Nano Magic Inc. - Annual Report: 2021 (Form 10-K)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

For the fiscal year ended December 31, 2021

For the transition period from _____________ to _____________

COMMISSION FILE NO. 1-11602

Nano Magic Holdings Inc.

(Exact name of registrant as specified in its charter)

31601 Research Park Drive, Madison Heights, MI 48071

(Address of principal executive office, including Zip Code)

Registrant’s telephone number, including area code: (844) 273-6462

Securities registered pursuant to Section 12(b) of the Exchange Act:

Securities registered pursuant to Section 12(g) of the Exchange Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer as defined in Rule 405 of the Securities Act. Yes ☐ No ☒

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☒

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

The aggregate market value of the Common Stock held by non-affiliates of the Registrant, based upon the closing price of the Common Stock on the OTCQB system on June 30, 2021 of $1.25, was approximately $1,125,970.

As of March 28, 2022, the registrant had 10,077,681 shares of common stock issued and outstanding.

Documents Incorporated by Reference: No documents are incorporated by reference into this annual report on Form 10-K.

NANO MAGIC HOLDINGS INC.

FORM 10-K

TABLE OF CONTENTS

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Annual Report on Form 10-K (this “Report”) contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, which includes information about us and our industry that involve substantial risks and uncertainties. All statements, other than statements of historical facts, included in this Report regarding our strategy, future operations, future financial position, future net sales, projected expenses, prospects and plans and objectives of management are forward-looking statements. These statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, levels of activity, performance or achievement to be materially different from those expressed or implied by the forward-looking statements.

In some cases, you can identify forward-looking statements by terms such as “anticipate,” “believe,” “estimate,” “expect,” “intend,” “may,” “might,” “plan,” “project,” “will,” “would,” “should,” “could,” “can,” “potential,” “continue,” or the negative of these terms, and similar expressions intended to identify forward-looking statements. However, not all forward-looking statements contain these identifying words. These forward-looking statements reflect our current views about future events and are based on assumptions and subject to risks and uncertainties. Given these uncertainties, you should not place undue reliance on these forward-looking statements. Actual events or results could differ materially from those expressed or implied by these forward-looking statements as a result of various factors. There may be other factors that cause our actual results to differ materially from the forward-looking statements.

These forward-looking statements represent our estimates and assumptions only as of the date of this report. Unless required by U.S. federal securities laws, we do not intend to update any of these forward-looking statements to reflect circumstances or events that occur after the statement is made or to conform these statements to actual results.

PART I

Item 1. Business

Nano Magic Holdings Inc., a Delaware corporation (“we”, “us”, “our”, “Nano Magic” or the “Company”), formerly Nano Magic Inc., develops, commercializes and markets consumer and industrial products powered by nanotechnology. Our nanotechnology powered solutions are formulated in the Unites States. We are recognized for the products manufactured and sold by our wholly-owned subsidiary Nano Magic LLC (formerly PEN Brands LLC). These include the NANO MAGIC and ULTRA CLARITY brand eyeglass cleaner. Our consumer products include electronic device hygiene & protection, anti-fog solutions, household cleaning and automobile cleaning and protection in addition to lens care. Our focus for consumer products is to sell Nano Magic-branded consumer products in big box retail and direct-to-consumer sales on our website and other on-line marketplaces. We historically sold our consumer products directly to opticians, ophthalmologists and small optical retailers and we will continue to do so. Institutional and industrial applications include cleaning and defogging and other coatings for glass and ceramics. We also develop and sell printable inks and pastes, thermal management materials, and graphene foils and windows through our other wholly-owned subsidiary, Applied Nanotech, Inc. (“Applied Nanotech”). Applied Nanotech also functions as our Innovation and Technology Center in Austin, Texas, and, in addition to performing product development work for our business, engages in contract research and development work for government and private customers.

Our principal operating segments coincide with our different business activities. Our two reportable segments for the years ended December 31, 2021 and 2020 were (i) the Product segment and (ii) the Contract Services segment.

Product Segment

In our Product segment, revenue is based on the retail and institutional sale of specialty products utilizing nanotechnology to deliver unique performance attributes. We have a strong focus on understanding surfaces and our products for surfaces can be used on a wide variety of substrates. Our consumer products are sold as liquids, gels, foam and as wet and dry towelettes. Institutional coating products are typically sold in liquid form enabling application by a variety of common commercial techniques We rely on intellectual property including trade secret formulations to protect our proprietary technology.

We have multiple product technology platforms that offer solutions to common surface problems such as ease of cleaning, preventing fogging, preventing accumulation of dirt or grime, improving resistance to scuffing and wear and surface protection. All our products have some “nano” characteristic about them – whether it is being active at the molecular level, incorporation of submicron-particles, or creating very thin, self-assembling coatings that are 20 nanometers or less in thickness.

Our consumer products are primarily customized cleaning and protection solutions. With respect to our consumer products, we strive to create segment leading brands for solutions that are sustainable, of high quality, and that are both easy and safe to apply. Recently we introduced a new product that combines antifog and cleaning into one for convenience for our users. This, and other products can be used on eyeglasses, safety goggles and glasses, extreme sport glasses, goggles and visors. Our solutions are also packaged for use on electronic screens, windows, mirrors, shower doors, and other similar clear surfaces along with the cleaning of everyday household surfaces. We have also expanded into the auto care sector with Force Field^® windshield protection. This product creates a non-stick, super water repellent protective barrier — like a force field — to protect the windshield against rain, bugs, and salt. The coating solution is easy-to-apply and improves visibility and safety while driving.

Industrial surface treatment products include a family of coating liquids that create nano-thin, strongly-bound, invisible, “forcefield”-like coatings on surfaces used for glass and ceramic surfaces and a series of clear coatings for plastics incorporating submicron sized particles to improve abrasion resistance and wear resistance without sacrificing transparency. We manufacture our formulations internally to protect our technology and strive to maintain the highest quality for the products that we and our commercial partners bring to the marketplace.

Our surface treating products include:

In addition to our surface treatment products, we sell metallic inks and pastes to a variety of customers around the world. The submicron particles in our formulations are compatible with the nozzles used in digital printing, including 3D printing. Certain products based on nano-copper are available only outside Asia under agreements with our former research partner Ishihara Chemical Company, Ltd., that has exclusive rights in Asia to patents developed under research contracts with them. Other copper products that we sell are available worldwide.

In the medical field, our thin carbon foil made of layers of graphene is sold for use in cyclotron accelerators that produce nuclear pharmaceuticals used by the medical field in Positron Emission Tomography (PET) imaging.

Our vision is to harness the power of nanotechnology to create a safer, more socially conscious, and higher performing world. We have three primary areas of focus:

Marketing and Distribution

We sell our Nano Magic branded consumer products directly to consumers and retailers in the United States and through a distributor in Canada. Direct-to-consumer sales are through our website, nanomagic.com, on Amazon and other online marketplaces. We also have products in pharmacies, and big box retailers. Sales to big box retailers also include private label products under the retailers’ names. Some of our products are incorporated into our customer’s branded products. We continue direct sales to opticians and ophthalmologists.

Our industrial coating products, inks and pastes, and graphene foil products are sold directly to institutional and industrial customers.

Manufacturing Operations

We manufacture, pack and label liquids and towelettes as well as specialty surface coatings at our 29,220-square foot facility in Madison Heights, Michigan. Metallic inks and pastes and the graphene windows are made at our Innovation and Technology Center in Austin, Texas. Health and safety protocols related to the COVID-19 pandemic are in effect at our facilities, but both our facilities are operating.

Intellectual Property and Proprietary Rights

Our nanotechnology expertise and the related intellectual property used in our current products is specialized in the areas of surface science, molecular self-assembly, transparent composites, surfactants, sub-micron metallic inks and pastes and graphene foils. The intellectual property developed from this work is protected with a combination of selective patents and primarily by trade secrets. This intellectual property strategy is like that used by leading companies in the fragrance and flavors industry. No single patent is significant to any of our commercial products. Please refer to the section entitled “Intellectual Property Rights” in this Item 1 for a more detailed discussion of these matters.

Competition

Products sold into the optical segment, which has historically been our core sales channel, have a small number of significant competitors. Our products are known to be the “benchmark” products in these segments and generally outperform those of our competitors. Some of our products in these segments do compete for certain customers or certain applications against lower-priced, traditional materials. Most of the companies selling products into these market segments are privately-held U.S. packaging or catalog companies. Examples in the U.S. include Hilco Accessories, California Accessories, and Amcon Laboratories. Internationally, the catalog company, Prosben, Inc., from the Peoples Republic of China is a competitor. These companies are not selling direct to consumer or in big box retail and pharmacies. Optical company, Carl Zeiss, sells its branded optical products in big box retail in those chains where it has optical stores.

In the nano-coating products area or the anti-fog product line we are not aware of any competitive products that we believe match our product performance or processing characteristics. With the COVID-19 pandemic and fogging caused by increased use of masks, other companies have made more of an effort to sell anti-fog products and there were new entrants into this market, but no company has a significant portion of the market.

Most inks and pastes sold in commercial quantities today are manufactured and sold by large multinational chemical companies. For example, the two largest suppliers of silver inks and pastes for solar cell production are DuPont and Ferro. We are unable to compete directly with companies of that size in established silver ink markets. The use of metallic inks in 2D and 3D printing is just developing. Because silver is expensive, other metals are preferred for these applications. Numerous other companies are working with other technologies for the commercial use of conductive inks and pastes.

