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 consolidated financial statements. OVERVIEWNano Magic develops, commercializes and markets consumer and industrial products enabled by nanotechnology that solve everyday problems for customers in many markets, including the optical, transportation, military, sports and safety industries. Our primary business is the formulation, marketing and sale of products enabled by nanotechnology. We are in the process of rebrandingNano Magic products, including what were formerly known as ULTRA CLARITY brand eyeglass cleaner, DEFOGIT brand defogging products. Our "Forcefield" products will include the CLARITY ULTRASEAL nanocoating products for glass and ceramics. We also plan to increase our focus on our environmentally friendly surface protector, fortifier, and cleaner. Our design center conducts development services for us and for government and private customers and develops and sells printable inks and pastes, thermal management materials, and graphene foils
and windows. Our principal operating segments coincide with our different business activities and types of products sold. This is consistent with our internal reporting structure. Our two reportable segments for the three and six months endedJune 30, 2020 were (i) the Product Segment and (ii) the Contract services Segment. For the three and six months endedJune 30, 2019 , the Company operated the
same two segments. 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 unaudited 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 six months endedJune 30, 2020 and 2019.
Comparison of Results of Operations for the Three and Six Months ended
Revenues:
For the three and six months endedJune 30, 2020 , revenues were up$471,029 or 108%, and$255,878 or 29%, as compared to the three and six months endedJune 30, 2019 , respectively. Three Months Ended June 30, Six Months Ended June 30, 2020 2019 2020 2019 Revenue: Product segment$ 908,062 $ 415,832 $ 1,149,779 $ 872,700 Contract services segment 244,422 206,156 450,879 507,149 Total consolidated revenue$ 1,152,484 $ 621,988 $ 1,600,658 $ 1,379,849 For the three months endedJune 30, 2020 , sales from the Product segment increased by$492,230 or 118% as compared to the three months endedJune 30, 2019 . For the six months endedJune 30, 2020 revenue from the Product segment increased by$277,079 or 32%, as compared to the six months endedJune 30, 2019 . Increased use of facemasks and shields during the COVID-19 pandemic has resulted in increased demand for our anti-fog product that is reflected in the increased sales for the quarter endedJune 30, 2020 . For the three months endedJune 30, 2020 , sales from the Contract services segment increased by$38,266 or 19% as compared to the three months endedJune 30, 2019 which was primarily attributable to a new contract award and work started under that contract. For the six months endedJune 30, 2020 revenue from the Contract services segment decreased by$56,270 or 11%, as compared to the six months endedJune 30, 2019 . Cost of revenues Cost of revenues includes inventory costs, materials and supplies costs, internal labor and related benefits, subcontractor costs, depreciation, overhead and shipping and handling costs incurred and costs related to government and private research contracts in our Contract services segment. 4 For the three months endedJune 30, 2020 , cost of revenues increased by$166,123 or 28% as compared to the three months endedJune 30, 2019 . For the six months endedJune 30, 2020 , cost of revenues increased by$25,335 or 2% as compared to the same period in 2019. These changes are reflected in the chart that follows. We have seen some price increases and shortages for some of our raw materials and packaging as a result of the COVID-19 pandemic, but thus far we have been able to obtain adequate supply. Three Months ended June 30, Six Months ended June 30, 2020 2019 2020 2019 Cost of revenues: Product segment$ 600,781 $ 390,939 $ 823,599 $ 588,896
Contract services segment 155,004 198,723 321,903 531,271 Total segment and consolidated cost of revenues$ 755,785 $ 589,662 $ 1,145,502 $ 1,120,167 Gross profit and gross margin For the three months endedJune 30, 2020 , gross profit increased by$364,373 or 1127%. For the six months endedJune 30, 2020 , gross profit increased by$195,474 or 75%. Three Months Ended June 30, Six Months Ended June 30, 2020 % 2019 % 2020 % 2019 % Gross profit: Product segment *$ 307,281 33.8 % 24,893 6.0 %$ 326,180 28.4 % 283,804 32.5 % Contract services segment *$ 89,418 36.6 % 7,433 3.6 %$ 128,976 28.6 % (24,122 ) (4.8 )% Total gross profit$ 396,699 34.4 % 32,326 5.2 % 455,156 28.4 % 259,682 18.8 %
* Gross margin % based on respective segments revenues.
