NMGX 10-Q Quarter ended March 31, 2024

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.

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.

Basis of Presentation

The accompanying unaudited 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 financial statements of the Company as of March 31, 2024 and for the three months ended March 31, 2024 and 2023. The results of operations for the three months ended March 31, 2024 are not necessarily indicative of the operating results for the full year ending December 31, 2024 or any other period. The balance sheet at December 31, 2023 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 financial statements should be read in conjunction with the audited financial statements and related disclosures of the Company as of December 31, 2023 and for the year then ended, which were filed with the Securities and Exchange Commission on Form 10-K on April 3, 2024.

Going Concern

These unaudited 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 financial statements, the Company had losses from operations and net cash used by operations of $ 734,874 and $ 476,043 for the three months ended March 31, 2024, respectively, and negative working capital of $ 369,388 . These factors raise substantial doubt about the Company’s ability to continue as a going concern within one year after the date that these unaudited financial statements are issued. Management cannot provide assurance that the Company will ultimately achieve profitable operations, become cash flow positive or raise additional capital. The accompanying financial statements have been prepared assuming that the Company will continue as a going concern, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. They do not include any adjustments related to the recoverability and/or classification of the recorded asset amounts and/or the classification of the liabilities that might be necessary should the Company be unable to continue as a going concern.

NOTE 2 – INVENTORY

NOTE 3 – INVESTMENT IN SUBSIDIARY

The Company holds a note receivable from its subsidiary ANI. On March 15, 2024 we sold $ 115,000 of the ANI note for cash proceeds of $ 100,000 , reducing the balance owed to the Company. The loss of $ 15,000 was recorded in Other Expense. As a result, at March 31, 2024, the note receivable had a balance of $ 226,782 as compared to $ 341,782 at December 31, 2023. $ 33,000 was included in current assets at March 31, 2024 with $ 50,000 included in current assets at December 31, 2023.

The Company accounts for its 30 % ownership interest in ANI by the equity method of accounting under which the Company’s share of the net income (loss) of ANI is recognized as income (loss) in the Company’s statement of operations. Any dividends received from ANI as well as periodic losses for the Company’s 30 % share will be treated as a reduction of the investment account. Periodic income will be treated as an increase in the investment account. At March 31, 2024 and December 31, 2023, the non-marketable investment in subsidiary was $ 263,959 and $ 253,835 , included in non-current assets. For the three-month periods ended March 31, 2024 and March 31, 2023, the Company recorded income from the investment in subsidiary of $ 10,123 and $ 32,156 , respectively.

NOTE 4 – NOTES PAYABLE AND FINANCE LEASES

Notes Payable

On January 7, 2022, the Company sold to one investor a $ 100,000 convertible note due March 31, 2025 . On January 26, 2022, and January 31, 2022, the Company sold two $ 50,000 convertible notes to two different investors. The $ 50,000 notes are due March 31, 2025 and March 31, 2026 . All three notes were issued at face value, and 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 July 27, 2022, the Company sold two convertible notes, one for $ 50,000 and one for $ 25,000 , both due on March 31, 2025. The $ 25,000 note is to Mr. Ron Berman, a Related Party. On August 22, 2022, the Company sold a $ 25,000 convertible promissory note due March 31, 2026 . All three notes were issued at face value, and 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 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 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. On October 18, 2023, the Company and the holder extended the maturity date of the note to October 31, 2024.

On December 18, 2022, the Company issued a convertible promissory note for $ 50,000 that is secured by certain payroll tax credits the Company is entitled to receive under the Employee Retention Tax Credit program. The note bears interest at 8 % per annum, payable at maturity on June 18, 2024 . The note can be converted to common stock at any time at the option of the holders at a conversion price of $ 1.75 per share at which point accrued interest will be paid in cash.