Backlog

Sales are primarily made under purchase orders for delivery of products. We do not believe that a backlog as of any date is indicative of future results. Some agreements give customers the right to purchase a specific quantity of products during a specified period, but these agreements do not obligate the customers to purchase any minimum quantity. Private label customers are required to commit either to minimums or to repurchase unique inventory items related to their product(s). The quantities purchased by the customer, as well as the shipment schedules, are frequently revised during the agreement term to reflect changes in the customer’s needs. Because of our relatively small size, a customer’s delay of a product shipment can make a difference in the results for an accounting period.

Geographical Information

All long-lived assets are in the United States.

Sources and availability of raw materials and the names of principal suppliers

We use third-party suppliers in the United States to obtain substantially all raw materials, components and packaging products. As is customary in our industry, historically we have not had long-term or exclusive agreements with third-party suppliers and have generally made purchases through purchase orders. In the last quarter of 2018 and first quarter of 2019 we terminated most of our outside contract and toll manufacturing, bringing our manufacturing back in house. We believe that we have good relationships with our suppliers.

Apart from the disruption affecting all manufacturing businesses as a result of the COVID-19 pandemic, some of the raw materials and bottles used to produce our liquid products are used to produce hand sanitizer and other cleaning product that were in high demand during the pandemic and some of our raw materials and packaging became harder to find due to the COVID-19 pandemic, but we were able to obtain what we needed for our operations. With some suppliers we have moved to blanket purchase orders and have seen some price increases, but this has not disrupted operations.

Key Customers

A limited number of key customers historically accounted for a majority of our revenue in the Product segment. The company re-built its customer base in 2021 and 2020 with the addition of new sales channels. In 2021 four customers represented 52% of Product revenue, and in 2020, two customers represented 21% of Product revenue. A limited number of customers constitute substantially all of our Contract services segment. In 2021, two customers provided 100% of revenue in the Contract services segment and, in 2020, three customers represented 92% of revenue in that segment.

Impact of COVID-19

In December 2019, COVID-19 was first reported in Wuhan, China. Less than four months later, on March 11, 2020, the World Health Organization declared COVID-19 a pandemic. During the rest of 2020, restrictions imposed by Federal, state and local governments 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. We experienced longer lead-times to receive supplies and price increases on some items, but did not suffer any major disruption and these changes have been incorporated into our operating procedures and business.

The increased use of face masks and other personal protective equipment as a result of the pandemic created additional demand for our antifog product. Whether this will continue as government restrictions are lifted and COVID-19 related recommendations for mask wearing become less restrictive is unknown.

Whether the effects of COVID-19 restrictions on businesses and our customers generally, and on our business in particular, will continue, and how this will change with changes in government restrictions over time, or from other effects of the COVID-19 pandemic is unknown.

Contract Services Segment

Our Contract services segment functions as the Innovation and Technology Center for our new products as well as performing work for government agencies and private strategic partners. Formerly called the research and development segment, this segment has moved away from areas of research that do not involve product development, especially government contracts that required us to fund part of the research cost. This segment is involved in development work under contract for government and private entities. The Center is also a resource for proof of concepts and prototypes for proposed Nano Magic products. Our work generally falls under one of three technology platforms:

Much of our contract product development work is done under government contracts. Government contracts frequently limit profit on work done. With private development contracts, there is a relationship between revenues received under the contract and rights granted to the licensee under the contract. Our short-term goal when we work for others is to cover all out-of-pocket costs and contribute to our overall overhead. Our long-term goal is to become a trusted supplier of products to our development partners.

Nanoelectronics Applications – Inks and Pastes

Metallic Inks & Pastes

Copper Inks - New digital and additive manufacturing processes allow industries to move from the design process directly to the production line. We believe that only submicron particles are capable of producing inks that are compatible with the nozzles used in digital printing.

Other metallic inks – Our technology and development work in conductive inks also resulted in inks and pastes using nickel, copper-nickel alloy, silver, indium, and aluminum. Research partners who funded some of our work using silver and aluminum have exclusive rights to certain products for solar applications. We are not restricted in using products for other applications, and we can sell into the solar field our products that do not infringe those specific patents.

These different inks can be used in printed electronics as well as printed sensors.

Technical Inks Printing Solution (TIPS)

Conductive inks have the potential to revolutionize many types of electronics manufacturing. Our strategy is to provide a comprehensive solution for end users not just by developing inks, but assisting in the process from start to finish. We call this our Technical Inks Printing Solution. We have also formed relationships with hardware manufacturers with the goal of providing seamless integration into high volume manufacturing for companies wishing to use conductive inks in their manufacturing processes. In addition to traditional 2D printing applications, we developed multifunctional inks for 3D printing applications, the fastest growing segment of printed electronics.

We also build on our expertise in inks and pastes to work with potential customers to develop inks to their specifications for their products in development. Product sales typically come from repeat business or from customer inquiries in our areas of expertise.

Sensors

Our approach to sensor technology offers the unique advantage of recognizing and sometimes measuring materials at the molecular level. Our competition in the sensor area will come from a variety of technologies and companies depending on the purpose and use of the sensor. The areas where we are currently active are described below.

Hydrogen and Methane Sensors. Hydrogen sensors were initially targeted for use in fuel cells for automobiles and for remote monitoring of large power transformers. We developed a hydrogen sensor for use in the measurement of hydrogen in power transformer products. Currently, we are not aware of commercial interest in hydrogen sensors.

Methane gas detectors that we developed for use in the natural gas industry under funding from the Northeast Gas Association have achieved UL 1484 certification for Residential Gas Detectors. In 2018, the Northeast Gas Association completed a field test and reliability study of these sensors. The results have led to further work to improve the performance of these detectors beyond the UL 1484 standards. Northeast Gas Association has told us that they have a commercialization partner. Following that, in 2020 we reached agreement with the Northeast Gas Association to license to our background intellectual property pursuant to which we will be entitled to a percentage of revenue from any commercial sales through March 31, 2028. It is our understanding that the Northeast Gas Association is not presently working to commercialize its sensor technology.

Submicron Particle Formulations and Materials for Health and Safety Applications

Using our experience with metallic inks and our prior work with carbon nanotube composites we developed a new graphene foil that is used by institutional customers who make nuclear pharmaceuticals for medical imaging applications. We have developed mountings for the foil and have developed foils that include both carbon nanotubes and graphene for longer life in cyclotron applications. We have built on this experience to develop targets to be used by customers in this industry.

Related to the Company’s contract services revenue, three customers accounted for 100% and 92% of contract services revenue in 2021 and 2020, respectively. All three of those customers were government entities in 2021 and 2020.

Intellectual Property Rights

An important part of our overall business and product development strategy is to protect our intellectual property and, when appropriate, we seek patent protection for our products and proprietary technology. Trade secret protection is most important to our products. Our patent portfolio consists of approximately a dozen issued patents.

The patenting of technology-related products and processes involves uncertain and complex legal and factual questions. The legal standards change from time to time, and administrative and court interpretations are not always consistent in one jurisdiction, or across different jurisdictions. Therefore, there is no assurance what scope of protection any issued patents will provide, or whether any such patents ultimately will be upheld as valid by a court of competent jurisdiction in the event of a legal challenge. The costs of such proceedings would be significant and an unfavorable outcome could result in the loss of rights to the invention at issue in the proceedings.

If we fail to obtain patents or elect not to file for patent protection, there can be no assurance that we can protect our rights in the technology, or that others will not independently develop substantially equivalent proprietary products and techniques, or otherwise gain access to our technology.

Competitors have filed applications for, or have been issued, patents, and may obtain additional patents and proprietary rights relating to products or processes used in, necessary to, competitive with, or otherwise related to, our patents. The scope and validity of these patents, and the extent to which we may be required to obtain licenses under these patents or under other proprietary rights and the cost and availability of licenses is unknown. This may limit our ability to use and to license our technology. Litigation concerning these or other patents could be protracted and expensive. If suit were brought against us for patent infringement, we could potentially challenge the validity of the other patent but would need to overcome a presumption of validity. If we were found to infringe and the patent was held valid (or was unchallenged), there could be no assurance that the prevailing party would grant us a license. Even if a license were available, the payments that would be required would be unknown and could materially reduce the value of our interest in the affected products.

We require our employees, directors, consultants, outside scientific collaborators, sponsored researchers, and other advisors to execute confidentiality agreements upon the commencement of employment or consulting relationships with us. These agreements provide that all confidential information developed or made known to the individual through the relationship is to be kept confidential and not disclosed to third parties except in specific circumstances. In the case of employees and some consultants, the agreements provide that all inventions conceived by the individual while working for us will be our property. There is no assurance, however, that these agreements will provide sufficient protection for our trade secrets in the event of unauthorized use or disclosure of such information.

Government Contracts

A portion of our revenue in the Contract services segment consists of reimbursement of expenditures under U.S. government contracts. Our revenue from government contracts was $376,105 and $683,422 for the years ended December 31, 2021 and 2020, respectively. These reimbursements represented all or a portion of the costs associated with such contracts. As of December 31, 2021, we had one government contract in process that had approximately $90,762 of potential revenue yet to be recognized. Government contracts are subject to delays and risk of cancellation. Also, in the ordinary course of business, government contractors generally are subject to audits and reviews by government agencies. These audits and reviews involve review of a contractor’s performance on its contracts, as well as its pricing practices, the costs incurred and compliance with all laws, regulations and standards. We have been audited by the government, with no material changes, and we do not expect the results of any government audit to have a significant effect on our operations or our financial statements.