Operating expenses For the three months endedJune 30, 2020 , operating expenses increased by$333,091 or 96% compared to the three months endedJune 30, 2019 . Similarly, for the six months period operating expenses increased by$468,044 or 73% for the period endedJune 30, 2020 , as compared to the six months endedJune 30, 2019 . For the three and six months endedJune 30, 2020 and 2019, operating expenses consisted of the following: Three Months Ended June 30, Six Months Ended June 30, 2020 2019 2020 2019
Selling and marketing expenses$ 4,826 $ 17,298 $ 15,883 $ 25,098 Salaries, wages and related benefits 163,831 148,186
308,464 204,698
Research and development 14,383 41,024 31,035 56,829
Professional fees 359,420 72,920 484,172 152,354General and administrative expenses 136,234 140,855
273,304 280,515
Total $ 678,694 $ 420,283 $ 1,122,859 $ 719,494 ? For the three months ended
decreased by
due to general decreases in marketing spend. For the six months ended
2020, sales and marketing expenses decreased by
the six months ended
? For the three months ended
increased by
2019. For the six months ended
services increased by
increases were due to salary increases and additional personnel related to our
ongoing efforts to build our team and increase sales and productivity.
? For the three months ended
decreased by
2019. For the six months ended
decreased by
For both periods the decreases reflect a general spend decrease in R&D
supplies.
? For the three and six months ended
increased by
and six months ended
attributable to increased audit fees and other third-party professional
expenses to support the business.
? For the three months ended
decreased by
For the six months ended
decreased by approximately
June 30, 2019 . 5 Loss from operations As a result of the factors described above, for the three months endedJune 30, 2020 , loss from operations amounted to$281,995 as compared to loss from operations of$387,957 for the three months endedJune 30, 2019 , a decrease of$105,962 or 27%. For the six months endedJune 30, 2020 , loss from operations amounted to$657,703 as compared to a loss from operations of$459,812 for the six months endedJune 30, 2019 , an increased loss of$197,891 or 43%. Other expense (income) For the three months endedJune 30, 2020 , other expense was$282 as compared to other expense of$5,159 for the three months endedJune 30, 2019 , a decrease of income of$4,690 or 90%. There was a decrease in interest expense as a result of deferral of principal and interest on the equipment loan, and a reduction in other income. For the six months endedJune 30, 2020 other expense was$2,390 , as compared to other expense of$2,684 , for the six months ended 2019, a decrease of$294 , or 11% due to the same factors. Net loss As a result of the foregoing, for the three and six months endedJune 30, 2020 , net loss amounted to$282,277 and$660,093 as compared to net loss of$392,257 and$462,496 for the three and six months endedJune 30, 2019 . The decrease in net loss for the 3-month period was$109,980 or 28%. For the six-month period there was an increased net loss of$197,597 or 43%. For the three months endedJune 30, 2020 and 2019, net loss amounted to$0.04 per common share (basic and diluted), and$0.09 per common share (basic and diluted), respectively. For the six months endedJune 30, 2020 and 2019, net loss amounted to$0.10 per common share (basic and diluted) and$0.11 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 working capital deficit of
The following table sets forth a summary of changes in our working capital from
Change in Percentage
June 30, 2020 December 31, 2019 working capital Change
Working capital:
Total current
assets $ 1,293,502 $ 835,109 $ 458,393 54.89 %
Total current
liabilities 1,586,305 1,508,149 78,156 5.18 %
Working capital
deficit: $ (292,803 ) $ (673,040 ) $ 380,237 (56.50 )%
The increase in current assets was attributable primarily to increased accounts
receivable and pre-paid expenses. The increase in current liabilities reflects
an increase in accounts payable and the new loan under the paycheck protection
program.
Net cash used in operating activities was$944,752 for the six months endedJune 30, 2020 as compared to$382,053 for the six months endedJune 30, 2019 , a change of$562,698 or 147%. Net cash used in operating activities for the six months endedJune 30, 2020 primarily reflected a net loss of ($660,093 ) adjusted for add-backs of$163,425 and changes in operating assets of ($448,083 ). 6
Net cash flow used in investing activities was
Net cash provided by financing activities of$1,268,240 for the six months endedJune 30, 2020 as compared to$348,770 in the same period in 2019. During the six months endedJune 30, 2020 , we sold additional common stock and warrants.
Future Liquidity and Capital Needs.
Our principal future uses of cash are for working capital requirements, including adding new personnel to support the growth of our business as well as inventory purchases. Funds required for inventory are higher in part for increased prices and longer lead time for some items affected by the COVID-19 pandemic, in part because of higher volume purchases as we prepare for the full-scale launch ofNano Magic branded products and, in part, for inventory build to avoid disruption when theBrooklyn Heights manufacturing moves to the new space inMichigan during the fourth quarter. Application of funds will depend on numerous factors including our sales and other revenues and our ability to control costs. Equipment Financing OnFebruary 10, 2015 ,Nano Magic LLC entered a$373,000 promissory note (the "Equipment Note") withKeyBank, N.A. (the "Bank"). The unpaid principal balance of this Equipment Note is payable in 60 equal monthly installments payments of principal and interest throughSeptember 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. AtJune 30, 2020 , the principal amount due under the Equipment Note amounted to$105,551 .
OnJune 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 untilApril 10, 2022 , the interest rate was raised to 6.29% per year, and the monthly payments were reduced to$4,052 per month. Paycheck Protection Loan
On
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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