UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM
For
the quarterly period ended
COMMISSION
FILE NO.
(Exact name of registrant as specified in its charter)
| (State or other jurisdiction of | (I.R.S. Employer | |
| incorporation or organization) | Identification No.) |
(Address of principal executive office, including Zip Code)
Registrant’s
telephone number, including area code:
Securities registered pursuant to Section 12(b) of the Exchange Act:
| Title of each class | Trading Symbol | Name of Each Exchange on Which Registered | ||
| OTC Markets |
Securities registered pursuant to Section 12(g) of the Exchange Act: None
Indicate
by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. ☐ Yes ☒
Indicate
by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data
File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post such files). ☐ Yes ☒
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “accelerated filer”, “large accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer ☐ | Accelerated filer ☐ |
| Smaller
reporting company |
Emerging
growth company
Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ☐ Yes ☒
As of November 14, 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 | For the Nine Months Ended | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| 2022 | 2021 | 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 (EXPENSE) | ||||||||||||||||
| Income from investment in subsidiary | ||||||||||||||||
| Interest expense | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Other income | ||||||||||||||||
| Total Other Income (Expense) | ( | ) | ( | ) | ||||||||||||
| LOSS FROM CONTINUING OPERATIONS | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| INCOME FROM DISCONTINUED OPERATIONS | ||||||||||||||||
| Income from discontinued operations | ||||||||||||||||
| Gain on sale of discontinued operations | ||||||||||||||||
| NET INCOME 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 condensed consolidated financial statements.
| F-1 |
NANO MAGIC HOLDINGS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)
| September 30 | December 31 | |||||||
| 2022 | 2021 | |||||||
| ASSETS | ||||||||
| CURRENT ASSETS: | ||||||||
| Cash | $ | $ | ||||||
| Accounts receivable, net | ||||||||
| Inventory, net | ||||||||
| Prepaid expenses and contract assets | ||||||||
| 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 | ||||||||
| Advances from related parties | ||||||||
| Current portion of lease liabilities | ||||||||
| Contract liabilities | ||||||||
| Current liabilities of discontinued operations | ||||||||
| Total Current Liabilities | ||||||||
| Notes Payable, net of current portion | ||||||||
| Lease liabilities, net of current portion | ||||||||
| Non current liabilities of discontinued operations | ||||||||
| Total Liabilities | ||||||||
| Commitments and Contingencies (See Note 9) | ||||||||
| STOCKHOLDERS’ EQUITY: | ||||||||
| Preferred stock, $ par value, shares authorized; shares issued and outstanding | ||||||||
| Common stock: $ par value, shares authorized; and issued and outstanding at September 30, 2022 and December 31, 2021, respectively | ||||||||
| Additional paid-in capital | ||||||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| Total Stockholders’ Equity | ||||||||
| Total Liabilities and Stockholders’ Equity | $ | $ | ||||||
See accompanying notes to consolidated financial statements.
| F-2 |
NANO MAGIC HOLDINGS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2022 AND 2021
(unaudited)
| Common Stock | Additional Paid-in | Accumulated | Total Stockholders’ | |||||||||||||||||
| Shares | Amount | Capital |
Deficit |
Equity | ||||||||||||||||
| Balance, June 30, 2022 | $ | $ | $ | ( | ) | $ | ||||||||||||||
| Common stock issued for cash, net of issuance costs | ||||||||||||||||||||
| Warrants and options on private placement | - | |||||||||||||||||||
| Stock-based compensation | - | |||||||||||||||||||
| Net income | - | ( | ) | ( | ) | |||||||||||||||
| Balance, September 30, 2022 | ( | ) | ||||||||||||||||||
| Balance, June 30, 2021 | $ | $ | $ | $ | ( | ) | $ | |||||||||||||
| Stock-based compensation | - | |||||||||||||||||||
| Net loss | - | ( | ) | ( | ) | |||||||||||||||
| Balance, September 30, 2021 | ( | ) | ||||||||||||||||||
See accompanying notes to condensed consolidated financial statements.
