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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM
For
the quarterly period ended
COMMISSION
FILE NO.
(Exact name of registrant as specified in its charter)
| (State or other jurisdiction of | (I.R.S. Employer | |
| incorporation or organization) | Identification No.) |
(Address of principal executive office, including Zip Code)
Registrant’s
telephone number, including area code:
Securities registered pursuant to Section 12(b) of the Exchange Act:
| Title of each class | Trading Symbol | Name of Each Exchange on Which Registered | ||
| OTC Markets |
Securities registered pursuant to Section 12(g) of the Exchange Act: None
Indicate
by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. ☐ Yes ☒
Indicate
by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data
File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post such files). ☒
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “accelerated filer”, “large accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer ☐ | Accelerated filer ☐ |
| Smaller
reporting company |
Emerging
growth company
Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ☐ Yes ☒
As of May 9, 2022, the registrant had shares of Common Stock issued and outstanding.
Nano Magic Holdings Inc.
INDEX
| 2 |
FORWARD-LOOKING STATEMENTS
This Form 10-Q contains certain forward-looking statements that we believe are within the meaning of the federal securities laws. For this purpose, any statements that are not statements of historical fact may be deemed to be forward-looking statements, including the statements under “Management’s Discussion and Analysis of Financial Condition and Results of Operations” regarding our strategy, future operations, future expectations or future estimates, financial position and objectives of management. Those statements in this Form 10-Q containing the words “believes,” “anticipates,” “plans,” “expects” and similar expressions constitute forward-looking statements, although not all forward-looking statements contain such identifying words. These forward-looking statements are based on our current expectations and are subject to a number of risks, uncertainties and assumptions relating to our operations, results of operations, competitive factors, shifts in market demand and other risks and uncertainties.
Although we believe that the assumptions underlying our forward-looking statements are reasonable, any of the assumptions could be inaccurate and actual results may differ from those indicated by the forward-looking statements included in this Form 10-Q. In light of the significant uncertainties inherent in the forward-looking statements included in this Form 10-Q, you should not consider the inclusion of such information as a representation by us or anyone else that we will achieve such results. Moreover, we assume no obligation to update these forward-looking statements to reflect actual results, changes in assumptions or changes in other factors affecting such forward-looking statements.
| 3 |
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
NANO MAGIC HOLDINGS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
| For the Three Months Ended | ||||||||
| March 31, | ||||||||
| 2022 | 2021 | |||||||
| REVENUES: | ||||||||
| Products | $ | $ | ||||||
| Contract services | ||||||||
| Total Revenues | ||||||||
| COST OF REVENUES: | ||||||||
| Products | ||||||||
| Contract services | ||||||||
| Total Cost of Revenues | ||||||||
| 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 | ||||||||
| INCOME (LOSS) FROM OPERATIONS | ( | ) | ||||||
| OTHER EXPENSE: | ||||||||
| Interest expense | ||||||||
| Total Other Expense | ||||||||
| NET INCOME (LOSS) | $ | ( | ) | $ | ||||
| NET INCOME (LOSS) PER COMMON SHARE: | ||||||||
| Basic | $ | ( | ) | $ | ||||
| Diluted | $ | ( | ) | $ | ||||
| WEIGHTED AVERAGE COMMON SHARES OUTSTANDING: | ||||||||
| Basic | ||||||||
| Diluted | ||||||||
See accompanying notes to condensed consolidated financial statements.
