 2021. Sales of private label and co-branded products to optical and industrial customers remain significant. We continue to focus to increase sales of our Nano Magic branded solutions by direct sales to consumers using e-commerce, and are expanding by placing products with pharmacies, big box stores and other retailer outlets. Revenue opportunities from those solutions has been delayed by the logistics and other supply chain issues those customers have been facing in their business.
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 including costs related to government and private contracts in our Contract services segment.
For the year ended December 31, 2022, cost of revenues was $2,481,110 as compared to $2,651,325 for 2021, a decrease of $170,215 or 6%. Costs remained relatively high compared to the revenue decrease due primarily to fixed costs, increased energy costs and inflation.
| 17 |
Gross profit and gross margin
For the year ended December 31, 2022, gross profit amounted to $96,222 as compared to $1,662,118 for the year ended December 31, 2021, a decrease of $1,565,896, or 94%. The decrease was due primarily to the sales decrease, a higher proportion of sales through lower-margin channels, and fixed production expenses. For the years ended December 31, 2022 and 2021, gross margins were 3.7% and 38.5%, respectively.
Other operating income
For the year ended December 31, 2022, other operating income totaled $95,701 as compared to $632,069 for the year ended December 31, 2021, a decrease of $536,368, or 85%. The decrease was due primarily due to the completion of payments under a settlement agreement.
Operating expenses
For the year ended December 31, 2022, operating expenses decreased by $377,258, or 10% as compared to the year ended December 31, 2021. For the years ended December 31, 2022 and 2021, respectively, operating expenses consisted of the following:
| Year Ended December 31, | ||||||||
| 2022 | 2021 | |||||||
| Selling and marketing expenses | $ | 389,391 | $ | 161,194 | ||||
| Salaries, wages and related benefits | 1,520,970 | 2,244,832 | ||||||
| Research and development | 16,777 | 34,875 | ||||||
| Professional fees | 788,641 | 707,938 | ||||||
| General and administrative expenses | 829,841 | 774,039 | ||||||
| Total | $ | 3,545,620 | $ | 3,922,878 | ||||
| ● | For the year ended December 31, 2022, selling and marketing expenses increased by $228,197, or 142%, as compared to the year ended December 31, 2021. The increase was primarily attributable to attendance at trade shows and brand marketing activities designed to increase sales channels and market penetration. | |
| ● | For the year ended December 31, 2022, salaries, wages and related benefits decreased by $723,862 or 32%, as compared to the year ended December 31, 2021. This was due to the need for fewer personnel due to lower sales and to cost-cutting efforts. | |
| ● | For the year ended December 31, 2022, research and development costs decreased by $18,098, or 52%, as compared to the year ended December 31, 2021, driven by a reduction in R&D projects. | |
| ● | For the year ended December 31, 2022, professional fees increased by $80,703, or 11%, as compared to the year ended December 31, 2021, primarily driven by increased third-party legal fees and the assistance of sales consultants. | |
| ● | For the year ended December 31, 2022, general and administrative expenses increased by $55,802, or 7%, as compared to the year ended December 31, 2021 primarily due to general rate increases and inflation. |
Loss from operations
As a result of the factors described above, for the year ended December 31, 2022, loss from operations amounted to $3,353,697 as compared to a loss from operations of $1,628,691 for the year ended December 31, 2021, an increase of $1,725,006 or 106%.
Other income
For the year ended December 31, 2022, total other income amounted to $102,583 as compared to other income of $113,173 for the year ended December 31, 2021, a decrease of $10,590 or 9%. The change is primarily due to a government grant for employee-retention tax credits recognized in 2022 as well income from investment in subsidiary of $57,289, offset by an increase in interest expense for the year ended December 31, 2022 as compared to the same period in 2021, and a loan forgiveness of $130,900 in 2021 that did not reoccur in 2022.
Loss from continuing operations
For the year ended December 31, 2022, loss from continuing operations amounted to $3,251,114 as compared to a loss from continuing operations of $1,515,518 for the year ended December 31, 2021, an increase of $1,735,596 or 115%.
| 18 |
Income (loss) from discontinued operations
For the year ended December 31, 2022, income from discontinued operations was $1,149,525, comprised of $1,300 income plus a gain on sale of discontinued operations of $1,148,225, as compared to a loss from discontinued operations of $59,046 for the year ended December 31, 2021.
Net loss
As a result of the foregoing, for the year ended December 31, 2022 our net loss amounted to $2,101,589 as compared to a net loss of $1,574,564 for the year ended December 31, 2021, an increase in losses of $527,025 or 33%.
For the years ended December 31, 2022 and 2021, net losses from continuing operations amounted to $0.32 and $0.16 per common share (basic and diluted), respectively. For the years ended December 31, 2022 and 2021, net income and (loss) for discontinued operations amounted to $0.11 and $(0.01) per common share (basic and diluted), 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 a working capital balance of $524,389 and unrestricted cash of $259,223 as of December 31, 2022.
The following table sets forth a summary of changes in our working capital from continuing operations for the period from December 31, 2022 to December 31, 2021:
| December 31, 2022 | December 31, 2021 | Dollar Change | Percentage Change | |||||||||||||
| Working capital: | ||||||||||||||||
| Total current assets | $ | 1,900,858 | $ | 2,082,293 | $ | (181,435 | ) | (8.71 | )% | |||||||
| Total current liabilities | 1,376,469 | 577,769 | 798,700 | 138.24 | % | |||||||||||
| Working capital: | $ | 524,389 | $ | 1,504,524 | $ | (980,135 | ) | (65.15 | )% | |||||||
The decrease in current assets reflects decreases in accounts receivable, prepaids, and inventory balances, offset by an increase in cash. The increase in current liabilities is primarily due to increases in accounts payable and accrued expenses.
Net cash used by operating activities was $1,708,365 for the year ended December 31, 2022 as compared to net cash used by operating activities of $1,377,056 for the year ended December 31, 2021, an increase of $331,309, or 24%. Net cash used by operating activities reflects a net loss of $3,251,114, partially offset by the add-back of non-cash items totaling $555,827 and changes in operating assets and liabilities of $1,059,167. Net cash used by continuing operations for the years ended December 31, 2022 and 2021 totaled $1,636,120 and $1,282,553, respectively. Net cash used by discontinued operations for the years ended December 31, 2022 and 2021 totaled $72,245 and $94,503, respectively.
We have worked over the last several quarters to reduce our costs and conserve cash. Our common stock suffered an extended period with no market makers and the caveat emptor designation on the OTC market, that made it increasingly difficult to raise additional capital. Since early March 2023, we have had market makers for our stock, and are working to remove the caveat emptor warning on our shares. We expect to need additional capital in the next quarter.
Net cash provided by investing activities was $20,090 for the year ended December 31, 2022 as compared to net cash used in investing activities of $127,257 for the year ended December 31, 2021.
Net cash provided by financing activities was $1,705,024 for the year ended December 31, 2022 as compared to $1,458,653 for the year ended December 31, 2021. The increase was primarily attributed to proceeds from the issuance of convertible debt in 2022.
CRITICAL ACCOUNTING POLICIES
Our critical accounting policies are included in Note 2 - Significant Accounting Policies of our consolidated financial statements included within this Report.
RECENT ACCOUNTING PRONOUNCEMENTS
Recently issued accounting standards are included in Note 2 - Significant Accounting Policies of our consolidated financial statements included within this Report.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
Not Applicable.
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Item 8. Financial Statements and Supplementary Data.
NANO MAGIC INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2022 and 2021
TABLE OF CONTENTS
| 20 |
Report of Independent Registered Public Accounting Firm
To the Shareholders and Board of Directors of
Nano Magic Inc.
Opinion on the Financial Statements
We have audited the accompanying balance sheets of Nano Magic Inc. (the “Company”) as of December 31, 2022 and 2021, and the related statements of operations, stockholders’ equity and cash flows for the years then ended, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2022 and 2021, and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.
Substantial Doubt about the Company’s Ability to Continue as a Going Concern
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the financial statements, the Company has recurring losses from operations, negative cash flow from operations, and an accumulated deficit. These conditions raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 1. The financial statements do not include any adjustment that might result from the outcome of this uncertainty. Our opinion is not modified with respect to this matter.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures include examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
| 21 |
To the Shareholders and Board of Directors of
Nano Magic Inc.
Page Two
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing separate opinions on the critical audit matter or on the accounts or disclosures to which they related.
Critical Audit Matter – Going Concern Assessment
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the financial statements, the Company suffered recurring losses from operations and negative cash flows from operations and expects to continue to incur losses for at least the next twelve months. This matter is also described in the “Emphasis of Matter – Substantial Doubt about the Company’s Ability to Continue as a Going Concern” section of our report.
We identified management’s judgements and assumptions used to assess the Company’s ability to continue as a going concern as a critical audit matter due to inherent complexities and uncertainties related to the Company’s projections of operations. Auditing these judgements and assumptions involved especially challenging auditor judgement due to the nature and extent of audit evidence and effort required to address these matters.
How the Critical Audit Matter Was Addressed in the Audit
The primary procedures we performed to address this critical audit matter included the following: (1) evaluating management’s assessment and assessing the reasonableness of key assumptions underlying management’s conclusion, (2) evaluating the probability that the Company will be able to reduce operating expenditures or raise additional capital if required, (3) assessing management’s plans in the context of other audit evidence obtained during the audit to determine whether it supported or contradicted the conclusions reached by management.
/s/ UHY LLP
We have served as the Company’s auditor since 2019.
