NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2020 AND 2019
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 primarily to customers in the optical industry. 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 and Principles of Consolidation
The
Company’s consolidated financial statements include the financial statements of its wholly-owned subsidiaries, Applied Nanotech,
Inc. and Nano Magic LLC. All significant intercompany accounts and transactions have been eliminated in consolidation.
Going Concern Matters and Management’s
Plan
As indicated in the accompanying financial statements,
the Company positive working capital including $288,134 of cash at December 31, 2020. The Company also had 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 accompanying consolidated statements
of operations also reflect an increase in product sales of $2,536,627, or 165%, as compared to the year ended December 31, 2019. In the
first quarter of 2021, the Company sold notes and warrants for total proceeds of $1,500,800.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 positive working capital at the end of 2020 and the
recent capital raise, 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 in increase in 2021 as compared
to 2020 that are expected to contribute additional funds to maintain operations.
The accompanying financial statements have been
prepared assuming that the Company will continue as a going concern, which contemplates the realization of assets and satisfaction of
liabilities in the normal course of business. They do not include any adjustments related to the recoverability and/or classification
of the recorded asset amounts and/or the classification of the liabilities that might be necessary should the Company be unable to continue
as a going concern.
NOTE
2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use
of Estimates
The
preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of
America (“US GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported
amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. Significant estimates
for the years ended December 31, 2020 and 2019 include estimates for allowance for doubtful accounts on accounts receivable, the estimates
for obsolete inventory, the useful life of property and equipment, assumptions used in assessing impairment of long-term assets, estimates
of current and deferred income taxes and deferred tax valuation allowances, the fair value of non-cash equity transactions, and the fair
value of equity incentives.
Cash,
Cash Equivalents and Restricted Cash
For
purposes of the consolidated statements of cash flows, the Company considers all highly liquid instruments with a maturity of three months
or less at the purchase date and money market accounts to be cash equivalents.
Investments
Investments
consist of long-term certificates of deposit. The certificate of deposit held at December 31, 2020 and 2019 matures in May 2021 and carries
interest at a rate of 2.29% per year.
Accounts
Receivable
The
Company recognizes an allowance for losses on accounts receivable in an amount equal to the estimated probable losses net of recoveries.
The allowance is based on an analysis of historical bad debt experience, current receivables aging, and expected future write-offs, as
well as an assessment of specific identifiable customer accounts considered at risk or uncollectible. The expense associated with the
allowance for doubtful accounts is recognized as general and administrative expense.
Inventory
Inventory
is stated at the lower of cost or net realizable value. Cost is determined using the first-in, first-out (FIFO) method based on prices
paid for inventory items. This valuation requires us to make judgments, based on currently available information, about the likely method
of disposition, such as sales to individual customers and expected recoverable values.
Property
and Equipment
Property
and equipment are stated at cost and are depreciated using the straight-line method over their estimated useful lives, which range from
three to ten years. Leasehold improvements are depreciated over the shorter of the useful life or lease term including scheduled renewal
terms. Maintenance and repairs are charged to expense as incurred. When assets are retired or disposed of, the cost and accumulated depreciation
are removed from the accounts, and any resulting gains or losses are included in other income or expense in the year of disposition.
The Company examines the possibility of decreases in the value of these assets when events or changes in circumstances reflect the fact
that their recorded value may not be recoverable.
Impairment
of Long-Lived Assets
In
accordance with ASC Topic 360, the Company reviews long-lived assets for impairment whenever events or changes in circumstances indicate
that the carrying amount of the assets may not be fully recoverable, or at least annually. The Company recognizes an impairment loss
when the sum of expected undiscounted future cash flows is less than the carrying amount of the asset. The amount of impairment is measured
as the difference between the asset’s estimated fair value and its book value. The Company did not record any impairment charge
for the year ended December 31, 2020 and 2019.
Revenue
Recognition
We
adopted ASC Topic 606, Revenue from Contracts with Customers (“ASC Topic 606”), effective January 1, 2018 using the
modified retrospective method. ASC Topic 606 is a comprehensive revenue recognition model that requires revenue to be recognized when
control of the promised goods or services are transferred to our customers at an amount that reflects the consideration that we expect
to receive. The application of ASC Topic 606 requires us to use significant judgment and estimates. Application of ASC Topic 606 requires
a five-step model applicable to all revenue streams as follows:
Identification
of the contract, or contracts, with a customer
A
contract with a customer exists when (i) we enter into an enforceable contract with a customer that defines each party’s rights
regarding the goods or services to be transferred and identifies the payment terms related to these goods or services, (ii) the contract
has commercial substance and, (iii) we determine that collection of substantially all consideration for goods or services that are transferred
is probable based on the customer’s intent and ability to pay the promised consideration. We apply judgment in determining the
customer’s ability and intention to pay, which is based on a variety of factors including the customer’s historical payment
experience or, in the case of a new customer, published credit and financial information pertaining to the customer.
Identification
of the performance obligations in the contract
Performance
obligations promised in a contract are identified based on the goods or services that will be transferred to the customer that are both
capable of being distinct, whereby the customer can benefit from the goods or service either on its own or together with other resources
that are readily available from third parties or from us, and are distinct in the context of the contract, whereby the transfer of the
goods or services is separately identifiable from other promises in the contract.
When
a contract includes multiple promised goods or services, we apply judgment to determine whether the promised goods or services are capable
of being distinct and are distinct within the context of the contract. If these criteria are not met, the promised goods or services
are accounted for as a combined performance obligation.
Determination
of the transaction price
The
transaction price is determined based on the consideration to which we will be entitled to receive in exchange for transferring goods
or services to our customer. We estimate any variable consideration included in the transaction price using the expected value method
that requires the use of significant estimates for discounts, cancellation periods, refunds and returns. Variable consideration is described
in detail below.
Allocation
of the transaction price to the performance obligations in the contract
If
the contract contains a single performance obligation, the entire transaction price is allocated to the single performance obligation.
Contracts that contain multiple performance obligations require an allocation of the transaction price to each performance obligation
based on a relative Stand-Alone Selling Price (“SSP,”) basis. We determine SSP based on the price at which the performance
obligation would be sold separately. If the SSP is not observable, we estimate the SSP based on available information, including market
conditions and any applicable internally approved pricing guidelines.
Recognition
of revenue when, or as, we satisfy a performance obligation
We
recognize contract revenue over time and product revenue at a point in time, when the related performance obligation is satisfied by
transferring the promised goods or services to our customer. Contract revenue is recognized based on a cost-to-cost input method.
Disaggregation
of Revenue
For
the years ended December 31, 2020 and 2019, total sales in the United States represent approximately 87% and 83% of total consolidated
revenues, respectively. Germany accounted for 10% of total sales during the year ended December 31, 2020. No geographic area outside
the United States accounted for more than 10% of sales in 2019.