| F-1 |
NANO MAGIC HOLDINGS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)
| March 31 | December 31 | |||||||
| 2022 | 2021 | |||||||
| ASSETS | ||||||||
| CURRENT ASSETS: | ||||||||
| Cash | $ | $ | ||||||
| Investments | ||||||||
| Accounts receivable, net | ||||||||
| Inventory, net | ||||||||
| Prepaid expenses and contract assets | ||||||||
| Total Current Assets | ||||||||
| Operating lease right-of-use assets | ||||||||
| Property, plant and equipment, net | ||||||||
| Other assets | ||||||||
| Total Assets | $ | $ | ||||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
| CURRENT LIABILITIES: | ||||||||
| Accounts payable | $ | $ | ||||||
| Accounts payable - related parties | ||||||||
| Accrued expenses and other current liabilities | ||||||||
| Current portion of notes payable | ||||||||
| Advances from related parties | ||||||||
| Current portion of lease liabilities | ||||||||
| Contract liabilities | ||||||||
| Total Current Liabilities | ||||||||
| Notes Payable, net of current portion | ||||||||
| Lease liabilities, net of current portion | ||||||||
| Total Liabilities | ||||||||
| Commitments and Contingencies (See Note 7) | ||||||||
| STOCKHOLDERS’ EQUITY: | ||||||||
| Preferred stock, $ par value, shares authorized; shares issued and outstanding | - | - | ||||||
| Common stock: $ par value, shares authorized; and issued and outstanding at March 31, 2022 and December 31, 2021, respectively | ||||||||
| Additional paid-in capital | ||||||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| Total Stockholders’ Equity | ||||||||
| Total Liabilities and Stockholders’ Equity | $ | $ | ||||||
See accompanying notes to condensed consolidated financial statements.
| F-2 |
NANO MAGIC HOLDINGS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(unaudited)
| Additional | Total | |||||||||||||||||||
| Class A Common Stock | Paid-in | Accumulated | Stockholders’ | |||||||||||||||||
| Shares | Amount | Capital | Deficit | Equity | ||||||||||||||||
| Balance, December 31, 2020 | $ | $ | $ | ( | ) | $ | ||||||||||||||
| Common stock issued for cash, net of issuance costs | - | |||||||||||||||||||
| Common stock issued for services and for stock appreciation rights | - | |||||||||||||||||||
| Warrants and options on private placement | - | - | - | |||||||||||||||||
| Stock-based compensation | - | - | - | |||||||||||||||||
| Net income | - | - | - | |||||||||||||||||
| Balance, March 31, 2021 | $ | $ | $ | ( | ) | $ | ||||||||||||||
| Balance, December 31, 2021 | $ | $ | $ | ( | ) | $ | ||||||||||||||
| Common stock issued for cash, net of issuance costs | - | |||||||||||||||||||
| Warrants on private placement | - | - | - | |||||||||||||||||
Stock-based compensation | - | - | - | |||||||||||||||||
| Net loss | - | - | - | ( | ) | ( | ) | |||||||||||||
| Balance, March 31, 2022 | $ | $ | $ | ( | ) | $ | ||||||||||||||
See accompanying notes to condensed consolidated financial statements.
| F-3 |
NANO MAGIC HOLDINGS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
| For the Three Months Ended | ||||||||
| March 31, | ||||||||
| 2022 | 2021 | |||||||
| CASH FLOWS FROM OPERATING ACTIVITIES | ||||||||
| Net income (loss) | $ | ( | ) | $ | ||||
| Adjustments to reconcile net income (loss) to net cash provided by operating activities: | ||||||||
| Change in inventory obsolescence reserve | - | |||||||
| Depreciation and amortization expense | ||||||||
| Bad debt expense | - | |||||||
| Stock-based compensation | ||||||||
| Change in operating assets and liabilities: | ||||||||
| Accounts receivable | ||||||||
| Inventory | ( | ) | ||||||
| Prepaid expenses and contract assets | ( | ) | ||||||
| Accounts payable and accrued expenses | ( | ) | ||||||
| Accounts payable - related party | ( | ) | ||||||
| Operating lease liabilities | ||||||||
| Deferred revenue | ( | ) | ( | ) | ||||
| NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES | ( | ) | ||||||
| CASH FLOWS FROM INVESTING ACTIVITIES | ||||||||
| Purchases of property and equipment | ( | ) | ( | ) | ||||
| NET CASH USED BY INVESTING ACTIVITIES | ( | ) | ( | ) | ||||
| CASH FLOWS FROM FINANCING ACTIVITIES | ||||||||
| Repayment of bank loans | ( | ) | ( | ) | ||||
| Proceeds from bank loans | - | |||||||
| Proceeds from issuance of convertible debt | - | |||||||
| Proceeds from sale of common stock and warrants | ||||||||
| Repayment of advances from related parties | ( | ) | ( | ) | ||||
| Repayment of finance leases | ( | ) | - | |||||
| NET CASH PROVIDED BY FINANCING ACTIVITIES | ||||||||
| NET INCREASE IN CASH | ||||||||
| CASH, beginning of year | ||||||||
| CASH, end of period | $ | $ | ||||||
| SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION | ||||||||
| Cash paid during the period for interest | $ | $ | ||||||
See accompanying notes to condensed consolidated financial statements.
