Quarterly Report (10-q)

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

FORM 10-Q

 

[X] Quarterly report under Section 13 or 15(d) of the Securities Exchange Act of 1934

 

For the quarterly period ended March 31, 2021

 

[  ] Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

COMMISSION FILE NO. 1-11602

 

NANO MAGIC HOLDINGS INC.

(Exact name of registrant as specified in its charter)

 

Delaware		47-1598792
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification No.)

 

31601 Research Park Drive, Madison Heights, MI 48071

(Address of principal executive office, including Zip Code)

 

Registrant’s telephone number, including area code: [phone]

 

Securities registered pursuant to Section 12(b) of the Exchange Act:

 

Title of each class		Trading Symbol		Name of Each Exchange on Which Registered
Common Stock, $0.0001 par value		NMGX		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 [X] No

 

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). [X] Yes [  ] No

 

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 [  ]
Non-accelerated filer [  ] (Do not check if a smaller reporting company)	Smaller reporting company [X]

 

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 [X] No.

 

As of July 28, 2021, the registrant had 9,657,347 shares of Common Stock issued and outstanding.

 

 

 

 

Nano Magic Holdings Inc.

 

INDEX

 

		Page
Part I. Financial Information
	Item 1. Financial Statements (Unaudited)	F-1
	Condensed Consolidated Statements of Operations—Three Months Ended March 31, 2021 and 2020	F-1
	Condensed Consolidated Balance Sheets—March 31, 2021 and December 31, 2020	F-2
	Condensed Consolidated Statements of Changes in Stockholders’ Deficit for the Three Months Ended March 31, 2021 and 2020	F-3
	Condensed Consolidated Statements of Cash Flows—Three Months Ended March 31, 2021 and 2020	F-4
	Notes to Unaudited Condensed Consolidated Financial Statements	F-5
	Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	4
	Item 3. Quantitative and Qualitative Disclosures about Market Risk	7
	Item 4. Controls and Procedures	7
Part II. Other Information
	Item 1. Legal Proceedings	8
	Item 1A. Risk Factors	8
	Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	8
	Item 3. Defaults Upon Senior Securities	8
	Item 4. Mine Safety Disclosures	8
	Item 5. Other Information	8
	Item 6. Exhibits	8
Signatures		9

 

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,
		2021				2020
REVENUES:
Products		$	2,182,446			$	241,717
Contract services			128,729				206,457
Total Revenues			2,311,175			$	448,174
COST OF REVENUES:
Products			1,131,768				222,818
Contract services			152,430				166,899
Total Cost of Revenues			1,284,198				389,717
GROSS PROFIT			1,026,977				58,457
OPERATING EXPENSES:
Selling and marketing expenses			36,896				11,057
Salaries, wages and related benefits			551,730				144,633
Research and development			1,876				16,652
Professional fees			212,106				124,752
General and administrative expenses			184,582				137,070
Other operating income, net			(336,017	)			-
Total Operating Expenses			651,173				434,164
INCOME (LOSS) FROM OPERATIONS			375,804				(375,707	)
OTHER EXPENSE:
Interest expense			5,407				2,108
Total Other Expense			5,407				2,108
NET INCOME (LOSS)		$	370,397			$	(377,815	)
NET INCOME (LOSS) PER COMMON SHARE:
Basic		$	0.04			$	(0.06	)
Diluted		$	0.04			$	(0.06	)
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
Basic			8,906,219				6,501,208
Diluted			8,906,219				6,501,208

 