April 11, 2023
| 22 |
NANO MAGIC INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
| December 31 | December 31 | |||||||
| 2022 | 2021 | |||||||
| ASSETS | ||||||||
| CURRENT ASSETS: | ||||||||
| Cash | $ | $ | ||||||
| Accounts receivable, net | ||||||||
| Inventory, net | ||||||||
| Prepaid expenses | ||||||||
| Current portion of note receivable | ||||||||
| Current assets of discontinued operations | ||||||||
| Total Current Assets | ||||||||
| Operating lease right-of-use assets | ||||||||
| Property, plant and equipment, net | ||||||||
| Note receivable, non-current | ||||||||
| Non-marketable equity investment in subsidiary | ||||||||
| Non-current assets of discontinued operations | ||||||||
| Total Assets | $ | $ | ||||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
| CURRENT LIABILITIES: | ||||||||
| Accounts payable | $ | $ | ||||||
| Accounts payable - related parties | ||||||||
| Accrued expenses and other current liabilities | ||||||||
| Current portion of notes payable | ||||||||
| Current portion of finance leases | ||||||||
| Advances from related parties | ||||||||
| Current portion of operating lease liabilities | ||||||||
| Current liabilities of discontinued operations | ||||||||
| Total Current Liabilities | ||||||||
| Notes payable, net of current portion | ||||||||
| Finance leases, net of current portion | ||||||||
| Operating lease liabilities, net of current portion | ||||||||
| Non-current liabilities of discontinued operations | ||||||||
| Total Liabilities | ||||||||
| Commitments and Contingencies (See Note 15) | ||||||||
| STOCKHOLDERS’ EQUITY: | ||||||||
| Preferred stock, $ par value, shares authorized; shares issued and outstanding | ||||||||
| Common stock: $ par value, shares authorized; and issued and outstanding at December 31, 2022 and 2021, respectively | ||||||||
| Additional paid-in capital | ||||||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| Total Stockholders’ Equity | ||||||||
| Total Liabilities and Stockholders’ Equity | $ | $ | ||||||
See accompanying notes to consolidated financial statements.
| 23 |
NANO MAGIC INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
| 2022 | 2021 | |||||||
| For the Years Ended | ||||||||
| December 31, | ||||||||
| 2022 | 2021 | |||||||
| NET REVENUES | $ | $ | ||||||
| COST OF SALES | ||||||||
| GROSS PROFIT | ||||||||
| OTHER OPERATING INCOME | ||||||||
| OPERATING EXPENSES: | ||||||||
| Selling and marketing expenses | ||||||||
| Salaries, wages and related benefits | ||||||||
| Research and development | ||||||||
| Professional fees | ||||||||
| General and administrative expenses | ||||||||
| Total Operating Expense | ||||||||
| LOSS FROM OPERATIONS | ( | ) | ( | ) | ||||
| OTHER INCOME | ||||||||
| Loan forgiveness | ||||||||
| Income from investment in subsidiary | ||||||||
| Government grant | ||||||||
| Interest expense | ( | ) | ( | ) | ||||
| Other income | ||||||||
| Total Other Income | ||||||||
| LOSS FROM CONTINUING OPERATIONS | ( | ) | ( | ) | ||||
| INCOME (LOSS) FROM DISCONTINUED OPERATIONS | ||||||||
| Income (loss) from discontinued operations | ( | ) | ||||||
| Gain on sale of discontinued operations | ||||||||
| NET INCOME (LOSS) FROM DISCONTINUED OPERATIONS | ( | ) | ||||||
| NET LOSS | $ | ( | ) | $ | ( | ) | ||
| NET INCOME (LOSS) PER SHARE - BASIC: | ||||||||
| Continuing operations | $ | ( | ) | $ | ( | ) | ||
| Discontinued operations | $ | $ | ( | ) | ||||
| NET INCOME (LOSS) PER SHARE - BASIC: | $ | ( | ) | $ | ( | ) | ||
| NET INCOME (LOSS) PER SHARE - DILUTED: | ||||||||
| Continuing operations | $ | ( | ) | $ | ( | ) | ||
| Discontinued operations | $ | $ | ( | ) | ||||
| NET INCOME (LOSS) PER SHARE - DILUTED: | $ | ( | ) | $ | ( | ) | ||
| WEIGHTED AVERAGE COMMON SHARES OUTSTANDING: | ||||||||
| Basic | ||||||||
| Diluted | ||||||||
See accompanying notes to consolidated financial statements.
| 24 |
NANO MAGIC INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (DEFICIT)
FOR THE YEARS ENDED DECEMBER 31, 2022 AND 2021
| Shares | Amount | Paid-in Capital | Deficit | Equity | ||||||||||||||||
| Class A Common Stock | Additional | Accumulated | Total Stockholders’ | |||||||||||||||||
| Shares | Amount | Paid-in Capital | Deficit | Equity | ||||||||||||||||
| Balance, December 31, 2020 | $ | $ | $ | ( | ) | $ | ||||||||||||||
| Common stock issued for cash, net of issuance costs | ||||||||||||||||||||
| Common stock issued for services | ||||||||||||||||||||
| Stock-based compensation | - | |||||||||||||||||||
| Warrants and options on private placement | - | |||||||||||||||||||
| Net loss | - | ( | ) | ( | ) | |||||||||||||||
| Balance, December 31, 2021 | $ | $ | $ | ( | ) | $ | ||||||||||||||
| Balance | ( | ) | ||||||||||||||||||
| Common stock issued for cash, net of issuance costs | ||||||||||||||||||||
| Common stock issued for services | ||||||||||||||||||||
| Stock-based compensation | - | |||||||||||||||||||
| Warrants and options on private placement | - | |||||||||||||||||||
| Net loss | - | ( | ) | ( | ) | |||||||||||||||
| Balance, December 31, 2022 | $ | $ | $ | ( | ) | $ | ||||||||||||||
| Balance | ( | ) | ||||||||||||||||||
See accompanying notes to consolidated financial statements.
| 25 |
NANO MAGIC INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
The following table provides a reconciliation of cash and restricted cash reported within the consolidated balance sheet that sum to the total of the same such amounts shown in the consolidated statement of cash flows:
| 2022 | 2021 | |||||||
| For the Years Ended | ||||||||
| December 31, | ||||||||
| 2022 | 2021 | |||||||
| CASH FLOWS FROM OPERATING ACTIVITIES | ||||||||
| Net loss from continuing operations | $ | ( | ) | $ | ( | ) | ||
| Net income (loss) from discontinued operations | ( | ) | ||||||
| Adjustments to reconcile net loss to net cash provided by operating activities: | ||||||||
| Change in inventory obsolescence reserve | ( | ) | ||||||
| Depreciation and amortization expense | ||||||||
| Gain on forgiveness of loan | ( | ) | ||||||
| Bad debt expense | ( | ) | ||||||
| Stock-based compensation | ||||||||
| Income from investment in subsidiary | ( | ) | ||||||
| Change in operating assets and liabilities: | ||||||||
| Accounts receivable | ( | ) | ||||||
| ERTC Receivable | ( | ) | ||||||
| Inventory | ( | ) | ||||||
| Prepaid expenses and contract assets | ( | ) | ||||||
| Accounts payable | ( | ) | ||||||
| Accounts payable - related party | ( | ) | ||||||
| Operating lease liabilities | ||||||||
| Accrued expenses | ( | ) | ||||||
| Total adjustments | ||||||||
| Net cash used by continuing operating activities | ( | ) | ( | ) | ||||
| Net cash used by discontinued operating activities | ( | ) | ( | ) | ||||
| NET CASH USED BY OPERATING ACTIVITIES | ( | ) | ( | ) | ||||
| CASH FLOWS FROM INVESTING ACTIVITIES | ||||||||
| Proceeds from note receivable | ||||||||
| Purchases of property and equipment | ( | ) | ( | ) | ||||
| Net cash provided (used) by continuing investing activities | ( | ) | ||||||
| Net cash used by discontinued investing activities | ( | ) | ||||||
| NET CASH PROVIDED (USED) BY INVESTING ACTIVITIES | ( | ) | ||||||
| CASH FLOWS FROM CONTINUING FINANCING ACTIVITIES | ||||||||
| Proceeds from sale of common stock and warrants | ||||||||
| Proceeds from issuance of convertible debt | ||||||||
| Repayment of bank loans | ( | ) | ( | ) | ||||
| Repayment of finance leases | ( | ) | ( | ) | ||||
| Repayment of advances from related parties | ( | ) | ( | ) | ||||
| Net cash provided by continuing financing activities | ||||||||
| Net cash provided by discontinued financing activities | ||||||||
| NET CASH PROVIDED BY FINANCING ACTIVITIES | ||||||||
| NET INCREASE (DECREASE) IN CASH | ( | ) | ||||||
| CASH in continuing operations, beginning of year | ||||||||
| CASH in discontinued operations, beginning of year | ||||||||
| CASH, end of period | $ | $ | ||||||
| Less: CASH in discontinued operations, end of period | $ | $ | ||||||
| CASH in continuing operations, end of period | $ | $ | ||||||
| SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION | ||||||||
| Cash paid during the period for interest | $ | $ | ||||||
See accompanying notes to consolidated financial statements.
| 26 |
NANO MAGIC INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2022 AND 2021
NOTE 1 – ORGANIZATION AND BASIS OF PRESENTATION
Organization
Nano Magic Inc. (“we”, “us”, “our”, “Nano Magic” or the “Company”), a Delaware corporation, develops and sells a portfolio of nano-layer coatings, nano-based cleaners, and nano-composite products based on its proprietary technology. On December 31, 2022, our wholly-owned subsidiary Nano Magic LLC was merged into the parent company and we changed our name to Nano Magic Inc.
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 primarily to customers in the optical industry.
Effective
May 31, 2022, we sold a
Going Concern
These
consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the
settlement of liabilities and commitments in the normal course of business. As reflected in the consolidated financial statements,
the Company had losses from continuing operations and net cash used by continuing operations of $
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 of America (“US GAAP”) 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, 2022 and 2021 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, 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.
Cash, Cash Equivalents and Restricted Cash
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.
| 27 |
Inventory
Inventory is stated at the lower of cost or net realizable value. Cost is determined using the average cost method based on prices paid for inventory items. This valuation requires us to make judgments, based on currently available information, about the likely method of disposition, such as sales to individual customers and expected recoverable values.
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 other income or expense 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.
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. The Company did not record any impairment charge for the year ended December 31, 2022 and 2021.
Leases
Operating leases are reflected on our balance sheet within operating lease Right-of-use (ROU) assets and the related current and non-current operating lease liabilities. ROU assets represent the right to use an underlying asset for the lease term, and lease liabilities represent the obligation to make lease payments arising from lease agreement. Operating lease ROU assets and liabilities are recognized at the commencement date, the date on which the lessor began making the underlying asset customizable for our use, based upon the present value of the lease payments over the respective lease term. Lease expense is recognized on a straight-line basis over the lease term, subject to any changes in the lease or expectation regarding the terms. Variable lease costs such as common area maintenance, property taxes and insurance are expensed as incurred.
Lease Term
The Company calculates the term for each lease agreement to include the noncancelable period specified in the agreement together with (1) the periods covered by options to extend the lease if the Company is reasonably certain to exercise that option, (2) periods covered by an option to terminate if the Company is reasonably certain not to exercise that option and (3) period covered by an option to extend (or not terminate) if controlled by the lessor.
The assessment of whether the Company is reasonably certain to exercise an option to extend a lease requires significant judgement surrounding contract-based factors, asset-based factors, entity-based factors and market-based factors.
Lease Payments
Lease payments consist of fixed payments, less any lease incentives paid or payable to the lessee related to the use of the underlying asset during the lease term.