| F-4 |
NANO MAGIC HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2022
(unaudited)
NOTE 1 – ORGANIZATION AND BASIS OF PRESENTATION
Organization
Nano Magic Holdings Inc. (“we”, “us”, “our”, “Nano Magic” or the “Company”), a Delaware corporation, develops and sells a portfolio of nano-layer coatings, nano-based cleaners, and nano-composite products based on its proprietary technology, and performs nanotechnology product research and development generating revenues through performing contract services. On March 3, 2020, we changed our name from PEN Inc. to Nano Magic Inc. and on March 2, 2021 we changed our name to Nano Magic Holdings Inc.
Through the Company’s wholly-owned subsidiary, Nano Magic LLC, formerly known as PEN Brands LLC, we develop, manufacture and sell consumer and institutional products using nanotechnology to deliver unique performance attributes at the surfaces of a wide variety of substrates. These products are marketed internationally directly to consumers and also to retailers and other institutional customers. On March 31, 2020, PEN Brands LLC changed its name to Nano Magic LLC.
Through the Company’s wholly-owned subsidiary, Applied Nanotech, Inc., we primarily perform contract research services for the Company and for governmental and private customers.
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“US GAAP”) for interim financial information. Accordingly, they do not include all the information and disclosures required by US GAAP for annual financial statements. In the opinion of management, such statements include all adjustments (consisting only of normal recurring items) which are considered necessary for a fair presentation of the unaudited condensed consolidated financial statements of the Company as of March 31, 2022 and for the three months ended March 31, 2022 and 2021. The results of operations for the three months ended March 31, 2022 are not necessarily indicative of the operating results for the full year ending December 31, 2022 or any other period. The balance sheet at December 31, 2021 has been derived from the audited financial statement at that date but does not include all the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. These unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and related disclosures of the Company as of December 31, 2021 and for the year then ended, which were filed with the Securities and Exchange Commission on Form 10-K on March 30, 2022.
Going Concern
These
unaudited 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 unaudited consolidated financial
statements, the Company had losses from operations and net cash used by operations of $
| F-5 |
Reclassifications
Certain accounts and financial statement captions in the prior periods have been reclassified to conform to the current period
NOTE 2 – INVENTORY
At March 31, 2022 and December 31, 2021, inventory consisted of the following:
| March 31, 2022 | December 31, 2021 | |||||||
| Raw materials | $ | $ | ||||||
| Work-in-progress | ||||||||
| Finished goods | ||||||||
| Less: reserve for obsolescence | ( | ) | ( | ) | ||||
| Inventory, net | $ | $ | ||||||
NOTE 3 – FACTORING
The
Company participates in a factoring program with NOWaccount ® Network Corporation (“NOW”). At the time of a sale, NOW
buys the receivables at a discount, based on the due date and other terms. The Company did not incur any cost associated with this program
for the period ended March 31, 2022. Costs associated with this program was $
NOTE 4 – DEBT
On
February 10, 2015, Nano Magic entered a $
On
August 11, 2020, the company entered into a finance lease for furniture that will be used in the new Michigan facility. We financed $
On
September 24, 2020, the company entered into a finance lease with Raymond Leasing Corporation for a forklift. Nano Magic LLC financed
$
In
December 2020, the company entered into a finance lease for production equipment. We financed $
Other
Applied Nanotech long term debt was $
Between January and February of 2022, the company issued three convertible
promissory notes for $
| F-6 |
NOTE 5 – RELATED PARTY TRANSACTIONS
For
the period ended March 31, 2022, we paid consulting and legal fees to our director Ronald Berman of $
Tom
J. Berman, a director and officer, was paid salary of $
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, LLC, 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 6.
