NANO MAGIC INC. The following is management's discussion and analysis of certain significant factors that have affected our financial position and operating results during the periods included in the accompanying unaudited condensed consolidated financial statements. OVERVIEWNano Magic develops, commercializes and markets cutting-edge consumer and industrial products powered by nanotechnology to clean, protect and enhance every-day surfaces. Our primary business is the formulation, marketing and sale of products powered by nanotechnology bearing the Nano Magic brand as well as Ultra Clarity and Defog It brand names and we also private label our solutions, such as our eyeglass cleaner, our defogging products and nanocoating products for glass and ceramics. We have historically sold our consumer products directly to opticians and ophthalmologists and small optical retailers and we will continue to do so, even as we are now working to expand product portfolio and our consumer sales through big box retailers and e-commerce. EffectiveMay 31, 2022 , we sold a majority interest in our subsidiary,Applied Nanotech, Inc. ("ANI"). ANI performs contract research services for the Company and for governmental and private customers and that work was previously reported as our Contract research segment. We retain a 30% interest in ANI that is now recorded as an equity investment. RESULTS OF OPERATIONS The following comparative analysis on results of operations was based primarily on the comparative condensed consolidated financial statements, footnotes and related information for the periods identified below and should be read in conjunction with the unaudited condensed consolidated financial statements and the notes to those statements that are included elsewhere in this report. The results discussed below are for the three and nine months endedSeptember 30, 2022 and 2021.
Comparison of Results of Continuing Operations for the Three and Nine Months
ended
Revenues:
For the three and nine months ended
Three Months Ended Nine Months Ended
September 30, September 30,
2022 2021 2022 2021
Total revenue $ 807,026 $ 545,515 $ 1,819,951 $ 3,673,263
For the three months ended September 30, 2022 , sales from continuing operations
increased by $261,511 or 48% as compared to the three months ended September 30,
2021 . For the nine months ended September 30, 2022 revenues decreased by
$1,853,312 or 50%, as compared to the nine months ended September 30, 2021 . The
increase for the three-month period was due primarily to growth in the company's
e-commerce sales channel. The decrease for the nine-month period was primarily
due to the high sales of anti-fog products during the first half of 2021 when
masks were required in many situations due to the COVID-19 pandemic.
Cost of sales
Cost of sales includes inventory costs, materials and supplies costs, internal
labor and related benefits, subcontractor costs, depreciation, and overhead and
shipping and handling costs incurred.
Three Months ended Nine Months ended
September 30, September 30,
2022 2021 2022 2021
Cost of sales: $ 698,448 $ 525,892 $ 1,689,342 $ 2,109,430
For the three months ended September 30, 2022 , cost of revenues increased by
$172,556 or 33% as compared to the three months ended September 30, 2021 . For
the nine months ended September 30, 2022 , cost of revenues decreased by $420,088
or 20% as compared to the nine months ended September 30, 2021 . For the
three-month period, the increase reflects the higher sales volume as compared to
the prior year. For the nine-month period, cost of sales decreased as sales
volume dropped, but did not reduce proportionately because of overhead and other
fixed production costs. We saw some price increases and shortages for some of
our raw materials and packaging during the COVID-19 pandemic and the ongoing
supply chain disruption, but thus far we have been able to obtain adequatesupply. Gross profit and gross margin
For the three months endedSeptember 30, 2022 , gross profit was$108,578 as compared to$19,623 for the prior year, an increase of$88,955 or 453%. For the nine months endedSeptember 30, 2022 , gross profit was$130,609 as compared to$1,563,833 for the prior year, a decrease of$1,433,224 or 92%. For the nine months endedSeptember 30, 2022 , gross margin was 7.2% as compared to 42.6% in the prior year. For the three months endedSeptember 30, 2022 , gross margin was 13.5% as compared to 3.6% in the prior year. For the three-month period the improvement was due to a combination of higher sales volume and lower fixed overhead costs at the plant. For the nine-month period the decrease was due to lower sales volumes as well as product mix. 4 Other operating income For the three months endedSeptember 30, 2022 , other operating income increased by$44,129 or 86% compared to the three months endedSeptember 30, 2021 . This was due primarily to settlement income from a customer in the third quarter of 2022. For the nine months endedSeptember 30, 2022 , other operating income decreased by$456,408 or 83% compared to the nine months endedSeptember 30, 2021 . This was due primarily to settlement income from a third party received in the first half of 2021 that significantly decreased in subsequent periods.
