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

Basis of Presentation

The accompanying unaudited condensed 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 financial statements of the Company as of September 30, 2024 and for the three and nine months ended September 30, 2024 and 2023. The results of operations for the three and nine months ended September 30, 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 condensed financial statements should be read in conjunction with the audited condensed 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 condensed 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 condensed financial statements, the Company had losses from operations and net cash used by operations of $2,974,546 and $1,634,053 for the nine months ended September 30, 2024 and a loss from operations of $2,009,247 and cash used by operations of $1,057,794 for the nine months ended September 30, 2023. Moreover, at September 30, 2024, the Company had a working capital deficit of $(889,966) as compared to positive working capital of $454,969 at December 31, 2023. 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 condensed 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.

Reclassifications

Certain accounts and financial statement captions in the prior periods have been reclassified to conform to the current period. These reclassifications had no effect on the previously reported net loss.

NOTE 2 – INVENTORY

NOTE 3 – ACCOUNTS RECEIVABLE

Bad debt expense was $80,865 and $84,132 in the nine months ended September 30, 2024 and September 30, 2023, respectively, and included in general and administrative expenses in the statements of operations.

NOTE 4 – INVESTMENT IN SUBSIDIARY

For the three- and nine-month periods ended September 30, 2024, we sold portions of the note receivable from ANI to various parties for total cash proceeds of $0 and $300,000, respectively, incurring a loss on the sale of the note of $41,782. The losses were recorded in other expense in the statement of operations. As a result, at September 30, 2024, the note receivable had a balance of $0 as compared to $341,782 at December 31, 2023; $0 was included in current assets at September 30, 2024 with $50,000 included in current assets at December 31, 2023.

The Company is accounting for its 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 share will be treated as a reduction of the investment account. Periodic income will be treated as an increase in the investment account. For the three- and nine-month periods ended September 30, 2024, the Company recorded a loss from the investment in the subsidiary of $2,155 and income of $7,969, respectively. For the three and nine-month periods ended September 30, 2023, the Company recorded a loss from the investment in subsidiary of $21,267 and income of $19,671, respectively.

During the three-month period ended September 30, 2024, The Company sold a portion of its stake in ANI for $100,000 in cash, reducing its ownership from 30% to 25%. The sale resulted in a gain of $56,067 and increased the investment account. At September 30, 2024 and December 31, 2023, the non-marketable investment was $217,871 and $253,835, included in non-current assets, respectively.

NOTE 5 – NOTES PAYABLE AND FINANCE LEASE

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 two $50,000 notes are 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 July 27, 2022, the Company sold two convertible notes, one for $50,000 and one for $25,000, both due on March 31, 2025. 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. The note was subsequently extended 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 was issued at face value and bears interest at 8% per annum, payable at maturity which is eighteen months from date of issue. 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. At September 30, 2024, the note remains unpaid.

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 September 30, 2024 and December 31, 2023 of the debt discount was $728 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 two years from date of issue, 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.

On June 10, 2024, the Company issued a $50,000 promissory note to an investor. The note bears interest at 1% per month and all principal and interest is payable 120 days from the date of issuance. The note is secured by two purchase orders from a large customer. At September 30, 2024, $40,000 remains unpaid on this note.

At September 30, 2024 and at December 31, 2023, we had outstanding convertible notes aggregating $565,000 and $525,000 in principal amount. The secured, convertible note that was due on June 18, 2024 remains unpaid. The convertible promissory notes have not been included in diluted earnings per share as they would be anti-dilutive.

Finance Lease

In December 2020, the company entered into a finance lease for production equipment. The Company financed $85,000 over a period of 48 months with monthly payments of $2,135 during that time. As of September 30, 2024, and December 31, 2024, the balances on the finance lease were $6,275 and $24,194, respectively. These balances are included in current liabilities on the balance sheet.

NOTE 6 – 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 8, 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 7 , 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. See Note 10 Subsequent Events for information about a subsequent lease amendment.

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 $675,988 at September 30, 2024 and $845,563 at December 31, 2023. The operating lease liability was $589,344 at September 30, 2024 and $722,419 at December 31, 2023.

NOTE 7 – RELATED PARTY TRANSACTIONS

At September 30, 2024 and at December 31, 2023, accounts payable – related parties totaled $157,402 and $55,520, respectively, and is presented separately in current liabilities. These balances consist of amounts owed to directors and officers as well as to the landlord in which three of our directors are investors. Specifically, Mr. Ron Berman is paid $8,000 monthly as a retainer on his contract with $8,000 owed at September 30, 2024 in accounts payable - related parties and $0 owed at December 31, 2023. Mr. Tom Berman is paid a monthly salary of $18,750, with $0 and $4,379 owed in accounts payable - related parties at September 30, 2024 and December 31, 2023, respectively. The landlord was owed $128,402 and $30,141 at September 30, 2024 and December 31, 2023, respectively.

At September 30, 2024 and at December 31, 2023, aggregate advances from Scott & Jeanne Rickert were $42,887. On both those dates, accrued payroll for the Rickerts was an aggregate of $16,000, which is included within accounts payable – related parties on the accompanying balance sheets.