In
addition, Mr. Tom Berman and Mr. Ron Berman are two of three individuals who share voting power of the sole manager of the limited
liability company that is our landlord in Michigan. Together, Tom and Ron Berman hold, in the aggregate, a
NOTE 6 - 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
Sales of Common Stock and Derivative Equity Securities
On
January 7, 2022, and again on February 14, 2022, the Company sold to several investors an aggregate of $
| F-7 |
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 $
Stock Options
Stock options to purchase common stock outstanding at March 31, 2022 include the options granted under the 2021 Equity Incentive Plan, and the expiration or forfeiture of options. No options were exercised during the period. No options have been included in diluted earnings per share as they would be anti-dilutive.
Number of Options | Weighted Average Exercise Price | Weighted Average Term (Years) | Aggregate Intrinsic Value | |||||||||||||
| Outstanding December 31, 2021 | $ | |||||||||||||||
| Exercised | ||||||||||||||||
| Issued | $ | - | ||||||||||||||
| Expired forfeited | ||||||||||||||||
| Outstanding March 31, 2022 | $ | $ | ||||||||||||||
| Exercisable March 31, 2022 | $ | $ | ||||||||||||||
| March 31, 2022 | December 31, 2021 | |||||||
| Stock options | ||||||||
| Stock warrants | ||||||||
| Total | ||||||||
Net income (loss) per share for common stock is as follows:
| Net income (loss) per common share outstanding: | Three Months Ended March 31, | Three Months Ended March 31, 2021 | ||||||
| Common stock | $ | ) | $ | |||||
| Weighted average shares outstanding: | ||||||||
Warrants
As
of March 31, 2022, there were outstanding and exercisable warrants to purchase
| F-8 |
2015 Equity Incentive Plan
On
November 30, 2015, the Board of Directors authorized the 2015 Equity Incentive Plan. On December 31, 2019, we issued an aggregate of
shares to employees in settlement of accrued salaries totaling $
2021 Equity Incentive Plan
On March 2, 2021, our Board adopted the 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. During the period ended March 31, 2022 we granted options with an exercise price of $and weighted average fair value on the grant date of $.
NOTE 7 - COMMITMENTS AND CONTINGENCIES
Litigation
The Company may be, from time to time, subject to various administrative, regulatory, and other legal proceedings arising in the ordinary course of business. 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 March 31, 2022, the Company has
NOTE 8 – SEGMENT REPORTING
The
Company’s principal operating segments coincide with the types of products to be sold. The products from which revenues are derived
are consistent with the reporting structure of the Company’s internal organization. The Company’s
Segment operating profit is determined based upon internal performance measures used by the chief operating decision-maker. The Company derives the segment results from its internal management reporting system. The accounting policies the Company uses to derive reportable segment results are the same as those used for external reporting purposes. Management measures the performance of each reportable segment based upon several metrics, including net revenues, gross profit and operating loss. Management uses these results to evaluate the performance of, and to assign resources to, each of the reportable segments. The Company manages certain operating expenses separately at the corporate level and does not allocate such expenses to the segments. Segment income from operations excludes interest income/expense and other income or expenses and income taxes according to how a particular reportable segment’s management is measured. Management does not consider impairment charges, and unallocated costs in measuring the performance of the reportable segments.