Research and Development

Research and development drive our new products and improvement of existing products. Research and development costs incurred in the development of the Company’s products was $34,875 for the year ended December 31, 2021. Research and development costs were $56,816 for 2020. This represented approximately 0.9% and 2.2% of our total operating costs in each of those years. The ability to engineer product performance using nanotechnology is one of the ways we distinguish our products in marketing and sales of our products. Product research and development work includes branding and packaging, development and refinement of formulas, engineering of liquid formulas that can be applied both by hand and by machine, optimization for a variety of performance characteristics, testing and characterization, and work on manufacturing processes and techniques both for producing the product, and for a customer’s use of the product.

Compliance with Laws and Regulations

Our operations must satisfy governmental safety standards. Applicable safety standards are established by the U.S. Occupational Safety and Health Administration (“OSHA”), pollution control standards by the U.S. Environmental Protection Agency (“EPA”) and other state and local regulations, including foreign regulation for products manufactured or shipped outside the U.S. We take these requirements into account in product development. Cost of compliance with these regulations has not been significant in the past and we do not expect it to be material in the future.

OSHA, the EPA, the CDRH and other governmental agencies, both in the United States, the states where we or our customers sell products, and foreign countries, may adopt additional rules and regulations that may affect us and products using our technology. The cost of compliance with these regulations has not been significant to us in the past and is not expected to be material in the future. Changing regulations can affect our customers, and we have in the past, and may be required in the future, to reformulate or change packaging to address regulatory issues. This can affect timing of sales which may be significant in an accounting period.

Our commercial products do not require any government approvals.

Employees

As of December 31, 2021, we had 35 full-time employees. Our employees are valued team members and are important to our growth and success. This is especially true given our relatively small size. By cross-training so that individuals can master a number of different tasks, we try to create a more challenging work environment and minimize disruption in the case of absence or employee departures. We strive to provide a positive work environment emphasizing a positive attitude, team work and ethical behavior. We are not subject to any collective bargaining agreements, and we consider our relations with our employees to be good.

Available Information

General information about the Company can be found on our website, www.nanomagic.com

Item 1A. Risk Factors

COVID-19 has disrupted the global economy and Nano Magic’s supply chain and the long-term effects of the pandemic cannot be predicted.

The COVID-19 pandemic and government orders imposed restrictions and disrupted the U.S. and global economies. The duration of the disruption and the short and long-term effects of new and changing requirements and new consumer and business behaviors are impossible to predict.

Nano Magic experienced increased demand for its anti-fog product as a result of the pandemic. It is unknown whether demand will remain high once the effects of the pandemic are blunted by the availability of new vaccines. Similarly, the staying power of new entrants who took advantage of the demand is unknown.

The long-term effect of the pandemic on the supply chain, raw materials supply and pricing, the distribution of Nano Magic products, and changes in consumer behavior as a result of the pandemic experience cannot be foreseen.

Supply chain disruption and sales growth can put additional strain on our need for working capital.

Disruption in the supply chain from COVID-19 has caused us to see some higher prices and longer lead times. To assure supply, Nano Magic must order materials with longer lead times, increasing the time between its down payments to vendors and the time when Nano Magic can realize a sale. Increased order volume and increased sales require that Nano Magic buy larger quantities of raw material inventory and packaging materials. Sales growth also increases its need for working capital, as Nano Magic must pay for the materials before it can see the increased revenue from customers. Similarly, labor must be paid for before the revenue is realized. This can create a greater need for growth capital when funds are already curtailed by Nano Magic’s operating losses.

Nano Magic has limited resources which can hamper its ability to execute its business plan.

Nano Magic is a small company with limited human and financial resources. This limits the resources Nano Magic can devote to the sale and promotion of its products, and may limit its ability to tackle issues that arise in manufacturing and distribution. Nano Magic’s size curtails the resources Nano Magic can devote to promoting its existing products and developing brand recognition. Nano Magic’s limited resources can constrain its ability to take advantage of opportunities, may limit its growth and may give competitors time to challenge its products in the marketplace. These factors will make it harder for Nano Magic to be successful.

Nano Magic is dependent on key executives and loss of its President and CEO or other key personnel could adversely affect its results of operations and financial condition.

Nano Magic’s President and CEO, Tom Berman, is under contract through the end of 2023. His vision and leadership are very important to the execution of the Nano Magic business plan, and loss of his services would adversely affect Nano Magic’s results of operations and the value of its stock. Other executives and employees are at-will employees, so they may terminate their employment relationship at any time. Loss of experienced personnel and their knowledge of Nano Magic’s business and industry would be extremely difficult to replace. Moreover, because of Nano Magic’s small size, it would be very difficult for remaining personnel to perform the duties fulfilled by the loss of personnel.

Increased sales under the Nano Magic brand name and building a strong brand with consumer brand loyalty will take time.

Nano Magic has placed a number of Nano Magic branded products in pharmacies and big box retailers. Developing customer loyalty and brand awareness takes time. The time frame could be shortened if Nano Magic had greater resources for marketing and advertising.

Consumer confidence and spending habits have been affected by the COVID-19 pandemic, but what that means and how this will affect sales of Nano Magic products remains unknown.

Nano Magic is a small company and the marketplace for consumer cleaning products is competitive.

Nano Magic has a limited line of products; retail chains and big-box stores may only want suppliers that offer a more extensive product line. Nano Magic has fewer resources than many of its competitors to devote to extending product lines, and to new products and packaging. Its inability to devote the required resources to adapt to the demands of consumers or to meet competitive product offerings may limit Nano Magic’s ability to execute on its business plan and hurt its revenue.

If we or our third-party service providers experience a security breach, data loss or other compromise, including if unauthorized access to our data, our business operations may be interrupted, our reputation and business relationships may be harmed, and we may incur other costs.

We use cloud-based computer systems for our communications (e-mail, voice, data exchange, etc.), for other aspects of our operations and for our business and financial records. Any security breach, data loss, or other compromise, including those resulting from a cybersecurity attack, phishing attack, or any unauthorized access, unauthorized usage, virus or similar breach or disruption could result in the loss or destruction of or unauthorized access to, or use, alteration, disclosure, or acquisition of, data, business disruptions and delays as well as damage to our reputation, litigation, regulatory investigations, or other liabilities. Our website and technology infrastructure also may experience performance issues due to a variety of factors, including infrastructure changes, human or software errors, hosting disruptions, capacity constraints, technical failures, natural disasters, or fraud.

We also rely on cloud technologies from third parties in order to operate critical functions of our business, including financial management services, relationship management services, and aspects of our manufacturing and sales functions. If our service agreements are terminated, or there is a lapse of service, elimination of services or features that we utilize, interruption of internet service provider connectivity or damage to our providers’ facilities, we could experience business interruptions as well as significant delays and additional expense in arranging or creating new facilities and services and/or re-architecting our cloud-based offerings for deployment on a different cloud infrastructure service provider, which could adversely affect our business, financial condition and results of operations. Our vendors and service providers may also be the targets of cyberattacks, malicious software, phishing schemes, and fraud. Any of the foregoing could have a material adverse effect on our business, including our financial condition, results of operations and reputation.

Our facilities, as well as the facilities of third-parties that provide or maintain, or have access to our data or network infrastructure, are vulnerable to damage or interruption from earthquakes, hurricanes, floods, fires, cyber security attacks, terrorist attacks, power losses, telecommunications failures and similar events. In the event that our or any third-party provider’s systems or service abilities are hindered by any of the events discussed above, our ability to operate may be impaired. A third party’s decision to close facilities or terminate services without adequate notice, or other unanticipated problems, could adversely impact our operations. If business continuity and disaster recovery plans of ours or of a third-party provider prove to be inadequate in preventing the loss of data or service interruptions, this could cause further disruptions to our operations or damages to important systems or facilities or damage to our computer hardware or systems or those of our employees, or customers. Our systems have been the target of cyber-attacks. Although we have taken and continue to take steps to enhance our cybersecurity posture, we cannot assure that future cyber incidents will not occur or that our systems will not be targeted or breached in the future.

Drug stores and big-box retail chains that Nano Magic has targeted as a distribution channel to increase its sales volume have their own specific product requirements and demand a high level of support from vendors which will be challenging for Nano Magic, due to its size and limited resources.

To supply a large number of stores and maintain their brand quality, drug stores and big-box retail chains often require, among other things, that their vendors comply with scheduling and packaging requirements, maintain back-up inventory in reserves and impose other standards and restrictions on their vendors. If Nano Magic, because of its limited resources, cannot meet these requirements, then it will not be able to service these distribution channels, and Nano Magic’s potential for revenue growth will be harmed. Moreover, losing a customer may leave Nano Magic with significant obsolete inventory.

Sales of specialized coatings to industrial customers that incorporate Nano Magic products into their own product offerings make us dependent on Nano Magic’s industrial customers’ commitment to the product and dependent on the success of Nano Magic’s customers.

Some of Nano Magic’s existing products are sold to institutional customers that incorporate Nano Magic’s product into their own product or service offering to their customers. This means the success of Nano Magic’s product is dependent on the level of support, marketing and customer assistance provided by the institutional customers. Also, Nano Magic cannot control timing, marketing or introduction of its products or improved products, the timing or methods used to address customer concerns, and Nano Magic cannot affect directly marketing or distribution of the products or services that incorporate its products. If Nano Magic’s industrial customer has other priorities or is unsuccessful in its marketing or provides poor customer service, then the sales of Nano Magic’s products and Nano Magic’s results of operations will be adversely affected. To the extent that Nano Magic’s customers feel the effects of an economic downturn from the COVID-19 pandemic, that may lessen their interest in introducing products or services incorporating Nano Magic products.

Revenue in the contract research segment is dependent on government funding for technology development that is subject to a number of risks that could adversely impact Nano Magic.