On June 14, 2023, the Company issued a convertible, secured note and warrants to purchase 10,000 shares of the Company’s common stock for $ 50,000 with the same terms as the one issued on December 18, 2022. The warrants were recorded as a debt discount on the date of issuance for a total value of $ 5,333 . The balance at March 31, 2024 and December 31, 2023 of the debt discount was $ 2,506 and $ 3,390 , respectively.

On July 24, 2023, the Company issued at face value a convertible note in the original principal amount of $ 50,000 . The note is due on July 24, 2025, bears interest at 8 % per annum and is convertible at $ 1.25 per share.

On November 2, 2023, the Company issued at face value a convertible note in the original principal amount of $ 50,000 . The note is due on November 2, 2025, bears interest at 8 % per annum and is convertible at $ 1.25 per share.

At March 31, 2024 and at December 31, 2023, we had outstanding convertible notes aggregating $ 525,000 in principal amount. The convertible promissory notes have not been included in diluted earnings per share as they would be anti-dilutive.

Finance Leases

In December 2020, the company entered into a finance lease for production equipment. We financed $ 85,000 over a period of 48 months with monthly payments of $ 2,135 during that time. As of December 31, 2023 the balance on the lease was $ 24,194 , and as of March 31, 2024, the balance on the lease was $ 18,368 , all of which was included in current liabilities.

NOTE 5 – OPERATING LEASE

Effective May 31, 2020, we entered into a lease with a related party for a 29,220 square foot building in Madison Heights, Michigan. The occupancy and rent commencement date was October 1, 2020. The lease has an initial term of seven years with a renewal option at the end of the initial term for an additional 3-year term, and a second renewal option thereafter for an additional 5-year term. The renewal term is not included in the calculation of the operating lease liability. As the sole tenant, we are responsible for all taxes, ordinary maintenance, snow removal and other ordinary operating expenses. Rent is $6.50 per square foot, increasing by $0.25 per year. During the first three years we had the right to buy up to a 49% interest in Magic Research LLC for a price equal to 49% of the contributions received from other members. This right has now expired as we did not exercise the option. See Note 7, Stockholders’ Equity, for a description of warrants issued to the owners of Magic Research LLC in connection with this lease. The fair value of these warrants totaling $ 311,718 were recorded as initial direct costs of obtaining the lease and are included in right-of-use assets on the accompanying balance sheet. See Note 6, Related Party Transactions, for information about roles in management and economic participation by our CEO and several other directors in the landlord.

In February 2023, we reached an 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. During that period, we paid cash of $ 8,056 per month, effectively a cash rent reduction of $ 10,983 per month. In May 2023, we reached a further agreement with the landlord under which we pay cash each month to cover the cost of the mortgage and the lease for the lighting fixtures, but that will allow us to pay the balance of the rent by issuing shares of our stock valued at $ 0.75 per share. We have the option to continue to use stock to pay a portion of the rent through 2024.

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. The ROU Asset was $ 795,634 at March 31, 2024 and $ 845,563 at December 31, 2023. The operating lease liability was $ 683,623 at March 31, 2024 and $ 722,419 at December 31, 2023.

NOTE 6 – RELATED PARTY TRANSACTIONS

For the three-month period ended March 31, 2024 and the three-months ended March 31, 2023, we accrued $ 6,000 in fees for each of the directors, totaling $ 36,000 for the period ended March 31, 2024 and $ 42,000 for the same period in 2023. For the period ended March 31, 2024 we paid $ 24,000 in consulting fees to director Ronald J. Berman. For the three-month period ended March 31, 2023, we accrued consulting and legal fees to him of $ 30,000 . At March 31, 2024, the Company owed $ 8,000 in related parties accounts payable to this director. During the three-month period ended March 31, 2024, we paid director and our President and CEO, Tom Berman, salary in the amount of $ 56,250 . For the three-month period ended March 31, 2023, we paid him $ 30,000 in salary, and we accrued additional salary of $ 30,000 for the period which was subsequently paid by the issuance of 30,000 options with an exercise price of $ 0.65 . At March 31 2024 the Company had $ 8,759 in payroll expenses payable to Mr. Berman included in related party accounts payable, which was paid in April of 2024. Additionally, $ 5,000 was payable to the Company’s CFO at March 31, 2024, also included in related parties accounts payable and paid in April of 2024.