| F-9 |
Segment information available with respect to these reportable business segments for the three months ended March 31, 2022 and 2021 was as follows:
| For the Three Months Ended March 31, | ||||||||
| 2022 | 2021 | |||||||
| Revenues: | ||||||||
| Product segment | $ | $ | ||||||
| Contract services segment | $ | |||||||
| Total segment and consolidated revenues | $ | $ | ||||||
| Cost of revenues: | ||||||||
| Products | $ | $ | ||||||
| Contract services segment | $ | |||||||
| Total segment and consolidated cost of revenues | $ | $ | ||||||
| Gross profit (loss): | ||||||||
| Product segment | $ | $ | ||||||
| Contract services segment | ( | ) | ( | ) | ||||
| Total segment and consolidated gross profit | $ | $ | ||||||
| Gross margin: | ||||||||
| Product segment | % | % | ||||||
| Contract services segment | ( | )% | ( | )% | ||||
| Total gross margin | % | % | ||||||
| Segment operating expenses (income): | ||||||||
| Product segment | ||||||||
| Product segment income | - | ( | ) | |||||
| Contract services segment | ||||||||
| Total segment operating expenses | ||||||||
| Income (loss) from operations: | ||||||||
| Product segment | $ | ( | ) | $ | ||||
| Contract services segment | ( | ) | ( | ) | ||||
| Total consolidated income (loss) from operations | ( | ) | ||||||
| Depreciation and amortization: | ||||||||
| Product segment | $ | $ | ||||||
| Contract services segment | ||||||||
| Total consolidated depreciation and amortization | $ | $ | ||||||
| Capital additions: | ||||||||
| Product segment | $ | $ | ||||||
| Contract services segment | - | - | ||||||
| Total consolidated capital additions | $ | $ | ||||||
| March 31, 2022 | March 31, 2021 | |||||||
| Segment total assets: | ||||||||
| Product segment | $ | $ | ||||||
| Contract services segment | ||||||||
| Corporate | ||||||||
| Total consolidated total assets | $ | $ |
NOTE 9 - SUBSEQUENT EVENTS
On
April 14, 2022, the Company sold to Magic Growth 3 LLC shares of common stock for proceeds of $
On
May 2, 2022, we amended the Equipment Note with Key Bank to extend the due date on the note until
| F-10 |
ITEM 2: MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following is management’s discussion and analysis of certain significant factors that have affected our financial position and operating results during the periods included in the accompanying unaudited condensed consolidated financial statements.
OVERVIEW
Nano Magic develops, commercializes and markets consumer and industrial products powered by nanotechnology that solve everyday problems for customers in the optical, transportation, military, sports and safety industries. Our primary business is the formulation, marketing and sale of products powered by nanotechnology including the ULTRA CLARITY brand eyeglass cleaner, our defogging products and nanocoating products for glass and ceramics. We have historically sold our consumer products directly to opticians and ophthalmologists and small optical retailers and we will continue to do so, even as we are now working to expand our consumer sales by sales to big box retailers and e-commerce. We also develop and sell printable inks and pastes, thermal management materials, and graphene foils and windows. Our Innovation and Technology Center conducts development services for us and for government and private customers.
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. Restrictions imposed by Federal, state and local governments during the pandemic affected operations of our business and those of our vendors and customers as well as logistics for shipping and receiving supplies and shipping our products.
As the pandemic has continued, lead times are significantly extended and costs of raw materials and logistics are up significantly. The increased use of face masks and other personal protective equipment as a result of the pandemic created additional demand for our antifog product in 2020 and the first half of 2021. The increased demand caused a number of new participants to start selling antifog product that hurt our sales. As mask mandates have ended, we have seen demand fall off. All of this is reflected in our results for the period ended March 31, 2022. We continue to see progress in our efforts to place Nano Magic products in big box retail and secured several national big box retail placements. However, 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.
Our principal operating segments coincide with our different business activities and types of products sold. This is consistent with our internal reporting structure. Our two reportable segments for the three months ended March 31, 2022 were (i) the Product Segment and (ii) the Contract services Segment. For the three months ended March 31, 2021, the Company operated the same two segments.
