NMGX Nano Magic Inc (QB)

NOTE 1 – ORGANIZATION AND BASIS OF PRESENTATION

Organization

Nano Magic Inc. (“we”, “us”, “our”, “Nano Magic” or the “Company”), a Delaware corporation, develops and sells a portfolio of nano-layer coatings, nano-based cleaners, and nano-composite products based on its proprietary technology.

Basis of Presentation

The accompanying unaudited condensed financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“US GAAP”) for interim financial information. Accordingly, they do not include all the information and disclosures required by US GAAP for annual financial statements. In the opinion of management, such statements include all adjustments (consisting only of normal recurring items) which are considered necessary for a fair presentation of the unaudited condensed financial statements of the Company as of June 30, 2024 and for the three and six months ended June 30, 2024 and 2023. The results of operations for the three and six months ended June 30, 2024 are not necessarily indicative of the operating results for the full year ending December 31, 2024 or any other period. The balance sheet at December 31, 2023 has been derived from the audited financial statement at that date but does not include all the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. These unaudited condensed financial statements should be read in conjunction with the audited financial statements and related disclosures of the Company as of December 31, 2023 and for the year then ended, which were filed with the Securities and Exchange Commission on Form 10-K on April 3, 2024.

Going Concern

These unaudited financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the settlement of liabilities and commitments in the normal course of business. As reflected in the unaudited financial statements, the Company had losses from operations and net cash used by operations of $1,522,906 and $992,505 for the six months ended June 30, 2024 and a loss from operations of $1,346,099 and net cash used by operations of $725,395 for the six months ended June 30, 2023. Moreover, at June 30, 2024, the Company had a working capital deficit of $(805,072) as compared to positive working capital of $454,969 at December 31, 2023. These factors raise substantial doubt about the Company’s ability to continue as a going concern within one year after the date that these unaudited financial statements are issued. Management cannot provide assurance that the Company will ultimately achieve profitable operations, become cash flow positive or raise additional capital. The accompanying financial statements have been prepared assuming that the Company will continue as a going concern, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. They do not include any adjustments related to the recoverability and/or classification of the recorded asset amounts and/or the classification of the liabilities that might be necessary should the Company be unable to continue as a going concern.

Reclassifications

Certain accounts and financial statement captions in the prior periods have been reclassified to conform to the current period. These reclassifications had no effect on the previously reported net loss.

NOTE 2 – INVENTORY

NOTE 3 – INVESTMENT IN SUBSIDIARY

For the three- and six-month periods ended June 30, 2024, we sold portions of the note receivable from ANI to various parties for total cash proceeds of $100,000 and $300,000, respectively, incurring a loss on the sale of the note of $15,000 and $41,782, respectively. The losses were recorded in Other Expense in the statement of operations. As a result, at June 30, 2024, the note receivable had a balance of $0 as compared to $341,782 at December 31, 2023; $0 was included in current assets at June 30, 2024 with $50,000 included in current assets at December 31, 2023.

The Company is accounting for its 30% ownership interest in ANI by the equity method of accounting under which the Company’s share of the net income (loss) of ANI is recognized as income (loss) in the Company’s statement of operations. Any dividends received from ANI as well as periodic losses for the Company’s 30% share will be treated as a reduction of the investment account. Periodic income will be treated as an increase in the investment account. At June 30, 2024 and December 31, 2023, the non-marketable investment in subsidiary was $263,959 and $253,835, included in non-current assets. For the three- and six-month periods ended June 30, 2024, the Company recorded income from the investment in the subsidiary of $0 and $10,123 respectively. For the three and six-month periods ended June 30, 2023, the Company recorded income of $8,782 and $40,938, respectively. See Note 9, Subsequent Events, describing the sale of a part of our interest in ANI.

NOTE 4 – NOTES PAYABLE AND FINANCE LEASE

Notes Payable

On January 7, 2022, the Company sold to one investor a $100,000 convertible note due March 31, 2025. On January 26, 2022, and January 31, 2022, the Company sold two $50,000 convertible notes to two different investors. The $50,000 notes are due March 31, 2025 and March 31, 2026. All three notes were issued at face value, and bear interest at 8% per annum, payable semi-annually in cash. The notes are convertible at any time at the option of the holder into shares of common stock at a conversion price of $1.75 per share.