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
		2021				2020
ASSETS
CURRENT ASSETS:
Cash		$	2,114,853			$	288,134
Investments			10,473			$	10,473
Accounts receivable, net			928,201				1,235,069
Inventory, net			970,476				841,694
Prepaid expenses and other current assets			336,798				278,461
Total Current Assets			4,360,801				2,653,831
Operating lease right-of-use assets			1,467,818				1,518,308
Property, plant and equipment, net			612,095				613,471
Other assets			5,890				5,890
Total Assets		$	6,446,604			$	4,791,500
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES:
Accounts payable		$	930,419			$	1,136,756
Accounts payable - related parties			-				12,000
Accrued expenses and other current liabilities			300,518				351,075
Current portion of debt			215,964				97,581
Advances from related parties			134,887				145,387
Current portion of operating lease liabilities			150,030				186,898
Contract liabilities			64,703				90,562
Total Current Liabilities			1,796,521				2,020,259
Debt, net of current portion			265,600				178,300
Operating lease liabilities, net of current portion			1,048,435				1,195,521
Total Liabilities			3,110,556				3,394,080
Commitments and Contingencies (See Note 7)
STOCKHOLDERS’ EQUITY:
Preferred stock, $0.0001 par value, 100,000 shares authorized; no shares issued and outstanding			-				-
Common stock: $0.0001 par value, 30,000,000 shares authorized; 9,657,347 and 8,459,995 outstanding at March 31, 2021 and December 31, 2020, respectively			965				846
Additional paid-in capital			11,435,286				9,867,174
Accumulated deficit			(8,100,203	)			(8,470,600	)
Total Stockholders’ Equity			3,336,048				1,397,420
Total Liabilities and Stockholders’ Equity		$	6,446,604			$	4,791,500

 

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)

 

		Common Stock								Additional Paid-in				Accumulated				Total Stockholders’
		Shares				Amount				Capital				Deficit				Equity
Balance, December 31, 2019			6,222,881			$	622			$	7,242,067			$	(7,689,545	)		$	(446,856	)
Common stock issued for cash, net of issuance costs			956,013				96				621,313				-				621,409
Common stock issued for services			21,048				2				11,998				-				12,000
Stock based compensation			-				-				24,475				-				24,475
Warrants and options on private placement			-				-				37,058				-				37,058
Stock subscription payable			-				-				181,533				-				181,533
Net loss			-				-				-				(377,815	)			(377,815	)
Balance, March 31, 2020			7,199,942				720				8,118,444				(8,067,360	)			51,804

 

		Common Stock								Additional Paid-in				Accumulated				Total Stockholders’
		Shares				Amount				Capital				Deficit				Equity
Balance, December 31, 2020			8,459,995			$	846			$	9,867,174			$	(8,470,600	)		$	1,397,420
Common stock issued for cash, net of issuance costs			1,154,462				115				1,442,962				-				1,443,077
Common stock issued for services and for stock appreciation rights			42,890				4				40,996				-				41,000
Warrants and options on private placement			-				-				57,723				-				57,723
Stock based compensation			-				-				26,431				-				26,431
Net income			-				-				-				370,397				370,397
Balance, March 31, 2021			9,657,347				965				11,435,286				(8,100,203	)			3,336,048

  

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,
		2021				2020
CASH FLOWS PROVIDED BY (USED IN) OPERATING ACTIVITIES
Net income (loss)		$	370,397			$	(377,815	)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Change in inventory obsolescence reserve			-				12,566
Depreciation and amortization expense			24,458				(4,841	)
Stock-based compensation			67,431				36,475
Change in operating assets and liabilities:
Accounts receivable			306,869				(47,020	)
Inventory			(128,783	)			(13,950	)
Prepaid expenses and other assets			(58,337	)			(3,691	)
Accounts payable			(206,339	)			(32,522	)
Operating lease liabilities			3,751				752
Accounts payable - related parties			(12,000	)
Customer deposits			-				66,943
Accrued expenses			(50,557	)			(36,032	)
Deferred revenue			(25,859	)			(68,754	)
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES			291,031				(467,889	)
CASH FLOWS USED IN INVESTING ACTIVITIES
Purchases of property, plant and equipment			(22,962	)			(1,475	)
NET CASH USED IN INVESTING ACTIVITIES			(22,962	)			(1,475	)
CASH FLOWS FROM FINANCING ACTIVITIES
Repayment of bank loan			(10,955	)			(10,378	)
Proceeds from bank loan			79,305				(3,000	)
Proceeds from sale of common stock and warrants			1,500,800				840,000
Repayment of advances from related parties			(10,500	)			-
NET CASH PROVIDED BY FINANCING ACTIVITIES			1,558,650				826,622
NET INCREASE IN CASH			1,826,719				357,258
CASH, beginning of period			288,134				216,801
CASH, end of period		$	2,114,853			$	574,059
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the period for interest
Interest		$	5,407			$	2,108

 

See accompanying notes to condensed consolidated financial statements.