RESULTS OF OPERATIONS
The following comparative analysis on results of operations was based primarily on the comparative condensed consolidated financial statements, footnotes and related information for the periods identified below and should be read in conjunction with the unaudited condensed consolidated financial statements and the notes to those statements that are included elsewhere in this report. The results discussed below are for the three months ended March 31, 2022 and 2021.
| 4 |
Comparison of Results of Operations for the Three Months ended March 31, 2022 and 2021
Revenues:
For the three months ended March 31, 2022 and 2021, revenues consisted of the following:
Three Months Ended March 31, | ||||||||
| 2022 | 2021 | |||||||
| Sales: | ||||||||
| Product segment | $ | 605,862 | $ | 2,182,446 | ||||
| Contract services segment | 80,396 | 128,729 | ||||||
| Total segment and consolidated sales | $ | 686,258 | $ | 2,311,175 | ||||
For the three months ended March 31, 2022, sales from the Product segment decreased by $1,576,584 or 72% due to reduced demand for our anti-fog products.
For the three months ended March 31, 2022, sales from the Contract services segment decreased by $48,333 or 38% as compared to the three months ended March 31, 2021 primarily due to lack of new research contracts.
Cost of revenues
Cost of revenues includes inventory costs, materials and supplies costs, internal labor and related benefits, subcontractor costs, depreciation, overhead and shipping and handling costs incurred and costs related to government and private research contracts in our Contract services segment.
For the three months ended March 31, 2022, cost of revenues decreased by $616,560 or 48% as compared to the three months ended March 31, 2021.
Three Months Ended March 31, | ||||||||
| 2022 | 2021 | |||||||
| Cost of revenues: | ||||||||
| Product segment | $ | 557,390 | $ | 1,130,776 | ||||
| Contract services segment | 109,256 | 152,430 | ||||||
| Total segment and consolidated cost of revenues | $ | 666,646 | $ | 1,283,206 | ||||
Gross profit and gross margin
Gross profit and gross margin by segment are as follows:
| Three Months Ended March 31, | ||||||||||||||||
| Gross Profit | 2022 | % | 2021 | % | ||||||||||||
| Product Segment | $ | 48,472 | 8.0 | % | $ | 1,051,670 | 48.2 | % | ||||||||
| Contract services segment | $ | (28,860 | ) | (35.9 | )% | (23,701 | ) | (18.4 | )% | |||||||
| Total gross profit | $ | 19,612 | 2.9 | % | $ | 1,027,969 | 44.5 | % | ||||||||
* Gross margin % based on respective segments revenues.
For the three months ended March 31, 2022, as compared to the comparable 2021 period, the margin in the Product segment decreased by $1,003,198 due to reduced volume, particularly of anti-fog products. The margin for the Contract research segment for the three months ended March 31, 2022 as compared to the three months ended March 31, 2021 decreased by $5,159 primarily due to completion of government contracts without new or renewal research contracts.
| 5 |
Operating income and expenses
For the three months ended March 31, 2021, other operating income was $336,017. There was no other operating income for the three months ended March 31, 2022. The decrease reflected income from a settlement agreement in 2021 that has not continued in 2022.