On July 27, 2022, the Company sold two convertible notes, one for $50,000 and one for $25,000, both due on March 31, 2025. The $25,000 note is to Mr. Ron Berman, a Related Party. On August 22, 2022, the Company sold a $25,000 convertible promissory note due March 31, 2026. All three notes were issued at face value, and bear interest at 8% per annum, payable semi-annually in cash. The notes are convertible at any time at the option of the holder into shares of common stock at a conversion price of $1.75 per share.

On October 26, 2022, the Company sold to an investor a $25,000 convertible promissory note due October 31, 2023. Issued at face value, the note bears interest at 8% per annum, payable semi-annually in cash. The note is convertible at any time at the option of the holder into shares of common stock at a conversion price of $1.75 per share. On October 18, 2023, the Company and the holder extended the maturity date of the note to October 31, 2024.

On December 18, 2022, the Company issued a convertible promissory note for $50,000 that is secured by certain payroll tax credits the Company is entitled to receive under the Employee Retention Tax Credit program. The note was issued at face value and bears interest at 8% per annum, payable at maturity on June 18, 2024. The note can be converted to common stock at any time at the option of the holders at a conversion price of $1.75 per share at which point accrued interest will be paid in cash. At June 30, 2024, the note remains unpaid.

On June 14, 2023, the Company issued a convertible, secured note and warrants to purchase 10,000 shares of the Company’s common stock for $50,000 with the same terms as the one issued on December 18, 2022. The warrants were recorded as a debt discount on the date of issuances for a total value of $5,333. The balance at June 30, 2024 and December 31, 2023 of the debt discount was $1,622 and $3,390, respectively.

On July 24, 2023, the Company issued at face value a convertible note in the original principal amount of $50,000. The note is due on July 24, 2025, bears interest at 8% per annum and is convertible at $1.25 per share.

On November 2, 2023, the Company issued at face value a convertible note in the original principal amount of $50,000. The note is due on November 2, 2025, bears interest at 8% per annum and is convertible at $1.25 per share.

On June 10, 2024, the Company issued a $50,000 promissory note to an investor. The note bears interest at 1% per month and all principal and interest is payable 120 days from the date of issuance. The note is secured by two purchase orders from a large customer.

At June 30, 2024 and at December 31, 2023, we had outstanding convertible notes aggregating $575,000 and $525,000 in principal amount. The convertible promissory notes have not been included in diluted earnings per share as they would be anti-dilutive.

Finance Lease

In December 2020, the company entered into a finance lease for production equipment. We financed $85,000 over a period of 48 months with monthly payments of $2,135 during that time. At June 30, 2024 and December 31, 2024, the balances on the finance lease were $12,396 and $24,194, respectively. These balances are included in current liabilities on the balance sheet.

NOTE 5 – OPERATING LEASE

Effective May 31, 2020, we entered into a lease with a related party for a 29,220 square foot building in Madison Heights, Michigan. The occupancy and rent commencement date was October 1, 2020. The lease has an initial term of seven years with a renewal option at the end of the initial term for an additional 3-year term, and a second renewal option thereafter for an additional 5-year term. The renewal term is not included in the calculation of the operating lease liability. As the sole tenant, we are responsible for all taxes, ordinary maintenance, snow removal and other ordinary operating expenses. Rent is $6.50 per square foot, increasing by $0.25 per year. During the first three years we had the right to buy up to a 49% interest in Magic Research LLC for a price equal to 49% of the contributions received from other members. This right has now expired as we did not exercise the option. See Note 7, Stockholders’ Equity, for a description of warrants issued to the owners of Magic Research LLC in connection with this lease. The fair value of these warrants totaling $311,718 were recorded as initial direct costs of obtaining the lease and are included in right-of-use assets on the accompanying balance sheet. See Note 6, Related Party Transactions, for information about roles in management and economic participation by our CEO and several other directors in the landlord.