Principal
versus Agent Considerations
When
another party is involved in providing goods or services to our customer, we apply the principal versus agent guidance in ASC Topic 606
to determine if we are the principal or an agent to the transaction. When we control the specified goods or services before they are
transferred to our customer, we report revenue gross, as principal. If we do not control the goods or services before they are transferred
to our customer, revenue is reported net of the fees paid to the other party, as agent. Our evaluation to determine if we control the
goods or services within ASC Topic 606 includes the following indicators:
We
are primarily responsible for fulfilling the promise to provide the specified good or service.
When
we are primarily responsible for providing the goods and services, such as when the other party is acting on our behalf, we have indication
that we are the principal to the transaction. We consider if we may terminate our relationship with the other party at any time without
penalty or without permission from our customer.
We
have inventory risk before the specified good or service has been transferred to a customer or after transfer of control to the customer.
We
may commit to obtaining the services of another party with or without an existing contract with our customer. In these situations, we
have risk of loss as principal for any amount due to the other party regardless of the amount(s) we earn as revenue from our customer.
The
entity has discretion in establishing the price for the specified good or service.
We
have discretion in establishing the price our customer pays for the specified goods or services.
Contract
Assets
We
capitalize costs and estimated earnings in excess of billings as a contract asset in current assets. At December 31, 2020 and 2019, contract
assets totaled $88,694 and $15,525, respectively.
Contract
Liabilities
Contract
liabilities consist of customer advance payments and billings in excess of revenue recognized. We may receive payments from our customers
in advance of completing our performance obligations. We record contract liabilities equal to the amount of payments received in excess
of revenue recognized, Contract liabilities are recorded under the caption “contract liabilities” and are reported as current
liabilities on our consolidated financial statements when the time to fulfill the performance obligations under terms of our contracts
is less than one year. At December 31, 2020 and 2019, contract liabilities totaled $90,562 and $162,123, respectively.
Cost
of Sales
Cost
of sales includes inventory costs, materials and supplies costs, internal labor and related benefits, subcontractor costs, depreciation,
overhead and shipping and handling costs incurred.
Shipping
and Handling Costs
Shipping
and handling costs incurred relating to the purchase of inventory are included in inventory which is charged to cost of sales as products
are sold. Shipping and handling costs incurred for product shipped to customers are included in cost of sales. For the years ended December
31, 2020 and 2019 shipping and handling costs amounted to $132,458 and $94,431, respectively.
Research
and Development
Research
and development costs incurred in the development of the Company’s products and under other Company sponsored research and development
projects are expensed as incurred. Costs such as direct labor, direct costs, and other allocated costs incurred to perform research and
development service pursuant to government and private research projects are in included in cost of sales. Research and development costs
incurred in the development of the Company’s products for the years ended December 31, 2020 and 2019 were $56,816 and $68,539,
respectively, and are included in operating expenses on the accompanying consolidated statements of operations.
Advertising
Costs
The
Company participates in various advertising programs. All costs related to advertising of the Company’s products are expensed in
the period incurred. Advertising costs charged to operations for the years ended December 31, 2020 and 2019 were $23,345 and $4,969,
respectively, and are included in selling and marketing on the consolidated accompanying statements of operations. These advertising
expenses do not include cooperative advertising and sales incentives which have been deducted from sales.
Federal
and State Income Taxes
The
Company accounts for income tax using the liability method prescribed by ASC 740, “Income Taxes”. Under this method, deferred
tax assets and liabilities are determined based on the difference between the financial reporting and tax bases of assets and liabilities
using enacted tax rates that will be in effect in the year in which the differences are expected to reverse. The Company records a valuation
allowance to offset deferred tax assets if based on the weight of available evidence, it is more-likely-than-not that some portion, or
all, of the deferred tax assets will not be realized. The effect on deferred taxes of a change in tax rates is recognized as income or
loss in the period that includes the enactment date.
The
Company follows the accounting guidance for uncertainty in income taxes using the provisions of ASC 740 “Income Taxes”.
Using that guidance, tax positions initially need to be recognized in the financial statements when it is more likely than not the position
will be sustained upon examination by the tax authorities. As of December 31, 2020, the Company had no uncertain tax positions that qualify
for either recognition or disclosure in the financial statements. Tax years that remain subject to examination are the years ending on
and after December 31, 2017. The Company does not expect any significant changes in its unrecognized tax benefits within twelve months
of the reporting date. The Company recognizes interest and penalties related to uncertain income tax positions in other expense. However,
no such interest and penalties were recorded as of December 31, 2020 or 2019.
Stock-Based
Compensation
Stock-based
compensation is accounted for based on the requirements of the Share-Based Payment Topic of ASC 718 which requires recognition in the
financial statements of the cost of employee and director services received in exchange for an award of equity instruments over the period
the employee or director is required to perform the services in exchange for the award (presumptively, the vesting period). The ASC also
requires measurement of the cost of employee and director services received in exchange for an award based on the grant-date fair value
of the award. The Company adopted ASU No. 2017-09 in 2018; its adoption did not have a material impact on its consolidated financial
statements.
Pursuant
to ASC Topic 505-50, for share-based payments to consultants and other third-parties, compensation expense is determined at the “measurement
date.” The expense is recognized over the service period of the award. Until the measurement date is reached, the total amount
of compensation expense remains uncertain. The Company initially records compensation expense based on the fair value of the award at
the reporting date.
Earnings
(Loss) Per Share of Common Stock
ASC
260 “Earnings Per Share”, requires dual presentation of basic and diluted earnings per share (“EPS”) with a reconciliation
of the numerator and denominator of the basic EPS computation to the numerator and denominator of the diluted EPS computation. Basic
EPS excludes dilution. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common
stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the
entity. Basic net loss per common share is computed by dividing net loss available to common shareholders by the weighted average number
of shares of common shares outstanding during the period. Diluted net loss per common share is computed by dividing net loss by the weighted
average number of shares of common stock, common stock equivalents and potentially dilutive securities outstanding during each period.
Additionally, potentially dilutive common shares consist of common stock options and warrants (using the treasury stock method).
These
common stock equivalents may be dilutive in the future. Potentially dilutive common shares were excluded from the computation
of diluted shares outstanding as they would have an anti-dilutive impact on the Company’s net income (loss) and consisted of the
following:
|
|
December
31,
2020
|
|
|
December
31,
2019
|
|
Stock
options
|
|
|
502,892
|
|
|
|
455,502
|
|
Stock
warrants
|
|
|
5,443,440
|
|
|
|
2,817,463
|
|
Total
|
|
|
5,946,332
|
|
|
|
3,272,952
|
|
Additionally,
there are an unknown quantity of common stock equivalents that result from a potential conversion of stock appreciation rights (See Note
15).
