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 nine months endedSeptember 30, 2020 were (i) the Product Segment and (ii) the Contract services Segment. For the three and nine months endedSeptember 30, 2019 , the Company operated the same two segments. Restrictions imposed by Federal, state and local governments as a result of the COVID-19 pandemic continue to impact our operations, but to date our sources of supply have been adequate for our needs and we have been able to fulfill orders on a timely basis. We have seen a strong increase in demand for anti-fog products. At the same time, there has been a slow-down in our lens cleaning and other business activity as a result of the COVID-19 pandemic, and the severity of the disruption and the length of the slow-down and timing of recovery are unknown. As noted last quarter, some of the raw materials and bottles used to produce our liquid products, are used to produce hand sanitizer and other cleaning products that are in high demand and some of our raw materials and packaging have become harder to find due to the COVID-19 pandemic. Price increases for raw materials can be expected to adversely impact our profit margin. We have financing for the furniture and some of the equipment we will be using in the new space inMichigan , and we also have pending another application for a PPE loan. This enables us to use more of our cash to keep up with increased demand for our anti-fog product as well as to build inventory as we prepare for the move fromBrooklyn Heights to the newMichigan space. 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 nine months endedSeptember 30, 2020 and 2019.
Comparison of Results of 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,
2020 2019 2020 2019
Revenue:
Product segment $ 983,628 $ 302,294 $ 2,133,407 $ 1,174,994
Contract services segment 117,219 203,049 568,098 710,198
Total consolidated revenue $ 1,100,847 $ 505,343 $ 2,701,505 $ 1,885,192
For the three months ended September 30, 2020 , sales from the Product segment
increased by $681,334 or 225% as compared to the three months ended September
30, 2019 . For the nine months ended September 30, 2020 revenue from the Product
segment increased by $958,413 or 82%, as compared to the nine months ended
September 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 ended September 30, 2020 .
For the three months ended September 30, 2020 , sales from the Contract services
segment decreased by $85,830 or 42% as compared to the three months ended
September 30, 2019 which was primarily attributable to a contract that expired
in 2019 and was not replaced. For the nine months ended September 30, 2020
revenue from the Contract services segment decreased by $142,100 or 20%, as
compared to the nine months ended September 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 ended September 30, 2020 , cost of revenues increased by
$241,176 or 56% as compared to the three months ended September 30, 2019 . For
the nine months ended September 30, 2020 , cost of revenues increased by $266,510
or 17% 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 Nine Months ended
September 30, September 30,
2020 2019 2020 2019
Cost of revenues:
Product segment $ 541,272 $ 241,694 $ 1,364,870 $ 830,590
Contract services segment 132,663 191,065 454,566 722,336
Total segment and consolidated
cost of revenues $ 673,935 $ 432,759 $ 1,819,436 $ 1,552,926 Gross profit and gross margin
For the three months ended
Three Months Ended September 30, Nine Months Ended September 30,
2020 % 2019 % 2020 % 2019 %
Gross profit:
Product segment * $ 442,356 45.0 % 60,600
20.0 %
$ 426,912 38.8 % 72,584 14.4 %$ 882,069 32.7 % 332,266 17.6 %
* Gross margin % based on respective segments revenues.
Operating expenses
For the three months endedSeptember 30, 2020 , operating expenses increased by$170,044 or 46% compared to the three months endedSeptember 30, 2019 . Similarly, for the nine months period operating expenses increased by$563,410 or 52% for the period endedSeptember 30, 2020 , as compared to the nine months endedSeptember 30, 2019 . For the three and nine months endedSeptember 30, 2020 and 2019, operating expenses consisted of the following: Three Months Ended Nine Months Ended September 30, September 30, 2020 2019 2020 2019 Selling and marketing expenses$ 9,032 $ 11,812 $ 24,915 $ 36,910 Salaries, wages and related benefits 184,675 77,268 493,139 281,967 Research and development 22,383 10,778 53,418 67,607 Professional fees 145,140 99,371 629,313 251,725 General and administrative expenses 176,062 168,017 449,367 448,532 Total$ 537,292 $ 367,247 $ 1,650,152 $ 1,086,741
? For the three months ended
decreased by
2019 due to general decreases in marketing spend. For the nine months ended
compared to the nine months endedSeptember 30, 2019 , for same reasons.
