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 consolidated financial statements.
OVERVIEWNano Magic develops, commercializes and markets nanotechnology powered consumer and industrial cleaners and coatings to clean, protect, and enhance products for peak performance. Consumer products include lens and screen cleaners and coatings, anti-fog solutions, and household and automobile cleaners and protective coatings sold direct-to-consumer and in big box retail.Nano Magic also sells branded and private label cleaners and coatings into the optical, safety, and industrial channels. Our focus is to expand our direct-to-consumer sales through e-commerce and to grow sales to big box retailers. We continue to sell our consumer products directly to opticians and ophthalmologists and small optical retailers. InDecember 2019 , a novel strain of coronavirus disease ("COVID-19") was first reported inWuhan, China . Less than four months later, onMarch 11, 2020 , theWorld Health Organization declared COVID-19 a pandemic. Disruptions to the economy, the supply chain and the labor force caused by the pandemic and government policies adopted to address the pandemic continue to have an effect on our business and the business of our suppliers and customers. For example, despite progress in our efforts to placeNano Magic products in big box retail and secured several national big box retail placements, these customers are also suffering from supply chain disruptions and their focus on their core business is delaying roll-out of some of our solutions. The Company experienced margin erosion as a result of government orders issued in response to the COVID-19 pandemic. Contributing factors included but were not limited to higher raw material prices, longer lead-times, and production delays. EffectiveMay 31, 2022 , we sold a 70% interest in our subsidiary,Applied Nanotech, Inc. ("ANI"). The contract research services performed by ANI for governmental and private customers was previously reported as our Contract research segment. As a result of this sale, the Company has deconsolidated ANI from its financial reporting, and we will report as only one 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 consolidated financial statements, footnotes and related information for the periods identified below and should be read in conjunction with the consolidated financial statements and the notes to those statements that are included elsewhere in this report. The results discussed below are for the years endedDecember 31, 2022 and 2021.
Comparison of Results of Operations for the Year Ended
Revenues For the years endedDecember 31, 2022 and 2021, revenues were$2,577,332 and$4,313,443 , respectively. For the year endedDecember 31, 2022 , sales decreased by$1,736,111 , or 40%, as compared to the year endedDecember 31, 2021 . This decrease is primarily driven by a reduction in high anti-fog product shipments during COVID, in particular high demand in the first half of 2021. Sales of private label and co-branded products to optical and industrial customers remain significant. We continue to focus to increase sales of ourNano Magic branded solutions by direct sales to consumers using e-commerce, and are expanding by placing products with pharmacies, big box stores and other retailer outlets. Revenue opportunities from those solutions has been delayed by the logistics and other supply chain issues those customers have been facing in their business. Cost of revenues Cost of revenues includes inventory costs, materials and supplies costs, internal labor and related benefits, subcontractor costs, depreciation, overhead and shipping and handling costs incurred including costs related to government and private contracts in our Contract services segment. For the year endedDecember 31, 2022 , cost of revenues was$2,481,110 as compared to$2,651,325 for 2021, a decrease of$170,215 or 6%. Costs remained relatively high compared to the revenue decrease due primarily to fixed costs, increased energy costs and inflation. 17 Gross profit and gross margin For the year endedDecember 31, 2022 , gross profit amounted to$96,222 as compared to$1,662,118 for the year endedDecember 31, 2021 , a decrease of$1,565,896 , or 94%. The decrease was due primarily to the sales decrease, a higher proportion of sales through lower-margin channels, and fixed production expenses. For the years endedDecember 31, 2022 and 2021, gross margins were 3.7% and 38.5%, respectively. Other operating income
For the year ended
Operating expenses For the year endedDecember 31, 2022 , operating expenses decreased by$377,258 , or 10% as compared to the year endedDecember 31, 2021 . For the years endedDecember 31, 2022 and 2021, respectively, operating expenses consisted of the following: Year EndedDecember 31, 2022 2021
Selling and marketing expenses
16,777 34,875
Professional fees 788,641 707,938
General and administrative expenses 829,841 774,039 Total
$ 3,545,620 $ 3,922,878
? For the year ended
by
increase was primarily attributable to attendance at trade shows and brand
marketing activities designed to increase sales channels and market
penetration.