 

F-4

 

NANO MAGIC HOLDINGS INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2021

(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, 2021 and for the three months ended March 31, 2021 and 2020. The results of operations for the three months ended March 31, 2021 are not necessarily indicative of the operating results for the full year ending December 31, 2021 or any other period. The balance sheet at December 31, 2020 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, 2020 and for the year then ended, which were filed with the Securities and Exchange Commission on Form 10-K on May 28, 2021.

 

Going Concern Matters and Management’s Plan

 

As indicated in the accompanying condensed consolidated financial statements, the Company has positive working capital on March 31, 2021 and at December 31, 2020, including $2,114,853 and $288,134 of cash at March 31, 2021 and December 31, 2020, respectively. The Company had net income of $370,397 for the quarter ended March 31, 2021 and net cash provided by operating activities of $291,031 for the period, but reported a net loss of $781,055 for the year ended December 31, 2020 and negative cash flows from operations of $2,001,004 for the year. The consolidated statements of operations also reflect an increase in Product sales of $1,940,729 or 803% for the three months ended March 31, 2021 as compared to the three months ended March 31, 2020, Management has considered whether there is substantial doubt about its ability to continue as a going concern in light of the historical operating losses and negative cash flows from operations. Considering the increased sales generating increased revenue, the net income for the first quarter of 2021 and the positive working capital at March 31, 2021 and December 31, 2020, the Company believes that its capital resources are sufficient to maintain its business operations for the next twelve months. Moreover, the Company is implementing a marketing plan under which management projects sales to increase in 2021 and 2022 as compared to 2020 that are expected to contribute additional funds to maintain operations.

 

F-5

 

The accompanying condensed consolidated 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

 

At March 31, 2021 and December 31, 2020, inventory consisted of the following:

 

		March 31, 2021				December 31, 2020
Raw materials		$	847,361			$	632,055
Work-in-progress			185,590				176,392
Finished goods			52,191				147,913
			1,085,142				956,360
Less: reserve for obsolescence			(114,666	)			(114,666	)
Inventory, net		$	970,476			$	841,694

 

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. Cost associated with this program was $3,464 for the period ended March 31, 2021.

 

NOTE 4 – DEBT

 

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 installments 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. 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. At March 31, 2021, the principal amount due under the Equipment Note amounted to $75,242 and is current.

 

On August 11, 2020, the company entered into a finance lease for furniture that will be used in the new Michigan facility. We financed $60,684 over a period of 36 months and are required to make monthly payments of $1,972 during that time. As of March 31, 2021, the balance on the lease was $49,922; the current and non-current portions were $19,464 and $28,952, respectively.

 

On September 24, 2020, the company entered into a finance lease with Raymond Leasing Corporation for a forklift. Nano Magic LLC financed $14,250. The lease term is 36 months with monthly payments of $425. As of March 31, 2021, the balance on the lease was $12,012; the current and non-current portions were $4,654 and $7,358, respectively.

 

In December 2020, the company entered into a finance lease for production equipment. We financed $85,000 over a period of 48 months and are required to make monthly payments of $2,135 during that time. As of March 31, 2021, the balance on the lease was $79,915; the current and non-current portions were $18,432 and $61,483, respectively.

 

On May 8, 2020, Nano Magic LLC obtained a loan from Fifth Third Bank for $130,900 under the Small Business Administration Paycheck Protection Program. The loan bears interest at 1.00% and is payable in monthly installments of principal and interest in the amount of $7,330. We do not expect to make payments as long as our forgiveness application is filed not later than September 1, 2021. If our application is not timely filed, we will begin making monthly payments. As of March 31, 2021, the balance on the loan was the full principal amount; the current and non-current portions were $98,178 and $32,722, respectively.

 

On February 1, 2021, our subsidiary Applied Nanotech obtained a loan from Amegy Bank of Texas for $79,305 under the Small Business Administration Paycheck Protection Program. The loan bears interest at 1.00%. We do not expect to make payments as long as our forgiveness application is filed not later than June 30,2022. As of March 31, 2021, the entire loan was  classified as long term debt.

 

Other Applied Nanotech long term debt was $54,274 as of March 31,2021.