Incremental Borrowing Rate
The ROU asset and related lease liabilities recorded based on the present value of the lease payments using (1) the rate implicit in the lease or (2) the rate of interest that a lessee would have to pay to borrow on a collateralized basis over a similar term an amount equal to the lease payments in a similar economic environment.
| 28 |
Revenue Recognition
We adopted ASC Topic 606, Revenue from Contracts with Customers (“ASC Topic 606”), effective January 1, 2018 using the modified retrospective method. ASC Topic 606 is a comprehensive revenue recognition model that requires revenue to be recognized when control of the promised goods or services are transferred to our customers at an amount that reflects the consideration that we expect to receive. The application of ASC Topic 606 requires us to use significant judgment and estimates. Application of ASC Topic 606 requires a five-step model applicable to all revenue streams as follows:
Identification of the contract, or contracts, with a customer
A contract with a customer exists when (i) we enter into an enforceable contract with a customer that defines each party’s rights regarding the goods or services to be transferred and identifies the payment terms related to these goods or services, (ii) the contract has commercial substance and, (iii) we determine that collection of substantially all consideration for goods or services that are transferred is probable based on the customer’s intent and ability to pay the promised consideration. We apply judgment in determining the customer’s ability and intention to pay, which is based on a variety of factors including the customer’s historical payment experience or, in the case of a new customer, published credit and financial information pertaining to the customer.
Identification of the performance obligations in the contract
Performance obligations promised in a contract are identified based on the goods or services that will be transferred to the customer that are both capable of being distinct, whereby the customer can benefit from the goods or service either on its own or together with other resources that are readily available from third parties or from us, and are distinct in the context of the contract, whereby the transfer of the goods or services is separately identifiable from other promises in the contract.
When a contract includes multiple promised goods or services, we apply judgment to determine whether the promised goods or services are capable of being distinct and are distinct within the context of the contract. If these criteria are not met, the promised goods or services are accounted for as a combined performance obligation.
Determination of the transaction price
The transaction price is determined based on the consideration to which we will be entitled to receive in exchange for transferring goods or services to our customer. The Company generally ships products to customers and does not have multiple performance obligations in its revenue stream and therefore does not allocate transaction prices to multiple performance obligations. We estimate any variable consideration included in the transaction price using the expected value method that requires the use of significant estimates for discounts, cancellation periods, refunds and returns. Sales discounts applied on orders are treated as a reduction of revenues, as are any rebates provided under customer contracts.
| 29 |
Disaggregation of Revenue
A
limited number of key customers historically accounted for a majority of our revenue. In 2022, two customers accounted for
Principal versus Agent Considerations
When another party is involved in providing goods or services to our customer, we apply the principal versus agent guidance in ASC Topic 606 to determine if we are the principal or an agent to the transaction. When we control the specified goods or services before they are transferred to our customer, we report revenue gross, as principal. If we do not control the goods or services before they are transferred to our customer, revenue is reported net of the fees paid to the other party, as agent. Our evaluation to determine if we control the goods or services within ASC Topic 606 includes the following indicators:
We are primarily responsible for fulfilling the promise to provide the specified good or service.
When we are primarily responsible for providing the goods and services, such as when the other party is acting on our behalf, we have indication that we are the principal to the transaction. We consider if we may terminate our relationship with the other party at any time without penalty or without permission from our customer.
We have inventory risk before the specified good or service has been transferred to a customer or after transfer of control to the customer.
We may commit to obtaining the services of another party with or without an existing contract with our customer. In these situations, we have risk of loss as principal for any amount due to the other party regardless of the amount(s) we earn as revenue from our customer.
The entity has discretion in establishing the price for the specified good or service.
We have discretion in establishing the price our customer pays for the specified goods or services.
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.
Government Loan Forgiveness and Grants
In the year ended December 31, 2021 the Company had
$
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 products
are sold. Shipping and handling costs incurred for product shipped to customers are included in cost of sales. For the years ended December
31, 2022 and 2021 shipping and handling costs amounted to $
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. Research and development costs
incurred in the development of the Company’s products for the years ended December 31, 2022 and 2021 were $
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. Advertising costs charged to operations for the years ended December 31, 2022 and 2021 were $
| 30 |
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.
The Company follows the accounting guidance for uncertainty in income taxes using the provisions of 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, 2022, 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, 2018. The Company does not expect any significant changes in its unrecognized tax benefits within twelve months of the reporting date. 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, 2022 or 2021.
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. The Company adopted ASU No. 2017-09 in 2018; its adoption did not have a material impact on its consolidated financial statements.
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.
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 loss per common share is computed by dividing net loss available to common shareholders by the weighted average number of shares of common shares outstanding during the period. Diluted net loss per common share is computed by dividing net loss by the weighted average number of shares of common stock, common stock equivalents and potentially dilutive securities outstanding during each period. Additionally, potentially dilutive common shares consist of common stock options and warrants (using the treasury stock method).
SCHEDULE OF ANTI-DILUTIVE PER SHARE INFORMATION
December 31, 2022 | December 31, 2021 | |||||||
| Stock options | ||||||||
| Stock warrants | ||||||||
| Total | ||||||||
| 31 |
SCHEDULE OF RECONCILIATION OF BASIC AND DILUTED NET INCOME LOSS
| Net income (loss) per common shares outstanding: | Year
Ended December 31, 2022 | Year
Ended December 31, 2021 | ||||||
| Common stock | $ | ) | $ | ) | ||||
| Weighted average shares outstanding: | ||||||||
| Total weighted average common shares outstanding | ||||||||
Recently Adopted Accounting Pronouncements
The Company does not believe there are any other recently issued and effective, or not yet effective pronouncements that would have or are expected to have any significant effect on the Company’s financial position, results of operations or cash flows.
There have been no changes to our significant accounting policies described in Note 2 to our Annual Report on Form 10-K for the year ended December 31, 2022, that have had a material impact on our Consolidated Financial Statements and related notes.
Reclassifications
Certain accounts and financial statement captions in the prior periods have been reclassified to conform to the current period financial statements. None of the reclassifications had any impact on the net loss reported in 2021.
NOTE 3 – DISCONTINUED OPERATIONS
Effective
May 31, 2022, we sold a
In connection with the sale, the capital structure of Applied Nanotech was changed to give the Company, as the holder of Class B common stock of Applied Nanotech, a 30% economic interest, certain information rights, special consent rights, and tag-along rights, as well as the obligation to sell our stock under certain circumstances if other stockholders are selling. The Class A stock acquired by the buyers was pledged to secure the promissory note given in payment of the purchase price. The Company plans to hold its remaining shares in ANI for an indefinite period and treats its investment in ANI as an equity investment.
The following includes the detail of major classes of assets and liabilities of discontinued operations summarized on the accompanying unaudited consolidated financial statements:
SCHEDULE OF DISPOSAL GROUPS ASSETS AND LIABILITIES OF DISCONTINUED OPERATIONS SUMMARIZED
| December 31 | ||||
| 2021 | ||||
| ASSETS | ||||
| CURRENT ASSETS: | ||||
| Cash and investments | $ | |||
| Accounts receivable, net | ||||
| 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 | $ | |||
| Accrued expenses and other current liabilities | ||||
| Current portion of lease liabilities | ||||
| Contract liabilities | ||||
| Total Current Liabilities | ||||
| Notes Payable, net of current portion | ||||
| Lease liabilities, net of current portion | ||||
| Total Liabilities | $ | |||
| 32 |
The following is the detail of major line items that constitute income from discontinued operations:
SCHEDULE OF INCOME (LOSS) FROM DISCONTINUED OPERATIONS
| 2022 | 2021 | |||||||
| For the Year Ended | ||||||||
| December 31, | ||||||||
| 2022 | 2021 | |||||||
| Net Revenues | $ | $ | ||||||
| Cost of Sales | ||||||||
| Gross Profit | ||||||||
| Salaries, wages and related benefits | ||||||||
| General and administrative expenses | ||||||||
| Professional fees | ||||||||
| Other income | ( | ) | ||||||
| Interest and other expense | ||||||||
| Income (loss) from discontinued operations | ( | ) | ||||||
| Gain on sale of discontinued operations | ||||||||
| Net income (loss) from discontinued operations | $ | $ | ( | ) | ||||
In
the second quarter of 2022, the gain on the sale of
SCHEDULE OF SALE OF STOCK BY SUBSIDIARY
| Fair value of consideration received | $ | |||
| Fair value of retained interest | ||||
| Less carrying value of subsidiary sold | ( | ) | ||
| Gain on sale of subsidiary | $ |
NOTE 4 – INVESTMENT IN SUBSIDIARY
The
Company is accounting for its
At
December 31, 2022, a balance of $
SCHEDULE OF EQUITY EQUITY INVESTMENT IN SUBSIDIARY
| Investment in ANI | $ | |||
| Income from investment in subsidiary | ||||
| Non-marketable equity investment in subsidiary | $ |
NOTE 5 – ACCOUNTS RECEIVABLE
At December 31, 2022 and 2021, accounts receivable consisted of the following:
SCHEDULE OF ACCOUNTS RECEIVABLE
| December
31, 2022 | December
31, 2021 | |||||||
| Accounts receivable | $ | $ | ||||||
| Less: allowance for doubtful accounts | ( | ) | ( | ) | ||||
| Accounts receivable, net | $ | $ | ||||||
Bad
debt expense (recoveries) was $
| 33 |
NOTE 6 – INVENTORY
At December 31, 2022 and 2021, inventory consisted of the following:
SCHEDULE OF INVENTORY
| December
31, 2022 | December
31, 2021 | |||||||
| Raw materials | $ | $ | ||||||
| Work in progress | ||||||||
| Finished goods | ||||||||
| Inventory, gross | ||||||||
| Less: reserve for obsolescence | ( | ) | ( | ) | ||||
| Inventory, net | $ | $ | ||||||
NOTE 7 – OPERATING LEASE
Effective
May 31, 2020, we entered into a lease with a related party for a
For operating leases, we calculated ROU assets and lease liabilities based on the present value of the remaining lease payments as of the date of adoption using the IBR as of that date.
