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 consumer and industrial products powered by nanotechnology that solve everyday problems for customers in the optical, transportation, military, sports and safety industries. Our primary business is the formulation, marketing and sale of products powered by nanotechnology including the ULTRA CLARITY brand 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 our consumer sales by sales to big box retailers and e-commerce. We also develop and sell printable inks and pastes, thermal management materials, and graphene foils and windows. Our Innovation and Technology Center conducts development services for us and for government and private customers. 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. Restrictions imposed by Federal, state and local governments during the pandemic affected operations of our business and those of our vendors and customers as well as logistics for shipping and receiving supplies and shipping our products. As the pandemic has continued, lead times are significantly extended and costs of raw materials and logistics are up significantly. The increased use of face masks and other personal protective equipment as a result of the pandemic created additional demand for our antifog product in 2020 and the first half of 2021. The increased demand caused a number of new participants to start selling antifog product that hurt our sales. As mask mandates have ended, we have seen demand fall off. All of this is reflected in our results for the period endedMarch 31, 2022 . We continue to see progress in our efforts to placeNano Magic products in big box retail and secured several national big box retail placements. However, 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. 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 months endedMarch 31, 2022 were (i) the Product Segment and (ii) the Contract services Segment. For the three months endedMarch 31, 2021 , the Company operated the same two segments. 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 months endedMarch 31, 2022 and 2021. 4
Comparison of Results of Operations for the Three Months ended
Revenues: For the three months endedMarch 31, 2022 and 2021, revenues consisted of the following: Three Months Ended March 31, 2022 2021 Sales: Product segment$ 605,862 $ 2,182,446 Contract services segment 80,396 128,729
Total segment and consolidated sales
For the three months ended
For the three months ended
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.
For the three months ended
Three Months Ended
March 31,
2022 2021
Cost of revenues:
Product segment $ 557,390 $ 1,130,776
Contract services segment 109,256 152,430Total segment and consolidated cost of revenues$ 666,646 $ 1,283,206
Gross profit and gross margin
Gross profit and gross margin by segment are as follows:
Three Months Ended March 31,
Gross Profit 2022 % 2021 %
Product Segment $ 48,472 8.0 % $ 1,051,670 48.2 %
Contract services segment $ (28,860 ) (35.9 )% (23,701 ) (18.4 )%
Total gross profit $ 19,612 2.9 % $ 1,027,969 44.5 %
* Gross margin % based on respective segments revenues.
For the three months endedMarch 31, 2022 , as compared to the comparable 2021 period, the margin in the Product segment decreased by$1,003,198 due to reduced volume, particularly of anti-fog products. The margin for the Contract research segment for the three months endedMarch 31, 2022 as compared to the three months endedMarch 31, 2021 decreased by$5,159 primarily due to completion of government contracts without new or renewal research contracts. 5 Operating income and expenses For the three months endedMarch 31, 2021 , other operating income was$336,017 . There was no other operating income for the three months endedMarch 31, 2022 . The decrease reflected income from a settlement agreement in 2021 that has
not continued in 2022.
For the three months ended
Three Months Ended
March 31,
2022 2021
Selling and marketing expenses
7,489 1,876
Professional fees 253,979 192,641
General and administrative expenses 264,245 188,938 Total
$ 1,074,353 $ 988,182
? For the three months ended
increased by
2021, due to an increase in advertising and expenses for trade shows that have
resumed post-pandemic.
? For the three months ended
decreased by
2021. This was primarily attributable to bonus payments made in 2021 that were
not made in 2022.
? For the three months ended
increased by
2021, due to ongoing product development efforts as we work to expand our
product line.
? For the three months ended
increase in the Company's legal and professional expenses.
? For the three months ended
increased by
2021, reflecting increased support for the larger business operation. Loss (income) from operations As a result of the factors described above, for the three months endedMarch 31, 2022 , loss from operations amounted to$1,053,480 as compared to income from operations of$375,804 for the three months endedMarch 31, 2021 , a decrease of$1,429,284 or 380%.
Other non-operating expense (income)
For the three months endedMarch 31, 2022 , other expense was$8,911 as compared to$5,407 for the three months endedMarch 31, 2021 , an increase of$3,504 or 65% due to increased interest expense. 6 Net loss (income) For the three months endedMarch 31, 2022 , net loss amounted to$(1,063,652) , as compared to net income of$370,397 for the three months endedMarch 31, 2021 . For the three-month period the decrease was$1,424,519 or 385%
For the three months ended
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$903,843 and$303,374 of unrestricted cash as ofMarch 31, 2022 and working capital of$1,003,127 and$242,474 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
March 31, 2022
Change in
December 31, Working Percentage
March 31, 2022 2021 Capital Change
Working capital:
Total current assets $ 2,038,668 $ 2,156,666 $ (117,998 ) (5.47 )%
Total current liabilities 1,134,825 1,153,539 (18,714 ) (1.62 )% Working capital:$ 903,843 $ 1,003,127 $ (99,284 ) (9.90 )% Net cash used by operating activities was$(752,515) for the three months endedMarch 31, 2022 as compared to net cash provided by operating activities was$291,031 for the three months endedMarch 31, 2021 , a net change of$1,043,546 or 359%. Net cash used by operating activities for the three months endedMarch 31, 2022 was primarily due to a net loss of$1,063,652 adjusted for add-backs of$153,988 and changes in operating assets and liabilities of$157,149 .
Net cash flow used in investing activities was
Net cash provided by financing activities was
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 OnFebruary 10, 2015 ,Nano Magic 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 instalments payments of principal and interest throughJune 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. AtMarch 31, 2022 , the amount due under the Equipment Note amounted to$30,114 . 7 OnJune 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 untilApril 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. See Note 9, Subsequent Events, regarding a further amendment of the Equipment Note.
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.
© Edgar Online, source