 

NOTE 5 – RELATED PARTY TRANSACTIONS

 

For the period ended March 31, 2021, we paid consulting and legal fees to our director Ronald Berman of $62,600 and commissions of $18,667. During that period Tom J. Berman, a director and officer, was paid salary of $52,500 and sales bonuses of $120,453 during the period. During that period we repaid to Scott Rickert, a director, $10,500 of advances made during prior periods. We also accrued $2,000 in fees for each of the directors during the quarter ended March 31, 2021. For the period ended March 31, 2020, we paid consulting fees to our directors as follows: Ronald Berman $90,000; Scott Rickert $3,000, and Jeanne Rickert $3,000. Tom J. Berman, a director and officer was paid salary of $45,000 during the three-month period in 2020.

 

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 and Magic Growth 2 LLC. These four limited liability companies purchased shares of common stock and derivative securities from us in 2018, 2019, 2020, and 2021. See the subsection on Sales of Stock under Issuances of Common Stock in Note 6.

 

F-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 5% economic interest in the landlord entity. The lease for the Michigan facility gives us the right, during the first three years of the lease, to buy up to a 49% interest in the landlord for a price equal to 49% of the contributions received from other members.

 

NOTE 6 - STOCKHOLDERS’ EQUITY

 

Description of Preferred and Common Stock

 

On July 2, 2020, we amended and restated our certification of incorporation to eliminate the Company’s Class B common stock and Class Z common stock and rename as “common stock” the Company’s Class A Common Stock. As part of the amendment, we increased the number of authorized shares of common stock from 7,200,000 to 30,000,000. The par value of the common stock remained the same at $0.0001 per common share. The Company is also authorized to issue 100,000 shares of Preferred Stock, par value $0.0001 per share.

 

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 and Stock Appreciation Rights

 

Pursuant to the agreement entered into on October 20, 2020, with the holder of substantially all the outstanding stock appreciation rights, on March 2, 2021, we issued 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, we issued an aggregate of 37,890 shares of common stock to our directors as compensation to them for service on our Board. These shares were valued on that date at $0.95 per share based on the quoted price of the stock for a total value of $36,000.

 

Sales of Common Stock and Derivative Equity Securities

 

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 17, 2021, the Company sold to Magic Growth 2 LLC, 385,231 shares of common stock for proceeds of $481,539 and warrants to purchase up to 385,225 shares of common stock for proceeds of $19,260. The warrants are exercisable at any time during the four years after date of issue at a warrant exercise price of $2.00 per share.

 

In total for the three months ended March 31, 2021, 1,154,462 shares of common stock were sold and issued for $1,443,077. Additionally, 1,154,450 warrants were sold for $57,723.

 

F-7

 

Stock Options

 

In connection with the three-year extension of the contract with our President and Chief Executive Officer, he was granted an option on March 3, 2021 to purchase up to 2,350,000 shares of common stock at an exercise price of $0.75. Vesting is as follows:

 

The right to purchase:		Consisting of:		Is vested on:
Tranche 1		150,000 Option Shares		June 30, 2021
Tranche 2		150,000 Option Shares		December 31, 2021
Tranche 3		150,000 Option Shares		June 30, 2022
Tranche 4		150,000 Option Shares		December 31, 2022
Tranche 5		150,000 Option Shares		June 30, 2023
Tranche 6		150,000 Option Shares		December 31, 2023
Tranche 7		Up to 150,000 Option Shares		If the aggregate sales bonus payable for 2021 exceeds $240,000
Tranche 8		Up to 150,000 Option Shares		If the aggregate sales bonus payable for 2022 exceeds $260,000
Tranche 9		Up to 150,000 Option Shares		If the aggregate sales bonus payable for 2023 exceeds $300,000
Tranche 10		Up to 1 million Option Shares		If a profit bonus is payable under the employment contract and the Board determines to pay some or all of it with options, the number vested as determined by the Board

 

On March 2, 2021, we granted an option to Ronald J. Berman as part of his consulting contract entered into on that day. Under the consulting agreement, Mr Berman oversees sales and marketing for Nano Magic LLC and will work on special projects as requested by the President & CEO. His cash compensation is $10,000 per month, with bonuses from 1% to 3% on certain sales. He was also granted an option to purchase up to 100,000 shares at an exercise price of $0.75. Vesting for 75,000 shares is based on sales by Nano Magic LLC in 2021; 12,500 if sales in 2021 are $4 million, with additional tranches of 12,500 shares for each additional $1 million in sales. Vesting for the remaining 25,000 shares will occur if the Company realizes $1 million in EBITDA for 2021. Mr. Berman is a director and is the father of our President, Tom J. Berman.