| F-3 |
NANO MAGIC HOLDINGS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2022 AND 2021
(unaudited)
| Common Stock | Additional Paid-in | Accumulated | Total Stockholders’ | |||||||||||||||||
| Shares | Amount | Capital | Deficit | Equity | ||||||||||||||||
| Balance, December 31, 2021 | $ | $ | $ | ( | ) | $ | ||||||||||||||
| Common stock issued for cash, net of issuance costs | ||||||||||||||||||||
| Warrants and options on private placement | - | |||||||||||||||||||
| Stock-based compensation | - | |||||||||||||||||||
| Net loss | ( | ) | ( | ) | ||||||||||||||||
| Balance, September 30, 2022 | ( | ) | ||||||||||||||||||
| Balance, December 31, 2020 | $ | $ | $ | $ | ( | ) | $ | |||||||||||||
| Common stock issued for cash, net of issuance costs | ||||||||||||||||||||
| Common stock issued for services | ||||||||||||||||||||
| Warrants , options, and warrant options on private placement | - | |||||||||||||||||||
| Stock-based compensation | - | |||||||||||||||||||
| Net loss | - | ( | ) | ( | ) | |||||||||||||||
| Balance, September 30, 2021 | ( | ) | ||||||||||||||||||
See accompanying notes to condensed consolidated financial statements.
| F-4 |
NANO MAGIC HOLDINGS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
| For the Nine Months Ended | ||||||||
| September 30, | ||||||||
| 2022 | 2021 | |||||||
| CASH FLOWS FROM OPERATING ACTIVITIES | ||||||||
| Net loss from continuing operations | $ | ( | ) | $ | ( | ) | ||
| Net income from discontinued operations | ||||||||
| Adjustments to reconcile net loss to net cash provided by operating activities: | ||||||||
| Change in inventory obsolescence reserve | ( | ) | ||||||
| Depreciation and amortization expense | ||||||||
| Bad debt expense | ||||||||
| Stock-based compensation | ||||||||
| Income from investment in subsidiary | ( | ) |
| |||||
| Change in operating assets and liabilities: | ||||||||
| Accounts receivable | ( | ) | ||||||
| Accounts receivable - related party | ( | ) | ||||||
| Inventory | ( | ) | ||||||
| Prepaid expenses and contract assets | ( | ) | ||||||
| Accounts payable | ( | ) | ||||||
| Accounts payable - related party | ( | ) | ||||||
| Operating lease liabilities | ||||||||
| Customer deposits | ||||||||
| Accrued expenses | ( | ) | ||||||
| Contract liabilities | ||||||||
| 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 condensed consolidated financial statements.
| F-5 |
NANO MAGIC HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 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. 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 on 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.
Effective
May 31, 2022, we sold a
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 September 30, 2022 and for the three and nine months ended September 30, 2022 and 2021. The results of operations for the three and nine months ended September 30, 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 continuing operations and net cash used by continuing operations of
$
| F-6 |
NOTE 2 – DISCONTINUED OPERATIONS
Effective
May 31, 2022, we sold a
In
connection with the sale, the capital structure of Applied Nanotech was changed to give us, as the holder of Class B common stock of
Applied Nanotech, a
The following includes the detail of major classes of assets and liabilities of discontinued operations summarized on the accompanying unaudited consolidated financial statements:
| 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 | $ | |||
The following is the detail of major line items that constitute income from discontinued operations:
| For the Three Months Ended | For the Nine Months Ended | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| 2022 | 2021 | 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 on discontinued operations | ||||||||||||||||
| Gain on sale of discontinued operations | ||||||||||||||||
| Net income from discontinued operations | $ | $ | $ | $ | ||||||||||||
NOTE 3 – INVENTORY
At September 30, 2022 and December 31, 2021, inventory consisted of the following:
| September 30, 2022 | December 31, 2021 | |||||||
| Raw materials | $ | $ | ||||||
| Work-in-progress | ||||||||
| Finished goods | ||||||||
| Less: reserve for obsolescence | ( | ) | ( | ) | ||||
| Inventory, net | $ | $ | ||||||
| F-7 |
NOTE 4 – INVESTMENT IN SUBSIDIARY
The
Company is accounting for its
NOTE 5 – FACTORING
Since
September 1, 2020, The Company has participated in a factoring program with NOWaccount ® Network Corporation (“NOW”).