SCHEDULE OF REMAINING LEASE PAYMENTS
| December 31, 2022 | December 31, 2021 | |||||||
| Operating lease liabilities | $ | $ | ||||||
| Right-of-use assets | $ | $ | ||||||
Future payments on the operating lease are:
SCHEDULE OF FUTURE PAYMENTS ON OPERATING LEASE
| Operating Leases | ||||
| 2023 | $ | |||
| 2024 | ||||
| 2025 | ||||
| 2026 | ||||
| 2027 | ||||
| Less: impact of discounting | ( |
) | ||
| Present value of lease liabilities | ||||
| 34 |
NOTE 8 - PROPERTY AND EQUIPMENT
At December 31, 2022 and 2021, property and equipment consisted of the following:
SCHEDULE OF PROPERTY AND EQUIPMENT
| Useful Life | December
31, 2022 | December
31, 2021 | ||||||||
| Machinery and equipment | $ | $ | ||||||||
| Furniture and office equipment | ||||||||||
| Leasehold improvements | ||||||||||
| Property and equipment, gross | ||||||||||
| Less: accumulated depreciation | ( | ) | ( | ) | ||||||
| Property and equipment, net | $ | $ | ||||||||
For
the years ended December 31, 2022 and 2021, depreciation and amortization expense amounted to $
NOTE 9 – NOTES PAYABLE AND FINANCE LEASES
Notes Payable
On January 7, 2022, the Company sold to one investor
a $
On July 27, 2022, the Company sold two
convertible notes, one for $
On October 26, 2022, the Company sold to an investor
a $
On
December 18, 2022, the Company issued a convertible promissory note for $
The convertible promissory notes have not been included in diluted earnings per share as they would be anti-dilutive.
On
February 10, 2015, Nano Magic entered into a $
Finance leases
On
August 11, 2020, we entered into a finance lease for furniture used in the Michigan facility. We financed $
On
September 24, 2020, we entered into a finance lease with Raymond Leasing Corporation for a forklift. We financed $
In
December 2020, we entered into a finance lease for production equipment. We financed $
For
finance leases, we calculate ROU assets and lease liabilities based on the present value of the remaining lease payments as of the date
of lease commencement. The ROU assets for finance leases are depreciated in accordance with the Company’s depreciation policies
for those asset groupings. Finance lease liabilities were $
| 35 |
Maturities
Future minimum lease payments under leases that had initial or remaining non-cancelable lease terms in excess of one year as of December 31, 2022, are as follows:
SCHEDULE OF FUTURE MINIMUM FINANCE LEASE PAYMENTS
| Finance Leases | ||||
| 2023 | $ | |||
| 2024 | ||||
| Less: impact of discounting | ( | ) | ||
| Present value of lease liabilities | ||||
NOTE 10 – BANK LOANS
On
May 8, 2020, Nano Magic LLC obtained a loan from Fifth Third Bank for $
NOTE 11 – ACCOUNTS RECEIVABLE FACTORING
On
September 1, 2020, Nano Magic LLC entered an agreement with NOWaccount ® Network Corporation for the sale of accounts
receivable due from approved customers. Subject to certain limits, we will receive an immediate payment equal to the discounted value
of a receivable from those customers. The discount applied depends on the due date for payment from the customer. This agreement expired
on September 1, 2022. Costs associated with this program were $
NOTE 12 – RELATED PARTY TRANSACTIONS
Advances
from related parties aggregating $
Mr. Ron Berman and Mr. Tom Berman are the managers of the limited liability company that is the manager of PEN Comeback, LLC, PEN Comeback 2, LLC, Magic Growth, LLP, Magic Growth 2 LLC and Magic Growth 3 LLC. These five limited liability companies purchased shares of common stock and derivative securities from us in 2018, 2019, 2020, 2021, and 2022. See the subsection on Sales of Stock under Issuances of Common Stock in Note 11 and in Note 16 Subsequent Events.
In
addition, Mr. Tom Berman and Mr. Ron Berman are two of three individuals who share voting power of the sole manager of the limited liability
company that is our landlord in Michigan. Together, Tom and Ron Berman hold, in the aggregate, a 5% economic interest in the landlord
entity.
| 36 |
NOTE 13 - STOCKHOLDERS’ EQUITY
Description of Preferred and Common Stock
Preferred Stock
The preferred stock may be issued in one or more series. The Company’s board of directors are authorized to issue the shares of preferred stock in such series and to fix from time to time before issuance thereof the number of shares to be included in any such series and the designation, powers, preferences and relative, participating, optional or other rights, and the qualifications, limitations or restrictions thereof, of such series.
Common Stock
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 $
On
December 15, 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 for a total value of $
On December 6, 2022, 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 for
a total value of $
Sales of Common Stock
On
February 16, 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 $
On
January 11, 2022, the Company sold to Magic Growth 3 LLC shares of common stock for proceeds of $
On
February 22, 2022, the Company sold to Magic Growth 3 LLC shares of common stock for proceeds of $
| 37 |
On
April 14, 2022, the Company sold to Magic Growth 3 LLC shares of common stock for proceeds of $
On
May 27, 2022, the Company sold to Magic Growth 3 LLC shares of common stock for proceeds of $
On
August 29, 2022, the Company sold to Magic Growth 3 LLC shares of common stock for proceeds of $
On
October 31, 2022, the Company sold to Magic Growth 3 LLC shares of common stock for proceeds of $
In
December 2022, the Company sold shares of common stock to individual, accredited investors for aggregate proceeds of $
All of these sales of stock and warrants were sold in private placements exempt from registration under Section 4(a)(2) of the Securities Act of 1933, as amended.
Stock Options
SCHEDULE OF STOCK OPTION PLAN ACTIVITY
| Number of Options | Weighted Average Exercise Price |
Weighted Average Remaining Contractual Term (Years) |
Aggregate Intrinsic Value |
|||||||||||||
| Balance Outstanding, December 31, 2020 | $ | $ | ||||||||||||||
| Exercised | ||||||||||||||||
| Forfeited or expired | ( |
) | ||||||||||||||
| Granted | ||||||||||||||||
| Balance Outstanding, December 31, 2021 | $ | $ | ||||||||||||||
| Exercised | ||||||||||||||||
| Forfeited or expired | ( |
) | ||||||||||||||
| Granted | ||||||||||||||||
| Balance Outstanding, December 31, 2022 | $ | $ | ||||||||||||||
| Exercisable, December 31, 2022 | $ | $ | ||||||||||||||
Options Issued Outside of a Plan
On April 3, 2019, we issued to our CEO and President, Tom Berman, options to purchase up to shares of common Stock at a price of $ per share. The options vested over time, each tranche exercisable for 4 years after vesting. Two of the tranches were tied to the bonus under Mr. Berman’s employment agreement. The bonus cap under Mr. Berman’s employment agreement was not reached in 2019, accordingly that tranche of option shares was forfeited. Mr. Berman reached the bonus cap for 2020 and the option to purchase that tranche vested. Consequently, the remaining options to purchase up to shares were fully vested as of December 31, 2020.
| 38 |
On March 2, 2021, in connection with the three-year extension of the contract with our President and Chief Executive Officer, Mr. Tom Berman was granted an option to purchase up to shares of common stock at an exercise price of $. Vesting is as follows:
SCHEDULE OF STOCK OPTIONS VESTING
| The right to purchase: | Consisting of: | Vesting: | ||
| 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. Based on sales revenue in 2021, he vested in options to purchase shares at an exercise price of $ and the balance of the option was forfeited. Mr. Berman is a director and is the father of our President, Tom J. Berman.
In December 2022, the options held by Tom Berman and Ron Berman were amended so that, in the event of their death or disability, their personal representative has the same rights as the original holder to exercise the vested options during their term.
SCHEDULE OF FAIR VALUE OF OPTION AWARD VALUATION ASSUMPTIONS
| Exercise price per option | $ | |||
| Fair value per option at grant date | $ | - | ||
| Expected term | years | |||
| Expected volatility | - | % | ||
| Expected dividend yield | % | |||
| Risk-free interest rate | - | % | ||
| Expense in period | $ | |||
| Unearned expense | $ |
2015 Equity Incentive Plan
On November 30, 2015, the Board of Directors authorized the 2015 Equity Incentive Plan. On January 31, 2020 we granted an option to purchase shares to a senior member of the sales team with vesting tied directly to 2020 sales goals. On April 8, 2021, the Board terminated the 2015 Equity Incentive Plan. One option for shares is vested and outstanding under this Plan.
| 39 |
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. 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.
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.
On February 16, 2022, the Board increased the number of options available for issuance under the 2021 Equity Plan and issued options under that Plan. On August 17, 2022, the Board issued an aggregate of options under the 2021 Equity Plan to two employees. On August 17, 2022, the Board also acted to suspend operation of the provision of the 2021 Equity Plan that causes forfeiture of vested options if the service provider leaves the Company.
The fair value of the options awarded to employees and service providers under the 2021 Equity Plan were calculated using the Black-Scholes method and were tied to service conditions for purposes of vesting. The assumptions used in the calculations are shown below. The expected term represents the period of time that the options are expected to be outstanding. During the year ended December 31, 2021, options vested and compensation expense related to them for the year-ending 2021 was $with unearned expense of $. During the year ended December 31, 2022, options vested and compensation expense related to them for the year-ending 2022 was $ with unearned expense of $. Below is a summary of terms for options issued in 2022 under the plan.
| Exercise price per option | $ | |||
| Fair value per option at grant date | $ | |||
| Expected term | years | |||
| Expected volatility | - | % | ||
| Expected dividend yield | % | |||
| Risk-free interest rate | - | % |
Warrants
As
of December 31, 2022, there were outstanding and exercisable warrants to purchase
As
of December 31, 2021, there were outstanding and exercisable warrants to
NOTE 14 – 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.
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, 2022 and 2021 were as follows:
SCHEDULE OF EFFECTIVE STATUTORY RATE OF INCOME TAXES
| 2022 | 2021 | |||||||
| Years Ended December 31, | ||||||||
| 2022 | 2021 | |||||||
| Income
tax provision (benefit) at U.S. statutory rate of | $ | $ | ||||||
Government grant | ||||||||
| Payroll Protection Program loan forgiveness | ||||||||
| Change in valuation allowance | ( | ) | ( | ) | ||||
| Revaluation of deferred tax asset | ( | ) | ||||||
| Revaluation of valuation allowance | ( | ) | ||||||
| Revaluation of valuation allowance due to return to provision | ||||||||
| Revaluation of valuation allowance due to ANI sale | ||||||||
| Total provision for income tax | $ | $ | ||||||
| 40 |
The Company’s approximate net deferred tax assets as of December 31, 2022 and 2021 were as follows:
SCHEDULE OF COMPONENTS OF DEFERRED TAX ASSETS AND LIABILITIES
| December
31, 2022 | December
31, 2021 | |||||||
| Deferred Tax Assets: | ||||||||
| Net operating loss carryforward | $ | $ | ||||||
| Stock-based compensation | ||||||||
| Allowance for inventory obsolescence | ||||||||
| Accrued compensation | ||||||||
| Other | ||||||||
| Total deferred tax assets | ||||||||
| Valuation allowance | ( | ) | ( | ) | ||||
| Net deferred tax assets | $ | |||||||
The
gross estimated net operating loss carryforward was approximately $
In
accordance with Section 382 of the Internal Revenue Code, the usage of the Company’s net operating loss carry forwards are subject
to annual limitations due to greater than
The Company’s 2019, 2020, 2021 and 2022 Corporate Income Tax Returns are subject to Internal Revenue Service examination.