In July 2024, we granted options to purchase 60,000 shares to both our CFO and to director Ronald Berman, and the option to purchase up to 30,000 shares to both our General Counsel, Jeanne Rickert, and our Chaiman, Scott Rickert. These grants were half vested on the date of grant and the balance vests monthly over the rest of 2024. In July 2024, we also granted an option to purchase up to 500,000 shares to our President and CEO, half vested on the date of grant and the rest will vest on December 31, 2024. All the options granted in July 2024 were at an exercise price of $0.31 and have a five-year term. The stock option awards to directors and officers resulted in an expense of $208,280 included in stock compensation expense in the statements of operations for the three- and nine-month periods ending September 30, 2024.

In 2023, we granted options to our President and CEO Tom Berman in lieu of salary: In April, an option to purchase up to 30,000 shares, fully vested for salary not paid from January to March, and, in May, a second option for up to 69,228 shares that vest at the rate of 7,692 shares monthly for salary not paid in April and subsequent months of 2023. Also in May 2023, we granted our Chief Financial Officer an option for up to 100,000 shares in recognition of his services from 2019 through 2022. Both our CFO and our General Counsel were granted options in May 2023 for up to 60,000 shares, vesting 5,000 shares per month starting in January 2023 and each month thereafter. In May 2023, we also granted director Ronald Berman an option to purchase up to 50,000 shares for services previously rendered and granted him an option for 45,000 shares that vest at the rate of 5,000 shares per month beginning in April and for each calendar month of 2023. All options have an exercise price of $0.65 per share and a four-year term.

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.

In addition, Mr. Tom Berman and Mr. Ron Berman are two of the three individuals who hold the voting power of the sole manager of the limited liability company that is the Company’s 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 8, Stockholder’s Equity regarding the issuance of stock in partial satisfaction of unpaid rent. At September 30, 2024 and at December 31, 2023, rents accrued and unpaid totaled $128,402 and $30,141, respectively.

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

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

Through the nine months ended September 30, 2024, no stock has been 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 nine-month period from October 2022 through March 2023. Those shares were issued in March, 2023. In May 2023, we reached a further agreement with the landlord that calls for us to 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. The landlord is a Related Party.

On May 30, 2023, the Company issued 76,922 shares of restricted common stock to a consultant as compensation for services. The shares are subject to forfeiture until vested. So long as the consulting services agreement remains in effect 4,273 shares vested in May for prior service, and another 4,273 shares vest at the end of May and each calendar month thereafter, with 4,277 shares vesting in December 2023. During 2024, 3,205 shares will vest at the end of each month, with 3,206 shares vesting at the end of December 2024.

In August 2023, the Company issued to each of three individuals who are serving on its advisory committee a total of 38,460 shares of restricted stock for their services during 2023. All shares vested ratably by December 31, 2023.

Sales of Common Stock and Derivative Equity Securities

During the quarter ended September 30, 2024, the Company sold 699,999 shares of common stock for proceeds of $525,000. For the nine months ended September 30, 2024 the company sold a total of 983,333 shares of common stock for proceeds of $737,500.

During the quarter ended September 30, 2023, the Company sold 533,331 shares of common stock for proceeds of $400,000. In addition, during the three-month period ended September 30, 2023, an investment made in April was cancelled and the $250,000 investment was reissued at $0.75 per share, resulting in a net increase in the outstanding stock of 136,482 shares. In connection with this sale, the company canceled the 196,813 warrants previously issued in April.

Stock Options

Stock options to purchase common stock outstanding at September 30, 2024 include those described below. No options were exercised during the period. No options have been included in diluted earnings per share as they would be anti-dilutive. During the three- and nine-month periods ending September 31, 2024, stock compensation expense totaled $771,495 and $787,830 respectively. During the three- and nine-month periods ending September 31, 2023, stock compensation expense totaled $119,999 and $410,392.

Warrants

As of September 30, 2024 and September 30, 2023, 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 31.72 months. As of September 30, 2024, 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.

On July 29, 2024, the Company granted 426,268 options under the 2021 Equity Plan at an exercise price of $0.31 per share.

Other Options

See Note 7 Related Parties for other options granted to officers and directors in 2023 and 2024.

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, 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 September 30, 2024, the Company has not accrued any amount for litigation contingencies.

NOTE 10 – SUBSEQUENT EVENTS

In October 2024, we reached agreement with our landlord in Michigan to use stock to pay a portion of our rent during the first half of 2025, continuing the arrangements in place for 2024.

On October 21, 2024, the Company authorized the issuance of warrants to a consultant that will vest at the rate of 62,500 per quarter starting December 1, 2024 so long as the consulting arrangement continues, up to a maximum of 250,000 shares at an exercise price of $0.75 per share.

On October 21, 2024 the Company sold a convertible note in the principal amount of $50,000 and on October 24, 2024 sold another note in the principal amount of $50,000. The notes were sold for proceeds equal to the face amount; they are due six months from date of issue, bear interest at an annual rate of 10% and are convertible into common stock at the option of the holder at a price of $1.00 per share.