Operating expenses
For the three months endedSeptember 30, 2022 , operating expenses decreased by$104,924 or 12% compared to the three months endedSeptember 30, 2021 . Similarly, for the nine months period operating expenses decreased by$418,063 or 14% for the period endedSeptember 30, 2022 , as compared to the nine months endedSeptember 30, 2021 . For the three and nine months endedSeptember 30, 2022 and 2021, operating expenses consisted of the following: Three Months Ended Nine Months Ended September 30, September 30, 2022 2021 2022 2021 Selling and marketing expenses$ 88,635 $ 59,203 $ 264,465 $ 136,423 Salaries, wages and related benefits 359,273 464,042 1,178,612 1,754,585 Research and development 4,566 2,482 15,266 11,795 Professional fees 129,362 183,167 572,135 592,067 General and administrative expenses 183,728 161,594 646,989 600,660 Total$ 765,564 $ 870,488 $ 2,677,467 $ 3,095,530
? For the three months ended
increased by
2021, due to increased marketing expenses, sales consultants and trade show
expenses. For the nine months ended
expenses increased by
? For the three months ended
benefits decreased by
wages and related benefits decreased by
nine-months ended
and equity compensation expenses, and reduced staffing in light of lower sales
volumes.
? For the three months ended
increased by
2021. For the nine months ended
costs increased by
course of ongoing work.
? For the three months ended
the nine months ended
changes were due to ongoing legal expenses related to our challenge to the
trading suspension and additional trademark expenses in 2022 that decreased in
comparison to prior periods in 2021.
? For the three months ended
expenses increased by
administrative expenses increased by
months ended
primarily due to increased board and governance costs. Loss from operations As a result of the factors described above, for the three months endedSeptember 30, 2022 , loss from operations amounted to$561,285 as compared to a loss of$799,293 for the three months endedSeptember 30, 2021 , a change of$238,008 or 30%. For the nine-month period endedSeptember 30,2022 , the loss was$2,451,157 , as compared to a loss of$979,588 for the nine months endedSeptember 30, 2021 , an increase of$1,471,569 or 150%. 5
Income from investment in subsidiary
As a result of the sale of a 70% interest in ANI , we now report our 30% share of ANI's income or loss as an investment in a subsidiary. For the three months endedSeptember 30, 2022 that was income of$19,203 , and for the nine months then ended income of$16,042 . Interest expense
For the three months endedSeptember 30, 2022 interest expense was$10,799 as compared to$3,879 in the prior year, and for the nine months endedSeptember 30, 2022 interest expense was$26,414 up from$13,874 in the prior year. The increases were due to interest expense for convertible notes issued in 2022. Other income
For the three months endedSeptember 30, 2022 , other income was$10,267 as compared to$0 for the three months endedSeptember 30, 2021 . For the nine months endedSeptember 30, 2022 , other income was$12,892 as compared to$10 for the nine months endedSeptember 30, 2021 . The increases were due to interest income accrued on notes receivable issued in 2022.
Loss from continuing operations
As a result of the foregoing, we reported a loss from continuing operations of$542,594 for the three-month period endedSeptember 30, 2022 and a loss of$803,172 for the three-month period in the prior year, a decrease of$260,578 or 32%. For the nine-month period endedSeptember 30, 2022 our loss from continuing operations was$2,448,637 as compared to$993,452 for the nine-month period endedSeptember 30, 2021 , an increase of$1,455,185 or 146%.