NOTE 15 - 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. We are not currently a defendant in any proceedings. Our policy is to accrue costs for contingent liabilities, including
legal proceedings or unasserted claims that may result in legal proceedings, when a liability is probable and the amount can be reasonably
estimated. As of December 31, 2022, the Company has
NOTE 16 – 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.
| 41 |
Customer Concentrations
Customer concentrations for the years ended December 31, 2022 and 2021 are as follows:
SCHEDULE OF CONCENTRATION RISK, CUSTOMER
For the Years Ended December 31, | ||||||||
| 2022 | 2021 | |||||||
| Customer A | % | % | ||||||
| Customer B | % | % | ||||||
| Customer C | % | % | ||||||
| Customer D | % | % | ||||||
| Customer E | % | % | ||||||
| Total | % | % | ||||||
| * |
Accounts
receivable balances for these customers at December 31, 2022 and 2021 were $
Geographic Concentrations of Sales
For
the years ended December 31, 2022 and 2021, total sales in the United States represent approximately
Vendor Concentrations
Vendor concentrations for inventory purchases for the years ended December 31, 2022 and 2021 are:
SCHEDULE OF CONCENTRATION RISK, CUSTOMER
For the Years Ended December 31, | ||||||||
| 2022 | 2021 | |||||||
| Vendor A | % | -* | % | |||||
| Vendor B | -* | |||||||
| Vendor C | -* | |||||||
| Total | % | % | ||||||
| * |
The vendors above are used for raw material purchases used primarily in the production of lens care and anti-fog products.
NOTE 17 - SUBSEQUENT EVENTS
In
January 2023, the Company sold shares of common stock to an individual, accredited investor for proceeds of $
In
February 2023, we reached an agreement with the landlord of our Michigan facility to accept $
On March 23, 2023, the Company sold shares
of common stock to an individual, accredited investor for proceeds of $
Item 9. Changes and Disagreements with Accountants on Accounting and Financial Disclosures.
Not applicable.
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Item 9A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports, filed under the Securities Exchange Act of 1934, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate, to allow timely decisions regarding required disclosure. Our Chief Executive Officer and Chief Financial Officer evaluated the effectiveness of disclosure controls and procedures as of the end of the period covered by this report under Rule 13a-15(b) under the Exchange Act. The review for the period ended December 31, 2022 and for the year ended December 31, 2021, concluded that there were material weaknesses in our disclosure procedures and controls. In 2021 one weakness related to our ability to accomplish our financial reporting within the time periods specified in the SEC rules and forms, for both 2021 and 2022 our small staff size restricts our ability to adequately segregate duties. The sale of our subsidiary ANI in May 2022 and the merger of our subsidiary limited liability company into the parent at the end of 2022 has simplified our corporate structure so that will, after a transition period, simplify our financial reporting.
Management’s Annual Report on Internal Control Over Financial Reporting.
The management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting for the Company. These internal controls are designed to provide reasonable assurance that the reported financial information is presented fairly, that disclosures are adequate and that the judgments inherent in the preparation of financial statements are reasonable. There are inherent limitations in the effectiveness of any system of internal controls, including the possibility of human error; consequently, internal control over financial reporting may not prevent or detect misstatements. Also, effectiveness as it relates to future periods is subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
The Company’s internal control over financial reporting includes policies and procedures that: (i) pertain to maintaining records that, in reasonable detail, accurately and fairly reflect our transactions; (ii) provide reasonable assurance that transactions are recorded as necessary for preparation of our financial statements in accordance with generally accepted accounting principles and that the receipts and expenditures of company assets are made in accordance with our management and directors authorization; and (iii) provide reasonable assurance regarding the prevention of or timely detection of unauthorized acquisition, use or disposition of assets that could have a material effect on our financial statements.
| 43 |
Under the supervision of management, including the Company’s Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission published in 2013 and subsequent guidance prepared by the Commission specifically for smaller public companies. Management has identified the following material weaknesses which have caused management to conclude that as of December 31, 2022 the Company’s internal controls over financial reporting were not effective at the reasonable assurance level: We have not had sufficient resources in our accounting function to have segregation of duties so that the initiation of transactions, the custody of assets and the recording of transactions are performed by separate individuals. However, to the extent possible, the initiation of transactions, the custody of assets and the recording of transactions are performed by separate individuals. Management evaluated our limited resources and our failure to have segregation of duties on our assessment of our disclosure controls and procedures and has concluded that the control deficiency that resulted represented a material weakness.
Notwithstanding the assessment that our internal controls over financial reporting was not effective, we believe that our consolidated financial statements contained in this Annual Report fairly present our financial position, results of operations and cash flows for the years covered thereby in all material respects.
Our management, including our Chief Executive Officer and Chief 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.
This annual report does not include an attestation report of our independent registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by our registered public accounting firm pursuant to the rules of the Securities and Exchange Commission that permit us to provide only management’s report in this annual report.
Changes in Internal Control Over Financial Reporting
Our internal control over financial reporting has not changed during the fourth quarter covered by this Annual Report on Form 10-K, except as discussed above.
Item 9B. Other Information.
Not Applicable.
Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections.
Not Applicable.
| 44 |
PART III
Item 10. Directors, Executive Officers and Corporate Governance
The following sets forth the names of our directors and executive officers, their ages, positions they hold and the time they have served us and our predecessors. The narrative below sets out their principal occupations at present and for at least the past five years.
| Name | Age | Position(s) | Serving Since | |||
| Ronald J. Berman | 65 | Director | May 1996 | |||
| Tom J. Berman | 43 | Director, President & CEO | October 2018 | |||
| Miles Gatland | 53 | Director | February 2022 | |||
| Raymond Gunn | 64 | Director | December 2022 | |||
| Jeanne M. Rickert | 68 | Director and Chief Legal Officer | August 2014 | |||
| Scott E. Rickert | 68 | Chairman of the Board | August 2014 | |||
| David Sherbin | 62 | Director | May 2022 | |||
| Leandro Vera | 50 | Chief Financial Officer | February 2020 |
Our directors are appointed for a one-year term to hold office until the next annual general meeting of our shareholders or until removed from office in accordance with our bylaws. All directors listed above will remain in office until the next annual meeting of our stockholders, and until their successors have been duly elected and qualified. There are no agreements with respect to the election of Directors. Our Board of Directors appoints officers annually and each Executive Officer serves at the discretion of our Board of Directors.
Ronald J. Berman was in the private practice of law from 1980-1987. Mr. Berman co-founded Rock Financial (now Quicken Loans) in 1985 and was a member of its Board of Directors. Mr. Berman co-founded BEG Enterprises and served as its President from 1989 to 1998. Mr. Berman is currently practicing law as a sole practitioner. Mr. Berman is a licensed attorney in both Michigan and Florida. He is the father of director and officer Tom Berman.
With his experience in legal matters and founding businesses, Mr. Berman provides our board with professional and strategic expertise as well as the benefit of his significant knowledge of business operations.
Tom J. Berman joined us on October 15, 2018, as our President and as a director and he serves as President and CEO of our subsidiary, Nano Magic LLC. Prior to joining us, Mr. Berman was most recently Chief Administrative Officer and General Counsel for Ascion, LLC d/b/a Reverie, a Michigan based Sleep Technology company. At Ascion he was responsible to help to develop that company’s overall business strategy along with leading its business development, HR and IT and Legal departments as well as its real estate management. He was with Ascion from 2012 until 2018. Prior to joining Ascion Mr. Berman founded Berman Law, PLLC. He is a graduate of Michigan State University and of the University of Detroit Mercy School of law. Tom Berman is the son of director Ronald J. Berman.
With his operations experience and experience guiding the growth at Ascion, Mr. Berman will provide operational and strategic guidance especially to our Product segment as well as bringing his viewpoint as a legal professional.
Miles Gatland is a real estate entrepreneur. He founded Miles Gatland and Associates, Inc. in 1994 and continues to be active in commercial brokerage and redevelopment. He is also an active private investor and served on the board of Surgical Safety Scanner, Inc. from November 2019 to December 2020. He attended Oakland University in Rochester, Michigan for several years.
His experience as an entrepreneur and investor in real estate and other opportunities will provide value to the Company and the Board.
Raymond Gunn is an experienced chief executive officer, chief financial officer and board member. In 2006, Ray co-founded Wingspan Capital Partners, a private equity and consulting firm. That became Wingspan Group in 2017, and Ray became, and continues as, its CEO. Since January 2018 he has also been the CEO and CFO of Blakes Family of Companies and in 2022 he became the Chairman and CEO of FSB Holdings, In., a bank holding company. Additionlly, he currently serves on the boards of TrillaMed, LLC., Cadillac Products Packaging Company, Blake’s Family of Companies, Central Michigan University Research Corp., the Eastern Division of The Salvation Army and he is vice chairman of the Board of Visitors for the School of Business at Oakland University. He is a graduate of Oakland University and pursued a Masters in Taxation from Walsh College. He is a CPA.
Mr. Gunn’s accounting expertise and his experience as a senior executive and CEO of operating companies is valuable to management and the Board.
Jeanne M. Rickert has served as our General Counsel and a Director since August 2014 and as the General Counsel of Nanofilm (now our subsidiary, Nano Magic LLC) since January, 2014. Before that she was a lawyer with the Cleveland office of the international law firm of Jones Day, as a partner of the firm for 25 years and as Of Counsel in 2013. Her practice focused on mergers and acquisitions, joint ventures and general corporate and commercial matters. Her undergraduate degree is from Cornell University and her law degree from Case Western Reserve University. She is married to Scott Rickert.
With her prior experience in the practice of law and as our General Counsel, Ms. Rickert provides our board with legal expertise as well as the benefit of her significant knowledge of business law and transactions.
| 45 |
Scott E. Rickert has served as Chairman of our Board of Directors since August 2014. He served as our President and Chief Executive Officer from August, 2014 until Mr. Tom Berman was elected President in April, 2019. Mr. Rickert had been the Chief Executive Officer of Nanofilm since 2002, after serving Nanofilm as President from its founding in 1985. Prior to starting Nanofilm, Mr. Rickert was a tenured professor of Macromolecular Science at Case Western Reserve University. He has a B.S. in Chemical Engineering from Cornell University and an M.S. and Ph.D. from Case Western Reserve University. He did post-doctoral work at the University of Pennsylvania. He is married to Jeanne Rickert.