Research contracts funded by the U.S. government are awarded through multiple agencies. Agency priorities and focus can change over time, and government funding overall is affected by political considerations affecting priorities and budgets. Government funding and priorities will also be impacted by the COVID-19 pandemic. Many of Nano Magic’s projects originate with the SBIR program. The initial grant is small, but if Nano Magic establishes proof of concept, then it will be eligible for larger, follow-on grants. However, eligibility for such additional grants also require approval and grant award funding. If funding priorities change, then new grants may not be made in areas that are a focus for Nano Magic’s research, and Nano Magic may need to refocus its funding proposals or apply to different agencies. Moreover, some parts of most projects are the responsibility of subcontractors, and a failure of performance by a subcontractor may adversely affect performance under the contract and may affect follow-on funding or Nano Magic’s reputation as a government contractor or subcontractor. Failure to receive awards of new research funding will adversely affect revenue and margin in Nano Magic’s Contract research segment.

Risks relating to the Introduction of New Products

Other cleaning product companies are much larger, with more money for advertising and marketing and staff dedicated to regulatory regimes related to selling disinfectants into the consumer market.

Nano Magic is working to accomplish a commercial launch of a new cleaning product based on its patented technology. Other Nano Magic products have not been subject to regulations administered by the EPA. Compliance with EPA requirements may involve significant product testing and qualification — and take time and money — and new and changed regulations require monitoring on an ongoing basis. In addition, other government regulations apply to consumer sales. Nano Magic does not presently have staff responsible for regulatory approvals and compliance and will need to build that capacity or hire outside consultants. How this will impact time to commercial launch and the cost of compliance, both to accomplish launch and on an ongoing basis, are unknown.

Sales to new industrial or institutional customers typically have a long-lead time, as much as two years between customer interest and the first commercial sale, which makes it difficult to capitalize on opportunities and limits Nano Magic’s ability to grow revenue.

To become a supplier to a new institutional customer Nano Magic must complete the customer’s internal approval process and be set up as a new vendor. This process is outside of Nano Magic’s control and puts a strain on its limited resources. When the product is a coating product, Nano Magic’s technology may need to be incorporated into the customer’s manufacturing or the production processes of its customers. This can require an initial small-scale pilot project before the process with Nano Magic’s coating or technology is expanded to full-scale commercial production. If that occurs, even if no problems are encountered, then commercial sales will be delayed, and Nano Magic must allocate the technical resources to support the customer as it scales-up production. The time and resources required make the effort more risky for Nano Magic, as the customer could stop the project at any point. The process also requires a significant commitment from the customer, and recognizing the limits of Nano Magic’s resources, potential customers may choose not to work with a small supplier.

Nano Magic has limited resources which could hamper its ability to launch new products.

Nano Magic’s small size and limited resources reduce the number of potential new product ideas that Nano Magic can pursue and the number of potential products that Nano Magic works on at any time. These constraints can also limit Nano Magic’s ability to bring new product ideas through development stage and commercial-scale manufacturing. Its limited resources can inhibit Nano Magic’s ability to take advantage of opportunities, and may give competitors time to challenge its products in the marketplace. These factors may hinder Nano Magic’s ability to expand its product line and grow its revenue.

Some of Nano Magic’s technology development is in its early stages and the viability of commercial products is unknown.

Some applications of Nano Magic’s intellectual property, and certain products that use these technologies, will require significant additional development, engineering, testing and investment prior to commercialization. Unknowns include: whether commercially viable products can be developed; the size of the potential customer base; the resources required to develop, test, standardize, manufacture, market, distribute and sell these potential products. Evaluating the potential of a product under development is a matter of judgment, and errors in judgment relating to products Nano Magic is developing would reduce the resources available for other potential products and delay commercialization which would adversely affect Nano Magic’s results of operations and may require Nano Magic to seek additional capital that may not be available on acceptable terms, if at all.

Risks Relating to Nano Magic’s Technology and Commercialization

Nano Magic’s strategy to commercialize new products from its intellectual property may be more difficult, costly or time-consuming than expected, any of which could adversely affect Nano Magic’s results and negatively affect the value of its common stock.

Though few companies have successfully developed commercial products based on nanotechnology, Nano Magic plans to create new products using its intellectual property. To implement this plan, Nano Magic must identify product opportunities, take the products from concept to prototype, and make and sell the new product commercially. Many factors affect a customer’s acceptance of new products and many new product ideas are never realized. Many others never achieve commercial success. If Nano Magic cannot successfully develop and sell products enhanced by nanotechnology, or if the process drags on, then the value of Nano Magic’s common stock may continue to be adversely affected.

Nano Magic’s products may infringe the intellectual property rights of others, which may subject it to claims, or prevent or delay its product development efforts and stop it from selling or increase the costs of its products.

Nano Magic’s commercial success depends in part on its ability to operate without infringing the patents and other intellectual property rights of third parties. If claims are made that Nano Magic is using third party technology without authorization or that any third-party patents cover Nano Magic’s products or their use, then the holders of any of these patents or other intellectual property may be able to block the sale of Nano Magic’s products unless Nano Magic obtains a license or changes the products so as not to use the third-party’s intellectual property. Nano Magic could incur significant costs defending against any claim; and, if Nano Magic is liable, then Nano Magic may not be able to enter licensing arrangements or to redesign the products at a reasonable cost or on reasonable terms.

Nano Magic may be unable to adequately prevent disclosure of trade secrets and other proprietary information.

Nano Magic relies on trade secrets to protect its proprietary know-how and technology, especially where Nano Magic does not believe patent protection is appropriate or obtainable. Others independently may develop the same or similar technology, or otherwise obtain access to Nano Magic’s proprietary technology. Nano Magic relies in part on confidentiality agreements with its employees and consultants to protect its trade secrets and other proprietary information. These agreements may not effectively prevent disclosure of confidential information and may not provide an adequate remedy in the event of unauthorized disclosure. Costly and time-consuming litigation could be necessary to enforce and determine the scope of Nano Magic’s proprietary rights. Failure to obtain or maintain trade secret protection could enable competitors to use Nano Magic’s proprietary information and to develop products that better compete with its products.

Any lawsuits relating to infringement of intellectual property rights necessary to defend Nano Magic or enforce its rights will be costly and time consuming.

Nano Magic’s ability to defend its intellectual property may require litigation to enforce its rights or to defend litigation brought by a third-party. Any of these lawsuits, regardless of their success, could be time consuming and expensive to defend and resolve and may require delay or suspension of commercial sales while they are pending. The cost could cause Nano Magic to forego litigation or to settle on terms that are disadvantageous. If litigation is undertaken or defended, that attendant cost or delay could have a material, adverse impact on Nano Magic’s results of operations.

Some health effects of nanotechnology are unknown.

There has been scientific debate on the health effects of nanomaterials. The science of nanotechnology is engineering at the molecular level to modify or build materials. Many nano-materials are found in nature; others are not naturally occurring. Some scientists believe that certain nanomaterials may be hazardous to human health or the environment. The health effect of new materials is unknown, and can be affected by how they are incorporated and bonded to other materials. Nano Magic focuses on materials larger than 100 nanometers so that they are not regulated as nanoparticles, and Nano Magic carefully evaluates potential health effects of its products on its customers and the effects of handling materials on Nano Magic’s employees. Nano Magic is very mindful of the risks of materials Nano Magic uses and focuses on health and safety. However, debate about the health effects of nanoparticles and nanotechnology may adversely affect market acceptance of Nano Magic’s products and adversely affect its financial performance.

Risks Related to Ownership of Nano Magic’s Common Stock

Nano Magic common stock has not resumed trading on the OCTQB since the SEC issued an order suspending trading for a period of 10 days. Very few companies resume trading following a trading suspension, and failure of Nano Magic stock to resume trading will likely depress Nano Magic’s stock price and will also make it more difficult to sell Nano Magic stock.

On April 30, 2020, the Commission issued an Order of Suspension of Trading (the “Order”) with respect to Nano Magic’s Common Stock. The trading suspension associated with the Order expired after ten (10) business days, at 11:59 PM on Thursday, May 14, 2020. Nano Magic has not resumed trading on the OTCQB since entry of the trading suspension and the resumption of trading eligibility. One effect of the Order is Nano Magic lost eligibility for the “piggyback exception” under Rule 15c2-11(f)(3) promulgated under the Exchange Act. Even if the Commission were to rule in favor of Nano Magic and restore the “piggyback exception,” then there still is no assurance that a broker-dealer will resume publishing quotations for Nano Magic.

Concentration of stock ownership with affiliates could make a management change or an acquisition of Nano Magic more difficult.

Approximately 84% of the outstanding common stock is owned or controlled by Nano Magic’s present officers and directors. Certain provisions of Nano Magic’s organizational documents could discourage potential acquisition proposals, delay or prevent a change in control of us or limit the price that investors may be willing to pay in the future for shares of Nano Magic’s common stock. For example, the amended and restated certificate of incorporation and amended and restated by-laws will:

These provisions could also limit the price that investors would be willing to pay in the future for shares of Nano Magic common stock.

Nano Magic’s common stock is thinly traded, and the number of free trading shares is small, thereby contributing to price volatility.

Even before the trading suspension (described above), there was little trading of Nano Magic common stock. At present, Nano Magic stock trades in the grey market. As a result, an investor may not be able to sell Nano Magic common stock at the time that the investor would like to sell. Furthermore, if a stock is thinly traded, then any sale may depress the market price.

The limited number of Nano Magic’s free trading shares may limit its ability to raise capital through private placements forcing Nano Magic to offer its stock using more costly qualification or registration procedures.