At the time of a sale, NOW buys the receivables at a discount, based on the due date and other terms. The Company has not been using
this program in 2022, and there were
NOTE 6 – DEBT AND EQUIPMENT FINANCING
On
February 10, 2015, Nano Magic entered into a $
On
August 11, 2020, the company entered into a finance lease for furniture. We financed $
On
September 24, 2020, the company entered into a finance lease with Raymond Leasing Corporation for a forklift. Nano Magic LLC financed
$
In
December 2020, the company entered into a finance lease for production equipment. We financed $
In
January and February of 2022, the company issued three convertible promissory notes for $
NOTE 7 – RELATED PARTY TRANSACTIONS
For
the three month and nine-month periods ended September 30, 2022, we accrued $
Three Months ended September 30, | Nine Months ended September 30, | |||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| Ronald J. Berman | $ | $ | $ | $ | ||||||||||||
| Tom J. Berman | $ | $ | $ | $ | ||||||||||||
One of the purchasers of the 70% interest in Applied Nanotech was Richard Fink who was one of our named executive officers until that sale.
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 8.
| F-8 |
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 8 – 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
On
March 2, 2021, we issued an aggregate of shares of common stock to our directors as compensation to them for service on our Board.
These shares were valued on that date at $ per share based on the quoted price of the stock for a total value of $
Sales of Common Stock and Derivative Equity Securities
On
March 2, 2021, the Company sold to Magic Growth 2 LLC, shares of common stock for proceeds of $
On
March 17, 2021, the Company sold to Magic Growth 2 LLC, shares of common stock for proceeds of $
On
January 7, 2022, and again on February 14, 2022, the Company sold to several investors an aggregate of $
On
January 11, 2022, the Company sold to Magic Growth 3 LLC shares of common stock for proceeds of $
| F-9 |
On
February 22, 2022, the Company sold to Magic Growth 3 LLC shares of common stock for proceeds of $
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 $
In
total for the nine months ended September 30, 2022,
shares of common stock were sold and issued for $
Stock Options
Stock options to purchase common stock outstanding at September 30, 2022 include the options granted in February 2022 and options granted in August 2022 under the 2021 Equity Incentive Plan. 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 Remaining Contractual Term (Years) | Aggregate Intrinsic Value | |||||||||||||
| Outstanding December 31, 2021 | $ | |||||||||||||||
| Exercised | - | |||||||||||||||
| Issued | $ | - | ||||||||||||||
| Expired & forfeited | ( | ) | $ | - | ||||||||||||
| Outstanding September 30, 2022 | $ | $ | ||||||||||||||
| Exercisable September 30, 2022 | $ | $ | ||||||||||||||
| September 30, 2022 | December 31, 2021 | |||||||
| Stock options | ||||||||
| Stock warrants | ||||||||
| Total | ||||||||
Warrants
As
of September 30, 2022, there were outstanding and exercisable warrants to purchase
| F-10 |
2015 Equity Incentive Plan
On
November 30, 2015, the Board of Directors authorized the 2015 Equity Incentive Plan. On December 31, 2019, we issued an aggregate of
shares to employees in settlement of accrued salaries totaling $
2021 Equity Incentive Plan
On March 2, 2021, our Board adopted the 2021 Nano Magic 2021 Equity Incentive Plan (the “Plan”) to allow equity compensation for those who provide services to the Company and to encourage ownership in the Company by personnel whose service to the Company is important to its continued progress, to encourage recipients to act as owners and thereby in the stockholders’ interest and to enable recipients to share in the Company’s success. Initially, shares were available for issuance under the Plan and that number of options were also granted to employees on March 2, 2021. On April 8, 2021 the number of shares under the Plan was increased by , and an additional options were granted. On June 21, 2021 an additional shares were made available for issuance under the Plan and options for shares were granted, but subsequently forfeited. In February 2022, we granted options with an exercise price of $ and weighted average fair value on the grant date of $. In August 2022, we granted options with an exercise price of $ and weighted average fair value on the grant date of $.
NOTE 9 – 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 September 30, 2022 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 September 30, 2022, the Company has
NOTE 10 – SUBSEQUENT EVENTS
On October 26, 2022, the Company received $
| F-11 |
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 cutting-edge consumer and industrial products powered by nanotechnology to clean, protect and enhance every-day surfaces. Our primary business is the formulation, marketing and sale of products powered by nanotechnology bearing the Nano Magic brand as well as Ultra Clarity and Defog It brand names and we also private label our solutions, such as our 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 product portfolio and our consumer sales through big box retailers and e-commerce.