At March 31, 2024 and at December 31, 2023, aggregate advances from Scott & Jeanne Rickert were $ 42,887 , which is included in advances from related parties on the balance sheet. On both those dates, accrued payroll for the Rickerts was an aggregate of $ 16,000 , which is included in related parties accounts payable on the balance sheet.

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 warrants from us in 2018, 2019, 2020, 2021 and 2022.

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. Another director, Miles Gatland, owns a 12.5 % interest in the Michigan landlord and he is a co-guarantor on the debt of that limited liability company. See Note 6, Stockholder’s Equity regarding the issuance of stock in partial satisfaction of unpaid rent. Rent in the amount of $ 52,791 and $ 30,141 was accrued and unpaid at March 31, 2024 and December 31, 2023, respectively, which is included in related parties accounts payable on the balance sheet.

NOTE 7 – 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

The rights of each share of common are the same with respect to dividends, distributions and rights upon liquidation. Holders of common stock each have one vote per share in the election of directors and other matters submitted to a vote of the stockholders.

Issuances of Common Stock

Common Stock Issued for Services

In February 2023, we reached an agreement with the landlord of our Michigan facility to accept 52,800 shares 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. Those shares were issued in March 2023. The landlord is a Related Party .

Sales of Common Stock

During the quarter ended March 31, 2023, the Company sold 74,806 shares of common stock for proceeds of $ 93,507 and 74,626 warrants for proceeds of $ 1,492 . The warrants are exercisable at any time during the four years after date of issue at a warrant exercise price of $ 2.25 .

During the quarter ended March 31, 2024, the Company sold 73,334 shares of common stock for proceeds of $ 55,000 .

Stock Options

Warrants

As of March 31, 2024, there were outstanding and exercisable warrants to purchase 7,525,265 shares of common stock. The outstanding warrants have a weighted average exercise price of $ 1.72 per share and a weighted average remaining contractual term of 37.7 months. As of March 31, 2024 and December 31, 2023, there was no intrinsic value for the warrants. No warrants have been included in diluted earnings per share as they would be anti-dilutive.

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, 85,000 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 2,500 , and an additional 2,500 options were granted. On June 21, 2021 an additional 200,000 shares were made available for issuance under the Plan and options for 100,000 shares were granted, but subsequently forfeited. In February 2022, we granted 130,700 options with an exercise price of $ 0.80 and weighted average fair value on the grant date of $ 0.60 . In August 2022, we granted 15,000 options with an exercise price of $ 0.80 and weighted average fair value on the grant date of $ 0.60 .

On April 12, 2023, the Company granted 47,610 options under the 2021 Equity Plan. The options were granted to individuals in lieu of cash for a portion of their salary for the period from December 31, 2022 through March 31, 2023. All options are at an exercise price of $ 0.65 per share for a four-year term and were fully vested on date of grant. On May 30, 2023, the Company granted 175,071 options under the 2021 Equity Plan. The options were granted to employees and consultants at an exercise price of $ 0.65 per share.

No options were granted in the three-month period ending on March 31, 2024 or the three-month period ending on March 31, 2023.

NOTE 8 – 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. As of March 31, 2024, we were not 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, 2024, the Company has not accrued any amount for litigation contingencies.

NOTE 9 – SUBSEQUENT EVENTS

On April 17, 2024, the Company sold 33,333 shares of common stock for proceeds of $ 25,000 . On April 24, 2024, the Company sold 33,333 shares of common stock to another investor for proceeds of $ 25,000 .

On April 25, 2024, the Company sold another portion of the note receivable from ANI, reducing the balance owed to the Company by another $ 56,444.30 in exchange for aggregate proceeds of $ 50,000 .