Net
income (loss) per share for each class of common stock is as follows:
Net
income (loss) per common shares outstanding:
|
|
Year
Ended
December 31, 2020
|
|
|
Year
Ended
December 31, 2019
|
|
Common
stock
|
|
$
|
(0.10
|
)
|
|
$
|
(0.21
|
)
|
|
|
|
|
|
|
|
|
|
Weighted
average shares outstanding:
|
|
|
|
|
|
|
|
|
Total
weighted average common shares outstanding
|
|
|
7,558,078
|
|
|
|
5,607,392
|
|
Segment
Reporting
The
Company uses “the management approach” in determining reportable operating segments. The management approach considers the
internal organization and reporting used by the Company’s chief operating decision maker for making operating decisions and assessing
performance as the source for determining the Company’s reportable segments. The Company’s chief operating decision maker
is the President of the Company, who reviews operating results to make decisions about allocating resources and assessing performance
for the entire Company. The Company classified the reportable operating segments into (i) the development, manufacture and sale of consumer
and institutional products using nanotechnology to deliver unique performance attributes (the “Product segment”) and (ii)
nanotechnology design and development services for our future products and for government and private entities (the “Contract services
segment”).
Recently
Adopted Accounting Pronouncements
Financial
Instruments — Credit Losses (Topic 326)
In
June 2016, the FASB issued ASU 2016-13, Financial Instruments — Credit Losses (Topic 326): Measurement of Credit Losses on Financial
Instruments (“ASU 2016-13”). This standard prescribes an impairment model (known as the current expected credit loss
(“CECL”) model) that is based on expected losses rather than incurred losses. Under the new guidance, an entity recognizes
as an allowance its estimate of expected credit losses, which is intended to result in the timely recognition of losses. Under the CECL
model, entities will estimate credit losses over the entire contractual term of the instrument from the date of initial recognition of
the financial instrument.
Measurement
of expected credit losses is to be based on relevant forecasts that affect collectability. The scope of financial assets within the CECL
methodology is broad and includes trade receivables from certain revenue transactions and certain off-balance sheet credit exposures.
Different components of the guidance require modified retrospective or prospective adoption. ASU 2016-13 is effective for the annual
reporting period beginning on or after December 15, 2020. The Company adopted this standard January 1, 2020 and there was no material
impact.
Except
for our accounting policies for leases as a result of adopting ASC 842, there have been no changes to our significant accounting policies
described in Note 2 to our Annual Report on Form 10-K for the year ended December 31, 2019, that have had a material impact on our Consolidated
Financial Statements and related notes.
Reclassifications
Certain
accounts and financial statement captions in the prior periods have been reclassified to conform to the current period financial statements.
None of the reclassifications had any impact on the net loss reported in 2019.
NOTE 3 –
ACCOUNTS RECEIVABLE
At
December 31, 2020 and 2019, accounts receivable consisted of the following:
|
|
December
31, 2020
|
|
|
December
31, 2019
|
|
Accounts
receivable
|
|
$
|
1,296,657
|
|
|
$
|
164,960
|
|
Less:
allowance for doubtful accounts
|
|
|
(61,588
|
)
|
|
|
(13,960
|
)
|
Accounts
receivable, net
|
|
$
|
1,235,069
|
|
|
$
|
151,290
|
|
Bad
debt expense, net of recoveries, was $53,790 and $0 for the years ended December 31, 2020 and 2019, respectively.
NOTE
4 – INVENTORY
At
December 31, 2020 and 2019, inventory consisted of the following:
|
|
December
31, 2020
|
|
|
December
31, 2019
|
|
Raw
materials
|
|
$
|
632,055
|
|
|
$
|
663,932
|
|
Work
in progress
|
|
|
176,392
|
|
|
|
-
|
|
Finished
goods
|
|
|
147,913
|
|
|
|
335,762
|
|
|
|
|
956,360
|
|
|
|
999,694
|
|
Less:
reserve for obsolescence
|
|
|
(114,666
|
)
|
|
|
(577,072
|
)
|
Inventory,
net
|
|
$
|
841,694
|
|
|
$
|
422,622
|
|
The
reserve for obsolescence decreased by $462,406 due to scrap of obsolete inventory from reserves when we moved from Ohio to the new Michigan
facility.
NOTE
5 - PROPERTY AND EQUIPMENT
At
December 31, 2020 and 2019, property and equipment consisted of the following:
|
|
Useful
Life
|
|
December
31, 2020
|
|
|
December
31, 2019
|
|
Machinery
and equipment
|
|
5
- 10 Years
|
|
$
|
2,718,877
|
|
|
$
|
2,729,308
|
|
Furniture
and office equipment
|
|
3
- 7 Years
|
|
|
492,400
|
|
|
|
589,860
|
|
Leasehold
improvements
|
|
2
- 15 Years
|
|
|
106,935
|
|
|
|
10,843
|
|
|
|
|
|
|
3,318,212
|
|
|
|
3,330,011
|
|
Less:
accumulated depreciation
|
|
|
|
|
(2,704,741
|
)
|
|
|
(3,108,446
|
)
|
Property
and equipment, net
|
|
|
|
$
|
613,471
|
|
|
$
|
221,565
|
|
For
the years ended December 31, 2020 and 2019, depreciation and amortization expense amounted to $38,609 and $84,547, respectively.
During
the years ended December 31, 2020 and 2019 there were sales of equipment totaling $450 and $0, respectively.
NOTE
6 – LEASES
The
Company’s leased assets include offices, production and research and development facilities. Our current lease portfolio has remaining
terms from less than three years up to seven years. Many of these leases contain options under which we can extend the term for several
years. Renewal options are excluded from our calculation of lease liabilities unless we are reasonably assured to exercise the renewal
option. Our lease agreements do not contain residual value guarantees or material restrictive covenants.
On
September 20, 2017, the Company entered into a three-year lease agreement for 22,172 square feet of office space in Brooklyn Heights,
Ohio beginning September 20, 2017 ended September 20, 2020. Monthly lease payments were $8,688.
On
December 10, 2018, we entered into a five-year lease agreement for 3,742 square feet of space for the design facility in Austin, Texas,
beginning January 2019 and ending February 29, 2024. Monthly lease payments start at $3,472 per month, increasing 3% each year.
On
June 21, 2019, we leased approximately 1,200 square feet of office space in Bingham Farms, Michigan for nine months for a sales office.
Monthly payments were $1,529 per month. The lease was terminated in October 2020.
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. 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 also have 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. See Note 11, 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 other assets on the accompanying
balance sheet. See Note 10, Related Party Transactions, for information about Tom J. Berman and Ronald J. Berman’s role in
management and economic participation in the landlord.