To remain eligible for the OTCQB, Nano Magic must have a minimum float of 10% of the outstanding stock. Shares sold in a private placement are restricted, and issuing too many restricted shares will take Nano Magic below the float required to remain on the OTCQB. This may force Nano Magic to use available qualification and registration procedures for any capital raise. This in turn would require additional time and resources before Nano Magic would have additional funds for operations or other purposes.

The market price of Nano Magic’s common stock is subject to potential significant price fluctuation because the common stock is thinly traded, and that could result in substantial losses for investors and subject Nano Magic to securities class action litigation.

Among the factors that may cause the market price of Nano Magic’s common stock to fluctuate are the risks described in this “Risk Factors” section and other factors, including:

In addition, the stock market in general, the OTCQB and the market for nanotechnology companies in particular, may experience a loss of investor confidence. Such loss of investor confidence may result in extreme price and volume fluctuations in Nano Magic common stock that are unrelated or disproportionate to the operating performance of Nano Magic’s business, financial condition or results of operations. These broad market and industry factors may materially harm the market price of Nano Magic’s common stock and expose Nano Magic to securities class action litigation. Such litigation, even if unsuccessful, could be costly to defend and divert management’s attention and resources, which could further materially harm Nano Magic’s financial condition and results of operations.

Nano Magic does not intend to pay dividends for the foreseeable future.

Nano Magic intends to retain earnings for the foreseeable future to finance the operation and expansion of its business, and Nano Magic does not anticipate paying cash dividends. Stockholders can expect to receive a return on common stock only if the market price of the stock increases.

Future sales of Nano Magic’s common stock may depress its share price.

Sales of substantial number of shares of Nano Magic’s common stock in the public market following a capital raise, or the perception that these sales may occur, could cause the market price of Nano Magic’s common stock to decline.

Nano Magic’s common stock is a “penny stock” under SEC rules, and it may be more difficult to resell securities classified as “penny stock.”

Nano Magic’s common stock is a “penny stock” under applicable SEC rules (generally defined as non-exchange traded stock with a per-share price below $5.00). Unless Nano Magic maintains a per-share price above $5.00, these rules impose additional sales practice and disclosure requirements on broker-dealers that recommend the purchase or sale of penny stocks to persons other than those who qualify as “established customers” or “accredited investors.” The additional burdens imposed upon broker-dealers by such requirements may discourage broker-dealers from effecting transactions in Nano Magic’s securities, which could severely limit the market price and liquidity of Nano Magic’s securities. These requirements may also affect your ability to resell Nano Magic’s common stock.

Nano Magic has reported material weaknesses in its internal controls over financial reporting, and if not remedied, at some point Nano Magic may determine that these internal controls may not be effective.

In order to remedy the identified deficiencies in its internal controls over financial reporting, Nano Magic may be required to add additional staff. Nano Magic may not be able to remediate any future material weaknesses, or to complete its evaluation, testing and any required remediation in a timely fashion. During the annual evaluation process, if Nano Magic identifies one or more material weaknesses in its internal controls over financial reporting, then Nano Magic may be unable to assert that its internal controls are effective. If Nano Magic is unable to assert that its internal controls over financial reporting are effective, investors then could lose confidence in the accuracy and completeness of its financial reports, which could harm Nano Magic’s stock price.

Nano Magic’s obligations associated with being a public company require significant resources and management attention, and carry significant cost.

As a public company, Nano Magic has legal, accounting, administrative and other costs and expenses that burden its profit As a reporting company under the Exchange Act, Nano Magic is required to file annual, quarterly and current reports with respect to its business and financial condition, and proxy and other information statements, and is subject to the rules and regulations implemented by the Commission, the Sarbanes-Oxley Act, and the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, and accounting pronouncements and standards of the Public Company Accounting Oversight Board, each of which imposes additional reporting and other obligations on public companies.

Moreover, Nano Magic must monitor changes and comply with any changes to these rules and regulations, and with any future changes in laws, regulations and standards relating to corporate governance and public disclosure. Changes can create uncertainty for public companies, increase legal and financial compliance costs and make some activities more time consuming and costly. Laws, regulations and standards are subject to varying interpretations, in many cases, due to their lack of specificity, and, as a result, their application in practice may evolve over time as new guidance is provided by regulatory and governing bodies. This could result in uncertainty regarding compliance matters and higher costs necessitated by ongoing revisions to disclosure and governance practices. Nano Magic’s need to comply with existing and evolving regulatory requirements imposes administrative expense and also diverts management’s time and attention from revenue-generating activities to compliance activities, which could have a material adverse effect on its business, financial condition and results of operations.

Item 1B. Unresolved Staff Comments

Not applicable.

Item 2. Properties.

We lease facilities in two locations. Our headquarters and the office, warehouse, manufacturing and laboratory space of our subsidiary Nano Magic LLC are in leased space in Madison Heights, Michigan. Our leased space in Austin, Texas is used primarily by our Contract services segment and to produce our printable inks and pastes, thermal management materials, and graphene foils and window. These facilities are adequate for our current needs.

Item 3. Legal Proceedings.

None.

Item 4. Mine Safety Disclosures.

Not applicable.

PART II

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

Our common stock, $0.0001 par value, trades on the OTC system under the symbol “NMGX”. The following table sets forth, on a per share basis for the periods indicated, the high and low sale prices for the common stock as reported by that system. These quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not represent actual transactions.

As of March 14, 2022, the closing sale price for our common stock as reported on the OTCQB system was $0.20 per share. As of that date, there were approximately 357 shareholders of record for our common stock. This does not include beneficial owners holding common stock in street name in brokerage accounts. As of our last record of total shareholders, including those holding stock in street name, there were approximately 3,460 shareholders.

Trading Suspension

On April 30, 2020, the SEC issued an Order of Suspension of Trading (the “Order”) of our common stock for the 10-day period from May 1, 2020 to May 14, 2020. A trading suspension is not an enforcement action and is not a finding of wrongdoing by the SEC. In the Order, the SEC raised questions regarding the accuracy and adequacy of publicly available information in the marketplace concerning the Company since at least February 24, 2020, including (a) information in the marketplace claiming that the Company has a patent for a disinfectant that kills “coronavirus” and (b) a statement made by the Company on April 7, 2020 regarding the Company’s involvement in the fight against COVID-19. With the assistance of outside counsel, Dickinson Wright, we have notified the SEC that we do not believe the SEC should have ordered a trading suspension and we believe that all disclosures by the Company in the marketplace are accurate and adequate.

On May 6, 2020, we, through Dickinson Wright, filed with the SEC a Petition to Terminate Trading Suspension (“Petition”). On May 7, 2020, Dickinson Wright filed with the SEC a Motion for Expedited Consideration of Petition to Terminate Trading Suspension. In our Petition, we informed the SEC that neither the Company, nor its officers or directors were the source of the “information in the marketplace” cited by the SEC. The Company believes that the “information” to which the SEC refers is information that may have been posted by third parties on internet message boards. The Company cautions investors to rely only on information released by the Company in its current and periodic reports filed with the SEC, and in press releases that the Company, from time to time, may issue. The Company has a policy of not communicating on internet message boards and a policy of not communicating with persons seeking to obtain information from the Company outside of the Company’s public filings and official statements. The Company at no time and in no medium has communicated or published information claiming that “the Company has a patent for a disinfectant that kills ‘coronavirus.’” The Company has no knowledge of the source of such information entering the marketplace. The Company’s practice is to cooperate with non-public inquiries conducted by regulators. The Company does have four issued patents – two issued in April 2017, one issued in November 2018, and one issued in October 2019 – relating to the Company’s work in disinfectants. The testing on the Company’s formulations for the four patents all occurred prior to the filing in 2015 of the patent applications.

Because the SEC has not yet ruled on the Company’s challenge to the trading suspension, on February 14, 2022, the Company filed a petition for a writ of mandamus with the Unites States Court of Appeals for the District of Columbia asking the Court to order the SEC to rule on the Company’s petition filed back in May 2020.

Cash Dividends

We have never paid cash dividends on our common stock, have no plans to pay any dividends, and it is unlikely that we will pay any dividends in the foreseeable future. We currently intend to invest future earnings, if any, to finance expansion of our business. Any payment of cash dividends in the future will be dependent upon our earnings, financial condition, capital requirements, and other factors determined by our board of directors.

Recent Issuance of Unregistered Securities

On January 22, 2020, we sold 198,530 shares of common stock in a private placement to PEN Comeback 2 at a per share price of $0.65 for aggregate proceeds of $129,044. At the same time the investor bought 198,516 warrants to purchase up to 198,516 additional shares at a warrant exercise price of $1.50. The right to purchase warrant shares expires four years from date of issue. Aggregate proceeds from the sales of the warrants were $5,955.

On February 12, 2020, we issued an aggregate of 21,048 shares of common stock to our directors as compensation to them for service on our Board. These shares were valued on that date at $0.57 per share based on the quoted price of the stock for a total value of $12,000.

On February 24, 2020, we sold 205,883 shares of common stock in a private placement to PEN Comeback 2 at a per share price of $0.65 for aggregate proceeds of $133,824. At the same time the investor bought 205,868 warrants to purchase up to 205,868 additional shares at a warrant exercise price of $1.50. The right to purchase warrant shares expires four years from date of issue. Aggregate proceeds from the sales of the warrants were $6,176.