 

On March 2, 2021, our Board adopted the 2021 Nano Magic 2021 Equity Incentive Plan described below.

 

Stock options to purchase common stock outstanding at March 31, 2021 include the 87,500 options granted under the 2021 Equity Incentive Plan, and the expiration of 1,022 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 Remaining Contractual Term (Years)				Aggregate Intrinsic Value
Outstanding December 31, 2020				502,892			$	.89				3.23				220,000
Exercised				-				-				-				-
Issued				2,535,000			$	.75				-				-
Expired & forfeited				(51,022	)			4.50
Outstanding March 31, 2021				2,986,870			$	.75				3.85			$	4,500
Exercisable March 31, 2021				473,298			$	.75				3.09			$	4,500

 

F-8

 

		March 31, 2021				December 31, 2020
Stock options			2,986,870				502,892
Stock warrants			6,597,890				5,443,440
Total			9,584,760				5,946,332

 

Net income (loss) per share for common stock is as follows:

 

Net income (loss) per common share outstanding:		Three Months Ended March 31, 2021				Three Months Ended March 31, 2020
Common stock		$	0.04			$	(0.06	)
Weighted average shares outstanding:
Total weighted average shares outstanding			8,906,219				6,501,208

 

Warrants

 

As of March 31, 2021, there were outstanding and exercisable warrants to purchase 6,597,890 shares of common stock with a weighted average exercise price of $1.66 per share and a weighted average remaining contractual term of 34 months. As of March 31, 2021, there was no intrinsic value for the warrants. No warrants have been included in diluted earnings per share as they would be anti-dilutive.

 

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 102,500 shares to employees in settlement of accrued salaries totaling $66,615. On January 31, 2020 we granted an option to purchase 100,000 shares to a senior member of the sales team with vesting tied directly to 2020 sales goals. On April 8, 2021, the Board terminated the 2015 Equity Incentive Plan.

 

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.

 

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. See Note 9, Subsequent Events, regarding a settlement with a former consultant. 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, 2021, the Company has not accrued any amount for litigation contingencies.

 

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 two reportable segments for the three months ended March 31, 2021 and 2020 were the Product segment and the Contract services segment. The Company’s chief operating decision-maker has been identified as the Chairman and CEO, who reviews operating results to make decisions about allocating resources and assessing performance for the entire Company. Segment information is presented based upon the Company’s management organization structure as of March 31, 2021 and the distinctive nature of each segment. Future changes to this internal financial structure may result in changes to the reportable segments disclosed. There are no inter-segment revenue transactions and, therefore, revenues are only to external customers. As the Company primarily generates its revenues from customers in the United States, no geographical segments are presented.

 

F-9

 

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.

 

Segment information available with respect to these reportable business segments for the three months ended March 31, 2021 and 2020 was as follows:

 

		Three Months Ended March 31,
		2021				2020
Revenues:
Product segment		$	2,182,446			$	241,717
Contract services segment			128,729				206,457
Total segment and consolidated revenues		$	2,311,175			$	448,174
Cost of revenues:
Products		$	1,131,768			$	222,818
Contract services segment			152,430				166,899
Total segment and consolidated cost of revenues		$	1,284,198			$	389,717
Gross profit (loss):
Product segment		$	1,050,678			$	18,899
Contract services segment			(23,701	)			39,558
Total segment and consolidated gross profit		$	1,026,977			$	58,457
Gross margin:
Product segment			48.1	%			7.8	%
Contract services segment			(18.4	)%			19.2	%
Total gross margin			44.4	%			13.0	%
Segment operating expenses:
Product segment			551,730				242,240
Contract services segment			35,092				45,980
Total segment operating expenses			651,173				288,220
Income (loss) from operations:
Product segment		$	434,597			$	(223,341	)
Contract services segment			(58,793	)			(6,422	)
Total segment income (loss)			375,804				(229,763	)
Unallocated costs			-				(145,944	)
Total consolidated income (loss) from operations		$	375,804			$	(375,707	)
Depreciation and amortization:
Product segment		$	24,043			$	(5,260	)
Contract services segment			415				419
Total segment depreciation and amortization			24,458				(4,841	)
Unallocated depreciation			-				-
Total consolidated depreciation and amortization		$	24,458			$	(4,841	)
Capital additions:
Product segment		$	22,962			$	1,475
Contract services segment			-				-
Total segment capital additions			22,962				1,475
Unallocated capital additions			-				-
Total consolidated capital additions			22,962				1,475