Operating
leases are reflected on our balance sheet within operating lease ROU assets and the related current and non-current operating lease liabilities.
ROU assets represent the right to use an underlying asset for the lease term, and lease liabilities represent the obligation to make
lease payments arising from lease agreement. Operating lease ROU assets and liabilities are recognized at the commencement date, the
date on which the lessor began making the underlying asset customizable for our use, based upon the present value of the lease payments
over the respective lease term. Lease expense is recognized on a straight-line basis over the lease term, subject to any changes in the
lease or expectation regarding the terms. Variable lease costs such as common area maintenance, property taxes and insurance are expensed
as incurred.
On
August 11, 2020, we 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.
On
September 24, 2020, we entered into a finance lease with Raymond Leasing Corporation for a forklift. We financed $14,250. The lease
term is 36 months with monthly payments of $425.
In
December 2020, we 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.
Leases
The
Company adopted ASC 842 on January 1, 2019 using the modified retrospective basis and did not adjust comparative periods as permitted
under Accounting Standards Update (“ASU”) 2018-11. ASC 842 supersedes nearly all existing lease accounting guidance under
U.S. GAAP issued by the Financial Accounting Standards Board (“FASB”) including ASC Topic 840, Leases. ASC 842 requires that
lessees recognize Right-of-Use (ROU) assets and lease liabilities calculated based on the present value of lease payments for all lease
agreements with terms that are greater than twelve months. ASC 842 distinguishes leases as either a finance lease or an operating lease
that affects how the leases are measured and presented in the statement of operations and statement of cash flows.
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. On the date of adoption, operating lease liabilities and right-of-use assets totaled
$1,120,838 and $1,432,556. As of December 31, 2020, Operating lease liabilities were $1,231,681 recorded as other liabilities and
right-of-use assets totaled $1,518,308 recorded as other assets. Operating lease cost for the year was $219,305, variable lease cost
was $12,524.
For
finance leases, we calculated ROU assets and lease liabilities based on the present value of the remaining lease payments as of the date
of lease commencement. $60,684 was recorded in furniture and fixtures and $99,250 was recorded in Equipment, the ROU assets for finance
leases are depreciated in accordance with the Company’s depreciation policies for those asset groupings. Finance lease liabilities
totaled $150,738 at December 31,2020 recorded in lease liabilities. Finance lease interest expense was $2,844. Finance lease
depreciation expense for the year was $3,342.
The
FASB issued practical expedients and accounting policy elections that the Company applied at adoption as described below.
Practical
Expedients
ASC
842 provides a package of three practical expedients that must be adopted together and applied to all lease agreements. The Company elected
the package of practical expedients as follows for all leases:
Whether
expired or existing contracts contain leases under the new definition of a lease.
Because
the accounting for operating leases and service contracts was similar under ASC 840, there was no accounting reason to separate lease
agreements from service contracts in order to account for them correctly. The Company reviewed existing service contracts to determine
if the agreement contained an embedded lease to be accounted for on the balance sheet under ASC 842.
Lease
classification for expired or existing leases.
Leases
that were capital leases under ASC 840 are accounted for as financing leases under ASC 842 while leases that were operating leases under
ASC 840 are accounted for as operating leases under ASC 842.
Whether
previously capitalized initial direct costs would meet the definition of initial direct costs under the new standard guidance.
The
definition of initial direct costs is more restrictive under ASC 842 than under ASC 840. Entities that do not elect the practical expedient
are required to reassess capitalized initial direct costs under ASC 840 and record an equity adjustment for those that are not capitalizable
under ASC 842.
Accounting
Policy Elections
Lease
Term
The
Company calculates the term for each lease agreement to include the noncancelable period specified in the agreement together with (1)
the periods covered by options to extend the lease if the Company is reasonably certain to exercise that option, (2) periods covered
by an option to terminate if the Company is reasonably certain not to exercise that option and (3) period covered by an option to extend
(or not terminate) if controlled by the lessor.
The
assessment of whether the Company is reasonably certain to exercise an option to extend a lease requires significant judgement surrounding
contract-based factors, asset-based factors, entity-based factors and market-based factors.
Lease
Payments
Lease
payments consist of the following payments (as applicable) related to the use of the underlying asset during the lease term:
|
●
|
Fixed
payments, including in substance fixed payments, less any lease incentives paid or payable to the lessee
|
|
●
|
Variable
lease payments that depend on an index or a rate, such as the Consumer Price Index or a market interest rate, initially measured
using the index or rate at the commencement date of January 1, 2019.
|
|
|
|
|
●
|
The
exercise price of an option to purchase the underlying asset if the lessee is reasonably certain to exercise that option.
|
|
|
|
|
●
|
Payments
for penalties for terminating the lease if the lease term reflects the lessee exercising an option to terminate the lease.
|
|
|
|
|
●
|
Fees
paid by the lessee to the owners of a special-purpose entity for structuring the transaction
|
|
|
|
|
●
|
For
a lessee only, amounts probable of being owed by the lessee under residual value guarantees
|
Incremental
Borrowing Rate
The
ROU asset and related lease liabilities recorded under ASC 842 are calculated based on the present value of the lease payments using
(1) the rate implicit in the lease or (2) the lessee’s IBR, defined as the rate of interest that a lessee would have to pay to
borrow on a collateralized basis over a similar term an amount equal to the lease payments in a similar economic environment.
Maturities
Future
minimum lease payments under leases that had initial or remaining non-cancelable lease terms in excess of one year as of December 31,
2020, are as follows:
|
|
Operating
Lease
|
|
|
Finance
Lease
|
|
2021
|
|
$
|
239,168
|
|
|
$
|
54,394
|
|
2022
|
|
|
247,906
|
|
|
|
54,394
|
|
2023
|
|
|
256,688
|
|
|
|
41,979
|
|
2024
|
|
|
220,428
|
|
|
|
25,620
|
|
Thereafter
|
|
|
624,620
|
|
|
|
-
|
|
Less:
impact of discounting
|
|
|
356,375
|
|
|
|
27,129
|
|
Present
value of lease liabilities
|
|
|
1,232,435
|
|
|
|
149,257
|
|
NOTE
7 – BANK LOANS AND LINES OF REVOLVING CREDIT FACILITY
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 December 31, 2020, the balance on the loan was the full principal
amount; the current and non-current portions were $49,088 and $81,812, respectively.
NOTE
8 – ACCOUNTS RECEIVABLE FACTORING
On
September 1, 2020, Nano Magic LLC entered an agreement with NOWaccount ® Network Corporation for the sale of accounts
receivable due from approved customers. Subject to certain limits, we will receive an immediate payment equal to the discounted value
of a receivable from those customers. The discount applied depends on the due date for payment from the customer. This agreement expires
on September 1, 2022. No receivables had been sold as of December 31, 2020 under this agreement.
