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.
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.
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.
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
|
|
|
|
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.
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.