? For the year ended
decreased by
This was due to the need for fewer personnel due to lower sales and to
cost-cutting efforts.
? For the year ended
by
a reduction in R&D projects.
? For the year ended
or 11%, as compared to the year ended
increased third-party legal fees and the assistance of sales consultants.
? For the year ended
increased by
primarily due to general rate increases and inflation.
Loss from operations
As a result of the factors described above, for the year ended December 31,
2022 , loss from operations amounted to $3,353,697 as compared to a loss from
operations of $1,628,691 for the year ended December 31, 2021 , an increaseof$1,725,006 or 106%. Other income For the year endedDecember 31, 2022 , total other income amounted to$102,583 as compared to other income of$113,173 for the year endedDecember 31, 2021 , a decrease of$10,590 or 9%. The change is primarily due to a government grant for employee-retention tax credits recognized in 2022 as well income from investment in subsidiary of$57,289 , offset by an increase in interest expense for the year endedDecember 31, 2022 as compared to the same period in 2021, and a loan forgiveness of$130,900 in 2021 that did not reoccur in 2022.
Loss from continuing operations
For the year endedDecember 31, 2022 , loss from continuing operations amounted to$3,251,114 as compared to a loss from continuing operations of$1,515,518 for the year endedDecember 31, 2021 , an increase of$1,735,596 or 115%. 18
Income (loss) from discontinued operations
For the year endedDecember 31, 2022 , income from discontinued operations was$1,149,525 , comprised of$1,300 income plus a gain on sale of discontinued operations of$1,148,225 , as compared to a loss from discontinued operations of$59,046 for the year endedDecember 31, 2021 . Net loss
As a result of the foregoing, for the year ended
For the years endedDecember 31, 2022 and 2021, net losses from continuing operations amounted to$0.32 and$0.16 per common share (basic and diluted), respectively. For the years endedDecember 31, 2022 and 2021, net income and (loss) for discontinued operations amounted to$0.11 and$(0.01) per common share (basic and diluted), respectively.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity is the ability of an enterprise to generate adequate amounts of cash to meet its needs for cash requirements. We had a working capital balance of$524,389 and unrestricted cash of$259,223 as ofDecember 31, 2022 .
The following table sets forth a summary of changes in our working capital from
continuing operations for the period from
December 31, 2022 December 31, 2021 Dollar Change Percentage Change
Working capital:
Total current assets $ 1,900,858 $ 2,082,293 $ (181,435 ) (8.71 )%
Total current liabilities 1,376,469 577,769 798,700 138.24 %
Working capital: $ 524,389 $ 1,504,524 $ (980,135 ) (65.15 )%
The decrease in current assets reflects decreases in accounts receivable, prepaids, and inventory balances, offset by an increase in cash. The increase in current liabilities is primarily due to increases in accounts payable and accrued expenses.
Net cash used by operating activities was$1,708,365 for the year endedDecember 31, 2022 as compared to net cash used by operating activities of$1,377,056 for the year endedDecember 31, 2021 , an increase of$331,309 , or 24%. Net cash used by operating activities reflects a net loss of$3,251,114 , partially offset by the add-back of non-cash items totaling$555,827 and changes in operating assets and liabilities of$1,059,167 . Net cash used by continuing operations for the years endedDecember 31, 2022 and 2021 totaled$1,636,120 and$1,282,553 , respectively. Net cash used by discontinued operations for the years endedDecember 31, 2022 and 2021 totaled$72,245 and$94,503 , respectively. We have worked over the last several quarters to reduce our costs and conserve cash. Our common stock suffered an extended period with no market makers and the caveat emptor designation on the OTC market, that made it increasingly difficult to raise additional capital. Since earlyMarch 2023 , we have had market makers for our stock, and are working to remove the caveat emptor warning on our shares. We expect to need additional capital in the next quarter.
Net cash provided by investing activities was
Net cash provided by financing activities was
CRITICAL ACCOUNTING POLICIES
Our critical accounting policies are included in Note 2 - Significant Accounting Policies of our consolidated financial statements included within this Report.
RECENT ACCOUNTING PRONOUNCEMENTS
Recently issued accounting standards are included in Note 2 - Significant Accounting Policies of our consolidated financial statements included within this Report.
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