NOTE
9 – NOTES PAYABLE
On
February 10, 2015, Nano Magic LLC 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
September 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 LLC 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 $4,052 per month. At December 31, 2020 and 2019, the principal amount
due under the Equipment Note, as amended by the Amendment, amounted to $86,098 and $115,926, respectively. As of December 31, 2020, $44,493
and $41,605, respectively, represent the current and non-current portion due under the Equipment Note, as amended by the Amendment. At
December 31, 2019, the current and non-current portions were $48,641 and $67,285, respectively.
In June and November 2015, in connection with a severance
package offered to four employees, the Company entered into four promissory note agreements with the four employees in satisfaction
of accrued and unpaid deferred salary. The principal amounts due under these notes bear interest at the minimum rate of interest
applicable under the internal revenue code (approximately 3.0% at December 31, 2020). Principal payable under three of these notes
totaling $37,458 is due in 2025 and is included in non-current notes payable.
In January
2017, the Company issued a promissory note in the principal amount of $17,425 to a departing employee representing the amount of his
accrued and unpaid salary. The note does not bear interest and is due in January 2027, and is included in non-current notes payable.
In
October 20, 2020, we agreed to pay deferred salary of $6,000 in installments. Installments aggregating $4,000 remained unpaid on December
31, 2020 and is included in current notes payable.
Future
payments of notes payable, including those disclosed in Note 7, are as follows:
Year
|
|
As
of December 31, 2020
|
|
2021
|
|
$
|
97,581
|
|
2022
|
|
|
123,417
|
|
Thereafter
|
|
|
54,883
|
|
Total
|
|
$
|
275,881
|
|
NOTE
10 – RELATED PARTY TRANSACTIONS
Advances
from related parties aggregating $145,387 as of December 31, 2020, and $159,887 as of December 31, 2019 due to the Rickerts
for working capital advances made in 2018 and accrued payroll of $16,000 due to them have been included within the consolidated balance
sheets as of December 31, 2020 and December 31, 2019. We paid legal and consulting fees to director Mr. Ron Berman of $212,700 in 2020,
and $94,100 in 2019. We paid legal and consulting fees of $90,600 in 2019 to the law firm of Mr, Tom Berman, who is our President,
Chief Executive Officer and a director.
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 11 and in Note 17 Subsequent Events.
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
11 - 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.
Issuances
of Common Stock
Common
Stock Issued for Services
On
April 3, 2019, we issued an aggregate of 18,180 shares of common stock to five of our directors as compensation to them for service on
our Board. These shares were valued on that date at $0.55 per share based on the quoted price of the stock for a total value of $10,000.
On
April 24, 2019, we issued an aggregate of 19,998 shares of common stock to our directors as compensation to them for service on our Board.
These shares were valued on that date at $0.60 per share based on the quoted price of the stock for a total value of $12,000.
On
July 24, 2019, we issued an aggregate of 18,750 shares of common stock to our directors as compensation to them for service on our Board.
These shares were valued on that date at $0.64 per share based on the quoted price of the stock for a total value of $12,000.
On
October 24, 2019, we issued an aggregate of 23,331 shares of common stock to our directors as compensation to them for service on our
Board and its committees. These shares were valued on that date at $0.60 per share based on the quoted price of the stock for a total
value of $14,000.
On
December 18, 2019, we issued an aggregate of 20,688 shares of common stock to our directors as compensation to them for service on our
Board. These shares were valued on that date at $0.58 per share based on the quoted price of the stock for a total value of $12,000.
On
December 31, 2019, we issued an aggregate of 35,000 shares of common stock under the 2015 Equity Incentive Plan to three employees in
settlement of accrued salary due to them. These shares were valued on that date at $0.65 per share based on the quoted price of the stock
for a total value of $22,750.
On
February 12, 2020, we issued an aggregate of 21,048 shares of common stock to our directors as compensation to them for service on our
Board. These shares were valued on that date at $0.57 per share based on the quoted price of the stock for a total value of $12,000.
Sales
of Common Stock
On
January 31, 2019, we sold 325,581 shares of common stock in a private placement to PEN Comeback at a per share price of $0.40 for aggregate
proceeds of $130,232. At the same time the investor bought warrants to purchase up to 325,581 additional shares at a warrant exercise
price of $1.50. The right to purchase warrant shares expires on the earlier of (1) 45 days after the day that Nano Magic shares have
been trading at or above 120% of the exercise price for a period of 90 days, or (2) four years from date of issue. Aggregate proceeds
from the sales of the warrants were $9,767. Proceeds were used, along with other corporate funds, to pay in full the principal balance,
accrued interest and fees due to our lender Mackinac Commercial Credit, LLC.
On
March 22, 2019, we sold 232,558 shares of common stock in a private placement to PEN Comeback at a per share price of $0.40 for aggregate
proceeds of $93,023. At the same time the investor bought warrants to purchase up to 325,581 additional shares at a warrant exercise
price of $1.50. The right to purchase warrant shares expires on the earlier of (1) 45 days after the day that Nano Magic shares have
been trading at or above 120% of the exercise price for a period of 90 days, or (2) four years from date of issue. Aggregate proceeds
from the sales of the warrants were $6,977.
On
May 10, 2019, we sold 523,266 shares of common stock in a private placement to PEN Comeback at a per share price of $0.40 for aggregate
proceeds of $209,302. At the same time the investor bought warrants to purchase up to 523,266 additional shares at a warrant exercise
price of $1.50. The right to purchase warrant shares expires on the earlier of (1) 45 days after the day that Nano Magic shares have
been trading at or above 120% of the exercise price for a period of 90 days, or (2) four years from date of issue. Aggregate proceeds
from the sales of the warrants were $15,698.
On
June 27, 2019, we sold 441,860 shares of common stock in a private placement to PEN Comeback at a per share price of $0.40 for aggregate
proceeds of $176,744. At the same time the investor bought warrants to purchase up to 441,860 additional shares at a warrant exercise
price of $1.50. The right to purchase warrant shares expires on the earlier of (1) 45 days after the day that Nano Magic shares have
been trading at or above 120% of the exercise price for a period of 90 days, or (2) four years from date of issue. Aggregate proceeds
from the sales of the warrants were $13,256.
On
September 6, 2019, we sold 216,912 shares of common stock in a private placement to PEN Comeback 2, LLC (“PEN Comeback 2”)
at a per share price of $0.65 for aggregate proceeds of $140,993. At the same time the investor bought 216,906 warrants to purchase up
to 216,906 additional shares at a warrant exercise price of $1.50. The right to purchase warrant shares expires four years from date
of issue. Aggregate proceeds from the sales of the warrants were $6,507.