For the three months ended March 31, 2022, operating expenses increased by $103,397 or 10% compared to the three months ended March 31, 2021. For the three months ended March 31, 2022 and 2021, operating expenses consisted of the following:
Three Months Ended March 31, | ||||||||
| 2022 | 2021 | |||||||
| Selling and marketing expenses | $ | 79,529 | $ | 30,588 | ||||
| Salaries, wages and related benefits | 469,111 | 574,139 | ||||||
| Research and development | 7,489 | 1,876 | ||||||
| Professional fees | 253,979 | 192,641 | ||||||
| General and administrative expenses | 264,245 | 188,938 | ||||||
| Total | $ | 1,074,353 | $ | 988,182 | ||||
| ● | For the three months ended March 31, 2022, selling and marketing expenses increased by $48,941 or 160% as compared to the three months ended March 31, 2021, due to an increase in advertising and expenses for trade shows that have resumed post-pandemic. |
| ● | For the three months ended March 31, 2022, salaries, wages and related benefits decreased by $105,028 or 18%, as compared to the three months ended March 31, 2021. This was primarily attributable to bonus payments made in 2021 that were not made in 2022. |
| ● | For the three months ended March 31, 2022, research and development costs increased by $5,613 or 299%, as compared to the three months ended March 31, 2021, due to ongoing product development efforts as we work to expand our product line. |
| ● | For the three months ended March 31, 2022, professional fees increased by $61,338 or 32%, as compared to the three months ended March 31, 2021 due to an increase in the Company’s legal and professional expenses. |
| ● | For the three months ended March 31, 2022, general and administrative expenses increased by $75,307 or 40% as compared to the three months ended March 31, 2021, reflecting increased support for the larger business operation. |
Loss (income) from operations
As a result of the factors described above, for the three months ended March 31, 2022, loss from operations amounted to $1,053,480 as compared to income from operations of $375,804 for the three months ended March 31, 2021, a decrease of $1,429,284 or 380%.
Other non-operating expense (income)
For the three months ended March 31, 2022, other expense was $8,911 as compared to $5,407 for the three months ended March 31, 2021, an increase of $3,504 or 65% due to increased interest expense.
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Net loss (income)
For the three months ended March 31, 2022, net loss amounted to $(1,063,652), as compared to net income of $370,397 for the three months ended March 31, 2021. For the three-month period the decrease was $1,424,519 or 385%
For the three months ended March 31, 2022 and March 31, 2021, net income (loss) amounted to $(0.11) per common share (basic and diluted), and $0.04, respectively.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity is the ability of an enterprise to generate adequate amounts of cash to meet its needs for cash requirements. We had working capital of $903,843 and $303,374 of unrestricted cash as of March 31, 2022 and working capital of $1,003,127 and $242,474 of unrestricted cash as of December 31, 2021.
The following table sets forth a summary of changes in our working capital from December 31, 2021 to March 31, 2022:
December 31, 2021 to March 31, 2022 | ||||||||||||||||
| March 31, 2022 | December 31, 2021 | Change in Working Capital | Percentage Change | |||||||||||||
| Working capital: | ||||||||||||||||
| Total current assets | $ | 2,038,668 | $ | 2,156,666 | $ | (117,998 | ) | (5.47 | )% | |||||||
| Total current liabilities | 1,134,825 | 1,153,539 | (18,714 | ) | (1.62 | )% | ||||||||||
| Working capital: | $ | 903,843 | $ | 1,003,127 | $ | (99,284 | ) | (9.90 | )% | |||||||
Net cash used by operating activities was $(752,515) for the three months ended March 31, 2022 as compared to net cash provided by operating activities was $291,031 for the three months ended March 31, 2021, a net change of $1,043,546 or 359%. Net cash used by operating activities for the three months ended March 31, 2022 was primarily due to a net loss of $1,063,652 adjusted for add-backs of $153,988 and changes in operating assets and liabilities of $157,149.
Net cash flow used in investing activities was $(4,910) for the three months ended March 31, 2022 and $(22,962) for the three months ended March 31, 2021.
Net cash provided by financing activities was $818,325 for the three months ended March 31, 2022 reflecting $875,000 in proceeds from sales of convertible notes, common stock and warrants, offset by repayments, as compared to $1,558,650 for the same period in 2021.
Future Liquidity and Capital Needs.
Our principal future uses of cash are for working capital requirements, including working capital to support increased product sales, sales and marketing expenses and reduction of accrued liabilities. Application of funds among these uses will depend on numerous factors including our sales and other revenues and our ability to control costs.
Equipment Financing and Loans
On February 10, 2015, Nano Magic entered a $373,000 promissory note (the “Equipment Note”) with KeyBank, N.A. (the “Bank”). The unpaid principal balance of this Equipment Note is payable in 60 equal monthly instalments payments of principal and interest through June 10, 2020. The Equipment Note is secured by certain equipment, as defined in the Equipment Note, and bears interest computed at a rate of interest of 4.35% per annum based on a year of 360 days. At March 31, 2022, the amount due under the Equipment Note amounted to $30,114.