Combining his technical background and expertise with his prior experience in developing, commercializing and marketing enhanced-performance products powered by nanotechnology, Mr. Rickert provides our board with technical and operational expertise as well providing guidance to the companies based on his significant knowledge of all aspects of the production and sale of nanotechnology enhanced-performance products.
David Sherbin is the Senior Vice President, General Counsel and Chief Compliance Officer of Superior Industries, Inc, a position he has held since June 1, 2022. Previously, Mr. Sherbin provided legal and consulting services. He retired in April 2021 from his position as the senior vice president, general counsel, chief compliance officer and secretary at Aptiv PLC (formerly Delphi Automotive). He joined that company in 2005 and served as General counsel & Chief Compliance Officer. Prior to that, Mr. Sherbin served Pulte Group, Federal Mogul Corporation and Heller Financial Inc. in legal and compliance roles. He is a graduate of Oberlin College and Cornell Law School.
Mr. Sherbin’s experience in legal matters and his background in compliance strengthen the resources of the Company in those areas.
Leandro Vera was appointed as our Chief Financial Officer on February 12, 2020. Leo has worked with us in a consulting role since December 1, 2018, as the acting CFO for our operations. Leo is a co-founder of Swiftmile, Inc. and has served as its Chief Financial Officer since January of 2015. Between January 2015 and December 2017, Leo also served as Chief Operating Officer of Reverie, one of the leading manufacturers of innovative mattresses, adjustable beds, and pillows. Leo also previously worked at Ergomotion, a $100 million annual revenue supplier of power beds, with roles ranging from COO/CFO to COO, to President and CEO from October 2011 to September 2014, leading it to a successful acquisition by a strategic investor. Prior to Ergomotion, he was Managing Director of Pyrotek, a leading international supplier to aluminum, foundry, glass, zinc, and steel customers with performance improving technical products, integrated processing systems and consulting services worldwide. Leo began his career in public accounting with Coopers & Lybrand LLP in its Audit Assurance division between 1995 and 1997.
With his broad business experience and financial training, Leo brings important expertise to our financial function.
Delinquent Section 16(a) Reports
Based solely upon a review of Forms 3 and 4 and amendments thereto furnished to us under Rule 16a-3(d) of the Securities Exchange Act of 1934 during the fiscal year ended December 31, 2021 and Forms 5 and amendments thereto furnished to us with respect to the fiscal year ended December 31, 2021, as well as any written representation from a reporting person that no Form 5 is required, we are not aware that any officer, director or 10% or greater shareholder failed to file on a timely basis, as disclosed in the aforementioned Forms, reports required by Section 16(a) of the Securities Exchange Act of 1934 during the fiscal year ended December 31, 2022.
Code of Ethics
We have adopted a code of ethics (as such term is defined in Item 406 of Regulation S-K) (the “Code of Ethics”) that applies to our executive officers and other employees. A copy of the Code of Ethics will be sent, free of charge, to any person who sends a written request for a copy to Jeanne Rickert, Secretary, Nano Magic Inc., 31601 Research Park Drive, Madison Heights, MI 48071
Board Leadership Structure and Board’s Role in Risk Oversight
The Chairman of our Board is now a separate position from that of our Chief Executive Officer. The two roles were separated after our present Chief Executive Officer was elected to that position in February 2020 and the then-existing Chief Executive Officer was named Chairman. We believe having a separate Chairman who has previously been in the Chief Executive Officer role provides greater assurance of a continuity in the vision for our business.
Risk is inherent within every business, and how well a business manages risk can ultimately determine its success. We face a variety of risks. As a manufacturing company with nanotechnology products, operational risks relating to production, sources of supply and quality control are significant. Given our history of operating losses and our small size, liquidity risk is also significant. Management is responsible for the day-to-day management of the risks we face, while the Board has responsibility for the oversight of risk management. Taking its risk oversight role, the Board of Directors has the responsibility to satisfy itself that the risk management processes designed and implemented by management are adequate and functioning as designed. To do this, our directors discuss with management our strategy and risks we face.
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Board Committees and Director Independence
Our securities are not quoted on an exchange that requires a majority of the members of our Board of Directors (“the Board” or the “Board of Directors”) to be independent and we are not currently otherwise subject to any law, rule or regulation requiring that all or any portion of our Board of Directors include “independent” directors. Similarly, we are not required to establish or maintain an Audit Committee or other committee of our Board of Directors. Nonetheless, as a matter of corporate governance best practice, we have established an Audit Committee (as described below) and our board has determined that Messrs. Gatland, Gunn and Sherbin are “independent” as defined by the NASDAQ Marketplace rules.
The Board does not have standing compensation or nominating committees. The Board does not believe these committees are necessary based on the size of our company and the current levels of compensation to corporate officers. The entire Board participates in the consideration of compensation issues relating to the Chief Executive Officer. We plan to consider establishing compensation and nominating committees at the appropriate time.
Candidates for director nominees are reviewed in the context of the current composition of the Board and the operating and strategic challenges that we face in the next few years. In conducting this assessment, we consider skills, diversity, age, and such other factors as it deems appropriate given the current needs of the Board and our company, to maintain a balance of knowledge, experience and capability. We will seek out individuals with relevant experience to provide strategic guidance and to advise management as we operate our business and introduce new products.
Audit Committee
In February 2016, the Board created an audit committee. It is charged with overseeing (1) the integrity of our financial statements and accounting and financial reporting processes; (2) our compliance with legal and regulatory requirements; (3) the performance of our independent auditor and the qualifications and independence of that firm; (4) our system of disclosure, internal controls and compliance with our Code of Ethics. In December 2022, Messrs. Gatland, Gunn and Sherbin were elected to serve on that committee, Mr. Gunn as Chair of the committee. Mr. Gunn is an audit committee financial expert.
Report of the Audit Committee
The audit committee (the “Committee”) oversees the Company’s financial reporting process on behalf of the Board of Directors. Management has the primary responsibility for the financial statements and the reporting process, including internal control systems. The Company’s independent registered public accounting firm is responsible for expressing an opinion on the conformity of the company’s audited financial statements with U.S. generally accepted accounting principles.
The Committee has received the written disclosures and the letter from the independent registered public accounting firm required by the applicable requirements of the Public Company Accounting Oversight Board regarding the independent registered accounting firm’s communications with the Committee concerning independence and has discussed with the independent registered accounting firm the independence of that firm.
In reliance on the reviews conducted, the Committee recommends to the Board of the Directors (and the Board has approved) the inclusion of the audited financial statements in the Annual Report on Form 10-K for the fiscal year ended December 31, 2022 filed with the SEC.
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Stockholder Nominations
To nominate candidates for service as a director on our board a stockholder must hold at least $2,000 in value of shares entitled to vote in the election of directors. Notice must be given not less than 60 or more than 90 days before the meeting. If less than 75-days’ notice is given of the date of the meeting, the stockholder’s notice is due not more than 10 days after notice of the meeting is given or after public disclosure of the date of the meeting, whichever is first. The notice must include information about a proposed candidate: the class and number of shares of stock held of record, owned beneficially and represented by proxy by the nominating shareholder or any person directly or indirectly controlling, controlled by, under common control with or acting in concert with the nominating shareholder (which we refer to as a “shareholder associated person”), and by each person to be nominated such information to be as of the record date for the meeting and as of the date of such notice; a description of all contracts, arrangements, understandings or relationships between (a) the shareholder making the nomination and any shareholder associated person that relate to the nomination, (b) the shareholder making the nomination and the proposed nominee and (c) the shareholder making the nomination, the proposed nominee or any shareholder associated person and any other person or persons that relate to the nomination.
Item 11. Executive Compensation
SUMMARY COMPENSATION TABLE
The table below sets forth certain compensation information for: (i) our principal executive officer or other individual serving in a similar capacity during our fiscal year ended December 31, 2022; (ii) our two most highly compensated executive officers other than our principal executive officers who were serving as executive officers at December 31, 2022 whose compensation exceed $100,000; and (iii) up to two additional individuals for whom disclosure would have been required but for the fact that the individual was not serving as an executive officer at December 31, 2022. Compensation information is shown for the fiscal years ended December 31, 2022 and December 31, 2021.
We sometimes refer to these individuals to as the “named executive officers” as that term is defined under Rule 3b-7 of the Securities Exchange Act of 1934. The value attributable to any stock or option awards is computed in accordance with ASC Topic 718. None of our named executive officers received compensation in the form of Non-Equity Incentive Plan Compensation or Nonqualified Deferred Compensation Earnings in fiscal 2022 and fiscal 2021. The value of stock awards represents the grant date fair value of awards granted with respect to fiscal 2022 and fiscal 2021 in accordance with ASC Topic 718. Pursuant to Securities and Exchange Commission rules, the amounts shown exclude the impact of estimated forfeitures related to service-based vesting conditions. Our methodology, including its underlying estimates and assumptions used in calculating these values, is set forth in Note 2 to our audited financial statements for the fiscal year ended December 31, 2022.
For stock awards, these shares were valued on the grant date based on the quoted trading price of the stock on such date.
| Name & Principal position | Year | Salary
($) | Bonus
($) | Stock
Awards ($)(1) | Option
Awards ($) | All
Other Compensation ($) | Total
($) | |||||||||||||||||||||
| (a) | (b) | (c) | (d) | (e) | (f) | (i) | (j) | |||||||||||||||||||||
| Tom
J. Berman President & CEO | 2022 | 195,000 | (2) | - | 24,000 | 146,889 | 1,000 | 366,889 | ||||||||||||||||||||
| Tom J. Berman President & CEO | 2021 | 210,500 | 159,145 | 8,000 | 457,223 | - | 834,870 | |||||||||||||||||||||
| (1) | All directors are compensated for service on our Board. The compensation in this column for Mr. Berman, reflects awards for service as a director. | |
| (2) | $40,000 of this amount was earned, but was accrued and not paid. |
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Mr. Berman’s contract was originally from April 1, 2019 through December 31, 2020. In November 2020, the Board acted to extend his contract through 2023. His salary was $15,000 per month for 2020 and $17,500 per month for 2021. In 2020, Mr. Berman also earned a cash bonus of 10% of the amount by which revenue at our subsidiary Nano Magic LLC for any calendar quarter of 2020 exceeded $450,000, subject to an annual cap on the cash bonus payment of $200,000. In 2020, Mr. Berman reached the cap on the cash payment for the bonus; accordingly, options to purchase an additional 100,000 shares of stock at a price of $0.55 per share became vested. Because revenue for Nano Magic LLC was up more than 20% in 2021 over 2020, Mr. Berman’s salary increased in March 2022 to $20,000 per month. Mr. Berman also earned a sales bonus in 2021 and will earn a bonus on 2022 equal to 10% of the amount by which gross sales by Nano Magic LLC exceed the sales target for the quarter, subject to an annual cap.