Income (loss) from discontinued operations
EffectiveMay 31, 2022 , we sold a 70% interest in our subsidiary ANI to two of its officers and long-time employees in exchange for a promissory note in the face amount of$450,000 . We recognized no income on that discontinued operation for the three-month period endedSeptember 30, 2022 and on a comparative basis we recognized income of$45,603 for the three-month period endedSeptember 30, 2021 . For the nine months endedSeptember 30, 2022 we had income from discontinued operations of$1,300 and income of$132,863 on a comparative basis for the three-month period endedSeptember 30, 2021 . For the nine months endedSeptember 30, 2022 , we reported a gain on sale of discontinued operations of$1,148,225 and$0 on a comparative basis for the nine-month period endedSeptember 30, 2021 . Net loss (income) For the three months endedSeptember 30, 2022 , net loss was$542,594 as compared to a net loss of$757,569 for the three months endedSeptember 30, 2021 . For the nine months endedSeptember 30, 2022 , net loss amounted to$1,299,112 as compared to a loss of$860,769 for the nine months endedSeptember 30, 2021 .
LIQUIDITY AND CAPITAL RESOURCES
Liquidity is the ability of an enterprise to generate adequate amounts of cash to meet its needs for cash requirements. We had working capital of$942,354 and$206,286 of unrestricted cash as ofSeptember 30, 2022 and working capital of$1,003,127 and$197,932 of unrestricted cash as ofDecember 31, 2021 .
The following table sets forth a summary of changes in our working capital from
December 31, 2021 to
September 30, 2022
Change in
September December 31, Working Percentage
30, 2022 2021 Capital Change
Working capital:
Total current assets $ 2,094,940 $ 2,156,666 $ (61,726 ) (2.86 )%
Total current liabilities 1,152,586 1,153,539 (953 ) (0.08 )%
Working capital: $ 942,354 $ 1,003,127 $ (60,773 ) (6.06 )%
6
The decrease in current assets is primarily attributable to a decrease in inventory and prepaid expenses partially offset by an increase in accounts receivable.
Net cash used by operating activities was$(1,561,063) for the nine months endedSeptember 30, 2022 as compared to net cash used by operating activities of$(641,196) for the nine months endedSeptember 30, 2021 , a net change of$(919,867) or 143%. Net cash used by operating activities for the nine months endedSeptember 30, 2022 primarily resulted from net loss from continuing operations of$(2,448,637) adjusted for add-backs of$240,421 and changes in operating assets and liabilities of$719,398 . Net cash provided by continuing investing activities was$20,090 for the nine months endedSeptember 30, 2022 , as compared to net cash used by continuing investing activities of$(104,585) for the same period in 2021. Net cash used by discontinued investing activities was$0 and$(242) for the nine months endedSeptember 30, 2022 andSeptember 30, 2021 , respectively. Net cash provided by continuing financing activities was$1,484,785 for the nine months endedSeptember 30, 2022 reflecting$1,610,000 in proceeds from sales of common stock, warrants and convertible notes, as compared to net cash provided by continuing financing activities of$1,396,555 for the same period in 2021. Net cash provided by discontinued financing activities was$20,000 and$76,305 for the nine months endedSeptember 30, 2022 andSeptember 30, 2021 , respectively.
Future Liquidity and Capital Needs.
Our principal future uses of cash are for working capital requirements, including working capital to support increased product sales, sales and marketing expenses and reduction of accrued liabilities. Application of funds among these uses will depend on numerous factors including our sales and other revenues and our ability to control costs. Equipment Financing and Loans
See note 6 to our unaudited condensed consolidated financial statements regarding our equipment loan and financing leases.
Off-Balance Sheet Arrangements
We have not entered into any other financial guarantees or other commitments to guarantee the payment obligations of any third parties. We have not entered into any derivative contracts that are indexed to our shares and classified as shareholder's equity or that are not reflected in our consolidated unaudited financial statements. Furthermore, we do not have any retained or contingent interest in assets transferred to an unconsolidated entity that serves as credit, liquidity or market risk support to such entity. We do not have any variable interest in any unconsolidated entity that provides financing, liquidity, market risk or credit support to us or engages in leasing, hedging or research and development services with us.
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