On March 24, 2020, in a private placement to PEN Comeback 2, we sold 551,600 shares of common stock and committed to issue an additional 242,518 shares when we have additional authorized shares. That occurred on July 2, 2020, and the shares were issued. Proceeds, at a per share price of $0.65, were $516,177. At the same time the investor bought 794,110 warrants to purchase up to 794,110 additional shares at a warrant exercise price of $1.50. The right to purchase warrant shares expires four years from date of issue. Aggregate proceeds from the sale of the warrants were $23,823.

On March 26, 2020, in a private placement to the same investor we committed to issue 36,765 shares when we have additional authorized shares and accepted $.65 per share for proceeds of $23,897. The additional shares were authorized on July 2, 2020 and the shares were issued. Also on March 26, 2020 the investor bought 36,758 warrants to purchase up to 36,780 additional shares at a warrant exercise price of $1.50. The right to purchase warrant shares expires four years from date of issue. Aggregate proceeds from the sale of the warrants were $1,103.

In connection with the lease for the facility in Michigan effective May 31, 2020, we issued the landlord warrants to purchase up to 410,000 shares of our common stock at a warrant exercise price of $1.50 per share. The warrants are exercisable after we have additional authorized shares of stock until the fourth anniversary of the date of the lease. The fair value of the warrants at the date of issuance was $311,718 and is included in the calculation of right-of-use assets.

On July 13, 2020, Nano Magic Inc. sold to Magic Growth, LLC 388,462 shares of common stock for proceeds of $485,578 and warrants to purchase up to 388,450 shares of common stock for proceeds of $19,422. The warrants are exercisable at any time during the four years after date of issue at a warrant exercise price of $2.00 per share. The stock and warrants were sold in a private placement exempt from registration under Section 4(a)(2) of the Securities Act of 1933, as amended. PEN Comeback Management, LLC, owned by Tom J. Berman and Ronald J. Berman, is the sole voting member of Magic Growth, LLC.

On August 12, 2020, Nano Magic Inc. sold to Magic Growth, LLC 461,538 shares of common stock for proceeds of $576,923 and warrants to purchase up to 461,525 shares of common stock for proceeds of $23,079. The warrants are exercisable at any time during the four years after date of issue at a warrant exercise price of $2.00 per share. The stock and warrants were sold in a private placement exempt from registration under Section 4(a)(2) of the Securities Act of 1933, as amended.

On September 14, 2020, Nano Magic Inc. sold to Magic Growth, LLC 130,770 shares of common stock for proceeds of $163,463 and warrants to purchase up to 130,750 shares of common stock for proceeds of $6,537. The warrants are exercisable at any time during the four years after date of issue at a warrant exercise price of $2.00 per share. The stock and warrants were sold in a private placement exempt from registration under Section 4(a)(2) of the Securities Act of 1933, as amended.

On February 16, 2021, the Company sold to Magic Growth 2 LLC, 769,231 shares of common stock for proceeds of $961,538 and warrants to purchase up to 769,225 shares of common stock for proceeds of $38,463. The warrants are exercisable at any time during the four years after date of issue at a warrant exercise price of $2.00 per share. PEN Comeback Management, LLC, owned by Tom J. Berman and Ronald J. Berman, is the sole voting member of Magic Growth 2 LLC.

On March 2, 2021, we issued an aggregate of 37,890 shares of common stock to our directors as compensation to them for service on our Board. These shares were valued on that date at $0.95 per share based on the quoted price of the stock for a total value of $36,000.

On March 17, 2021, the Company sold to Magic Growth 2 LLC, 385,231 shares of common stock for proceeds of $481,539 and warrants to purchase up to 385,225 shares of common stock for proceeds of $19,260. The warrants are exercisable at any time during the four years after date of issue at a warrant exercise price of $2.00 per share.

On December 15, 2021, we issued an aggregate of 45,333 shares of common stock to our directors as compensation to them for service on our Board. These shares were valued on that date at $0.75 per share for a total value of $34,000.

On January 7, 2022, and again on February 14, 2022, the Company sold to several investors an aggregate of $200,000 convertible promissory notes due March 31, 2025. Issued at face value, the notes bear interest at 8% per annum, payable quarterly 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 January 11, 2022, the Company sold to Magic Growth 3 LLC 222,223 shares of common stock for proceeds of $388,890 and warrants to purchase up to 222,195 shares of common stock for proceeds of $11,110. The warrants are exercisable at any time during the four years after date of issue at a warrant exercise price of $1.75.

On February 22, 2022, the Company sold to Magic Growth 3 LLC 152,778 shares of common stock for proceeds of $267,362 and warrants to purchase up to 152,770 shares of common stock for proceeds of $7,638. The warrants are exercisable at any time during the four years after date of issue at a warrant exercise price of $1.75.

The issuances of all shares described in this section were exempt from registration under the Securities Act of 1933, as amended, in reliance on Section 4(a)(2).

Stock Options

In connection with the three-year extension of the contract with our President and Chief Executive Officer, he was granted an option on March 3, 2021 to purchase up to 2,350,000 shares of common stock at an exercise price of $0.75. Vesting is as follows:

On March 2, 2021, we granted an option to Ronald J. Berman as part of his consulting contract entered into on that day. Under the consulting agreement, as amended, Mr. Berman oversees sales and marketing for Nano Magic LLC and will work on special projects as requested by the President & CEO. His cash compensation is $10,000 per month, with bonuses from 1% to 3% on certain sales. He was also granted an option to purchase up to 100,000 shares at an exercise price of $0.75. Vesting for 75,000 shares is based on sales by Nano Magic LLC in 2021; 12,500 if sales in 2021 are $4 million, with additional tranches of 12,500 shares for each additional $1 million in sales. Vesting for the remaining 25,000 shares will occur if the Company realizes $1 million in EBITDA for 2021. Mr. Berman is a director and is the father of our President, Tom J. Berman.

On March 2, 2021, our Board adopted the Nano Magic 2021 Equity Incentive Plan described below.

On August 10, 2021 we issued the option to purchase up to 100,000 shares that had been approved by the Board in May, 2021 in connection with a consulting agreement. No options have been included in diluted earnings per share as they would be anti-dilutive.

Issuer Purchases of Equity Securities

Neither we nor any of our affiliates have engaged in any purchases of our equity securities during the periods discussed in this Report.

Equity Compensation Plan Information

The table below sets out as of December 31, 2021 the number of securities to be issued upon the exercise of outstanding options, warrants and rights (column (a)), the weighted average exercise price of those options, warrants and rights (column (b)), and the number of securities remaining available for future issuance under the plan (other than the securities to be issued upon the exercise of the outstanding options, warrants and rights) (column (c)).

Item 6. Selected Financial Data

As a smaller reporting company, we are not required to provide disclosure under this item.

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operation.

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.

OVERVIEW

Nano 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.

In December 2019, a novel strain of coronavirus disease (“COVID-19”) was first reported in Wuhan, China. Less than four months later, on March 11, 2020, the World 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.

Apart from the disruption affecting all manufacturing businesses, some of the raw materials and bottles used to produce our liquid products are used to produce hand sanitizer and other cleaning product that are in high demand and some of our raw materials and packaging were harder to find at several points during 2020 due to the COVID-19 pandemic. However, shortages did not continue, and we have been able to obtain adequate supply. As the pandemic has continued, lead times are significantly extended and costs of raw materials and shipping 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 are ending, we are seeing demand fall off. We continue to see progress in our efforts to place Nano 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 the types of products to be sold. The Company’s two reportable segments for the years ended December 31, 2021 and 2020 were (i) the Product segment and (ii) the Contract services segment.

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 ended December 31, 2021 and 2020.

Comparison of Results of Operations for the Year Ended December 31, 2021 and 2020

Revenues

For the years ended December 31, 2021 and 2020, revenues consisted of the following:

For the year ended December 31, 2021, sales from the Product segment increased by $587,690, or 14%, as compared to the year ended December 31, 2020. In 2020 and in the first half of 2021, sales of anti-fog solutions drove revenue. We continue to work to increase sales of our Nano Magic branded solutions by direct sales to consumers, especially using the internet, and are expanding by placing products with pharmacies, big box stores and other retailer outlets. Revenue opportunities from those solutions is delayed by the logistics and other supply chain issues those customers are facing in their business.

For the year ended December 31, 2021, revenues of our Contract services segment decreased by $307,317 or 45% as compared to the year ended December 31, 2020. This reflects completion of work under government contracts without new contracts to replace them. We have submitted proposals for funding of other projects and expect, in the ordinary course of business, that some of those proposals will be funded and new contracts will replace those that have been concluded.

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 ended December 31, 2021, cost of revenues increased by $246,886, or 8%. These consisted of the following:

Gross profit and gross margin

For the year ended December 31, 2021, gross profit amounted to $1,691,691 as compared to $1,658,204 for the year ended December 31, 2020, an increase of $33,487, or 2%. The increase was due primarily to the sales increase as well as the product mix. For the years ended December 31, 2021 and 2020, gross margins were 34% and 35%, respectively.

Gross profit and gross margin by segment and totals are as follows:

Operating expenses

For the year ended December 31, 2021, operating expenses increased by $1,505,355, or 58%. For the years ended December 31, 2021 and 2020, respectively, operating expenses consisted of the following:

Loss from operations

As a result of the factors described above, for the year ended December 31, 2021, loss from operations amounted to $1,765,945 as compared to a loss from operations of $792,646 for the year ended December 31, 2020, an increase of $973,299 or 123%.

Other income

For the year ended December 31, 2021, total other income amounted to $191,381 as compared to other income of $11,591 for the year ended December 31, 2020, an increase of $179,790 or 1,551%. The change was due primarily to the gain related to the forgiveness of the Payroll Protection Program loans in 2021.