On
October 9, 2019, we sold an additional 88,235 shares of common stock in a private placement to PEN Comeback 2 at a per share price of
$0.65 for aggregate proceeds of $57,353. At the same time the investor bought 88,235 warrants to purchase up to 88,235 additional shares
at a warrant exercise price of $1.50. The right to purchase warrant shares expires four years from date of issue. Aggregate proceeds
from the sales of the warrants were $2,647.
On
October 31, 2019, we sold an additional 165,441 shares of common stock in a private placement to PEN Comeback 2 and 15,384 shares of
common stock to the Rickert Family, Limited Partnership, all at a per share price of $0.65 for aggregate proceeds of $117,537. At the
same time PEN Comeback 2 bought 165,441 warrants to purchase up to 165,441 additional shares and the partnership bought 13 warrants to
purchase up to 13 additional shares, all at a warrant exercise price of $1.50. The right to purchase warrant shares expires four years
from date of issue. Aggregate proceeds from the sales of the warrants were $4,963.
On
December 10, 2019, we sold an additional 272,059 shares of common stock in a private placement to PEN Comeback 2 at a per share price
of $0.65 for aggregate proceeds of $176,838. At the same time the investor bought 272,055 warrants to purchase up to 272,055 additional
shares at a warrant exercise price of $1.50. The right to purchase warrant shares expires four years from date of issue. Aggregate proceeds
from the sales of the warrants were $0.03 per warrant for an aggregate of $8,162.
On
January 22, 2020, we sold 198,530 shares of common stock in a private placement to PEN Comeback 2 at a per share price of $0.65 for aggregate
proceeds of $129,044. At the same time the investor bought 198,516 warrants to purchase up to 198,516 additional shares at a warrant
exercise price of $1.50. The right to purchase warrant shares expires four years from date of issue. Aggregate proceeds from the sales
of the warrants were $5,955.
On
February 24, 2020, we sold 205,883 shares of common stock in a private placement to PEN Comeback 2 at a per share price of $0.65 for
aggregate proceeds of $133,824. At the same time the investor bought 205,868 warrants to purchase up to 198,516 additional shares at
a warrant exercise price of $1.50. The right to purchase warrant shares expires four years from date of issue. Aggregate proceeds from
the sales of the warrants were $6,176.
On
March 24, 2020, in a private placement to PEN Comeback 2, we sold 551,600 shares of common stock and committed to issue an additional
242,518 shares when we have additional authorized shares. That occurred on July 2, 2020, and the shares were issued. Proceeds, at a per
share price of $0.65, were $516,177. At the same time the investor bought 794,110 warrants to purchase up to 794,110 additional shares
at a warrant exercise price of $1.50. The right to purchase warrant shares expires four years from date of issue. Aggregate proceeds
from the sale of the warrants were $23,823.
On
March 26, 2020, in a private placement to the same investor we committed to issue 36,765 shares when we have additional authorized shares
and accepted $.65 per share for proceeds of $23,897. The additional shares were authorized on July 2, 2020 and the shares were issued.
Also on March 26, 2020 the investor bought 36,758 warrants to purchase up to 36,780 additional shares at a warrant exercise price of
$1.50. The right to purchase warrant shares expires four years from date of issue. Aggregate proceeds from the sale of the warrants were
$1,103.
On
July 13, 2020, Nano Magic Inc. sold to Magic Growth, LLC 388,462 shares of common stock for proceeds of $485,578 and warrants to purchase
up to 388,450 shares of common stock for proceeds of $19,422. 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, LLC.
On
August 12, 2020, Nano Magic Inc. sold to Magic Growth, LLC 461,538 shares of common stock for proceeds of $576,923 and
warrants to purchase up to 461,525 shares of common stock for proceeds of $23,079. 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
September 14, 2020, Nano Magic Inc. sold to Magic Growth, LLC 130,770 shares of common stock for proceeds of $163,463 and warrants to
purchase up to 130,750 shares of common stock for proceeds of $6,537. 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.
All
of these sales of stock and warrants were sold in private placements exempt from registration under Section 4(a)(2) of the Securities
Act of 1933, as amended.
Stock
Options
On
April 3, 2019, we issued to our CEO and President, Tom Berman, options to purchase up to 550,000 shares of common Stock at a price
of $0.55 per share. The options vested over time, each tranche exercisable for 4 years after vesting. Two of the tranches were
tied to the bonus under Mr. Berman’s employment agreement. The bonus cap under Mr. Berman’s employment agreement was not
reached in 2019, accordingly that tranche of 100,000 option shares was forfeited. Mr. Berman reached the bonus cap for 2020 and the
option to purchase that tranche vested. Consequently, the remaining options to purchase up to 450,000 shares were fully vested
as of December 31, 2020.
On
January 31, 2020 an option grant of 100,000 shares was made under the 2015 Equity Plan to one of our employees. Vesting was based on
achieving revenue targets. As of December 31, 2020, half the grant vested based on 2020 revenue and the other half of the grant was forfeited.
The
fair value of the options award to Mr. Tom Berman and the options awarded under the 2015 Equity Plan was calculated using
the Black-Scholes method. The assumptions used in the calculations are shown below. The expected term represents the period of
time that the options are expected to be outstanding. At the end of 2019, 125,000 options were vested and compensation expense
related to those options in that year was $59,091; 300,000 options
vested during the year ended December 31, 2020 and compensation expense related to them for the year-ending
2020 was $186,612.
Exercise
price per option
|
|
$
|
0.55-0.65
|
|
Fair value per option at grant date
|
|
$
|
0.49-0.55
|
|
Expected
term
|
|
|
5
years
|
|
Expected
volatility
|
|
|
141-161
|
%
|
Expected
dividend yield
|
|
|
0
|
%
|
Risk-free
interest rate
|
|
|
1.66-1.31
|
%
|
Stock
options outstanding are to purchase common stock. Stock option activities for the years ended December 31, 2020 and 2019 are summarized
as follows:
|
|
Number
of Options
|
|
|
Weighted
Average Exercise Price
|
|
|
Weighted
Average Remaining Contractual Term (Years)
|
|
|
Aggregate
Intrinsic Value
|
|
Balance
Outstanding, December 31, 2018
|
|
|
559,573
|
|
|
$
|
1.91
|
|
|
|
|
|
|
$
|
-
|
|
Exercised
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited
or expired
|
|
|
(654,071
|
)
|
|
|
1.23
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
550,000
|
|
|
|
0.55
|
|
|
|
|
|
|
|
|
|
Balance Outstanding,
December 31, 2019
|
|
|
455,502
|
|
|
$
|
1.24
|
|
|
|
|
|
|
$
|
-
|
|
Exercised
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited
or expired
|
|
|
(52,610
|
)
|
|
|
0.61
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
100,000
|
|
|
|
0.65
|
|
|
|
|
|
|
|
|
|
Balance
Outstanding, December 31, 2020
|
|
|
502,892
|
|
|
$
|
0.89
|
|
|
|
3.23
|
|
|
$
|
220,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable,
December 31, 2020
|
|
|
502,892
|
|
|
$
|
0.89
|
|
|
|
3.23
|
|
|
$
|
220,000
|
|
Warrants
As
described above, we issued warrants in connection with sales of our common stock. In addition, in connection with the lease for the facility
in Michigan effective May 31, 2020, we issued the landlord warrants to purchase up to 410,000 shares of our common stock at a warrant
exercise price of $1.50 per share. The warrants are exercisable until the fourth anniversary of the date of the lease. The fair value
of the warrants at the date of issuance was $311,718 and is included in the calculation of right-of-use assets.