Outstanding Equity Awards at Fiscal Year End Table
The following table provides information concerning unexercised options, stock that has not vested and equity incentive plan awards outstanding at December 31, 2022.
| Option Awards | Stock Awards | |||||||||||||||||||||||||||||||
| Name | Number of Securities Underlying Unexercised options - exercisable | Number of Securities Underlying Unexercised Options - unexercisable | Equity Incentive Plan Awards: Number of Securities Underlying Unexercised Unearned Options | Option Exercise Price ($) | Option Expiration Date | Number of Shares or Units of Stock that have not Vested | Market Value of Shares or Units of Stock that have not Vested ($) | Equity Incentive Plan Awards: Number of Unearned Shares, Units or Other Rights that have not Vested | Equity Incentive Plan Awards: Market Value of Unearned Shares, Units or other Rights that have not Vested ($) | |||||||||||||||||||||||
| (a) | (b) | (c) | (d) | (e) | (f) | (g) | (h) | (i) | (j) | |||||||||||||||||||||||
| Tom J. Berman | 450,000 | - | - | 0.55 | (1 | ) | - | - | - | - | ||||||||||||||||||||||
| Tom J. Berman | 600,000 | 1,450,000 | - | 0.75 | (2 | ) | - | - | - | - | ||||||||||||||||||||||
| (1) | The option to purchase: | Expires on: | ||
| 50,000 Option Shares | April 3, 2024 | |||
| 75,000 Option Shares | December 31, 2024 | |||
| 100,000 Option Shares | June 30, 2025 | |||
| 125,000 Option Shares | December 31, 2025 | |||
| 100,000 Option Shares | December 31,2025 | |||
| (2) | The option to purchase |
Expires on: |
||
| 150,000 Option Shares | June 30, 2025 | |||
| 150,000 Option Shares | December 31, 2025 | |||
| 150,000 Option Shares | June 30, 2026 | |||
| 150,000 Option Shares | December 31, 2026 |
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Director Compensation
We paid our directors the amounts shown below during the fiscal year ended December 31, 2022. Amounts paid to Mr. Tom Berman are shown in the summary Compensation Table for named executive officers. All directors were compensated for 2022 with a fee of $2,000 per meeting paid in shares of commons stock. Miles Gatland joined the Board in February, 2022, David Sherbin joined the board in May, 2022. Raymond Gunn joined the Board in December 2022 and was not compensated in 2022.
| Name | Fees
earned or paid in cash | Stock
Awards | Option
Awards(1) | All
Other Compensation | Total | |||||||||||||||
| Ronald J. Berman | $ | - | $ | 24,000 | - | $ | 124,150 | (2) | $ | 148,150 | ||||||||||
| Miles Gatland | $ | - | $ | 24,000 | - | - | $ | 24,000 | ||||||||||||
| Scott E. Rickert | $ | - | $ | 24,000 | - | $ | 50,000 | (3) | $ | 74,000 | ||||||||||
| Jeanne M. Rickert | $ | - | $ | 24,000 | - | $ | - | $ | 24,000 | |||||||||||
| David Sherbin | $ | - | $ | 12,000 | - | - | $ | 12,000 | ||||||||||||
| (1) | No option awards were made to Directors in 2022 or 2021. In 2021, in connection with consulting services, Mr. Ronald Berman was awarded an option described above. | |
| (2) | Bonus, consulting and legal fees paid to Mr. Berman in 2021. | |
| (3) | Repayment of cash advances made to the Company in prior years. |
We have entered into agreements to provide contractual indemnification and advancement of expenses to the directors.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Equity Compensation Plans
See table and related explanations under item 5 above regarding Equity Compensation Plans.
Security Ownership of Certain Beneficial Owners and Management
Set forth in the following table is the indicated information as of March 11, 2023 with respect to each person who is known to us to be the beneficial owner of more than five percent of our common stock.
| Name and address of beneficial owner | Amount and nature of beneficial ownership(1) | Percent of Class(2) | ||||||
PEN Comeback, LLC 31601 Research Park Drive Madison Heights, MI 48071 | 3,349,467 | 17 | % | |||||
PEN Comeback 2, LLC 31601 Research Park Drive Madison Heights, MI 48071 | 2,842,670 | 14 | % | |||||
Magic Growth LLC 31601 Research Park Drive Madison Heights, MI 48071 | 1,961,496 | 10 | % | |||||
Magic Growth 2 LLC 31601 Research Park Drive Madison Heights, MI 48071 | 2,308,912 | 12 | % | |||||
Magic Growth 3 LLC 31601 Research Park Drive Madison Heights, MI 48071 | 1,484,254 | 8 | % | |||||
Rickert Family, Limited Partnership 9 Diamond Drive Key West, FL 33040 | 1,564,512 | 8 | % | |||||
Ronald J. Berman 31601 Research Park Drive Madison Heights, MI 48071 | 2,064,868 | (3) | 11 | %(4) | ||||
Tom J. Berman 31601 Research Park Drive Madison Heights, MI 48071 | 1,864,457 | (5) | 9 | %(4) | ||||
| (1) | Includes warrants and options that are presently exercisable. | |
| (2) | Percentages assume that all options and warrants presently exercisable or exercisable in the next 60 days have been exercised. | |
| (3) | Mr. Ron Berman owns directly 521,374 shares and options and warrants presently exercisable for 45,000 shares. The balance of his economic interest is held indirectly through investment in PEN Comeback, LLC and PEN Comeback 2, LLC. | |
| (4) | Mr. Ron Berman and Mr. Tom Berman share equally the voting and dispositive power over the holdings of PEN Comeback, LLC; PEN Comeback 2, LLC; Magic Growth, LLC; Magic Growth 2 LLC and Magic Growth 3 LLC (these five entities, the “Investors”). As a result, their voting control on a fully diluted basis is 61% for Mr. Ron Berman and 64% for Mr. Tom Berman. | |
| (5) | Mr. Tom Berman owns directly 116,411 shares and options and warrants for 857,500 shares exercisable now or in the next 60 days. The balance of his economic interest is held indirectly through investment in PEN Comeback, LLC and PEN Comeback 2, LLC. |
Set forth in the table below is information as of March 11, 2023 with respect to the beneficial ownership of common stock by our directors and Executive Officers.
| Name of Beneficial Owner | Amount and Nature of Beneficial Ownership | Economic Percentage Ownership | Voting and Dispositive Power | |||||||||
| Ronald J Berman (1) (2) | 2,064,868 | 11 | % | 64 | % | |||||||
| Tom J. Berman (1) (2) | 2,064,457 | 11 | % | 67 | % | |||||||
| Miles Gatland (3) | 1,274,578 | 6 | % | (5) | ||||||||
| Raymond Gunn | 0 | - | - | |||||||||
| Jeanne M. Rickert (4) | 615,080 | 3 | % | (5) | ||||||||
| Scott E. Rickert (4) | 623,334 | 3 | % | 6 | %(4) | |||||||
| David Sherbin | 16,000 | - | (5) | - | (5) | |||||||
| Leandro Vera | 0 | - | - | |||||||||
| All directors and officers as a group | 35 | % | 84 | % | ||||||||
| (1) | Includes options and warrants held directly by the following individuals that are presently exercisable or exercisable in the next 60 days: |
| Mr. Ron Berman | 45,000 | |||
| Mr. Tom Berman | 1,057,500 | |||
| Mr. Miles Gatland | 70,000 |
| (2) | Includes economic interest in stock and warrants that are presently exercisable held indirectly in PEN Comeback LLC, PEN Comeback 2 LLC or both. Ronald Berman and Tom Berman share voting and dispositive power over all securities held by PEN Comeback LLC, PEN Comeback 2 LLC, Magic Growth LLC, Magic Growth 2 LLC and Magic Growth 3 LLC. | |
| (3) | Includes economic interest in stock and warrants that are presently exercisable held indirectly in Magic Growth LLC, Magic Growth 2 LLC and Magic Growth 3 LLC. Last column only includes securities held directly, as Messrs. Ron and Tom Berman hold voting and dispositive power of securities held indirectly. |
| (4) | Includes economic interest in stock and warrants that are presently exercisable held indirectly in Rickert Family, Limited Partnership. Mr. Rickert has sole voting and dispositive power over all securities held by Rickert Family, Limited Partnership. | |
| (5) | Less than 1%. |
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Item 13. Certain Relationships and Related Transaction, and Director Independence.
Our board has determined that Messrs. Gatland, Gunn and Sherbin are “independent” as defined by the NASDAQ Marketplace rules.
Please refer to Note 10 – “Related Party Transactions” to our Consolidated Financial Statements included in this Report. The information described therein is hereby incorporated by reference under this Item 13.
Item 14. Principal Accountant Fees and Services
The following table sets forth the fees billed by our principal independent accountants, UHY for categories of services indicated.
| Years Ended December 31, | ||||||||
| Category | 2022 | 2021 | ||||||
| Audit Fees | $ | 127,500 | $ | 127,500 | ||||
| Audit Related Fees | $ | $ | - | |||||
| Tax Fees | $ | 9,000 | $ | 9,000 | ||||
| All Other Fees | $ | - | $ | - | ||||
Audit fees. Consists of fees billed for the audit of our annual financial statements, review of our Form 10-K, review of our interim financial statements included in our Form 10-Q and services that are normally provided by the accountant in connection with year-end statutory and regulatory filings or engagements.
Audit-related fees. Consists of fees billed for assurance and related services that are reasonably related to the performance of the audit or review of our financial statements and are not reported under “Audit Fees”, review of our Forms 8-K filings and services that are normally provided by the accountant in connection with non-year-end statutory and regulatory filings or engagements.
Tax fees. Consists of professional services rendered by a company aligned with our principal accountant for tax compliance, tax advice and tax planning.