Net loss

As a result of the foregoing, for the year ended December 31, 2021, our net loss amounted to $1,574,564 as compared to a net loss of $781,055 for the year ended December 31, 2020, a change of $793,509 or 102%.

For the years ended December 31, 2021 and 2020, net loss amounted to $(0.17) per common share (basic and diluted), and a net loss of $(0.10) 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 $1,003,127 and unrestricted cash of $242,474 as of December 31, 2021.

The following table sets forth a summary of changes in our working capital from December 31, 2021 to December 31, 2020:

The decrease in current assets reflects reduction in accounts receivable during 2021 due to collection efforts. The decrease in current liabilities includes significant decreases in accounts payable and accrued liabilities because orders were weaker and purchases were reduced at the end of the year. In addition to the new Paycheck Protection Loan for our subsidiary Nano Magic LLC obtained in 2020, Applied Nanotech received a similar loan in 2021.

Net cash used in operating activities was $1,377,056 for the year ended December 31, 2021 as compared to net cash used by operating activities of $2,001,044 for the year ended December 31, 2020, a decrease of $623,988, or 31%.

Net cash used in investing activities was $127,257 for the year ended December 31, 2021 as compared to net cash used in investing activities of $143,693 for the year ended December 31, 2020.

Net cash provided by financing activities was $1,458,653 for the year ended December 31, 2021 as compared to $2,216,070 for the year ended December 31, 2020. During the year ended December 31, 2021, we received $1,500,800 in net proceeds from the sale of securities and received $79,306 in net proceeds from the bank loan under the Paycheck Protection Program, offset by repayments on loans totaling $121,453.

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.

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 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.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk.

Not Applicable.

Item 8. Financial Statements and Supplementary Data.

NANO MAGIC HOLDINGS INC. AND SUBSIDIARIES

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2021 and 2020

TABLE OF CONTENTS

Report of Independent Registered Public Accounting Firm

To the Shareholders and Board of Directors of
Nano Magic Holdings Inc.

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of Nano Magic Holdings Inc. and Subsidiaries (the “Company”) as of December 31, 2021 and 2020, and the related consolidated statements of operations, stockholders’ equity (deficit) and cash flows for the years then ended, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2021 and 2020, and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.

Substantial Doubt about the Company’s Ability to Continue as a Going Concern

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the consolidated financial statements, the Company has recurring losses from operations, negative cash flow from operations, and an accumulated deficit. These conditions raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 1. The consolidated financial statements do not include any adjustment that might result from the outcome of this uncertainty. Our opinion is not modified with respect to this matter.

Basis for Opinion

These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered number 1195 with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.

Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures include examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.

To the Shareholders and Board of Directors of
Nano Magic Holdings Inc.

Page Two

Critical Audit Matter

The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the consolidated financial statements and (2) involved especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing separate opinions on the critical audit matter or on the accounts or disclosures to which they related.

Critical Audit Matter – Going Concern Assessment

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the consolidated financial statements, the Company suffered recurring losses from operations and negative cash flows from operations and expects to continue to incur losses for at least the next twelve months. This matter is also described in the “Emphasis of Matter – Substantial Doubt about the Company’s Ability to Continue as a Going Concern” section of our report.

We identified management’s judgements and assumptions used to assess the Company’s ability to continue as a going concern as a critical audit matter due to inherent complexities and uncertainties related to the Company’s projections of operations. Auditing these judgements and assumptions involved especially challenging auditor judgement due to the nature and extent of audit evidence and effort required to address these matters.

How the Critical Audit Matter Was Addressed in the Audit

The primary procedures we performed to address this critical audit matter included the following: (1) evaluating management’s assessment and assessing the reasonableness of key assumptions underlying management’s conclusion, (2) evaluating the probability that the Company will be able to reduce operating expenditures or raise additional capital if required, (3) assessing management’s plans in the context of other audit evidence obtained during the audit to determine whether it supported or contradicted the conclusions reached by management.

/s/ UHY LLP

We have served as the Company’s auditor since 2019.

UHY LLP

Sterling Heights, Michigan

March 30, 2022

NANO MAGIC HOLDINGS INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

See accompanying notes to consolidated financial statements.

NANO MAGIC HOLDINGS INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

See accompanying notes to consolidated financial statements.

NANO MAGIC HOLDINGS INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (DEFICIT)

FOR THE YEARS ENDED DECEMBER 31, 2021 AND 2020

See accompanying notes to consolidated financial statements.

NANO MAGIC HOLDINGS INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

The following table provides a reconciliation of cash and restricted cash reported within the consolidated balance sheet that sum to the total of the same such amounts shown in the consolidated statement of cash flows:

See accompanying notes to consolidated financial statements.

NANO MAGIC HOLDINGS INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2021 AND 2020

NOTE 1 – ORGANIZATION AND BASIS OF PRESENTATION

Organization

Nano Magic Holdings 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, and performs nanotechnology product research and development generating revenues through performing contract services. On March 3, 2020, we changed our name from PEN Inc. to Nano Magic Inc. and on March 2, 2021 we changed our name to Nano Magic Holdings Inc.

Through the Company’s wholly-owned subsidiary, Nano Magic LLC, formerly known as PEN Brands LLC, we develop, manufacture and sell consumer and institutional products using nanotechnology to deliver unique performance attributes at the surfaces of a wide variety of substrates. These products are marketed internationally primarily to customers in the optical industry. On March 31, 2020, PEN Brands LLC changed its name to Nano Magic LLC.

Through the Company’s wholly-owned subsidiary, Applied Nanotech, Inc., we primarily perform contract research services for the Company and for governmental and private customers.

Basis of Presentation and Principles of Consolidation

The Company’s consolidated financial statements include the financial statements of its wholly-owned subsidiaries, Applied Nanotech, Inc. and Nano Magic LLC. All significant intercompany accounts and transactions have been eliminated in consolidation.

Going Concern

These consolidated 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 consolidated financial statements, the Company had losses from operations and net cash used by operations of $1,765,945 and $1,377,056, respectively, for the year ended December 31, 2021. As indicated in the accompanying financial statements, the Company had positive working capital of $1,003,127 including $242,474 of cash at December 31, 2021. These factors raise substantial doubt about the Company’s ability to continue as a going concern within one year after the date that these consolidated 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.

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Use of Estimates

The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America (“US GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. Significant estimates for the years ended December 31, 2021 and 2020 include estimates for allowance for doubtful accounts on accounts receivable, the estimates for obsolete inventory, the useful life of property and equipment, assumptions used in assessing impairment of long-term assets, estimates of current and deferred income taxes and deferred tax valuation allowances, the fair value of non-cash equity transactions, and the fair value of equity incentives.

Cash, Cash Equivalents and Restricted Cash

For purposes of the consolidated statements of cash flows, the Company considers all highly liquid instruments with a maturity of three months or less at the purchase date and money market accounts to be cash equivalents.

Investments

Investments consist of long-term certificates of deposit. The certificate of deposit held at December 31, 2020 was renewed in 2021. It matures in May 2024 and carries interest at a rate of 2.29% per year.

Accounts Receivable

The Company recognizes an allowance for losses on accounts receivable in an amount equal to the estimated probable losses net of recoveries. The allowance is based on an analysis of historical bad debt experience, current receivables aging, and expected future write-offs, as well as an assessment of specific identifiable customer accounts considered at risk or uncollectible. The expense associated with the allowance for doubtful accounts is recognized as general and administrative expense.

Inventory

Inventory is stated at the lower of cost or net realizable value. Cost is determined using the average cost method based on prices paid for inventory items. This valuation requires us to make judgments, based on currently available information, about the likely method of disposition, such as sales to individual customers and expected recoverable values.

Property and Equipment

Property and equipment are stated at cost and are depreciated using the straight-line method over their estimated useful lives, which range from three to ten years. Leasehold improvements are depreciated over the shorter of the useful life or lease term including scheduled renewal terms. Maintenance and repairs are charged to expense as incurred. When assets are retired or disposed of, the cost and accumulated depreciation are removed from the accounts, and any resulting gains or losses are included in other income or expense in the year of disposition. The Company examines the possibility of decreases in the value of these assets when events or changes in circumstances reflect the fact that their recorded value may not be recoverable.

Impairment of Long-Lived Assets

In accordance with ASC Topic 360, the Company reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be fully recoverable, or at least annually. The Company recognizes an impairment loss when the sum of expected undiscounted future cash flows is less than the carrying amount of the asset. The amount of impairment is measured as the difference between the asset’s estimated fair value and its book value. The Company did not record any impairment charge for the year ended December 31, 2021 and 2020.

Leases

Operating leases are reflected on our balance sheet within operating lease Right-of-use ( ROU) assets and the related current and non-current operating lease liabilities. ROU assets represent the right to use an underlying asset for the lease term, and lease liabilities represent the obligation to make lease payments arising from lease agreement. Operating lease ROU assets and liabilities are recognized at the commencement date, the date on which the lessor began making the underlying asset customizable for our use, based upon the present value of the lease payments over the respective lease term. Lease expense is recognized on a straight-line basis over the lease term, subject to any changes in the lease or expectation regarding the terms. Variable lease costs such as common area maintenance, property taxes and insurance are expensed as incurred.

Lease Term

The Company calculates the term for each lease agreement to include the noncancelable period specified in the agreement together with (1) the periods covered by options to extend the lease if the Company is reasonably certain to exercise that option, (2) periods covered by an option to terminate if the Company is reasonably certain not to exercise that option and (3) period covered by an option to extend (or not terminate) if controlled by the lessor.