As
of December 31, 2020, there were outstanding and exercisable warrants to purchase 5,443,440 shares of common stock with a weighted average
exercise price of $1.59 per share and a weighted average remaining contractual term of 34.1 months.
As
of December 31, 2019, there were outstanding and exercisable warrants to purchase 2,817,463 shares of common stock with a weighted average
exercise price of $1.50 per share and a weighted average remaining contractual term of 40.2 months.
2015
Equity Incentive Plan
On
November 30, 2015, the Board of Directors authorized the 2015 Equity Incentive Plan (the “Plan”). The Plan’s purpose
is to enable the Company to offer its employees, officers, directors and consultants an opportunity to acquire a proprietary interest
in the Company for their contributions. In December 2019, we issued an aggregate of 102,500 shares to employees in settlement of accrued
salaries totaling $66,615. In January 2020 we issued an option to purchase 100,000 shares at an exercise price of $0.65 to an employee;
vesting for this option was based on revenue targets. Based on our 2020 results, half the option was forfeited.
NOTE
12 – INCOME TAXES
The
Company maintains deferred tax assets and liabilities that reflect the net tax effects of temporary differences between the carrying
amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The net deferred tax
asset has been fully offset by a valuation allowance because of the uncertainty of the attainment of future taxable income.
The
items accounting for the difference between income taxes at the effective statutory rate and the provision for income taxes
for the years ended December 31, 2020 and 2019 were as follows:
|
|
Years
Ended December 31,
|
|
|
|
2020
|
|
|
2019
|
|
Income
tax provision (benefit) at U.S. statutory rate of 21%
|
|
$
|
(164,000
|
)
|
|
$
|
(203,000
|
)
|
Other
|
|
|
-
|
|
|
|
12,000
|
|
Change
in valuation allowance
|
|
|
164,000
|
|
|
|
191,000
|
|
Revaluation of deferred tax asset
|
|
|
76,000
|
|
|
|
-
|
|
Revaluation of valuation allowance
|
|
|
(76,000
|
)
|
|
|
-
|
|
Total
provision for income tax
|
|
$
|
-
|
|
|
$
|
-
|
|
The
Company’s approximate net deferred tax assets as of December 31, 2020 and 2019 were as follows:
|
|
December
31, 2020
|
|
|
December
31, 2019
|
|
Deferred Tax Assets:
|
|
|
|
|
|
|
|
|
Net operating
loss carryforward
|
|
$
|
2,569,000
|
|
|
$
|
2,247,000
|
|
Stock-based compensation
|
|
|
1,000
|
|
|
|
1,000
|
|
Allowance for inventory
obsolescence
|
|
|
24,000
|
|
|
|
125,000
|
|
Accrued compensation
|
|
|
6,000
|
|
|
|
34,000
|
|
Other
|
|
|
79,000
|
|
|
|
32,000
|
|
Total deferred tax assets
|
|
|
2,679,000
|
|
|
|
2,439,000
|
|
Valuation allowance
|
|
|
(2,679,000
|
)
|
|
|
(2,439,000
|
)
|
Net deferred tax assets
|
|
$
|
-
|
|
|
|
-
|
|
The
estimated net operating loss carryforward was approximately $12,232,000 at December 31, 2020, which is an estimate of the Company’s
net operating loss carryforward acquired in the Combination after giving effect to the limitation on the usage of such net operating
loss carryforwards due to a change in ownership in accordance with Section 382 of the Internal Revenue Code plus net operating loss carryforwards
since the Combination. The Company provided a valuation allowance equal to the net deferred income tax asset for the year ended December
31, 2020 because it was not known whether future taxable income will be sufficient to utilize the loss carryforward. The potential tax
benefit arising from tax loss carryforwards prior to 2017 will expire between 2021 and 2038, while the potential tax benefits
arising after 2017 currently have no expiration date.
In
accordance with Section 382 of the Internal Revenue Code, the usage of the Company’s net operating loss carry forwards are subject
to annual limitations due to greater than 50% ownership changes. Additionally, the future utilization of the net operating loss carryforwards
to offset future taxable income may be subject to special tax rules which may limit their usage under the Separate Return Limitation
Year (“SRLY”) rules. If necessary, the deferred tax assets will be reduced by any carryforward that expires prior to utilization
as a result of such limitations, with a corresponding reduction of the valuation allowance.
The
Company’s 2018, 2019 and 2020 Corporate Income Tax Returns are subject to Internal Revenue Service examination.
NOTE
13 - COMMITMENTS AND CONTINGENCIES
Litigation
The
Company may be, from time to time, subject to various administrative, regulatory, and other legal proceedings arising in the ordinary
course of business. We are not currently a defendant in any proceedings. Our policy is to accrue costs for contingent liabilities, including
legal proceedings or unasserted claims that may result in legal proceedings, when a liability is probable and the amount can be reasonably
estimated. As of December 31, 2020, the Company has not accrued any amount for litigation contingencies.
NOTE
14 – CONCENTRATIONS
Concentrations
of Credit Risk
Financial
instruments that potentially subject the Company to concentrations of credit risk consist primarily of trade accounts receivable and
cash deposits and investments in cash equivalent instruments.
Customer
Concentrations
Customer
concentrations for the years ended December 31, 2020 and 2019 are as follows:
|
|
Product
Revenues
|
|
|
|
For
the Years Ended
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
Customer
A
|
|
|
11
|
%
|
|
|
*
|
%
|
Customer
B
|
|
|
10
|
%
|
|
|
*
|
%
|
Total
|
|
|
21
|
%
|
|
|
*
|
%
|
|
|
Contract
Services Revenues
|
|
|
|
For
the Years Ended
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
Customer
E
|
|
|
47
|
%
|
|
|
46
|
%
|
Customer
F
|
|
|
26
|
%
|
|
|
36
|
%
|
Customer
G
|
|
|
19
|
%
|
|
|
*
|
%
|
Customer
H
|
|
|
*
|
%
|
|
|
17
|
%
|
Total
|
|
|
92
|
%
|
|
|
99
|
%
|
*Less than 10%
These
customers did not have material accounts receivable balances at December 31, 2020 and 2019. A reduction in sales from or loss of such
customers would have a material adverse effect on our results of operations and financial condition.