Other fees. The services provided by our accountants within this category consisted of advice and other services relating to SEC matters, registration statement review, accounting issues and client conferences.
| 51 |
PART IV
Item 15. Exhibits and Financial Statement Schedules
| 52 |
| 53 |
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities 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 Inc. | ||
| (Registrant) | ||
| By: | /s/ Tom J. Berman | |
| Tom J. Berman, President & CEO | ||
| Date: | April 11, 2023 | |
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Jeanne M. Rickert as his true and lawful attorney-in-fact and agent, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign any and all amendments to the annual report, which amendments may make such changes in the annual report as the attorney-in-fact deems appropriate and to file the same, with all exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorney-in-fact and agent, full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that such attorney-in-fact and agent or his substitutes or substitute, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
| Signature | Title | Date | ||
| /s/ Tom J. Berman | Director, President & CEO | April 11, 2023 | ||
| Tom J. Berman | (principal executive officer) | |||
| /s/ Leandro Vera | Chief Financial Officer | April 11, 2023 | ||
| Leandro Vera | (principal financial and accounting officer) | |||
| /s/ Ronald J. Berman | Director | April 11, 2023 | ||
| Ronald J. Berman | ||||
| /s/ Miles Gatland | Director | April 11, 2023 | ||
| Miles Gatland | ||||
| /s/ Raymond Gunn | Director | April 11, 2023 | ||
| Raymond Gunn | ||||
| /s/ Jeanne Rickert | Director | April 11, 2023 | ||
| Jeanne M. Rickert | ||||
| /s/ Scott E. Rickert | Director | April 11, 2023 | ||
| Scott E. Rickert | ||||
| /s/ David Sherbin | Director | April 11, 2023 | ||
| David Sherbin |
| 54 |
Exhibit 3.3
STATE OF DELAWARE
CERTIFICATE OF MERGER OF
DOMESTIC CORPORATION AND
FOREIGN LIMITED LIABILITY COMPANY
Pursuant to Title 8, Section 264(c) of the Delaware Corporation Law, the undersigned corporation executed the following Certificate of Merger:
FIRST: The name of the surviving corporation is now Nano Magic Holdings Inc., a Delaware corporation, and the name of the limited liability company being merged into this surviving corporation is Nano Magic LLC, a Michigan limited liability company.
SECOND: The Agreement and Plan of Merger has been approved, adopted, certified, executed and acknowledged by the surviving corporation and the merging limited liability company.
THIRD: Effective at the effective time of the merger, the name of the surviving corporation shall be: Nano Magic Inc.
FOURTH: The merger is to become effective on December 31, 2022, at 11:59p.m. (eastern Standard Time).
FIFTH: The Agreement and Plan of Merger is on file at 31601 Research Park Drive, Madison Heights, Michigan 48071, the place of business of the surviving corporation.
SIXTH: A copy of the Agreement and Plan of Merger will be furnished by the surviving corporation, on request without cost, to any stockholder of the surviving corporation or member of the constituent limited liability company.
SEVENTH: Except for the name change reflected in Article THIRD above, the certificate of incorporation of the surviving corporation shall be its certificate of incorporation.
IN WITNESS WHEREOF, the surviving corporation has caused this certificate to be signed by its authorized officer the 20th day of December, 2022.
| By: | /s/ J M Rickert | |
| Jeanne M Rickert, Secretary |
Exhibit 4.12
Amendment to Warrant[s]
This Amendment to Warrant[s] dated as of May 26, 2022, is by and between ______________ (“Holder”), and Nano Magic Holdings Inc., a Delaware corporation formerly known as PEN Inc. (the “Company”).
| 1. | The Company has issued to Holder warrants to purchase Class A common stock of the Company that, under the amended and restated certificate of incorporation of the Company is now simply common stock. The warrants owned by holder are: |
| Date of issue: | Underlying shares: |
| 2. | The Company and Holder agree to extend the original for year term of the warrants held by holder for an additional two-year term, meaning that each warrant will expire six years from date of issue. |
| 3. | The Company and Holder agree that for each of the above described warrants (i) the Notice of Warrant Exercise shall hereafter reference the warrant, as amended; (ii) notices to the Company shall be sent to Nano Magic Holdings Inc. at 31601 Research Park Drive, Madison Heights Ml 48701, and e-mail to tom@nanomagic.com with a copy to leo@nanomagic.com. |
| 4. | The Company and Holder agree that the other terms of the warrants remain in full force and effect without amendment. |
IN WITNESS WHEREOF, each of the parties has executed this Amendment to Warrants by its duly authorized representative.
| [Name of Holder] | Nano Magic Holdings Inc. | |||
| By: | By: | |||
Exhibit 4.13
AMENDMENT TO OPTIONS
This Amendment to Options is dated as of December 6, 2022, by and between [Tom J. Berman OR Ronald J. Berman] (“Holder”) and Nano Magic Inc. (the “Company”).
| 1. | The Company has issued to Holder [identify options] | |
| 2. | In further consideration for Holder’s service to the company, the Company, acting by its Board of Directors, has determined that, in the event of Holder’s death or disability, the power of his legal representative to exercise vested rights to purchase stock under the Options should not be time limited. | |
| 3. | Accordingly. Section 6 of each of the Options is hereby amended to state: |
6. Transfer. This Option and the rights granted to Holder are not transferable by the Holder and may not be transferred, in whole or in part, except that vested Tranches may be exercised by the legal representative of the Holder after his death or disability.
| 4. | Except as stated in this Amendment, the Options referenced in Section 1 remain in full force and effect in accordance with their terms. |
In witness whereof, the Company and the Holder have executed this Amendment.
| [Holder] | ||
| Nano Magic Inc. | ||
| By: | ||
| Leandro Vera, CFO | ||
Exhibit 4.14
THIS NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “SECURITIES ACT”), OR ANY APPLICABLE STATE SECURITIES LAWS AND MAY NOT BE SOLD OR OTHERWISE TRANSFERRED BY ANY PERSON, INCLUDING A PLEDGEE, UNLESS (1) EITHER (A) A REGISTRATION STATEMENT WITH RESPECT THERETO SHALL BE EFFECTIVE UNDER THE SECURITIES ACT, OR (B) THE COMPANY SHALL HAVE RECEIVED AN OPINION OF COUNSEL REASONABLY SATISFACTORY TO THE COMPANY THAT AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT IS AVAILABLE, AND (2) THERE SHALL HAVE BEEN COMPLIANCE WITH ALL APPLICABLE STATE SECURITIES OR “BLUE SKY” LAWS.
NANO MAGIC HOLDINGS, INC.
Secured, Convertible Promissory Note
$____Madison Heights, MI
[Date]
For value received NANO MAGIC HOLDINGS INC., a Delaware corporation (the “Company”), hereby unconditionally promises to pay to the order of ______________ (together with successors and assigns, the “Holder”), the principal sum of ______________ Dollars and No Cents ($___000.00) (the “Note”). The principal amount due under this Note shall bear interest at a rate of 8% per annum and accrue during the term of the loan, payable upon maturity. All Principal and Interest shall be due [18 mo. from date of issue], unless paid earlier. All payments in respect of this Note shall be made in lawful money of the United States of America, or common stock of the Company as set forth below.
The Conversion Price is $1.75 per share. This Note is be convertible at the Conversion Price in whole or in part at any time at the option of the Holder. Upon conversion, any accrued and unpaid interest will be paid in money.
This Note may be prepaid and redeemed by the Company at any time, in whole or in part, upon 30 days written notice to Holder. If some or all the Note Credits (as defined below) are paid to the Company before this Note is due, the Company shall offer to prepay the notes secured by the Note Credits in proportion to the principal balances of those notes. Notice of redemption will be effective if sent to the Holder at the e-mail address provided to the Company in the Holder’s subscription agreement. Upon receipt of such notice, Holder has 15 days to elect to receive some or all of the amount to be redeemed in shares of the Company’s common stock at the Conversion Price.
This Note is one of a series of notes secured by a security interest and pledge of certain amounts due to the Company and its affiliates under the Employee Retention Tax Credit program (“Note Credits”) as set forth in a Security Agreement dated December 15, 2022. The Holder must exercise any rights under the Security Agreement and under this Note in accordance with the terms of the Security Agreement and may not exercise rights independently.
The Company waives presentment, protest and demand, notice of protest, demand and dishonor and nonpayment of this Note and agrees to pay all costs of collection when incurred, including attorneys’ fees. No extension of the time for the payment of this Note or any installment thereof made by agreement with any person now or hereafter liable for the payment of this Note shall operate to release, discharge, modify, change or affect the Company’s liability under this Note, either in whole or in part, unless the Company shall be a party to such agreement.
The Company’s obligations under this Note are absolute and unconditional and shall not be subject to any defense, setoff or counterclaim that may at any time be available to or be asserted by the Company. The Company hereby waives, and agrees not to assert, any right to offset or interpose as a defense or counterclaim any claim against the Holder against its obligations under this Note.
This Note shall be governed by and construed in accordance with the laws of the State of Delaware. With respect to any suit, action shall lie in the venue of Detroit, Michigan.
IN WITNESS WHEREOF, this Note has been executed and delivered as a sealed instrument on the date first above written by the duly authorized representative of the Company.
| NANO MAGIC HOLDINGS, INC. | ||
| By: | ||
| Thomas J. Berman, President & CEO | ||
Exhibit 21.1
Subsidiaries of the Registrant
None
Exhibit 31.1
Certificate of Principal Executive Officer
Pursuant to Rule 13a-14(a)/15d-14(a)
I, Tom J. Berman, certify that:
1. I have reviewed this annual report on Form 10-K for the year ended December 31, 2022 of Nano Magic Inc. (the “registrant”);
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present, in all material respects, the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report.
4. The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in the Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting) as defined in the Exchange Act Rules 13a - 15(f) and 15d - 15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
| Date: April 11, 2023 | |
| /s/ Tom J. Berman | |
| Tom J. Berman | |
| President |
Exhibit 31.2
Certificate of Principal Financial Officer
Pursuant to Rule 13a-14(a)/15d-14(a)
I, Leandro Vera, certify that:
1. I have reviewed this annual report on Form 10-K for the year ended December 31, 2022 of Nano Magic Inc. (the “registrant”);
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present, in all material respects, the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report.
4. The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in the Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting) as defined in the Exchange Act Rules 13a - 15(f) and 15d - 15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
| Date: April 11, 2023 | |
| /s/ Leandro Vera | |
| Leandro Vera | |
| Chief Financial Officer |
Exhibit 32.1
Section 1350 Certification of Principal Executive Officer
In connection with the annual report of Nano Magic Inc. (the “Company”) on Form 10-K for the year ended December 31, 2022, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Tom J. Berman, the President and Chief Executive Officer of the Company, and I, Leandro Vera, Chief Financial Officer, certify to the best of our knowledge:
1. The Report fully complies with the requirements of Section 13 (a) or 15 (d) of the Securities Exchange Act of 1934; and
2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
| Date: April 11, 2023 | /s/ Tom J. Berman |
| Tom J. Berman | |
| President | |
| Date: April 11, 2023 | /s/ Leandro Vera |
| Leandro Vera | |
| Chief Financial Officer |