In February 2023, we reached an agreement with the landlord of our Michigan facility to accept $66,000 worth of our common stock at a price of $1.25 per share as partial payment of rent for the six-month period from October 2022 through March 2023. During that period, we paid cash of $8,056 per month, effectively a cash rent reduction of $10,983 per month. In May 2023, we reached a further agreement with the landlord under which we pay cash each month to cover the cost of the mortgage and the lease for the lighting fixtures, but that will allow us to pay the balance of the rent by issuing shares of our stock valued at $0.75 per share. We have the option to continue to use stock to pay a portion of the rent through 2024.

For operating leases, we calculated ROU assets and lease liabilities based on the present value of the remaining lease payments as of the date of adoption using the IBR as of that date. The ROU Asset was $727,814 at June 30, 2024 and $845,563 at December 31, 2023. The operating lease liability was $630,646 at June 30, 2024 and $722,419 at December 31, 2023.

NOTE 6 – RELATED PARTY TRANSACTIONS

At June 30, 2024 and at December 31, 2023, accounts payable – related parties totaled $117,627 and $55,520, respectively, and advances from related parties totaled $42,887 on both dates. These balances are presented separately in current liabilities on the accompanying balance sheets. These balances consist of amounts owed to directors and officers as well as to the landlord controlled by two of the Company’s directors.

See Note 9, Subsequent Events, regarding options granted to, among others, officers and certain directors.

Mr. Ron Berman and Mr. Tom Berman are the managers of the limited liability company that is the manager of PEN Comeback, LLC, PEN Comeback 2, LLC, Magic Growth, LLP, Magic Growth 2 LLC and Magic Growth 3 LLC. These five limited liability companies purchased shares of common stock and derivative securities from us in 2018, 2019, 2020, 2021 and 2022.

In addition, Mr. Tom Berman and Mr. Ron Berman are two of three individuals who share voting power of the sole manager of the limited liability company that is our landlord in Michigan. Together, Tom and Ron Berman hold, in the aggregate, a 5% economic interest in the landlord entity. Another director, Miles Gatland, owns a 12.5% interest in the Michigan landlord and he is a co-guarantor on the debt of that limited liability company. See Note 7, Stockholder’s Equity regarding the issuance of stock in partial satisfaction of unpaid rent. At June 30, 2024 and at December 31, 2023, rents accrued and unpaid totaled $93,627 and $30,141, respectively, which are included in related parties accounts payable on the balance sheet.

NOTE 7 – STOCKHOLDERS’ EQUITY

Description of Preferred and Common Stock

Preferred Stock

The preferred stock may be issued in one or more series. The Company’s board of directors are authorized to issue the shares of preferred stock in such series and to fix from time to time before issuance thereof the number of shares to be included in any such series and the designation, powers, preferences and relative, participating, optional or other rights, and the qualifications, limitations or restrictions thereof, of such series.

Common Stock

The rights of each share of common are the same with respect to dividends, distributions and rights upon liquidation. Holders of common stock each have one vote per share in the election of directors and other matters submitted to a vote of the stockholders.

Issuances of Common Stock

Common Stock Issued for Services

In February 2023, we reached an agreement with the landlord of our Michigan facility to accept 52,800 shares of our common stock at a price of $1.25 per share as partial payment of rent for the six-month period from October 2022 through March 2023. Those shares were issued in March, 2023. In May 2023, we reached a further agreement with the landlord that calls for us to pay cash each month to cover the cost of the mortgage and the lease for the lighting fixtures, but that will allow us to pay the balance of the rent by issuing shares of our stock valued at $0.75 per share. We have the option to continue to use stock to pay a portion of the rent through 2024. The landlord is a Related Party.

On May 30, 2023, the Company issued 76,922 shares of restricted common stock to a consultant as compensation for services. The shares are subject to forfeiture until vested. So long as the consulting services agreement remains in effect 4,273 shares vested in May for prior service, and another 4,273 shares vest at the end of May and each calendar month thereafter, with 4,277 shares vesting in December 2023. During 2024, 3,205 shares will vest at the end of each month, with 3,206 shares vesting at the end of December 2024.

Sales of Common Stock and Derivative Equity Securities

During the quarter ended June 30, 2024, the Company sold 210,000 shares of common stock for proceeds of $157,500. During the six-months ended June 30, 2024, the Company sold 283,334 shares of common stock for proceeds of $212,500.