The assessment of whether the Company is reasonably certain to exercise an option to extend a lease requires significant judgement surrounding contract-based factors, asset-based factors, entity-based factors and market-based factors.

Lease Payments

Lease payments consist of fixed payments, less any lease incentives paid or payable to the lessee related to the use of the underlying asset during the lease term.

Incremental Borrowing Rate

The ROU asset and related lease liabilities recorded based on the present value of the lease payments using (1) the rate implicit in the lease or (2) the rate of interest that a lessee would have to pay to borrow on a collateralized basis over a similar term an amount equal to the lease payments in a similar economic environment.

Revenue Recognition

We adopted ASC Topic 606, Revenue from Contracts with Customers (“ASC Topic 606”), effective January 1, 2018 using the modified retrospective method. ASC Topic 606 is a comprehensive revenue recognition model that requires revenue to be recognized when control of the promised goods or services are transferred to our customers at an amount that reflects the consideration that we expect to receive. The application of ASC Topic 606 requires us to use significant judgment and estimates. Application of ASC Topic 606 requires a five-step model applicable to all revenue streams as follows:

Identification of the contract, or contracts, with a customer

A contract with a customer exists when (i) we enter into an enforceable contract with a customer that defines each party’s rights regarding the goods or services to be transferred and identifies the payment terms related to these goods or services, (ii) the contract has commercial substance and, (iii) we determine that collection of substantially all consideration for goods or services that are transferred is probable based on the customer’s intent and ability to pay the promised consideration. We apply judgment in determining the customer’s ability and intention to pay, which is based on a variety of factors including the customer’s historical payment experience or, in the case of a new customer, published credit and financial information pertaining to the customer.

Identification of the performance obligations in the contract

Performance obligations promised in a contract are identified based on the goods or services that will be transferred to the customer that are both capable of being distinct, whereby the customer can benefit from the goods or service either on its own or together with other resources that are readily available from third parties or from us, and are distinct in the context of the contract, whereby the transfer of the goods or services is separately identifiable from other promises in the contract.

When a contract includes multiple promised goods or services, we apply judgment to determine whether the promised goods or services are capable of being distinct and are distinct within the context of the contract. If these criteria are not met, the promised goods or services are accounted for as a combined performance obligation.

Determination of the transaction price

The transaction price is determined based on the consideration to which we will be entitled to receive in exchange for transferring goods or services to our customer. We estimate any variable consideration included in the transaction price using the expected value method that requires the use of significant estimates for discounts, cancellation periods, refunds and returns. Variable consideration is described in detail below.

Allocation of the transaction price to the performance obligations in the contract

If the contract contains a single performance obligation, the entire transaction price is allocated to the single performance obligation. Contracts that contain multiple performance obligations require an allocation of the transaction price to each performance obligation based on a relative Stand-Alone Selling Price (“SSP,”) basis. We determine SSP based on the price at which the performance obligation would be sold separately. If the SSP is not observable, we estimate the SSP based on available information, including market conditions and any applicable internally approved pricing guidelines.

Recognition of revenue when, or as, we satisfy a performance obligation

We recognize contract revenue over time and product revenue at a point in time, when the related performance obligation is satisfied by transferring the promised goods or services to our customer. Contract revenue is recognized based on a cost-to-cost input method.

Disaggregation of Revenue

For the years ended December 31, 2021 and 2020, total sales in the United States represent approximately 78% and 87% of total consolidated revenues, respectively. Germany accounted for 13% and 10% of total sales during the years ended December 31, 2021 and 2020, respectively.

Principal versus Agent Considerations

When another party is involved in providing goods or services to our customer, we apply the principal versus agent guidance in ASC Topic 606 to determine if we are the principal or an agent to the transaction. When we control the specified goods or services before they are transferred to our customer, we report revenue gross, as principal. If we do not control the goods or services before they are transferred to our customer, revenue is reported net of the fees paid to the other party, as agent. Our evaluation to determine if we control the goods or services within ASC Topic 606 includes the following indicators:

We are primarily responsible for fulfilling the promise to provide the specified good or service.

When we are primarily responsible for providing the goods and services, such as when the other party is acting on our behalf, we have indication that we are the principal to the transaction. We consider if we may terminate our relationship with the other party at any time without penalty or without permission from our customer.

We have inventory risk before the specified good or service has been transferred to a customer or after transfer of control to the customer.

We may commit to obtaining the services of another party with or without an existing contract with our customer. In these situations, we have risk of loss as principal for any amount due to the other party regardless of the amount(s) we earn as revenue from our customer.

The entity has discretion in establishing the price for the specified good or service.

We have discretion in establishing the price our customer pays for the specified goods or services.

Contract Assets

We capitalize costs and estimated earnings in excess of billings as a contract asset in current assets. There were no contract assets recorded on the consolidated balance sheet at December 31, 2021. At December 31, 2020, contract assets totaled $88,694.

Contract Liabilities

Contract liabilities consist of customer advance payments and billings in excess of revenue recognized. We may receive payments from our customers in advance of completing our performance obligations. We record contract liabilities equal to the amount of payments received in excess of revenue recognized, Contract liabilities are recorded under the caption “contract liabilities” and are reported as current liabilities on our consolidated financial statements when the time to fulfill the performance obligations under terms of our contracts is less than one year. At December 31, 2021 and 2020, contract liabilities totaled $45,762 and $90,562, respectively.

Cost of Sales

Cost of sales includes inventory costs, materials and supplies costs, internal labor and related benefits, subcontractor costs, depreciation, overhead and shipping and handling costs incurred.

Shipping and Handling Costs

Shipping and handling costs incurred relating to the purchase of inventory are included in inventory which is charged to cost of sales as products are sold. Shipping and handling costs incurred for product shipped to customers are included in cost of sales. For the years ended December 31, 2021 and 2020 shipping and handling costs amounted to $187,154 and $132,458, respectively.

Research and Development

Research and development costs incurred in the development of the Company’s products and under other Company sponsored research and development projects are expensed as incurred. Costs such as direct labor, direct costs, and other allocated costs incurred to perform research and development service pursuant to government and private research projects are in included in cost of sales. Research and development costs incurred in the development of the Company’s products for the years ended December 31, 2021 and 2020 were $34,875 and $56,816, respectively, and are included in operating expenses on the accompanying consolidated statements of operations.

Advertising Costs

The Company participates in various advertising programs. All costs related to advertising of the Company’s products are expensed in the period incurred. Advertising costs charged to operations for the years ended December 31, 2021 and 2020 were $40,459 and $23,345, respectively, and are included in selling and marketing on the consolidated accompanying statements of operations. These advertising expenses do not include cooperative advertising and sales incentives which have been deducted from sales.

Federal and State Income Taxes

The Company accounts for income tax using the liability method prescribed by ASC 740, “Income Taxes”. Under this method, deferred tax assets and liabilities are determined based on the difference between the financial reporting and tax bases of assets and liabilities using enacted tax rates that will be in effect in the year in which the differences are expected to reverse. The Company records a valuation allowance to offset deferred tax assets if based on the weight of available evidence, it is more-likely-than-not that some portion, or all, of the deferred tax assets will not be realized. The effect on deferred taxes of a change in tax rates is recognized as income or loss in the period that includes the enactment date.

The Company follows the accounting guidance for uncertainty in income taxes using the provisions of ASC 740 “Income Taxes”. Using that guidance, tax positions initially need to be recognized in the financial statements when it is more likely than not the position will be sustained upon examination by the tax authorities. As of December 31, 2021, the Company had no uncertain tax positions that qualify for either recognition or disclosure in the financial statements. Tax years that remain subject to examination are the years ending on and after December 31, 2018. The Company does not expect any significant changes in its unrecognized tax benefits within twelve months of the reporting date. The Company recognizes interest and penalties related to uncertain income tax positions in other expense. However, no such interest and penalties were recorded as of December 31, 2021 or 2020.

Stock-Based Compensation

Stock-based compensation is accounted for based on the requirements of the Share-Based Payment Topic of ASC 718 which requires recognition in the financial statements of the cost of employee and director services received in exchange for an award of equity instruments over the period the employee or director is required to perform the services in exchange for the award (presumptively, the vesting period). The ASC also requires measurement of the cost of employee and director services received in exchange for an award based on the grant-date fair value of the award. The Company adopted ASU No. 2017-09 in 2018; its adoption did not have a material impact on its consolidated financial statements.

Pursuant to ASC Topic 505-50, for share-based payments to consultants and other third-parties, compensation expense is determined at the “measurement date.” The expense is recognized over the service period of the award. Until the measurement date is reached, the total amount of compensation expense remains uncertain. The Company initially records compensation expense based on the fair value of the award at the reporting date.

Earnings (Loss) Per Share of Common Stock

ASC 260 “Earnings Per Share”, requires dual presentation of basic and diluted earnings per share (“EPS”) with a reconciliation of the numerator and denominator of the basic EPS computation to the numerator and denominator of the diluted EPS computation. Basic EPS excludes dilution. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the entity. Basic net loss per common share is computed by dividing net loss available to common shareholders by the weighted average number of shares of common shares outstanding during the period. Diluted net loss per common share is computed by dividing net loss by the weighted average number of shares of common stock, common stock equivalents and potentially dilutive securities outstanding during each period. Additionally, potentially dilutive common shares consist of common stock options and warrants (using the treasury stock method).

These common stock equivalents may be dilutive in the future. Potentially dilutive common shares were excluded from the computation of diluted shares outstanding as they would have an anti-dilutive impact on the Company’s net income (loss) and consisted of the following:

 SCHEDULE OF ANTI-DILUTIVE PER SHARE INFORMATION