 

		March 31, 2021				March 31, 2020
Segment total assets:
Product segment		$	4,735,871			$	1,410,252
Contract services segment			366,186				223,819
Corporate			1,344,547				64,192
Total consolidated total assets		$	6,446,604			$	1,698,263

 

NOTE 9 - SUBSEQUENT EVENTS

 

On May 28, 2021, we entered into a settlement and release with a former consultant under which we will pay $15,000 in three monthly instalments commencing on June 1, 2021. On August 3, 2021, we were notified of a collection suit for approximately $23,000 plus financing charges.

 

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 enabled 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 enabled by nanotechnology including the ULTRA CLARITY brand eyeglass cleaner, CLARITY DEFOGIT brand defogging products and CLARITY ULTRASEAL nanocoating products for glass and ceramics. We also sell an environmentally friendly surface protector, fortifier, and cleaner. Our design center conducts development services for us and for government and private customers and develops and sells printable inks and pastes, thermal management materials, and graphene foils and windows.

 

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, 2021 were (i) the Product Segment and (ii) the Contract services Segment. For the three months ended March 31, 2020, 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, 2021 and 2020.

 

Comparison of Results of Operations for the Three Months ended March 31, 2021 and 2020

 

Revenues:

 

For the three months ended March 31, 2021 and 2020, revenues consisted of the following:

 

		Three Months Ended March 31,
		2021				2020
Sales:
Product segment		$	2,182,446			$	241,717
Contract services segment			128,729				206,457
Total segment and consolidated sales		$	2,311,175			$	448,174

 

For the three months ended March 31, 2021, sales from the Product segment increased by $1,940,729 or 803% due to increased sales to new customers added in 2020, increased internet sales and stocking orders from several retail customers.

 

For the three months ended March 31, 2021, sales from the Contract services segment decreased by $77,728 or 38% as compared to the three months ended March 31, 2020 primarily due to completion of major government contracts and 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, 2021, cost of revenues increased by $894,481 or 230% as compared to the three months ended March 31, 2020.

 

		Three Months Ended March 31,
		2021				2020
Cost of revenues:
Product segment		$	1,131,768			$	222,818
Contract services segment			152,430				166,899
Total segment and consolidated cost of revenues		$	1,284,198			$	389,717

 

4

 

Gross profit and gross margin

 

Gross profit and gross margin by segment are as follows:

 

		Three Months Ended March 31,
Gross Profit		2021				%				2020				%
Product Segment		$	1,050,678				48.1	%		$	18,899				7.8	%
Contract services segment		$	(23,701	)			(18.4	)%			39,558				19.2	%
Total gross profit		$	1,026,977				44.4	%		$	58,457				13.0	%

 

* Gross margin % based on respective segments revenues.

 

For the three months ended March 31, 2021, as compared to the comparable 2020 period, the margin in the Product segment increased by $1,031,779 due to product mix, pricing changes and changes in product formulations that improved margin. The margin for the Contract research segment for the three months ended March 31, 2021 as compared to the three months ended March 31, 2020 decreased by $63,259 primarily due to completion of government contracts without new or renewal research contracts.

 

Operating expenses

 

For the three months ended March 31, 2021, operating expenses increased by $217,009 or 50% compared to the three months ended March 31, 2020. For the three months ended March 31, 2021 and 2020, operating expenses consisted of the following:

 

		Three Months Ended March 31,
		2021				2020
Selling and marketing expenses		$	36,896			$	11,057
Salaries, wages and related benefits			551,730				144,633
Research and development			1,876				16,652
Professional fees			212,106				124,752
General and administrative expenses			184,582				137,070
Other income, net			(336,017	)			-
Total		$	651,173			$	434,164

 

●	For the three months ended March 31, 2021, selling and marketing expenses increased by $25,839 or 234% as compared to the three months ended March 31, 2020, due to an increase in advertising and trade show displays and expenses.
●	For the three months ended March 31, 2021, salaries, wages and related benefits increased by $407,097 or 281%, as compared to the three months ended March 31, 2020. These increases were attributable to higher management and personnel costs due to temporary labor to timely fill customer orders and hiring to support business growth.
●	For the three months ended March 31, 2021, research and development costs decreased by $14,776 or 89%, as compared to the three months ended March 31, 2020, due to reduced use of outside contractors and reduced product development costs incurred in the current period.
●	For the three months ended March 31, 2021, professional fees increased by $87,354 or 70%, as compared to the three months ended March 31, 2020 due to an increase in the Company’s legal and fundraising expenses.
●	For the three months ended March 31, 2021, general and administrative expenses increased by $45,512 or 35% as compared to the three months ended March 31, 2020, reflecting increased support for the larger business operation.
●	Other income, net for the period ended March 31, 2021 reflects payments received under a settlement agreement based on the counterparty’s sales to certain customers.