Effective May 31, 2022, we sold a majority interest in our subsidiary, Applied Nanotech, Inc. (“ANI”). ANI performs contract research services for the Company and for governmental and private customers and that work was previously reported as our Contract research 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 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 and nine months ended September 30, 2022 and 2021.
Comparison of Results of Continuing Operations for the Three and Nine Months ended September 30, 2022 and 2021
Revenues:
For the three and nine months ended September 30, 2022 and 2021, revenues from continuing operations were:
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| Total revenue | $ | 807,026 | $ | 545,515 | $ | 1,819,951 | $ | 3,673,263 | ||||||||
For the three months ended September 30, 2022, sales from continuing operations increased by $261,511 or 48% as compared to the three months ended September 30, 2021. For the nine months ended September 30, 2022 revenues decreased by $1,853,312 or 50%, as compared to the nine months ended September 30, 2021. The increase for the three-month period was due primarily to growth in the company’s e-commerce sales channel. The decrease for the nine-month period was primarily due to the high sales of anti-fog products during the first half of 2021 when masks were required in many situations due to the COVID-19 pandemic.
Cost of sales
Cost of sales includes inventory costs, materials and supplies costs, internal labor and related benefits, subcontractor costs, depreciation, and overhead and shipping and handling costs incurred.
Three Months ended September 30, | Nine Months ended September 30, | |||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| Cost of sales: | $ | 698,448 | $ | 525,892 | $ | 1,689,342 | $ | 2,109,430 | ||||||||
For the three months ended September 30, 2022, cost of revenues increased by $172,556 or 33% as compared to the three months ended September 30, 2021. For the nine months ended September 30, 2022, cost of revenues decreased by $420,088 or 20% as compared to the nine months ended September 30, 2021. For the three-month period, the increase reflects the higher sales volume as compared to the prior year. For the nine-month period, cost of sales decreased as sales volume dropped, but did not reduce proportionately because of overhead and other fixed production costs. We saw some price increases and shortages for some of our raw materials and packaging during the COVID-19 pandemic and the ongoing supply chain disruption, but thus far we have been able to obtain adequate supply.
Gross profit and gross margin
For the three months ended September 30, 2022, gross profit was $108,578 as compared to $19,623 for the prior year, an increase of $88,955 or 453%. For the nine months ended September 30, 2022, gross profit was $130,609 as compared to $1,563,833 for the prior year, a decrease of $1,433,224 or 92%. For the nine months ended September 30, 2022, gross margin was 7.2% as compared to 42.6% in the prior year. For the three months ended September 30, 2022, gross margin was 13.5% as compared to 3.6% in the prior year. For the three-month period the improvement was due to a combination of higher sales volume and lower fixed overhead costs at the plant. For the nine-month period the decrease was due to lower sales volumes as well as product mix.
| 4 |
Other operating income
For the three months ended September 30, 2022, other operating income increased by $44,129 or 86% compared to the three months ended September 30, 2021. This was due primarily to settlement income from a customer in the third quarter of 2022. For the nine months ended September 30, 2022, other operating income decreased by $456,408 or 83% compared to the nine months ended September 30, 2021. This was due primarily to settlement income from a third party received in the first half of 2021 that significantly decreased in subsequent periods.