During the quarter ended June 30, 2023, the Company sold 253,994 shares of common stock for proceeds of $346,064 and warrants to purchase up to 196,813 shares of common stock for proceeds of $4,136. The warrants are exercisable at any time during the four years after date of issue at a warrant exercise price of $1.75. During the six-months ended June 30, 2023, the Company sold 328,800 shares of common stock for proceeds of $439,571 and warrants to purchase up to 271,439 shares of common stock for proceeds of $5,428. The warrants are exercisable at any time during the four years after date of issue at a warrant exercise price of $1.75. Also, during the three-months ended June 30, 2023, the Company sold 10,000 warrants in connection with the issuance of a convertible note payable of $50,000 as disclosed in Note 5. In accordance with ASC 470, 11% of the value of the total convertible note payable was allocated to the warrants.

Stock Options

Warrants

As of June 30, 2024, there were outstanding and exercisable warrants to purchase 7,525,265 shares of common stock. The outstanding warrants have a weighted average exercise price of $1.72 per share and a weighted average remaining contractual term of 34.7 months. As of June 30, 2024 and December 31, 2023, there was no intrinsic value for the warrants. No warrants have been included in diluted earnings per share as they would be anti-dilutive.

2021 Equity Incentive Plan

On March 2, 2021, our Board adopted the 2021 Nano Magic 2021 Equity Incentive Plan (the “Plan”) to allow equity compensation for those who provide services to the Company and to encourage ownership in the Company by personnel whose service to the Company is important to its continued progress, to encourage recipients to act as owners and thereby in the stockholders’ interest and to enable recipients to share in the Company’s success.

On April 12, 2023, the Company granted 47,610 options under the 2021 Equity Plan. On May 30, 2023 the Board granted an additional 175,071 options under the 2021 Equity Plan to employees and a consultant. All options are at an exercise price of $0.65.

See Note 9, Subsequent Events, regarding additional options granted under the 2021 Equity Plan.

Other Options

On April 12, 2023, the Company issued an additional 30,000 options to Tom J. Berman, our President. On May 30, 2023, the Board granted 384,228 options to officers and to a consultant who is also a director.

See Note 9, Subsequent Events, regarding options granted to officers and certain directors.

NOTE 8 – COMMITMENTS AND CONTINGENCIES

Litigation

The Company may be, from time to time, subject to various administrative, regulatory, and other legal proceedings arising in the ordinary course of business. As of June 30, 2024 we were not a defendant in any proceedings. Our policy is to accrue costs for contingent liabilities, including legal proceedings or unasserted claims that may result in legal proceedings, when a liability is probable and the amount can be reasonably estimated. As of June 30, 2024 and December 31, 2023, the Company has not accrued any amount for litigation contingencies.

NOTE 9 – SUBSEQUENT EVENTS

On July 18, 2024, the Company sold an aggregate of 166,666 shares of common stock for proceeds of $125,000 to two different investors.

On July 29,2024, the Board authorized the sale of a portion of the Company’s interest in Applied Nanotech, Inc. The sale was consummated on the same day; the Company received $100,000 in cash and its interest in Applied Nanotech was reduced from 30% to 25%.

On July 29, 2024, The Company granted 411,268 options to employees, contractors and consultants under the 2021 Equity Plan and increased amounts available for grant by that number. All options entitle the holder to purchase shares at a strike price of $0.31 and expire five years from date of grant.

On July 29, 2024, the Company also granted options to our President & CEO, Tom Berman: 250,000 vesting on date of grant, 250,000 vesting on December 31,2024, and 1,000,000 that will vest if he earns a Profit Bonus under his contract and the Board elects to pay some or all of that bonus with options. On that same day, the Board granted 60,000 options to our Chief Financial Officer, Leandro Vera, 60,000 options to director Ronald Berman, 30,000 options to director Scott Rickert and 30,000 options to director and Secretary Jeanne Rickert. These options were 50% vested on date of grant and will vest ratably over the remainder of 2024. Options to officers and directors were not issued under the Plan, but these options also entitle the holder to purchase shares at a strike price of $0.31 and expire five years from date of grant.

On August 5, 2024, the Company sold 133,333 shares for proceeds of $100,000.