 

Income (loss) from operations

 

As a result of the factors described above, for the three months ended March 31, 2021, income from operations amounted to $375,804 as compared to a loss of $375,707 for the three months ended March 31, 2020, a change of $751,511 or 200%.

 

5

 

Other non-operating expense (income)

 

For the three months ended March 31, 2021, other expense was $5,407 as compared to $2,108 for the three months ended March 31, 2020, an increase of $3,299 or 156%.

 

Net income (loss)

 

For the three months ended March 31, 2021, net income amounted to $370,397 as compared to a loss of $(377,815) for the three months ended March 31, 2020. For the three-month period the change was $748,212 or 198%

 

For the three months ended March 31, 2021 and March 31, 2020, net income(loss) amounted to $0.04 per common share (basic and diluted), and $(0.06), 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 $2,564,280 and $2,114,853 of unrestricted cash as of March 31, 2021 and working capital of $633,572 and $288,134 of unrestricted cash as of December 31, 2020.

 

The following table sets forth a summary of changes in our working capital from December 31, 2020 to March 31, 2021:

 

										December 31, 2020 to March 31, 2021
		March 31, 2021				December 31, 2020				Change in Working Capital				Percentage Change
Working capital:
Total current assets		$	4,360,801			$	2,653,831			$	1,706,970				64.32	%
Total current liabilities			1,796,521				2,020,259				(228,738	)			(11.30	)%
Working capital:		$	2,564,280			$	633,572			$	1,930,708				304.73	%

 

The increase in current assets was due in substantial part to an increase in cash as a result of the sale of equity securities. The decrease in current liabilities was due to a reduction in accrued expenses and other current liabilities and to a reduction in the current portion of lease payments.

 

Net cash provided by operating activities was $291,031 for the three months ended March 31, 2021 as compared to net cash used in operating activities was $(467,889) for the three months ended March 31, 2020, a net change of $758,920 or 162%. Net cash provided by operating activities for the three months ended March 31, 2021 primarily reflected net income of $370,397 adjusted for add-backs of $91,889 and changes in operating assets and liabilities of $(171,255).

 

Net cash flow used in investing activities was $(22,962) for the three months ended March 31, 2021 and $(1,475) for the three months ended March 31, 2020.

 

Net cash provided by financing activities was $1,558,650 for the three months ended March 31, 2021 reflecting $1,500,800 in proceeds from sales of common stock and warrants, as compared to $840,000 for the same period in 2020.

 

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.

 

6

 

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 installments 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, 2021, the principal amount due under the Equipment Note amounted to $105,551.

 

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.

 

During the year ended December 31, 2020, we received $105,000 in net proceeds from equipment loans and the bank loan under the Paycheck Protection Program, offset by repayments on loans

 

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, 2021 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. The material weaknesses identified at December 31, 2020 are still in the process of being addressed as of March 31, 2021.

 

7

 

PART II. OTHER INFORMATION

 

ITEM 1. LEGAL PROCEEDINGS

 

On August 3, 2021, we were notified of a collection suit for approximately $23,000 plus financing charges.

 

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.

 

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		XBRL Instance Document
101.SCH		XBRL Taxonomy Extension Schema
101.CAL		XBRL Taxonomy Extension Calculation
101.DEF		XBRL Taxonomy Extension Definition
101.LAB		XBRL Taxonomy Extension Labels
101.PRE		XBRL Taxonomy Extension Presentation Linkbase
*		Filed herewith.

 

8

 

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: August 9, 2021	/s/ Tom J. Berman
	Tom J. Berman,
	President and Chief Executive Officer
Date: August 9, 2021	/s/ Leandro Vera
	Leandro Vera
	Chief Financial Officer

 

9