Operating expenses
For the three months ended September 30, 2022, operating expenses decreased by $104,924 or 12% compared to the three months ended September 30, 2021. Similarly, for the nine months period operating expenses decreased by $418,063 or 14% for the period ended September 30, 2022, as compared to the nine months ended September 30, 2021. For the three and nine months ended September 30, 2022 and 2021, operating expenses consisted of the following:
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| Selling and marketing expenses | $ | 88,635 | $ | 59,203 | $ | 264,465 | $ | 136,423 | ||||||||
| Salaries, wages and related benefits | 359,273 | 464,042 | 1,178,612 | 1,754,585 | ||||||||||||
| Research and development | 4,566 | 2,482 | 15,266 | 11,795 | ||||||||||||
| Professional fees | 129,362 | 183,167 | 572,135 | 592,067 | ||||||||||||
| General and administrative expenses | 183,728 | 161,594 | 646,989 | 600,660 | ||||||||||||
| Total | $ | 765,564 | $ | 870,488 | $ | 2,677,467 | $ | 3,095,530 | ||||||||
| ● | For the three months ended September 30, 2022, selling and marketing expenses increased by $29,432 or 50% as compared to the three months ended September 30, 2021, due to increased marketing expenses, sales consultants and trade show expenses. For the nine months ended September 30, 2022, selling and marketing expenses increased by $128,042 or 94% as compared to the nine months ended September 30, 2021, due to the foregoing factors. |
| ● | For the three months ended September 30, 2022, salaries, wages and related benefits decreased by $104,769 or 23%, as compared to the three months ended September 30, 2021. For the nine months ended September 30, 2022, salaries, wages and related benefits decreased by $575,973 or 33%, as compared to the nine-months ended September 30, 2021. These decreases were due to lower bonus and equity compensation expenses, and reduced staffing in light of lower sales volumes. |
| ● | For the three months ended September 30, 2022, research and development costs increased by $2,084 or 84%, as compared to the three months ended September 30, 2021. For the nine months ended September 30, 2022, research and development costs increased by $3,471 or 29%, as compared to the nine months ended September 30, 2021. The changes were due to the timing of expenses in the course of ongoing work. |
| ● | For the three months ended September 30, 2022, professional fees decreased by $53,805 or 29%, as compared to the three months ended September 30, 2021. For the nine months ended September 30, 2022, professional fees decreased by $19,932 or 3%, as compared to the nine months ended September 30, 2021. The changes were due to ongoing legal expenses related to our challenge to the SEC trading suspension and additional trademark expenses in 2022 that decreased in comparison to prior periods in 2021. |
| ● | For the three months ended September 30, 2022, general and administrative expenses increased by $22,134 or 14% as compared to the three months ended September 30, 2021. For the nine months ended September 30, 2022, general and administrative expenses increased by $46,329 or 8% as compared to the nine months ended September 30, 2021. In both comparative periods costs increased primarily due to increased board and governance costs. |
Loss from operations
As a result of the factors described above, for the three months ended September 30, 2022, loss from operations amounted to $561,285 as compared to a loss of $799,293 for the three months ended September 30, 2021, a change of $238,008 or 30%. For the nine-month period ended September 30,2022, the loss was $2,451,157, as compared to a loss of $979,588 for the nine months ended September 30, 2021, an increase of $1,471,569 or 150%.
| 5 |
Income from investment in subsidiary
As a result of the sale of a 70% interest in ANI , we now report our 30% share of ANI’s income or loss as an investment in a subsidiary. For the three months ended September 30, 2022 that was income of $19,203, and for the nine months then ended income of $16,042.
Interest expense
For the three months ended September 30, 2022 interest expense was $10,799 as compared to $3,879 in the prior year, and for the nine months ended September 30, 2022 interest expense was $26,414 up from $13,874 in the prior year. The increases were due to interest expense for convertible notes issued in 2022.
Other income
For the three months ended September 30, 2022, other income was $10,267 as compared to $0 for the three months ended September 30, 2021. For the nine months ended September 30, 2022, other income was $12,892 as compared to $10 for the nine months ended September 30, 2021. The increases were due to interest income accrued on notes receivable issued in 2022.
Loss from continuing operations
As a result of the foregoing, we reported a loss from continuing operations of $542,594 for the three-month period ended September 30, 2022 and a loss of $803,172 for the three-month period in the prior year, a decrease of $260,578 or 32%. For the nine-month period ended September 30, 2022 our loss from continuing operations was $2,448,637 as compared to $993,452 for the nine-month period ended September 30, 2021, an increase of $1,455,185 or 146%.
Income (loss) from discontinued operations
Effective May 31, 2022, we sold a 70% interest in our subsidiary ANI to two of its officers and long-time employees in exchange for a promissory note in the face amount of $450,000. We recognized no income on that discontinued operation for the three-month period ended September 30, 2022 and on a comparative basis we recognized income of $45,603 for the three-month period ended September 30, 2021. For the nine months ended September 30, 2022 we had income from discontinued operations of $1,300 and income of $132,863 on a comparative basis for the three-month period ended September 30, 2021. For the nine months ended September 30, 2022, we reported a gain on sale of discontinued operations of $1,148,225 and $0 on a comparative basis for the nine-month period ended September 30, 2021.