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On June 18, 2019, Nano Magic entered into an Amendment to the Equipment Note with the Bank. By the amendment, the maturity date of the note was extended until April 10, 2022, the interest rate was raised to 6.29% per year, and the monthly payments were reduced to $4,053 per month, including interest. See Note 9, Subsequent Events, regarding a further amendment of the Equipment Note.
Off-Balance Sheet Arrangements
We have not entered into any other financial guarantees or other commitments to guarantee the payment obligations of any third parties. We have not entered into any derivative contracts that are indexed to our shares and classified as shareholder’s equity or that are not reflected in our consolidated unaudited financial statements. Furthermore, we do not have any retained or contingent interest in assets transferred to an unconsolidated entity that serves as credit, liquidity or market risk support to such entity. We do not have any variable interest in any unconsolidated entity that provides financing, liquidity, market risk or credit support to us or engages in leasing, hedging or research and development services with us.
ITEM 3. Quantitative and Qualitative disclosures about market risk
Not applicable to smaller reporting companies.
ITEM 4. Controls and Procedures
Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as of the end of the period covered by this report (the “Evaluation Date”). Based upon this evaluation, our principal executive officer and principal financial officer concluded as of the Evaluation Date that our disclosure controls and procedures were effective such that the material information required to be included in our Securities and Exchange Commission (“SEC”) reports was recorded, but we lacked the staff or cash to purchase outside resources to process, summarize, and report within the time periods specified in SEC rules and forms.
Our management, including our principal executive officer and principal financial officer, does not expect that our disclosure controls and procedures or our internal controls will prevent all error and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints and the benefits of controls must be considered relative to their costs. Due to the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within our company have been detected.
Changes in Internal Control
There were no changes identified in connection with our internal control over financial reporting during the three months ended March 31, 2022 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. The material weaknesses identified at December 31, 2021 are still in the process of being addressed as of March 31, 2022.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We are not a party to any pending proceedings.
ITEM 1A. RISK FACTORS
Not required of smaller reporting companies.
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ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
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, 2025. Issued at face value, the notes bear interest at 8% per annum, payable quarterly 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 January 11, 2022, the Company sold to Magic Growth 3 LLC 222,223 shares of common stock for proceeds of $388,890 and warrants to purchase up to 222,195 shares of common stock for proceeds of $11,110. The warrants are exercisable at any time during the four years after date of issue at a warrant exercise price of $2.25.
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 $2.25.
The sales and issuances of stock and other securities were exempt from registration under Section 4(2) of the Securities Act. Cash proceeds were used for general corporate purposes.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS
| Exhibit No. | Description | |
| 31.1* | Rule 13a-14(a)/15d-14(a) Certificate of Principal Executive Officer | |
| 31.2* | Rule 13a-14(a)/15d-14(a) Certificate of Chief Financial Officer | |
| 32.1* | Section 1350 Certificate of Principal Executive Officer and Chief Financial Officer | |
| 101.INS | Inline XBRL Instance Document | |
| 101.SCH | Inline XBRL Taxonomy Extension Schema | |
| 101.CAL | Inline XBRL Taxonomy Extension Calculation | |
| 101.DEF | Inline XBRL Taxonomy Extension Definition | |
| 101.LAB | Inline XBRL Taxonomy Extension Labels | |
| 101.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase | |
| 104 | Cover Page Interactive Data File (embedded within the Inline XBRL document) | |
| * | Filed herewith. |
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SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned thereunto duly authorized.
Nano Magic Holdings Inc. (Registrant) | |
| Date: May 16, 2022 | /s/ Tom J. Berman |
| Tom J. Berman, | |
| President and Chief Executive Officer | |
| Date: May 16, 2022 | /s/ Leandro Vera |
| Leandro Vera | |
| Chief Financial Officer |
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