Geographic
Concentrations of Sales
For
the years ended December 31, 2020 and 2019, total sales in the United States represent approximately 87% and 83% of total consolidated
revenues, respectively. Germany accounted for 10% of total sales during the year ended December 31, 2020. No geographical area
outside the United States accounted for more than 10% of total sales during the years ended December 31, 2019.
Vendor
Concentrations
Vendor
concentrations for inventory purchases for the years ended December 31, 2020 and 2019 are:
|
|
For
the Years Ended
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
Vendor A
|
|
|
48
|
%
|
|
|
*
|
%
|
Total
|
|
|
48
|
%
|
|
|
*
|
%
|
*Less
than 10%
The
significant increase in vendor concentrations resulted from the company’s increase in chemical purchases from one supplier for
the production of lens care and anti-fog products in the year ended December 31, 2020.
NOTE
15 – STOCK APPRECIATION RIGHTS PLAN
From
June 1, 1988, until December 31, 1997, when the plan was terminated, Nano Magic LLC had in place a Stock Appreciation Rights Plan A (the
“SAR Plan”), intended to provide employees, directors, members of a technical advisory board and certain independent contractors
selected by the Board with equity-like participation in the growth of Nano Magic LLC. The maximum number of stock appreciation rights
that could be granted by the Board was 1,000,000. There were 235,782 fully vested stock appreciation rights outstanding under the terms
of the SAR Plan at December 31, 2019. On October 20, 2020, the Company entered into an agreement with the holder of substantially all
the outstanding stock appreciation rights under which the Company paid cash and issued shares in full settlement of the stock appreciation
rights resulting in a reversal or a portion of the accrual on our books. At December 31, 2020, the Company accrued $3,169 related
to the cash redemption value associated with the stock appreciation rights then outstanding.
NOTE
16 – 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 years ended December 31, 2020 and 2019 were the Product segment and the Contract services segment (formerly the research and
development segment). The Company’s chief operating decision-maker has been identified as the President, 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 December 31, 2020 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.
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 years ended December 31, 2020 and 2019 was as follows:
|
|
For
the Years Ended December 31,
|
|
|
|
2020
|
|
|
2019
|
|
Revenues:
|
|
|
|
|
|
|
|
|
Product
segment
|
|
$
|
4,075,818
|
|
|
$
|
1,539,191
|
|
Contract
services segment
|
|
|
683,422
|
|
|
|
896,819
|
|
Total segment and
consolidated revenues
|
|
$
|
4,759,240
|
|
|
$
|
2,436,010
|
|
Cost of revenues:
|
|
|
|
|
|
|
|
|
Products
|
|
$
|
2,533,497
|
|
|
$
|
1,200,168
|
|
Contract
services segment
|
|
|
586,917
|
|
|
|
911,941
|
|
Total segment and
consolidated cost of revenues
|
|
$
|
3,120,414
|
|
|
$
|
2,112,109
|
|
|
|
|
|
|
|
|
|
|
Gross profit (loss):
|
|
|
|
|
|
|
|
|
Product segment
|
|
$
|
1,542,321
|
|
|
$
|
339,023
|
|
Contract
services segment
|
|
|
96,505
|
|
|
|
(15,122
|
)
|
Total segment and
consolidated gross profit
|
|
$
|
1,638,826
|
|
|
$
|
323,901
|
|
Gross margin:
|
|
|
|
|
|
|
|
|
Product segment
|
|
|
37.8
|
%
|
|
|
22.0
|
%
|
Contract
services segment
|
|
|
14.1
|
%
|
|
|
-1.7
|
%
|
Total gross margin
|
|
|
34.4
|
%
|
|
|
13.3
|
%
|
Segment operating expenses:
|
|
|
|
|
|
|
|
|
Product segment
|
|
|
1,428,849
|
|
|
|
770,667
|
|
Contract
services segment
|
|
|
155,673
|
|
|
|
215,026
|
|
Total segment operating expenses
|
|
|
1,584,523
|
|
|
|
985,693
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations:
|
|
|
|
|
|
|
|
|
Product segment
|
|
$
|
113,471
|
|
|
$
|
(431,644
|
)
|
Contract
services segment
|
|
|
(59,168
|
)
|
|
|
(230,148
|
)
|
Total segment income (loss)
|
|
|
54,303
|
|
|
|
(661,792
|
)
|
Unallocated
costs
|
|
$
|
(846,499
|
)
|
|
|
(369,291
|
)
|
Total consolidated
income (loss) from operations
|
|
$
|
(792,196
|
)
|
|
$
|
(1,031,083
|
)
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization:
|
|
|
|
|
|
|
|
|
Product segment
|
|
$
|
36,946
|
|
|
$
|
83,281
|
|
Contract
services segment
|
|
|
1,663
|
|
|
|
1,266
|
|
Total segment depreciation and amortization
|
|
|
38,609
|
|
|
|
84,547
|
|
Unallocated
depreciation
|
|
|
-
|
|
|
|
-
|
|
Total consolidated
depreciation and amortization
|
|
$
|
38,609
|
|
|
$
|
84,547
|
|
|
|
|
|
|
|
|
|
|
Capital additions:
|
|
|
|
|
|
|
|
|
Product segment
|
|
$
|
303,390
|
|
|
$
|
9,400
|
|
Contract
services segment
|
|
|
-
|
|
|
|
1,729
|
|
Total segment capital additions
|
|
|
303,390
|
|
|
|
11,129
|
|
Unallocated
capital additions
|
|
|
-
|
|
|
|
-
|
|
Total consolidated
capital additions
|
|
$
|
303,390
|
|
|
$
|
11,129
|
|
|
|
|
December
31, 2020
|
|
|
|
December
31, 2019
|
|
Segment total assets:
|
|
|
|
|
|
|
|
|
Product segment
|
|
$
|
4,458,227
|
|
|
$
|
1,132,858
|
|
Contract services segment
|
|
|
299,385
|
|
|
|
176,568
|
|
Corporate
|
|
|
33,888
|
|
|
|
10,661
|
|
Total consolidated
total assets
|
|
$
|
4,791,500
|
|
|
$
|
1,320,087
|
|
NOTE
17 - SUBSEQUENT EVENTS
Option
to Tom J. Berman, President & CEO
In
connection with the three-year extension of the contract with our President & CEO, 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
|
Sales
of Common Stock and Derivate 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 $19,261. 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.
Stock
for Services
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
during 2020. 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.
Also
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.
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.
Bank
Loan under Paycheck Protection Program
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.