Net loss (income)
For the three months ended September 30, 2022, net loss was $542,594 as compared to a net loss of $757,569 for the three months ended September 30, 2021. For the nine months ended September 30, 2022, net loss amounted to $1,299,112 as compared to a loss of $860,769 for the nine months ended September 30, 2021.
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 $942,354 and $206,286 of unrestricted cash as of September 30, 2022 and working capital of $1,003,127 and $197,932 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 September 30, 2022:
December 31, 2021 to September 30, 2022 | ||||||||||||||||
| September 30, 2022 | December 31, 2021 | Change in Working Capital | Percentage Change | |||||||||||||
| Working capital: | ||||||||||||||||
| Total current assets | $ | 2,094,940 | $ | 2,156,666 | $ | (61,726 | ) | (2.86 | )% | |||||||
| Total current liabilities | 1,152,586 | 1,153,539 | (953 | ) | (0.08 | )% | ||||||||||
| Working capital: | $ | 942,354 | $ | 1,003,127 | $ | (60,773 | ) | (6.06 | )% | |||||||
| 6 |
The decrease in current assets is primarily attributable to a decrease in inventory and prepaid expenses partially offset by an increase in accounts receivable.
Net cash used by operating activities was $(1,561,063) for the nine months ended September 30, 2022 as compared to net cash used by operating activities of $(641,196) for the nine months ended September 30, 2021, a net change of $(919,867) or 143%. Net cash used by operating activities for the nine months ended September 30, 2022 primarily resulted from net loss from continuing operations of $(2,448,637) adjusted for add-backs of $240,421 and changes in operating assets and liabilities of $719,398.
Net cash provided by continuing investing activities was $20,090 for the nine months ended September 30, 2022, as compared to net cash used by continuing investing activities of $(104,585) for the same period in 2021. Net cash used by discontinued investing activities was $0 and $(242) for the nine months ended September 30, 2022 and September 30, 2021, respectively.
Net cash provided by continuing financing activities was $1,484,785 for the nine months ended September 30, 2022 reflecting $1,610,000 in proceeds from sales of common stock, warrants and convertible notes, as compared to net cash provided by continuing financing activities of $1,396,555 for the same period in 2021. Net cash provided by discontinued financing activities was $20,000 and $76,305 for the nine months ended September 30, 2022 and September 30, 2021, respectively.
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
See note 6 to our unaudited condensed consolidated financial statements regarding our equipment loan and financing leases.
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 that we do not have 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, these tasks are performed by separate individuals. Management evaluated 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.
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 September 30, 2022 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
| 7 |
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 1A. RISK FACTORS
Not required of smaller reporting companies.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Pursuant to the agreement entered into on October 20, 2020, with the holder of substantially all the outstanding stock appreciation rights, on March 2, 2021, we issued 5,000 shares of common stock at value of $1.00 in partial settlement of that holder’s stock appreciation rights.
On March 2, 2021, the Company sold to Magic Growth 2 LLC, 769,231 shares of common stock for proceeds of $961,539 and warrants to purchase up to 769,225 shares of common stock for proceeds of $38,461. The warrants are exercisable at any time during the four years after date of issue at a warrant exercise price of $2.00 per share. PEN Comeback Management, LLC, owned by Tom J. Berman and Ronald J. Berman, is the sole voting member of Magic Growth 2 LLC.
On March 2, 2021, we also issued an aggregate of 37,890 shares of common stock to our directors as compensation to them for service on our Board. These shares were valued on that date at $0.95 per share based on the quoted price of the stock for a total value of $36,000.
On March 17, 2021, the Company sold to Magic Growth 2 LLC, 385,231 shares of common stock for proceeds of $481,539 and warrants to purchase up to 385,225 shares of common stock for proceeds of $19,261. The warrants are exercisable at any time during the four years after date of issue at a warrant exercise price of $2.00 per share.
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.
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, the Company sold two additional convertible notes for an aggregate of $75,000.
On August 22, 2022, the Company sold an additional convertible note for an aggregate of $25,000.
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.
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.
| 8 |
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. |
| 9 |
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: November 14, 2022 | /s/ Tom J. Berman |
| Tom J. Berman, | |
| President and Chief Executive Officer | |
| Date: November 14, 2022 | /s/ Leandro Vera |
| Leandro Vera | |
| Chief Financial Officer |
| 10 |