5
? For the three months ended
benefits increased by
wages and contract services increased by
nine months ended
relocating to
after the move.
? For the three months ended
decreased by
30, 2019. For the nine months ended
development costs decreased by
ended
spend decrease in R&D spending.
? For the three and nine months ended
fees increased by
three and nine months ended
are primarily attributable to increased audit fees and other third-party
professional expenses to support the business.
? For the three months ended
expenses increased by
administrative expenses increased by approximately
the nine months endedSeptember 30, 2019 . Loss from operations As a result of the factors described above, for the three months endedSeptember 30, 2020 , loss from operations amounted to$110,380 as compared to loss from operations of$294,663 for the three months endedSeptember 30, 2019 , a change of$184,284 or 63%. For the nine months endedSeptember 30, 2020 , loss from operations amounted to$768,083 as compared to a loss from operations of$754,475 for the nine months endedSeptember 30, 2019 , a decreased loss of
$13,608 or 2%. Other expense (income) For the three months endedSeptember 30, 2020 , other expense was$230 as compared to other income of$29,083 for the three months endedSeptember 30, 2019 , a decrease of income of$29,313 or 101%. 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 nine months endedSeptember 30, 2020 other expense was$2,620 , as compared to other income of$26,399 , for the nine months ended 2019, a decrease of$29,019 , or 110% due to the same factors.
Net loss
As a result of the foregoing, for the three and nine months endedSeptember 30, 2020 , net loss amounted to$110,610 and$770,703 as compared to net loss of$265,580 and$728,076 for the three and nine months endedSeptember 30, 2019 . The decrease in net loss for the 3-month period was$154,970 or 58%. For the nine-month period there was a decrease in the net loss of$42,627 or 6%. For the three months endedSeptember 30, 2020 the net loss amounted to$0.01 per common share (basic and diluted), and for the same period in 2019 net loss amounted to$0.05 per common share (basic and diluted). For the nine months endedSeptember 30, 2020 and 2019, net loss amounted to$0.11 per common share (basic and diluted) and$0.16 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 of$726,242 and$899,429 of unrestricted cash as ofSeptember 30, 2020 and a working capital deficit of$673,040 and$216,801 of cash as ofDecember 31, 2019 . 6
The following table sets forth a summary of changes in our working capital from
December
31, 2019 to
September December 31, Change in Percentage
30, 2020 2019 working capital Change
Working capital:
Total current assets $ 2,343,410 $ 835,109 $ 1,508,301 180.6 %
Total current liabilities 1,617,168 1,508,149 109,020 (7.2 )%
Working capital (deficit): $ 726,242 $ (673,040 ) $ 1,399,281 (207.9 )%
The increase in current assets was attributable to increases in all components
other than investments that remained largely unchanged. The increase in current
liabilities was attributable primarily to an increase in lease liabilities.
Net cash used in operating activities was $914,671 for the nine months ended
September 30, 2020 as compared to $677,304 for the nine months ended September
30, 2019 , a change of $237,367 or 35%. Net cash used in operating activities for
the nine months ended September 30, 2020 primarily reflected a net loss of
($770,703 ) adjusted for add-backs of $(3,152) and changes in operating assets
and liabilities of ($147,120 ).
Net cash flow used in investing activities was
Net cash provided by financing activities was$2,543,444 for the nine months endedSeptember 30, 2020 as compared to$483,976 in the same period in 2019. During the nine months endedSeptember 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. AtSeptember 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
OnMay 8, 2020 , we obtained a loan fromFifth 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 thanSeptember 1, 2021 . 7
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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